10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number 1-4448

Baxter International Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	36-0781620
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

One Baxter Parkway, Deerfield, Illinois	60015
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code 847.948.2000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common stock, $1.00 par value	New York Stock Exchange Chicago Stock Exchange
Preferred Stock Purchase Rights	New York Stock Exchange
(currently traded with common stock)	Chicago Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

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

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

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2008 (the last business day of the registrant’s most recently completed second fiscal quarter), based on the per share closing sale price of $63.94 on that date and the assumption for the purpose of this computation only that all of the registrant’s directors and executive officers are affiliates, was approximately $40 billion. There is no non-voting common equity held by non-affiliates of the registrant.

The number of shares of the registrant’s common stock, $1.00 par value, outstanding as of January 31, 2009 was 613,849,295.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Annual Report to Shareholders for fiscal year ended December 31, 2008 are incorporated by reference into Parts I, II and IV of this report. Portions of the registrant’s definitive 2009 proxy statement for use in connection with its Annual Meeting of Shareholders to be held on May 5, 2009 are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

		Page
		Number
Item 1.	Business	1
Item 1A.	Risk Factors	6
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	11
Item 3.	Legal Proceedings	12
Item 4.	Submission of Matters to a Vote of Security Holders	12
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6.	Selected Financial Data	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	14
Item 8.	Financial Statements and Supplementary Data	14
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	14
Item 9A.	Controls and Procedures	15
Item 9B.	Other Information	15
Item 10.	Directors, Executive Officers and Corporate Governance	15
Item 11.	Executive Compensation	15
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	16
Item 13.	Certain Relationships and Related Transactions and Director Independence	17
Item 14.	Principal Accountant Fees and Services	17
Item 15.	Exhibits and Financial Statement Schedules	18
Directors' Deferred Compensation Plan
Form of Severance Agreement
Supplemental Pension Plan
Deferred Compensation Plan
Non-Employee Director Compensation Plan
Computation of Ratio of Earnings to Fixed Charges
Selections from the 2008 Annual Report to Shareholders
Subsidiaries
Consent of PricewaterhouseCoopers LLP
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer

PART I

Item 1.   Business.

Company Overview

Baxter develops, manufactures and markets products that save and sustain the lives of people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma and other chronic and acute medical conditions. As a global, diversified healthcare company, Baxter applies a unique combination of expertise in medical devices, pharmaceuticals and biotechnology to create products that advance patient care worldwide. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices, clinical and medical research laboratories, and by patients at home under physician supervision. Baxter manufactures products in 26 countries and sells them in more than 100 countries.

Baxter International Inc. was incorporated under Delaware law in 1931. As used in this report, except as otherwise indicated in information incorporated by reference, “Baxter International” means Baxter International Inc. and “Baxter,” the “company” or the “Company” means Baxter International and its consolidated subsidiaries.

Business Segments

The BioScience, Medication Delivery and Renal segments comprise Baxter’s continuing operations.

BioScience.  The BioScience business manufactures recombinant and plasma-based proteins to treat hemophilia and other bleeding disorders; plasma-based therapies to treat immune deficiencies, alpha 1-antitrypsin deficiency, burns and shock, and other chronic and acute blood-related conditions; products for regenerative medicine, such as biosurgery products and technologies used in adult stem-cell therapies; and vaccines.

Medication Delivery.  The Medication Delivery business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filled vials and syringes for injectable drugs, IV nutrition products, infusion pumps, and inhalation anesthetics, as well as products and services related to pharmacy compounding, drug formulation and packaging technologies.

Renal.  The Renal business provides products to treat end-stage renal disease, or irreversible kidney failure. The business manufactures solutions and other products for peritoneal dialysis (PD), a home-based therapy, and also distributes products for hemodialysis (HD), which is generally conducted in a hospital or clinic.

Financial information about Baxter’s segments and principal product lines is incorporated by reference from the section entitled “Notes to Consolidated Financial Statements — Note 12 Segment Information” of Baxter’s Annual Report to Shareholders for fiscal year 2008 (the “Annual Report”), which is filed as Exhibit 13 to this Report on Form 10-K.

Sales and Distribution

The company has its own sales force and also makes sales to and through independent distributors, drug wholesalers acting as sales agents and specialty pharmacy or homecare companies. In the United States, Cardinal Health, Inc. warehouses and ships a significant portion of the company’s products through its distribution centers. These centers are generally stocked with adequate inventories to facilitate prompt customer service. Sales and distribution methods include frequent contact by sales representatives, automated communications via various electronic purchasing systems, circulation of catalogs and merchandising bulletins, direct-mail campaigns, trade publication presence and advertising.

International sales are made and products are distributed on a direct basis or through independent local distributors or sales agents in more than 100 countries.

International Markets

Baxter generates approximately 60% of its revenues outside the United States. While healthcare cost containment continues to be a focus around the world, demand for healthcare products and services continues

1

to be strong worldwide. The company’s strategies emphasize global expansion and technological innovation to advance medical care worldwide. Baxter’s operations are subject to certain additional risks inherent in conducting business outside the United States, such as fluctuations in currency exchange rates, changes in exchange controls, loss of business in government tenders, nationalization, increasingly complex labor environments, expropriation and other governmental actions, changes in taxation, importation limitations, export control restrictions, violations of U.S. or local laws, dependence on a few government entities as customers, pricing restrictions, economic destabilization, instability, disruption or destruction in a significant geographic region — due to the location of manufacturing facilities, distribution facilities or customers.

Financial information about foreign and domestic operations and geographic information is incorporated by reference from the section entitled “Notes to Consolidated Financial Statements — Note 12 Segment Information” of the Annual Report.

Contractual Arrangements

Substantial portions of the company’s products are sold through contracts with customers, both within and outside the United States. Some of these contracts have terms of more than one year and place limits on our ability to increase prices. In the case of hospitals and other facilities, these contracts may specify minimum quantities of a particular product or categories of products to be purchased by the customer.

In keeping with the increased emphasis on cost-effectiveness in healthcare delivery, many hospitals and other customers of medical products in the United States and in other countries have joined group purchasing organizations (GPOs), or combined to form integrated delivery networks (IDNs), to enhance purchasing power. GPOs and IDNs negotiate pricing arrangements with manufacturers and distributors, and the negotiated prices are made available to members. Baxter has purchasing agreements with several of the major GPOs in the United States. GPOs may have agreements with more than one supplier for certain products. Accordingly, in these cases, Baxter faces competition from other suppliers even where a customer is a member of a GPO under contract with Baxter.

Raw Materials

Raw materials essential to Baxter’s business are purchased from numerous suppliers worldwide in the ordinary course of business. Although most of these materials are generally available, certain raw materials used in producing some of the company’s products are available only from one or a limited number of suppliers, and Baxter at times may experience shortages of supply. In an effort to manage risk associated with raw materials supply, Baxter works closely with its suppliers to help ensure availability and continuity of supply while maintaining high quality and reliability. The company also seeks to develop new and alternative sources of supply where beneficial to its overall raw materials procurement strategy.

The company also utilizes long-term supply contracts with some suppliers to help maintain continuity of supply and manage the risk of price increases. Baxter is not always able to recover cost increases for raw materials through customer pricing due to contractual limits and market pressure on such price increases.

Competition

Baxter’s Medication Delivery, BioScience and Renal businesses enjoy leading positions based on a number of competitive advantages. The Medication Delivery business benefits from the breadth and depth of its product offering, as well as strong relationships with customers, including hospitals, customer purchasing groups and pharmaceutical and biotechnology companies. The BioScience business benefits from continued innovation in its products and therapies, consistency of its supply of products, and strong customer relationships. The Renal business benefits from its position as one of the world’s leading manufacturers of PD products, as well as its strong relationships with customers and patients, including the many patients who self-administer the home-based therapy supplied by Baxter. Baxter as a whole benefits from efficiencies and cost advantages resulting from shared manufacturing facilities and the technological advantages of its products.

2

Although no single company competes with Baxter in all of its businesses, Baxter faces competition in each of its segments from international and domestic healthcare and pharmaceutical companies of all sizes. BioScience continues to face competitors from pharmaceutical, biotechnology and other companies. Medication Delivery faces competition from medical device manufacturers and pharmaceutical companies particularly in the multi-source generics and anesthetics markets. In Renal, global and regional competitors continue to expand their manufacturing capacity for PD products and their PD sales and marketing channels. Competition is primarily focused on cost-effectiveness, price, service, product performance, and technological innovation. There has been consolidation in the company’s customer base and by its competitors, which continues to result in pricing and market share pressures.

Global efforts toward healthcare cost containment continue to exert pressure on product pricing. Governments around the world use various mechanisms to control healthcare expenditures, such as price controls, product formularies (lists of recommended or approved products), and competitive tenders which require the submission of a bid to sell products. Sales of Baxter’s products are dependent, in part, on the availability of reimbursement by government agencies and healthcare programs, as well as insurance companies and other private payers. In the United States, many state governments have adopted or proposed initiatives relating to Medicaid and other health programs that may limit reimbursement or increase rebates that Baxter and other providers are required to pay to the state. In addition to government regulation, managed care organizations in the United States, which include medical insurance companies, medical plan administrators, health-maintenance organizations, hospital and physician alliances and pharmacy benefit managers, continue to put pressure on the price and usage of healthcare products. Managed care organizations seek to contain healthcare expenditures, and their purchasing strength has been increasing due to their consolidation into fewer, larger organizations and a growing number of enrolled patients. Baxter faces similar issues outside of the United States. In Europe and Latin America, for example, the government provides healthcare at low cost to patients, and controls its expenditures by purchasing products through public tenders, regulating prices, setting reference prices in public tenders or limiting reimbursement or patient access to certain products.

Intellectual Property

Patents and other proprietary rights are essential to Baxter’s business. Baxter relies on trademarks, copyrights, trade secrets, know-how and confidentiality agreements to develop, maintain and strengthen its competitive position. Baxter owns a number of patents and trademarks throughout the world and has entered into license arrangements relating to various third-party patents and technologies. Products manufactured by Baxter are sold primarily under its own trademarks and trade names. Some products distributed by the company are sold under the company’s trade names while others are sold under trade names owned by its suppliers. Trade secret protection of unpatented confidential and proprietary information is also important to Baxter. The company maintains certain details about its processes, products, and technology as trade secrets and generally requires employees, consultants, parties to collaboration agreements and other business partners to enter into confidentiality agreements.

Baxter’s policy is to protect its products and technology through patents and trademarks on a worldwide basis. This protection is sought in a manner that balances the cost of such protection against obtaining the greatest value for the company. Baxter also recognizes the need to promote the enforcement of its patents and trademarks. Baxter will continue to take commercially reasonable steps to enforce its patents and trademarks around the world against potential infringers, including judicial or administrative action where appropriate.

Baxter operates in an industry susceptible to significant patent litigation. At any given time, the company is involved as either a plaintiff or defendant in a number of patent infringement and other intellectual property-related actions. Such litigation can result in significant royalty or other payments or result in injunctions that can prevent the sale of products.

Research and Development

Baxter’s investment in research and development is essential to its future growth and its ability to remain competitive in all three of its business segments. Accordingly, Baxter continues to increase its investment in

3

research and development programs to develop innovative products, systems and manufacturing methods. Expenditures for Baxter’s research and development activities were $868 million in 2008, $760 million in 2007 and $614 million in 2006. These expenditures include costs associated with research and development activities performed at the company’s research and development centers located around the world, which include facilities in Austria, Belgium, Japan and the United States, as well as in-licensing, milestone and reimbursement payments made to partners for research and development work performed at non-Baxter locations.

Principal areas of strategic focus for research and development include recombinant therapeutics, plasma-based therapeutics, vaccines, initiatives in regenerative medicine including adult stem-cell therapy, kidney dialysis, small molecule drugs, enhanced packaging systems for medication delivery, drug formulation technologies, and pharmacy compounding. The company’s research efforts emphasize self-manufactured product development, and portions of that research relate to multiple product lines. Baxter supplements its own research and development efforts by acquiring various technologies and entering into development and other collaboration agreements with third parties. For more information on the company’s research and development activities, please refer to our discussion under the caption entitled “Research and Development” in “Management’s Discussion and Analysis” of the Annual Report.

Quality Management

Baxter places significant emphasis on providing quality products and services to its customers. Quality management plays an essential role in determining and meeting customer requirements, preventing defects and improving the company’s products and services. Baxter has a network of quality systems throughout the company’s business units and facilities that relate to the design, development, manufacturing, packaging, sterilization, handling, distribution and labeling of the company’s products. To assess and facilitate compliance with applicable requirements, the company regularly reviews its quality systems to determine their effectiveness and identify areas for improvement. Baxter also performs assessments of its suppliers of raw materials, components and finished goods. In addition, the company conducts quality management reviews designed to inform management of key issues that may affect the quality of products and services.

From time to time, the company may determine that products manufactured or marketed by the company do not meet company specifications, published standards, such as those issued by the International Standards Organization, or regulatory requirements. When a quality issue is identified, Baxter investigates the issue and takes appropriate corrective action, such as withdrawal of the product from the market, correction of the product at the customer location, notice to the customer of revised labeling, and other actions. For more information on corrective actions taken by Baxter, please refer to our discussion under the caption entitled “Certain Regulatory Matters” in “Management’s Discussion and Analysis” of the Annual Report.

Government Regulation

The operations of Baxter and many of the products manufactured or sold by the company are subject to extensive regulation by numerous government agencies, both within and outside the United States. In the United States, the federal agencies that regulate the company’s facilities, operations, employees, products (their manufacture, sale, import and export) and services include: the U.S. Food and Drug Administration (FDA), the Drug Enforcement Agency, the Environmental Protection Agency, the Occupational Health & Safety Administration, the Department of Agriculture, the Department of Labor, the Department of Defense, Customs and Border Protection, the Department of Commerce, the Department of Treasury and others. Because Baxter supplies products and services to healthcare providers that are reimbursed by federally funded programs such as Medicare, its activities are also subject to regulation by the Center for Medicare/Medicaid Services and enforcement by the Office of the Inspector General within the Department of Health and Human Services. State agencies in the United States also regulate the facilities, operations, employees, products and services of the company within their respective states. Outside the United States, our products and operations are subject to extensive regulation by government agencies, including the European Medicines Agency (EMEA) in the European Union. International government agencies also regulate public health, product registration, manufacturing, environmental conditions, labor, exports, imports and other aspects of the company’s global operations.

4

The FDA in the United States, the EMEA in Europe, and other government agencies inside and outside of the United States, administer requirements covering the testing, safety, effectiveness, manufacturing, labeling, promotion and advertising, distribution and post-market surveillance of Baxter’s products. The company must obtain specific approval from the FDA and non-U.S. regulatory authorities before it can market and sell most of its products in a particular country. Even after the company obtains regulatory approval to market a product, the product and the company’s manufacturing processes are subject to continued review by the FDA and other regulatory authorities.

The company is subject to possible administrative and legal actions by the FDA and other regulatory agencies inside and outside the United States. Such actions may include warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals, restrictions on operations or withdrawal of existing approvals. From time to time, the company institutes compliance actions, such as removing products from the market found not to meet applicable requirements and improving the effectiveness of quality systems. For more information on compliance actions taken by the company, please refer to our discussion under the caption entitled “Certain Regulatory Matters” in “Management’s Discussion and Analysis” of the Annual Report.

Environmental policies of the company require compliance with all applicable environmental regulations and contemplate, among other things, appropriate capital expenditures for environmental protection.

Employees

As of December 31, 2008, Baxter employed approximately 48,500 people.

Available Information

Baxter makes available free of charge on its website at www.baxter.com its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing or furnishing such material to the Securities and Exchange Commission.

In addition, Baxter’s Corporate Governance Guidelines, Code of Conduct, and the charters for the committees of Baxter’s Board of Directors are available on Baxter’s website at www.baxter.com under “Corporate Governance” and in print upon request by writing to: Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015. Information contained on Baxter’s website shall not be deemed incorporated into, or to be a part of, this Annual Report on Form 10-K.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

This Annual Report includes forward-looking statements, including statements with respect to accounting estimates and assumptions, future litigation outcomes, the company’s efforts to remediate its infusion pumps and other regulatory matters, expectations with respect to restructuring programs (including expected cost savings), strategic plans, product mix, promotional efforts, geographic expansion, sales and pricing forecasts, expectations with respect to business development activities, the divestiture of low margin businesses, potential developments with respect to credit and credit ratings, interest expense in 2009, estimates of liabilities, ongoing tax audits and related tax provisions, deferred tax assets, future pension plan expense, expectations with respect to the company’s exposure to foreign currency risk, the company’s internal R&D pipeline, future capital and R&D expenditures, the sufficiency of the company’s financial flexibility and the adequacy of credit facilities and reserves, the effective tax rate in 2009, expected revenues from the Fenwal transition services agreements, and all other statements that do not relate to historical facts. The statements are based on assumptions about many important factors, including assumptions concerning: demand for and market acceptance risks for new and existing products, such as ADVATE and IGIV, and other therapies; the company’s ability to identify business development and growth opportunities for existing products and to exit low margin businesses or products; product quality or patient safety issues, leading to product recalls, withdrawals, launch

5

delays, sanctions, seizures, litigation, or declining sales, including with respect to the company’s heparin products; future actions of regulatory bodies and other government authorities that could delay, limit or suspend product development, manufacturing or sale or result in seizures, injunctions, monetary sanctions or criminal or civil penalties, including any sanctions available under the Consent Decree entered into with the FDA concerning the COLLEAGUE and SYNDEO pumps; foreign currency fluctuations, particularly due to reduced benefits from the company’s natural hedges and limitations on the ability to cost-effectively hedge resulting from the recent financial market and currency volatility; fluctuations in the balance between supply and demand with respect to the market for plasma protein products; reimbursement policies of government agencies and private payers; product development risks including satisfactory clinical performance, the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle; the ability to enforce the company’s patent rights or patents of third parties preventing or restricting the company’s manufacture, sale or use of affected products or technology; the impact of geographic and product mix on the company’s sales; the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies; inventory reductions or fluctuations in buying patterns by wholesalers or distributors; the availability and pricing of acceptable raw materials and component supply; global regulatory, trade and tax policies; any changes in law concerning the taxation of income, including income earned outside of the United States; actions by tax authorities in connection with ongoing tax audits; the company’s ability to realize the anticipated benefits of restructuring initiatives; change in credit agency ratings; any impact of the commercial and credit environment on the company and its customers; continued developments in the market for transfusion therapies products and Fenwal’s ability to execute with respect to the acquired business; and other factors identified elsewhere in this report, including those factors described below under the caption “Item 1A. Risk Factors,” and other filings with the Securities and Exchange Commission, all of which are available on the company’s website.

Actual results may differ materially from those projected in the forward-looking statements. The company does not undertake to update its forward-looking statements.

Item 1A.   Risk Factors.

In addition to the other information in this Annual Report on Form 10-K, shareholders or prospective investors should carefully consider the following risk factors. If any of the events described below occurs, our business, financial condition and results of operations and future growth prospects could suffer.

If we are unable to successfully introduce new products or fail to keep pace with advances in technology, our business, financial condition and results of operations could be adversely affected.

The successful and timely implementation of our business model depends on our ability to adapt to changing technologies and introduce new products. As Baxter’s competitors will continue to introduce competitive products, the development and acquisition of innovative products and technologies that improve efficacy, safety, patients’ and clinicians’ ease of use and cost-effectiveness are important to Baxter’s success. The success of new product offerings will depend on many factors, including our ability to properly anticipate and satisfy customer needs, obtain regulatory approvals on a timely basis, develop and manufacture products in an economic and timely manner, maintain advantageous positions with respect to intellectual property, and differentiate our products from those of our competitors. A failure by us to introduce planned products or other new products or to introduce these products on schedule could have an adverse effect on our business, financial condition and results of operations.

The development and acquisition of innovative products and technologies that improve efficacy, safety, patients’ and clinicians’ ease of use and cost-effectiveness involve significant technical and business risks. If we cannot adapt to changing technologies, our products may become obsolete, and our business could suffer. Because the healthcare industry is characterized by rapid technological change, we may be unable to anticipate changes in our current and potential customers’ requirements. Our success will depend, in part, on our ability to continue to enhance our existing products, develop new technology that addresses the increasingly sophisticated and varied needs of our prospective customers, license or acquire leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis.

6

We are subject to a number of existing laws and regulations, non-compliance with which could adversely affect our business, financial condition and results of operations, and we are susceptible to a changing regulatory environment.

As a participant in the healthcare industry, our operations and products, and those of our customers, are regulated by numerous government agencies, both within and outside the United States. The impact of this on us is direct, to the extent we are subject to these laws and regulations, and indirect in that in a number of situations, even though we may not be directly regulated by specific healthcare laws and regulations, our products must be capable of being used by our customers in a manner that complies with those laws and regulations.

The manufacture, distribution and marketing of our products are subject to extensive ongoing regulation by the FDA and other regulatory authorities both within and outside the United States. Any new product must undergo lengthy and rigorous testing and other extensive, costly and time-consuming procedures mandated by the FDA and foreign regulatory authorities. We may elect to delay or cancel our anticipated regulatory submissions for new indications for our current or proposed new products for a number of reasons. Failure to comply with the requirements of the FDA or other regulatory authorities could result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals, restrictions on operations or withdrawal of existing approvals. Any of these actions could cause a loss of customer confidence in us and our products, which could adversely affect our sales.

We continue to address issues with our infusion pumps as discussed further under the caption entitled “Certain Regulatory Matters” in “Management’s Discussion and Analysis” of the Annual Report. In connection with these issues, there can be no assurance that additional costs or civil and criminal penalties will not be incurred, that additional regulatory actions with respect to the company will not occur, that substantial additional charges or significant asset impairments may not be required, or that additional legislation or regulation will not be introduced that may adversely affect the company’s operations. Third parties may also file claims against us in connection with these pump issues. In addition, sales of these products may continue to be affected and sales of other Baxter products may be adversely affected if we do not adequately address these pump issues.

In addition, the healthcare regulatory environment may change in a way that restricts our existing operations or our growth. The healthcare industry is likely to continue to undergo significant changes for the foreseeable future, which could have an adverse effect on our business, financial condition and results of operations. We cannot predict the effect of possible future legislation and regulation.

Failure to provide quality products and services to our customers could have an adverse effect on our business and subject us to regulatory actions and costly litigation.

Quality management plays an essential role in determining and meeting customer requirements, preventing defects and improving the company’s products and services. Our future operating results will depend on our ability to implement and improve our quality management program, and effectively train and manage our employee base with respect to quality management. While Baxter has a network of quality systems throughout our business units and facilities, which relates to the design, development, manufacturing, packaging, sterilization, handling, distribution and labeling of our products, quality and safety issues may occur with respect to any of our products. In addition, some of the raw materials employed in Baxter’s production processes are derived from human and animal origins. Though great care is taken to assure the safety of these raw materials, the nature of their origin elevates the potential for the introduction of pathogenic agents or other contaminants.

A quality or safety issue could have an adverse effect on our business, financial condition and results of operations and may result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals, restrictions on operations or withdrawal of existing approvals. An inability to address a quality or safety issue in an effective manner on a timely basis may also cause a loss of customer confidence in us or our products, which may result in losses of sales. In addition, we may be named as a defendant in product

7

liability lawsuits, which could result in costly litigation, reduced sales, significant liabilities and diversion of our management’s time, attention and resources. Even claims without merit could subject us to adverse publicity and require us to incur significant legal fees.

In 2008, we removed our heparin sodium injection products from distribution in the United States after identifying an increasing level of allergic-type and hypotensive adverse reactions occurring in certain patients. For more information on this recall and the lawsuits we face in connection with this recall, please refer to “Certain Regulatory Matters” in “Management’s Discussion and Analysis” of the Annual Report and “Notes to Consolidated Financial Statements — Note 11 Legal Proceedings” of the Annual Report.

If reimbursement for our current or future products is reduced or modified, our business could suffer.

Sales of our products depend, in part, on the extent to which the costs of our products are paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payors. These healthcare management organizations and third-party payors are increasingly challenging the prices charged for medical products and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs have been targeted in this effort. We also face challenges in certain foreign markets where the pricing and profitability of our products generally are subject to government controls. Government controls in foreign markets also impact our ability to collect accounts receivable in a timely manner. Accordingly, our current and potential products may not be considered cost effective, and reimbursement to the consumer may not be available or sufficient to allow us to sell our products on a competitive basis. Legislation and regulations affecting reimbursement for our products may change at any time and in ways that are difficult to predict and these changes may be adverse to us. Any reduction in Medicare, Medicaid or other third-party payor reimbursements could have a negative effect on our operating results.

If we are unable to obtain sufficient components and/or raw materials on a timely basis, our business may be adversely affected.

The manufacture of our products requires the timely delivery of sufficient amounts of quality components and materials. We manufacture our products in over 50 manufacturing facilities around the world. We acquire our components and materials from many suppliers in various countries. While efforts are made to diversify our sources of components and materials, in certain instances we acquire components and materials from a sole supplier. We work closely with our suppliers to ensure the continuity of supply but we cannot guarantee these efforts will continue to be successful. In addition, due to the regulatory environment in which we operate, we may not be able to quickly establish additional or replacement sources for some components or materials. A reduction or interruption in supply, and an inability to develop alternative sources for such supply, could adversely affect our ability to manufacture our products in a timely or cost-effective manner, and our ability to make product sales.

Consolidation in the healthcare industry could adversely affect our business, financial condition and results of operations.

There has been consolidation in our customer base, and by our competitors, which has resulted in pricing and sales pressures. As these consolidations occur, competition to provide products like ours will become more intense, and the importance of establishing relationships with key industry participants including GPOs, IDNs and other customers will become greater. Customers will continue to work and organize to negotiate price reductions for our products and services. To the extent we are forced to reduce our prices, our business will become less profitable unless we are able to achieve corresponding reductions in costs. The company’s sales could be adversely affected if any of its contracts with its GPOs, IDNs or other customers are terminated in part or in their entirety, or members decide to purchase from another supplier.

If we are unable to protect our patents or other proprietary rights, or if we infringe on the patents or other proprietary rights of others, our competitiveness and business prospects may be materially damaged.

Patent and other proprietary rights are essential to our business. Our success depends to a significant degree on our ability to obtain and enforce patents and licenses to patent rights, both in the United States and

8

in other countries. We cannot assure that pending patent applications will result in issued patents, that patents issued or licensed will not be challenged or circumvented by competitors, that our patents will not be found to be invalid or that the intellectual property rights of others will not prevent the company from selling certain products or including key features in the company’s products.

The patent position of a healthcare company is often uncertain and involves complex legal and factual questions. Significant litigation concerning patents and products is pervasive in our industry. Patent claims include challenges to the coverage and validity of our patents on products or processes as well as allegations that our products infringe patents held by competitors or other third parties. A loss in any of these types of cases could result in a loss of patent protection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations.

We also rely on trademarks, copyrights, trade secrets and know-how to develop, maintain and strengthen our competitive positions. While we protect our proprietary rights to the extent possible, we cannot guarantee that third parties will not know, discover or develop independently equivalent proprietary information or techniques, or that they will not gain access to our trade secrets or disclose our trade secrets to the public. Therefore, we cannot guarantee that we can maintain and protect unpatented proprietary information and trade secrets. Misappropriation of our intellectual property would have an adverse effect on our competitive position and may cause us to incur substantial litigation costs.

If our business development activities are unsuccessful, our business could suffer and our financial performance could be adversely affected.

We are engaged in business development activities including evaluating acquisitions, joint development opportunities, technology licensing arrangements and other opportunities. These activities may result in substantial investment of the company’s resources. Our success developing products or expanding into new markets from such activities will depend on a number of factors, including our ability to find suitable opportunities for acquisition, investment or alliance; whether we are able to establish an acquisition, investment or alliance on terms that are satisfactory to us; the strength of the other company’s underlying technology, products and ability to execute its business strategies; any intellectual property and litigation related to these products or technology; and our ability to successfully integrate the acquired company, business, product, technology or research into our existing operations including the ability to adequately fund acquired in-process research and development projects. If we are unsuccessful in our business development activities, we may be unable to meet our financial targets and we may be required to record asset impairment charges.

If we are unsuccessful in identifying growth opportunities or if we are unsuccessful in exiting low margin businesses or discontinuing low profit products, our business, financial condition and results could be adversely affected.

Successful execution of our business strategy depends, in part, on improving the profit margins we earn with respect to our current and future products. A failure to identify and take advantage of opportunities that allow us to increase our profit margins or a failure by us to exit low profit margin businesses or discontinue low profit margin products, may result in us failing to meet our financial targets and may otherwise have an adverse effect on our business, financial condition and results of operations.

We face substantial competition and many of our competitors have significantly greater financial and other resources.

Although no single company competes with Baxter in all of its businesses, Baxter faces substantial competition in each of its segments, from international and domestic healthcare and pharmaceutical companies of all sizes. Competition is primarily focused on cost-effectiveness, price, service, product performance, and technological innovation. Some competitors, principally large pharmaceutical companies, have greater financial, research and development and marketing resources than Baxter. Competition may increase further as additional companies begin to enter our markets or modify their existing products to compete directly with ours. Greater financial, research and development and marketing resources may allow our competitors to respond more quickly

9

to new or emerging technologies and changes in customer requirements that may render our products obsolete or non-competitive. If our competitors develop more effective or affordable products, or achieve earlier patent protection or product commercialization than we do, our operations will likely be negatively affected.

We also face competition for marketing, distribution and collaborative development agreements, for establishing relationships with academic and research institutions, and for licenses to intellectual property. In addition, academic institutions, government agencies and other public and private research organizations may also conduct research, seek patent protection and establish collaborative arrangements for discovery, research, clinical development and marketing of products similar to ours. These companies and institutions compete with us in recruiting and retaining qualified scientific and management personnel as well as in acquiring technologies complementary to our programs. If we are unable to successfully compete with these companies and institutions, our business may suffer.

We are subject to risks associated with doing business globally.

Our operations, both within and outside the United States, are subject to risks inherent in conducting business globally and under the laws, regulations and customs of various jurisdictions and geographies. These risks include fluctuations in currency exchange rates, changes in exchange controls, loss of business in government tenders that are held annually in many cases, nationalization, increasingly complex labor environments, expropriation and other governmental actions, changes in taxation, including legislative changes in United States and international taxation of income earned outside of the United States, importation limitations, export control restrictions, violations of U.S. or local laws, including the U.S. Foreign Corrupt Practices Act (FCPA), dependence on a few government entities as customers, pricing restrictions, economic destabilization, instability, disruption or destruction in a significant geographic region — due to the location of manufacturing facilities, distribution facilities or customers — regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, or natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease. Failure to comply with the laws and regulations that affect our global operations, including the FCPA, could have an adverse effect on our business, financial condition or results of operations.

We are subject to foreign currency exchange risk.

In 2008, we generated approximately 60% of our revenue outside the United States. Our financial results may be adversely affected by fluctuations in foreign currency exchange rates, especially in light of recent market volatility and drastic movements in currency exchange rates. These conditions may also reduce the benefits from our natural hedges and limit our ability to cost-effectively hedge against our foreign currency exposure. A discussion of the financial impact of foreign exchange rate fluctuations and the ways and extent to which we attempt to mitigate such impact is contained under the heading “Financial Instrument Market Risk” contained in “Management’s Discussion and Analysis” of the Annual Report. We cannot predict with any certainty changes in foreign currency exchange rates or the degree to which we can mitigate these risks.

Current challenges in the commercial and credit environment may adversely affect our business and financial condition.

The global financial markets have recently experienced unprecedented levels of volatility. The company’s ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for the company’s products or in the solvency of its customers or suppliers, deterioration in the company’s key financial ratios or credit ratings, or other significantly unfavorable changes in conditions. While these conditions and the current economic downturn have not meaningfully impaired our ability to access credit markets or meaningfully adversely affected our operations to date, continuing volatility in the global financial markets could increase borrowing costs or affect the company’s ability to access the capital markets. Current or worsening economic conditions may also adversely affect the business of our customers, including their ability to pay for our products and services, and the amount spent on healthcare generally. This could result in a decrease in the demand for our products and services, longer sales cycles, slower adoption of new technologies and increased price competition. These conditions may also adversely affect certain of our suppliers, which could cause a disruption in our ability to produce our products.

10

Item 1B.   Unresolved Staff Comments.

None.

Item 2.   Properties.

Our corporate offices are owned and located at One Baxter Parkway, Deerfield, Illinois 60015.

Baxter owns or has long-term leases on substantially all of its major manufacturing facilities. With respect to its continuing operations, the company maintains 15 manufacturing facilities in the United States and its territories, including three in Puerto Rico. The company also manufactures in Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Costa Rica, the Czech Republic, Germany, India, Ireland, Italy, Japan, Malta, Mexico, the Philippines, Poland, Singapore, Spain, Switzerland, Tunisia, Turkey and the United Kingdom. The majority of these facilities are shared by more than one of the company’s business segments. Our principal manufacturing facilities by segment are listed below:

Business	Location	Owned/Leased
BioScience
	Orth, Austria	Owned
	Vienna, Austria	Owned
	Lessines, Belgium	Owned
	Hayward, California	Leased
	Los Angeles, California	Owned
	Thousand Oaks, California	Owned
	Bohumil, Czech Republic	Owned
	Pisa, Italy	Owned
	Rieti, Italy	Owned
	Beltsville, Maryland	Leased
	Neuchatel, Switzerland	Owned
Medication Delivery
	Mountain Home, Arkansas	Owned
	Toongabbie, Australia	Owned
	Lessines, Belgium	Owned
	Sao Paulo, Brazil	Owned
	Alliston, Canada	Owned
	Shanghai, China	Owned
	Cali, Colombia	Owned
	Cartago, Costa Rica	Owned
	Thetford, England	Owned
	Halle, Germany	Owned
	Round Lake, Illinois	Owned
	Bloomington, Indiana	Owned/Leased(1)
	Grosotto, Italy	Owned
	Cleveland, Mississippi	Leased
	Cherry Hill, New Jersey	Owned/Leased(1)
	North Cove, North Carolina	Owned
	Aibonito, Puerto Rico	Leased
	Guayama, Puerto Rico	Owned
	Jayuya, Puerto Rico	Leased
	Woodlands, Singapore	Owned/Leased(2)
	Sabinanigo, Spain	Owned

11

Business	Location	Owned/Leased
Renal
	Mountain Home, Arkansas	Owned
	Toongabbie, Australia	Owned
	Sao Paulo, Brazil	Owned
	Alliston, Canada	Owned
	Guangzhou, China	Owned(3)
	Cali, Colombia	Owned
	Castlebar, Ireland	Owned
	Miyazaki, Japan	Owned
	Cuernavaca, Mexico	Owned
	North Cove, North Carolina	Owned
	Woodlands, Singapore	Owned/Leased(2)

(1)	The Bloomington, Indiana and Cherry Hill, New Jersey locations include both owned and leased facilities.
(2)	Baxter owns the facility located at Woodlands, Singapore and leases the property upon which it rests.
(3)	The Guangzhou, China facility is owned by a joint venture in which Baxter owns a majority share.

The company also owns or operates shared distribution facilities throughout the world. In the United States and Puerto Rico, there are 13 shared distribution facilities with the principal facilities located in Memphis, Tennessee; Catano, Puerto Rico; North Cove, North Carolina; and Round Lake, Illinois. Internationally, we have more than 100 shared distribution facilities located in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Costa Rica, Czech Republic, Ecuador, France, Germany, Greece, Guatemala, Hong Kong, India, Italy, Japan, Korea, Mexico, New Zealand, Panama, Peru, Philippines, Poland, Portugal, Russia, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Arab Emirates, the United Kingdom, and Venezuela.

The company continually evaluates its plants and production lines and believes that its current facilities plus any planned expansions are generally sufficient to meet its expected needs and expected near-term growth. Expansion projects and facility closings will be undertaken as necessary in response to market needs.

Item 3.   Legal Proceedings.

Incorporated by reference to “Notes to Consolidated Financial Statements — Note 11 Legal Proceedings” of the Annual Report.

Item 4.   Submission of Matters to a Vote of Security Holders.

None.

Executive Officers of the Registrant

Robert L. Parkinson, Jr., age 58, is Chairman and Chief Executive Officer of Baxter, having served in that capacity since April 2004. Prior to joining Baxter, Mr. Parkinson was Dean of Loyola University Chicago’s School of Business Administration and Graduate School of Business from 2002 to 2004. He retired from Abbott Laboratories in 2001 following a 25-year career, having served in a variety of domestic and international management and leadership positions, including as President and Chief Operating Officer. Mr. Parkinson also serves on the boards of directors of Chicago-based Northwestern Memorial Hospital and the Northwestern Memorial Foundation as well as Loyola University Chicago’s Board of Trustees.

Joy A. Amundson, age 54, is Corporate Vice President — President, BioScience, having served in that capacity since August 2004. Prior to joining Baxter in August 2004, Ms. Amundson was a principal of Amundson Partners, Inc., a healthcare-consulting firm, from 2001. From 1995 to 2001, she served as a Senior Vice President of Abbott Laboratories.

Peter J. Arduini, age 44, is Corporate Vice President — President, Medication Delivery. Prior to joining Baxter in March 2005, Mr. Arduini spent 15 years at GE Healthcare in a variety of management roles for domestic and global businesses, the most recent of which was global general manager of GE Healthcare’s computerized axial tomography scan (CT) and functional imaging business.

12

Michael J. Baughman, age 44, is Corporate Vice President and Controller, having served in that capacity since May 2006. Mr. Baughman joined Baxter in 2003 as Vice President of Corporate Audit and was appointed Controller in March 2005. Before joining Baxter, Mr. Baughman spent 16 years at PricewaterhouseCoopers LLP, in roles of increasing responsibility, which included audit partner and partner in the firm’s mergers and acquisitions practice.

Robert M. Davis, age 42, is Corporate Vice President and Chief Financial Officer, having served in that capacity since May 2006. Mr. Davis joined Baxter as Treasurer in November 2004. Prior to joining Baxter, Mr. Davis was with Eli Lilly and Company from 1990 where he held a number of financial positions, including Assistant Treasurer, Director of Corporate Financial Planning and tax counsel.

James M. Gatling, age 59, is Corporate Vice President — Manufacturing having served in that capacity since December 1996. Mr. Gatling is also responsible for the environment, health and safety function.

John J. Greisch, age 53, is Corporate Vice President — President, International, having served in that capacity since May 2006. From June 2004 to May 2006, he served as Corporate Vice President and Chief Financial Officer and from January to June 2004, he was Corporate Vice President — President, BioScience. Prior to that, Mr. Greisch served as Vice President of Finance and Strategy for BioScience from May 2003 to January 2004 and as Vice President of Finance for Renal from March 2002 until April 2003. Prior to joining Baxter, he was President and Chief Executive Officer of FleetPride Corporation, a distribution company, from 1998 until 2001.

Susan R. Lichtenstein, age 52, is Corporate Vice President and General Counsel. Prior to joining Baxter in April 2005, Ms. Lichtenstein was a partner with McDermott Will & Emery. She joined the law firm after having served as General Counsel to the Governor of Illinois from 2003 to 2004. Ms. Lichtenstein served as Senior Vice President, General Counsel and Corporate Secretary for Tellabs, Inc. from 2000 to 2002. From 1994 to 2000, Ms. Lichtenstein held several positions with Ameritech Corporation, including Senior Vice President, General Counsel and Corporate Secretary from 1999 to 2000.

Jeanne K. Mason, age 53, is Corporate Vice President, Human Resources. Prior to joining Baxter in May 2006, Ms. Mason was with General Electric from 1988, holding various leadership positions, the most recent of which was with GE Insurance Solutions, a primary insurance and reinsurance business, where she was responsible for global human resource functions.

Bruce H. McGillivray, age 53, is Corporate Vice President — President, Renal, having served in that capacity since August 2004. From 2002 until August 2004, Mr. McGillivray was President of Renal, Europe and from 1997 to 2002, he was President of Baxter Corporation in Canada.

Norbert G. Riedel, age 51, is Corporate Vice President and Chief Scientific Officer, having served in that capacity since May 2001. From 1998 to 2001, he served as President of the recombinant business unit of BioScience. Prior to joining Baxter, Dr. Riedel was head of worldwide biotechnology and worldwide core research functions at Hoechst Marion Roussel, now Sanofi-Aventis.

Karenann K. Terrell, age 47, is Corporate Vice President and Chief Information Officer. Prior to joining Baxter in April 2006, Ms. Terrell was with DaimlerChrysler Corporation from 2000 where she served in various positions, the most recent of which was Vice President and Chief Information Officer, Chrysler Group and Mercedes Benz North America. Prior to that, she spent 16 years with General Motors with responsibility for brand development and e-business management.

Cheryl L. White, age 55, is Corporate Vice President, Quality, having served in that capacity since March 2006. From 1997 to 2006, Ms. White held various management positions in Baxter’s BioScience business, the most recent of which was Vice President, Quality Management.

All executive officers hold office until the next annual election of officers and until their respective successors are elected and qualified.

13

PART II

Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The following table includes information about the company’s common stock repurchases during the three-month period ended December 31, 2008.

Issuer Purchases of Equity Securities

					Total Number of Shares		Approximate Dollar
	Total Number				Purchased as Part of		Value of Shares that
	of Shares		Average Price		Publicly Announced		may yet be Purchased
Period	Purchased(1)		Paid per Share		Program(1)		Under the Program(1)
October 1, 2008 through October 31, 2008		3,072,800	$	60.60		3,072,800
November 1, 2008 through November 30, 2008		3,127,267	$	56.68		3,127,267
December 1, 2008 through December 31, 2008		1,911,418	$	52.26		1,911,418
Total		8,111,485	$	57.12		8,111,485	$	1,165,944,322

(1) On March 18, 2008, the company announced that its Board of Directors authorized the repurchase of up to $2.0 billion of the company’s common stock. During the fourth quarter of 2008, the company repurchased approximately 8.1 million shares in open market purchases for approximately $463 million under this program. The remaining authorization under this program totaled approximately $1.2 billion at December 31, 2008. The program does not have an expiration date.

Additional information required by this item is incorporated by reference from the section entitled “Notes to Consolidated Financial Statements — Note 13 Quarterly Financial Results and Market for the Company’s Stock (Unaudited)” of the Annual Report.

Item 6.   Selected Financial Data.

Incorporated by reference from the section entitled “Five-Year Summary of Selected Financial Data” of the Annual Report.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Incorporated by reference from the section entitled “Management’s Discussion and Analysis” of the Annual Report.

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.

Incorporated by reference from the section entitled “Financial Instrument Market Risk” in “Management’s Discussion and Analysis” of the Annual Report.

Item 8.   Financial Statements and Supplementary Data.

Incorporated by reference from the sections entitled “Report of Independent Registered Public Accounting Firm,” “Consolidated Balance Sheets,” “Consolidated Statements of Income,” “Consolidated Statements of Cash Flows,” “Consolidated Statements of Shareholders’ Equity and Comprehensive Income” and “Notes to Consolidated Financial Statements” of the Annual Report.

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

14

Item 9A.   Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Baxter carried out an evaluation, under the supervision and with the participation of its Disclosure Committee and management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of Baxter’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2008. Baxter’s disclosure controls and procedures are designed to ensure that information required to be disclosed by Baxter in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is communicated to management, including the Chief Executive Officer, Chief Financial Officer and its Board of Directors, to allow timely decisions regarding required disclosure.

Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures were effective as of December 31, 2008.

Assessment of Internal Control Over Financial Reporting

Baxter included a report of management’s assessment of the effectiveness of its internal control over financial reporting as of December 31, 2008 in its Annual Report. Baxter’s independent auditor, PricewaterhouseCoopers LLP, an independent registered public accounting firm, also audited, and reported on, the effectiveness of internal control over financial reporting. Management’s report and the independent registered public accounting firm’s audit report are included in the Annual Report and incorporated herein by reference.

Changes in Internal Control over Financial Reporting

There has been no change in Baxter’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, Baxter’s internal control over financial reporting.

Item 9B.   Other Information.

None.

PART III

Item 10.   Directors, Executive Officers and Corporate Governance.

Refer to information under the captions entitled “Election of Directors,” “Committees of the Board — Audit Committee,” “Corporate Governance — Code of Conduct” and “Section 16(a) Beneficial Ownership Reporting Compliance” in Baxter’s definitive proxy statement to be filed with the Securities and Exchange Commission and delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on May 5, 2009 (the “Proxy Statement”), all of which information is incorporated herein by reference. Also refer to information regarding executive officers of Baxter under the caption entitled “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K.

Item 11.   Executive Compensation.

Refer to information under the captions entitled “Executive Compensation,” “Director Compensation” and “Compensation Committee Report” in the Proxy Statement, all of which information is incorporated herein by reference.

15

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information relating to shares of common stock that may be issued under Baxter’s existing equity compensation plans as of December 31, 2008.

							Number of Shares
	Number of Shares to be			Weighted-Average			Remaining Available
	Issued upon Exercise			Exercise Price of			for Future Issuance
	of Outstanding			Outstanding			Under Equity Compensation
	Options, Warrants			Options, Warrants			Plans (Excluding Shares
Plan Category	and Rights(a)			and Rights(b)			Reflected in Column (a)) (c)
Equity Compensation Plans Approved by Shareholders(1)		42,520,943	(2)	$	44.46	(3)		33,401,811	(4)
Equity Compensation Plans Not Approved by Shareholders(5)		3,530,851	(2)(6)	$	40.41			847,839	(7)
Total		46,051,794	(8)	$	44.13			34,249,650

(1)	Consists of the 2000, 2001, 2003 Incentive Compensation Programs, the 2007 Incentive Plan and the Employee Stock Purchase Plan for United States Employees and the Employee Stock Purchase Plan for International Employees (collectively, the “Employee Stock Purchase Plans”).
(2)	Excludes purchase rights under the Employee Stock Purchase Plans. Under the Employee Stock Purchase Plans, eligible employees may purchase shares of common stock through payroll deductions of up to 15 percent of base pay at a purchase price equal to 85 percent of the closing market price on the purchase date (as defined by the Employee Stock Purchase Plans). A participating employee may not purchase more than $25,000 in fair market value of common stock under the Employee Stock Purchase Plans in any calendar year and may withdraw from the Employee Stock Purchase Plans at any time.
(3)	Restricted stock units and performance share units are excluded when determining the weighted-average exercise price of outstanding options.
(4)	Includes (i) 4,484,436 shares of common stock available for purchase under the Employee Stock Purchase Plan for United States Employees as of December 31, 2008; (ii) 213,668 shares of common stock available under the 2000 Incentive Compensation Program; (iii) 1,258,172 shares of common stock available under the 2001 Incentive Compensation Program; (iv) 4,021,395 shares of common stock available under the 2003 Incentive Compensation Program; and (v) 23,424,140 shares of common stock available under the 2007 Incentive Plan.
(5)	Consists of the 2001 Global Stock Option Plan, additional shares of common stock available under the 2001 Incentive Compensation Program pursuant to an amendment thereto not approved by shareholders, and the stock option grants described below under “February 2000 Stock Option Grant.”
(6)	Of the 3,530,851 shares issuable upon exercise of outstanding options granted under equity compensation plans not approved by shareholders, 1,237,831 shares are issuable upon exercise of options granted in February 2001 under the 2001 Global Stock Option Plan, 1,690,656 shares are issuable upon exercise of options granted under the 2001 Incentive Compensation Program pursuant to an amendment thereto not approved by shareholders, and 602,364 shares are issuable upon exercise of the options described below under “February 2000 Stock Option Grant.”
(7)	Consists of 847,839 shares of common stock available for purchase under the Employee Stock Purchase Plan for International Employees. Although the company’s shareholders have approved the Employee Stock Purchase Plan for International Employees, only the company’s Board of Directors has approved these additional shares.
(8)	Includes outstanding awards of 44,026,498 stock options, which have a weighted-average exercise price of $44.13 and a weighted-average remaining term of 5.9 years, 655,274 shares issuable upon vesting of restricted stock units, and 1,370,022 shares issuable upon vesting of performance share units.

16

The material features of each equity compensation plan under which equity securities are authorized for issuance that was adopted without the approval of shareholders are described below.

February 2000 Stock Option Grant

The Compensation Committee approved grants to Baxter employees of non-qualified stock options to purchase 5,625,114 shares in February 2000. As of December 31, 2008, 602,364 shares are issuable under the February 2000 grant. The exercise price of these stock options is equal to the fair market value of Baxter common stock on the date of grant, which is the closing price of the common stock on the New York Stock Exchange on the grant date. The exercise price of the options may be paid in cash or in certain shares of Baxter common stock. All of the stock options granted under these programs have vested. The terms and conditions of each of these grants provide that the provisions of the shareholder-approved 1998 Incentive Compensation Program govern these stock option grants (except for the limit on shares available under the 1998 Program).

2001 Global Stock Option Plan

The 2001 Global Stock Option Plan is a broad-based plan adopted by Baxter’s Board of Directors in February 2001 to enable Baxter to make a special one-time stock option grant to eligible non-officer employees worldwide. On February 28, 2001, Baxter granted a non-qualified option to purchase 200 shares of common stock at an exercise price of $45.515 per share (post 2001 stock split) to approximately 44,000 eligible employees under the 2001 Global Stock Option Plan. The exercise price of these options equals the closing price for Baxter common stock on the New York Stock Exchange on the grant date. The options became exercisable on February 28, 2004, which was the third anniversary of the grant date, and expire on February 25, 2011. If an option holder leaves Baxter after the vesting date, then the option will expire three months after the holder leaves the company.

Refer to information under the captions entitled “Security Ownership by Directors and Executive Officers” and “Security Ownership by Certain Beneficial Owners” in the Proxy Statement for additional information required by this item, all of which information is incorporated herein by reference.

Item 13.   Certain Relationships and Related Transactions and Director Independence.

Refer to the information under the caption entitled “Certain Relationships and Related Transactions,” “Board of Directors” and “Corporate Governance — Director Independence” in the Proxy Statement, all of which information is incorporated herein by reference.

Item 14.   Principal Accountant Fees and Services.

Refer to the information under the caption entitled “Audit and Non-Audit Fees” in the Proxy Statement, all of which information is incorporated herein by reference.

17

PART IV

Item 15.   Exhibits and Financial Statement Schedules.

The following documents are filed as a part of this report:

(1)  Financial Statements:

Consolidated Balance Sheets	Annual Report, page 55
Consolidated Statements of Income	Annual Report, page 56
Consolidated Statements of Cash Flows	Annual Report, page 57
Consolidated Statements of Shareholders’ Equity and Comprehensive Income	Annual Report, page 58
Notes to Consolidated Financial Statements	Annual Report, pages 59-85
Report of Independent Registered Public Accounting Firm	Annual Report, page 54

(2)  Schedules required by Article 12 of Regulation S-X:

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule	Page 24
Schedule II — Valuation and Qualifying Accounts	Page 25

All other schedules have been omitted because they are not applicable or not required.

(3)  Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference. Exhibits in the Exhibit Index marked with a “C” in the left margin constitute management contracts or compensatory plans or arrangements contemplated by Item 15(b) of Form 10-K.

18

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Baxter International Inc.

By:  /s/  Robert L. Parkinson, Jr.

Robert L. Parkinson, Jr.

Chairman and Chief Executive Officer

DATE: February 19, 2009

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 19, 2009.

Signature	Title
/s/  Robert L. Parkinson, Jr. Robert L. Parkinson, Jr.	Chairman and Chief Executive Officer (principal executive officer)
/s/  Robert M. Davis Robert M. Davis	Corporate Vice President and Chief Financial Officer (principal financial officer)
/s/  Michael J. Baughman Michael J. Baughman	Corporate Vice President and Controller (principal accounting officer)
/s/  Walter E. Boomer Walter E. Boomer	Director
/s/  Blake E. Devitt Blake E. Devitt	Director
/s/  John D. Forsyth John D. Forsyth	Director
/s/  Gail D. Fosler Gail D. Fosler	Director
/s/  James R. Gavin III, M.D., Ph.D. James R. Gavin III, M.D., Ph.D.	Director
/s/  Peter S. Hellman Peter S. Hellman	Director
/s/  Wayne T. Hockmeyer, Ph.D Wayne T. Hockmeyer, Ph.D	Director

19

Signature	Title
/s/  Joseph B. Martin, M.D., Ph.D. Joseph B. Martin, M.D., Ph.D.	Director
/s/  Carole J. Shapazian Carole J. Shapazian	Director
/s/  Thomas T. Stallkamp Thomas T. Stallkamp	Director
/s/  Albert P. L. Stroucken Albert P. L. Stroucken	Director

20

EXHIBIT INDEX

Number and Description of Exhibit
3.	Certificate of Incorporation and Bylaws
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on May 18, 2006).
3.2	Bylaws, as amended and restated on November 11, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on November 17, 2008).
4.	Instruments defining the rights of security holders, including indentures
4.1	Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit (a) to the Company’s Registration Statement on Form S-16 (Registration No. 02-65269), filed on August 17, 1979).
4.2	Rights Agreement, dated as of December 9, 1998, between the Company and First Chicago Trust Company of New York as Rights Agent (including form of Certificate of Designation, form of Rights Certificates and form of Summary of Rights) (incorporated by reference to Exhibit 10 to the Company’s Current Report on Form 8-K, filed on December 15, 1998).
4.3	Certificate of Adjustment to the Rights Agreement, dated as of May 30, 2001 (incorporated by reference to Exhibit 2 to the Company’s Amendment No. 1 to Registration Statement on Form 8-A, filed on May 30, 2001).
4.4	Indenture, dated as of April 26, 2002, between the Company and Bank One Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.5 to Amendment No. 1 to Form 8-A, filed on December 23, 2002).
4.5	Second Supplemental Indenture, dated as of March 10, 2003, to Indenture dated as of April 26, 2002, between the Company and Bank One Trust Company, N.A., as Trustee (including form of 4.625% Notes due 2015) (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-4 (Registration No. 333-109329), filed on September 30, 2003).
4.6	Indenture, dated August 8, 2006, between the Company and J.P. Morgan Trust Company, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Form 8-K, filed on August 9, 2006).
4.7	First Supplemental Indenture, dated August 8, 2006, between the Company and J.P. Morgan Trust Company, National Association, as Trustee (including form of 5.90% Senior Note due 2016) (incorporated by reference to Exhibit 4.2 to Form 8-K, filed on August 9, 2006).
4.8	Second Supplemental Indenture, dated December 7, 2007, between the Company and The Bank of New York Trust Company, N.A. (as successor in interest to J.P. Morgan Trust Company, National Association), as Trustee (including form of 6.250% Senior Note due 2037) (incorporated by reference to Exhibit 4.1 to Form 8-K, filed on December 7, 2007).
4.9	Third Supplemental Indenture, dated May 22, 2008, between the Company and The Bank of New York Trust Company, N.A. (as successor in interest to J.P. Morgan Trust Company, National Association), as Trustee (including form of 5.375% Senior Notes due 2018) (incorporated by reference to Exhibit 4.1 to Form 8-K, filed on May 22, 2008).
10.	Material Contracts
10.1	Credit Agreement, dated December 20, 2006, among Baxter International Inc. as Borrower, J.P. Morgan Chase Bank, as Administrative Agent and certain other financial institutions named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 22, 2006).
10.2	Consent Decree for Condemnation and Permanent Injunction with the United States of America (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on June 29, 2006).
C 10.3	Form of Indemnification Agreement entered into with directors and officers (incorporated by reference to Exhibit 19.4 to the Company’s Quarterly Report on Form 10-Q, filed on November 14, 1986).
C 10.4	Baxter International Inc. 1998 Incentive Compensation Program (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K, filed on March 20, 1998).

21

Number and Description of Exhibit
C 10.5	Baxter International Inc. 2000 Incentive Compensation Program (incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement on Schedule 14A, filed on March 23, 2000).
C 10.6	Baxter International Inc. 2001 Incentive Compensation Program and Amendment No. 1 thereto (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K, filed on March 13, 2002).
C 10.7	Baxter International Inc. 2003 Incentive Compensation Program (incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement on Schedule 14A, filed on March 21, 2003).
C 10.8	Baxter International Inc. 2007 Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A, filed on March 20, 2007).
C 10.9	Form of Baxter International Inc. LTI Stock Option and Restricted Stock Unit Plan (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K, filed on March 16, 2005).
C 10.10	Baxter International Inc. Equity Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on March 16, 2007).
C 10.11	Form of Stock Option Plan Terms and Conditions (incorporated by reference to Exhibit 10.40 to the Company’s Quarterly Report on Form 10-Q, filed on November 4, 2004).
C 10.12	Baxter International Inc. Stock Option Plan adopted February 17, 1998, Terms and Conditions (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-8 (Registration No. 333-71553), filed on February 1, 1999).
C 10.13	Baxter International Inc. Stock Option Plan adopted February 21, 2000, Terms and Conditions (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-8 (Registration No. 333-48906), filed on October 30, 2000).
C 10.14	2001 Global Stock Option Plan adopted February 27, 2001, Terms and Conditions (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K, filed on March 12, 2003).
C *10.15	Baxter International Inc. Directors’ Deferred Compensation Plan (amended and restated effective January 1, 2009).
C 10.16	Amended and Restated Employment Agreement, between Robert L. Parkinson, Jr. and Baxter International Inc., dated December 12, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 17, 2008).
C *10.17	Form of Severance Agreement entered into with executive officers (amended and restated effective December 18, 2008).
C *10.18	Baxter International Inc. and Subsidiaries Supplemental Pension Plan (amended and restated effective January 1, 2009).
C *10.19	Baxter International Inc. and Subsidiaries Deferred Compensation Plan (amended and restated effective January 1, 2009).
C 10.20	Baxter International Inc. Employee Stock Purchase Plan for United States Employees (as amended and restated effective January 1, 2008) (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K, filed on February 26, 2008).
C *10.21	Baxter International Inc. Non-Employee Director Compensation Plan (as amended and restated effective January 1, 2009).
*12.	Computation of Ratio of Earnings to Fixed Charges.
*13.	Selections from the 2008 Annual Report to Shareholders (such report, except to the extent expressly incorporated herein by reference, is being furnished for the information of the Securities and Exchange Commission only and is not deemed to be filed as part of this Annual Report on Form 10-K).
*21.	Subsidiaries of Baxter International Inc.
*23.	Consent of PricewaterhouseCoopers LLP.

22

Number and Description of Exhibit
*31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
*31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
*32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.
C	Management contract or compensatory plan or arrangement.

23

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of Baxter International Inc.:

Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 19, 2009 appearing in the 2008 Annual Report to Shareholders of Baxter International Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

February 19, 2009

24

SCHEDULE II

			Additions
	Balance at		Charged to								Balance at
Valuation and Qualifying Accounts	Beginning		Costs and		Charged/(Credited) to			Deductions			End of
(In millions of dollars)	of Period		Expenses		Other Accounts(1)			From Reserves			Period
Year ended December 31, 2008:
Allowance for doubtful accounts	$	134		2		(17	)		(16	)	$	103
Inventory reserves	$	212		158		(11	)		(112	)	$	247
Deferred tax asset valuation allowance	$	196		8		(18	)		(46	)	$	140
Year ended December 31, 2007:
Allowance for doubtful accounts	$	127		6		13			(12	)	$	134
Inventory reserves	$	180		139		3			(110	)	$	212
Deferred tax asset valuation allowance	$	234		32		(8	)		(62	)	$	196
Year ended December 31, 2006:
Allowance for doubtful accounts	$	120		23		8			(24	)	$	127
Inventory reserves	$	146		176		6			(148	)	$	180
Deferred tax asset valuation allowance	$	319		21		(46	)		(60	)	$	234

(1) Valuation accounts of acquired or divested companies and foreign currency translation adjustments. Reserves are deducted from assets to which they apply.

25

EX-10.15

Exhibit 10.15

Baxter International Inc.
Directors’ Deferred Compensation Plan

(Amended and Restated Effective January 1, 2009)

TABLE OF CONTENTS

Article I Purpose and Effective Date	1
1.1 Purpose	1
1.2 Effective Date	1
Article II Definitions	2
2.1 Account	2
2.2 Administrator	2
2.3 Baxter	2
2.4 Beneficiary	2
2.5 Board	2
2.6 Compensation	2
2.7 Compensation Committee	2
2.8 Deferral	2
2.9 Deferral Election Form	2
2.10 Distribution Election Form	2
2.11 Outside Director	3
2.12 Participant	3
2.13 Plan Year	3
2.14 Termination	3
2.15 Unforeseeable Emergency	3
Article III   Eligibility for Compensation Deferrals	4
3.1 Compensation Deferral Elections	4
3.2 Timing of and Changes in Deferral Election	4
3.3 Deferral of Restricted Stock Units	4
Article IV Crediting of Accounts	6
4.1 Crediting of Accounts	6
4.2 Earnings	6
4.3 Account Statements	6
4.4 Vesting	6
Article V Distribution of Benefits	7
5.1 Distribution of Benefits	7
5.2 Distribution	7
5.3 Effect of Payment	9
5.4 Taxation of Plan Benefits	9
5.5 Withholding and Payroll Taxes	9
5.6 Distribution Due to Unforeseeable Emergency	9
Article VI Beneficiary Designation	10
6.1 Beneficiary Designation	10
6.2 Amendments to Beneficiary Designation	10
6.3 No Beneficiary Designation	10

i 

Article VII Administration	11
7.1 Administration	11
7.2 Administrator Powers	11
7.3 Finality of Decisions	11
7.4 Claims Procedure	11
7.5 Indemnity	11
Article VIII Amendment and Termination Of Plan	13
8.1 Amendment	13
8.2 Right to Terminate	13
8.3 Payment at Termination	13
Article IX Miscellaneous	14
9.1 Unfunded Plan	14
9.2 Unsecured General Creditor	14
9.3 Nonassignability	14
9.4 Protective Provisions	14
9.5 Governing Law	14
9.6 Severability	14
9.7 Notice	14
9.8 Successors	15
9.9 Action by Baxter	15
9.10 Participant Litigation	15

ii 

BAXTER INTERNATIONAL INC.
DIRECTORS’ DEFERRED COMPENSATION PLAN

(Amended and Restated Effective January 1, 2009)

ARTICLE I — PURPOSE AND EFFECTIVE DATE

1.1 Purpose.

The Baxter International Inc. Directors’ Deferred Compensation Plan (the “Plan”) has been adopted by Baxter International Inc. (“Baxter”). The Plan is intended to help Baxter retain the services of qualified individuals to serve as outside members of its Board of Directors by offering them the opportunity to defer payment of their retainers and directors’ fees through an unfunded deferred compensation arrangement.

1.2 Effective Date.

The original effective date of this Plan was July 1, 2003. The Plan was amended and restated in its entirety effective January 1, 2005, and two amendments have been adopted to the Plan as so amended and restated. The Plan is being again amended and restated in its entirety in order to incorporate the prior amendments, to comply with the final regulations issued by the Internal Revenue Service to implement the requirements of §409A of the Internal Revenue Code (“Code”), and for certain other purposes. This amendment and restatement of the Plan is generally effective as of January 1, 2009; provided that the amendments to the Plan (including without limitation Section 2.10(b) and 5.2(A)) permitting a Participant to make certain distribution elections, or changes to distribution elections previously made, prior to January 1, 2009, in accordance with the transitional rules set forth in IRS Notice 2007-86, shall be effective on the date approved by the Compensation Committee; and provided further than any provision of the amendment and restatement that reflects the manner in which the Plan has been administered in compliance with §409A since January 1, 2005, shall, to the extent required by §409A, be effective as of January 1, 2005.

1

ARTICLE II — DEFINITIONS

2.1 Account.

The bookkeeping account established to record a Participant’s interest in the Plan as provided in Article IV.

2.2 Administrator.

The person or entity appointed to administer the Plan as provided in Article VII.

2.3 Baxter.

Baxter International Inc., a Delaware corporation, and any other company that succeeds to the obligations of Baxter under this Plan pursuant to Section 9.8.

2.4 Beneficiary.

A Participant’s Beneficiary, as defined in Article VI, is the Beneficiary designated to receive the Participant’s Account, if any, from the Plan, upon the death of the Participant.

2.5 Board.

The Board of Directors of Baxter.

2.6 Compensation.

All compensation (other than Stock Options) payable by Baxter to a Participant for his/her services as a member of the Board, including without limitation any annual retainer, fees for attending meetings of the Board or any committee thereof, fees for acting as chairperson of any Board or committee meeting, and any other fees as may become payable to a Non-Employee Director, including the additional retainer payable to the Lead Director.

2.7 Compensation Committee.

The Compensation Committee of the Board.

2.8 Deferral.

The Deferral is the amount of the Participant’s Compensation that the Participant elected to defer and contribute to the Plan, which, but for such election, would have otherwise been paid to him/her.

2.9 Deferral Election Form.

The form that a Participant must complete and return to the Administrator, in accordance with the rules and procedures as may be established by the Administrator, in order to elect to defer a portion of his or her Compensation into the Plan.

2.10 Distribution Election Form.

The form that a Participant must complete and return to the Administrator, in accordance with the rules and procedures as may be established by the Administrator. This form is to be used by Participants for two purposes:

(a)	To elect the manner in which the Participant’s Account will be distributed upon Termination. Only one election form shall be filed with respect to distribution of a Participant’s Account following Termination.
(b)	Prior to January 1, 2009, a Participant may also file a Distribution Election Form to request a scheduled in-service distribution of all or a portion of his or her Account, in accordance with Section 5.2(B). Effective January 1, 2009, scheduled in-service distributions are no longer permitted unless elected at the same time the Participant commences participation in the Plan.

2

To be effective, a Distribution Election Form must be filed at the same time as the Participant’s first Deferral Election Form (in which case it may be combined with the Deferral Election Form), or at such other time as may be permitted by Section 5.2.

2.11 Outside Director.

Any member of the Board who is not an employee of Baxter or its subsidiaries and who receives Compensation for his services as a member of the Board.

2.12 Participant.

A Participant is any Outside Director or former Outside Director who has an Account balance in the Plan.

2.13 Plan Year.

The Plan Year is the calendar year. The first Plan Year was the six-month period commencing July 1, 2003, and ending December 31, 2003.

2.14 Termination.

For purposes of the Plan, Termination means a Participant ceasing to be a member of the Board for any reason, including resignation, removal, or failure to be re-elected. A Participant who ceases to be an Outside Director, but is still a member of the Board, shall not have incurred a Termination. Notwithstanding the foregoing, for purposes of determining when a Participant’s Account becomes payable, Termination shall not be considered to have occurred until the Participant incurs a separation from service as defined in Treasury Regulations issued pursuant to §409A of the Code. A Participant shall not be considered to have incurred a separation from service until the Participant has ceased to provide any services as a director or independent contractor for Baxter, its subsidiaries, and any other entity that would be treated as a member of a controlled group that includes Baxter under §414(b) or (c) of the Code (as modified by substituting 50% ownership for 80% for all purposes thereof), without any expectation of the Participant being retained to provide future services as a director or independent contractor; provided, however, that a Participant shall not be considered to have failed to incur a separation from service if the Participant is, or becomes, an employee of any such entity.

2.15 Unforeseeable Emergency.

A severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, the Participant’s Beneficiary, or the Participant’s dependent (as defined in §152 of the Code, without regard to §§152(b)(1), (b)(2), and (d)(1)(B)); loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance); or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Whether a Participant is faced with an unforeseeable emergency permitting a distribution under this Plan is to be determined based on the relevant facts and circumstances of each case and in accordance with the requirements of §409A of the Code.

3

ARTICLE III — ELIGIBILITY FOR COMPENSATION DEFERRALS

3.1 Compensation Deferral Elections.

Any Outside Director may elect to defer a portion of his or her Compensation as set forth on his or her Deferral Election Form, in accordance with applicable rules and procedures established by the Administrator. An Outside Director Participant may elect to defer up to a total of 100% of his or her Compensation, or any lesser amount; provided that the Administrator may establish reasonable procedures requiring Deferral Elections to be stated in whole dollar amounts or whole percentages.

3.2 Timing of and Changes in Deferral Election.

An Outside Director may make a Deferral Election for each Plan Year either

(a)

during the annual enrollment period established by the Administrator prior to the beginning of the Plan Year, in which event such Deferral Election shall apply to all Compensation payable to such Outside Director during the Plan Year; or

(b)

not later than 30 days after the Outside Director is first elected to the Board, in which event such Deferral Election shall apply to all Compensation earned after the election is made in the remainder of the Plan Year (including a pro rata share of any annual retainer or similar amount, determined by multiplying the amount of such Compensation by a fraction, the numerator of which is the number of days remaining in the Plan Year after the election and denominator is the number of days remaining in the Plan Year after the Outside Director is elected to the Board); provided, that prior to his election to the Board the Outside Director did not participate in any elective deferred compensation arrangement with respect to Baxter, its subsidiaries, and any other entity that would be treated as a member of a controlled group that includes Baxter under §414(b) or (c) of the Code, other than (i) the Baxter International Inc. and Subsidiaries Deferred Compensation Plan, or any similar plan applicable only to employees, or (ii) a deferred compensation plan under which the Outside Director either accrued no additional benefit (other than investment earnings) during the 24 month period prior to his election, or received a complete distribution of his entire account balance and ceased to be eligible to participate prior to his election.

A Participant who has a Deferral Election in effect may not change such election during the Plan Year, and may only revoke such election in accordance with procedures established by the Administrator consistent with Treasury Regulations issued pursuant to §409A of the Code, subject to Section 5.6.

3.3 Deferral of Restricted Stock Units.

Effective January 1, 2007, each Participant may elect to defer the receipt of all (but not fewer than all) of the shares of Stock the Participant is entitled to receive upon the vesting of any annual grant of Restricted Stock Units to the

4

Participant for service on the Board. Such deferral election must be made, in accordance with procedures established by the Administrator, during either of the enrollment periods described in Section 3.2 for the Plan Year in which the Restricted Stock Units are granted; provided that if the Outside Director makes such election during the 30 day period described in Section 3.2(b), and after the date of grant of the RSUs, the number of shares deferred shall be equal to the total number of RSUs multiplied by a fraction, the numerator of which is the number of days between the date on which the election is made and the date of the next annual meeting following the date of grant and the denominator of which is the number of days between the date of grant and the date of the next annual meeting, rounded to the next lower number of whole shares. If a Participant elects to defer an annual grant of Restricted Stock Units, the Stock underlying such grant shall be distributed on the third anniversary of the date on which such grant vests (and may not be deferred to any other date), provided that if the Director incurs a Termination before such date, the Stock, to the extent vested, shall be distributed as soon as practical after the Termination. A Participant’s deferred Restricted Stock Units shall be accounted for separately as part of the Participant’s Account, and shall not be subject to Section 4.1, 4.2, 5.2 or 5.6, but shall otherwise be subject to the provisions of this Plan.

5

ARTICLE IV — CREDITING OF ACCOUNTS

4.1 Crediting of Accounts.

All amounts deferred by a Participant under the Plan shall be credited to his/her Account in the Plan. Each Participant’s Account shall be credited or charged with its share of investment earnings or losses determined in accordance with Section 4.2, and shall be charged with all distributions made to the Participant or his/her Beneficiary. Accounts shall be maintained for bookkeeping purposes only, and shall not require the segregation of funds or establishment of a separate fund.

4.2 Earnings.

Each Participant’s Account shall be adjusted upward or downward, on a weekly (or as otherwise determined by the Administrator) basis to reflect the investment return that would have been realized had such amounts been invested in one or more investments selected by the Participant from among the assumed investment alternatives designated by the Administrator for use under the Plan. Until otherwise determined by the Administrator in its sole discretion, the investment alternatives shall be the same as those available under the Baxter International Inc. and Subsidiaries Deferred Compensation Plan, and Accounts for which no election is made shall be invested in the Stable Income Fund. Prior to the first day of each calendar quarter (or at such other intervals as may be determined by the Administrator), Participants may change the assumed investment alternatives in which their Account will be deemed invested for such quarter. Participant elections of assumed investment alternatives shall be made at the time and in the form determined by the Administrator, and shall be subject to such other restrictions and limitations as the Administrator shall determine.

4.3 Account Statements.

Account Statements will be generated effective as of the last day of each calendar quarter and mailed to each Participant as soon as administratively feasible. Account Statements will reflect all Account activity during the reporting quarter, including Account contributions, distributions and earnings credits. Notwithstanding the foregoing, the failure to provide an Account Statement shall not constitute a breach of this Plan or entitle any Participant to any amount that he would not otherwise be entitled to under the Plan.

4.4 Vesting.

Subject to Sections 9.1 and 9.2, a Participant is always 100% vested in his or her Account in the Plan at all times.

6

ARTICLE V — DISTRIBUTION OF BENEFITS

5.1 Distribution of Benefits.

Subject to Section 5.2, distribution of a Participant’s Account, if any, will be made in accordance with the Participant’s Distribution Election Form. Anything else in this Plan to the contrary notwithstanding, effective October 22, 2004, (i) in no event shall the distribution of any Account be accelerated to a time earlier than which it would otherwise have been paid, whether by amendment of the Plan, exercise of the Compensation Committee’s discretion, or otherwise, except as permitted by Treasury Regulations issued pursuant to §409A of the Code, and (ii) in the event that the Compensation Committee, in its sole discretion, determines that any time or form of distribution provided for in the Plan, or the existence of a right to elect a different time or form of distribution, would cause the Plan to fail to meet the requirements of §409A of the Code, or otherwise cause Participants to be subject to any adverse federal income tax consequences, the Compensation Committee shall amend the Plan to modify or remove the form of distribution or election right. The distribution restrictions under §409A of the Code shall apply to Participant’s entire account balances under the Plan, whether deferred before or after January 1, 2005. Notwithstanding the foregoing, if at any time any portion of a Participant’s account balance is includible in the Participant’s income pursuant to §409A of the Code, the portion so included shall be distributed to the Participant as soon as administratively feasible.

5.2 Distribution.

     A. Distribution Election Form — Termination. A Participant’s Account will be paid after the Participant’s Termination, in accordance with the form of payment designated in such Participant’s Distribution Election Form. Only one Distribution Election Form may be submitted with respect to distribution of a Participant’s Account following Termination, and such election shall apply to the Participant’s entire Account balance at his or her Termination. A Participant shall file a Distribution Election Form with his or her first Deferral Election Form, and may change the form of payment designated on his or her Distribution Election Form from time to time by filing a new Distribution Election Form in accordance with procedures established by the Administrator; provided that, in the case of a change made after December 31, 2008 (and after the last day permitted for filing the initial Deferral Election Form), (i) distribution of the Account following the change shall commence not earlier than five years after the distribution would otherwise have begun, and (ii) if the Participant incurs a Termination within 12 months after changing the form of payment designated, the change shall be disregarded and his/her Account shall be distributed in accordance with the form of payment designated prior to the change.

7

     B. In-Service Distribution. Prior to January 1, 2009, a Participant may also elect to receive a distribution of all or a portion of his or her Account at a specified future date, by filing a Distribution Election Form with the Administrator, either electing to have his or her entire Account balance on such date distributed, or specifying the dollar amount of the distribution. A Participant who has elected to receive an in-service distribution may subsequently elect to postpone the date of such distribution (but may not change the amount to be distributed) by filing a new Distribution Election Form, provided that the new Distribution Election From must be filed not later than twelve months prior to the original specified distribution date, and the new distribution date must be at least five years after the original distribution date. If the balance in the Participant’s Account on the specified distribution date is less than the dollar amount requested, the entire balance of the Account shall be distributed. If the Participant has a Termination prior to the specific date requested on such Distribution Election Form, such form shall be ignored and the Participant’s distribution election with respect to Termination shall be followed.

     C. Forms of Distribution. The forms of distribution are:

(a)	a lump sum payment, or
(b)	for distributions upon Termination only, annual installments of at least 2 years, but not to exceed 15 years.

Annual installments will commence in the first ninety days of the Plan Year following the Plan Year in which the Participant incurs a Termination. Subsequent installments will be paid annually in the first ninety days of subsequent Plan Years, and each installment shall be equal to the remaining balance in the Participant’s Account immediately prior to such payment divided by the number of installments remaining to be paid.

Lump sum payments pursuant to a Distribution Election Form relating to payments following Termination will be made in the first ninety days of the Plan Year following the Plan Year in which the Participant incurs a Termination. All distributions of a Participant’s Account prior to Termination will be paid in a lump sum as soon as administratively feasible after the date elected by the Participant in the Distribution Election Form.

If a Participant does not elect a form of distribution by the time the Deferral Election Form or the Distribution Election Form is required to be completed, the Participant’s election will default to a lump sum payment in the first ninety days of the Plan Year following the Plan Year in which the Participant incurs a Termination.

Notwithstanding the above, a Participant whose Account totals less than $50,000 as of the last day of the Plan Year in which he or she incurs a Termination will receive lump sum payment of his or her Account in the first ninety days of the Plan Year following the Plan Year in which the Participant incurs a Termination.

     D. Distributions Upon Death. Upon the death of a Participant prior to the complete distribution of the Participant’s account, the Participant’s remaining account balance shall be paid to his or her Beneficiary in a lump sum as soon as practical, but not later than ninety days after the Participant’s death, regardless of whether the Participant had elected

8

payment in installments or whether installment payments had begun prior to the Participant’s death.

5.3 Effect of Payment.

Payment to the person, trust or other entity reasonably and in good faith determined by the Administrator to be the Participant’s Beneficiary will completely discharge any obligations Baxter or any other Employer may have under the Plan. If a Plan benefit is payable to a minor or a person declared to be incompetent or to a person the Administrator in good faith believes to be incompetent or incapable of handling the disposition of property, the Administrator may direct payment of such Plan benefit to the guardian, legal representative or person having the care and custody of such minor and such decision by the Administrator is binding on all parties. The Administrator may initiate whatever action it deems appropriate to ensure that benefits are properly paid to an appropriate guardian.

The Administrator may require proof of incompetence, minority, incapacity or guardianship, as it may deem appropriate prior to distribution of the Plan benefit. Such distribution will completely discharge the Administrator and the Employer from all liability with respect to such benefit.

5.4 Taxation of Plan Benefits.

It is intended that each Participant will be taxed on amounts credited to him or her under the Plan at the time such amounts are received, and the provisions of the Plan will be interpreted consistent with that intention.

5.5 Withholding and Payroll Taxes.

Baxter will withhold from payments made hereunder any taxes required to be withheld for the payment of taxes to the Federal, or any state or local government.

5.6 Distribution Due to Unforeseeable Emergency.

Upon written request of a Participant and the showing of Unforeseeable Emergency, the Administrator may authorize distribution of all or a portion of the Participant’s Accounts, and or the acceleration of any installment payments being made from the Plan, but only to the extent reasonably necessary to relieve the Unforeseeable Emergency, including federal, state, local, or foreign income taxes or penalties reasonably imposed upon the distribution. In any event, payment may not be made to the extent such Unforeseeable Emergency is or may be satisfied through reimbursement by insurance or otherwise, including, but not limited to, liquidation of the Participant’s assets (but not including hardship deferrals or loans from the Participant’s account in any qualified retirement plan, as defined in Treasury Regulations §1.409A-1(a)(2)), to the extent that such liquidation would not in and of itself cause severe financial hardship. If the Participant demonstrates the existence of an Unforeseeable Emergency, the Administrator shall first cancel the Participant’s Deferrals for the Plan Year (other than Deferrals of Restricted Stock Units pursuant to Section 3.3), and the amount of the distribution required to relieve the Unforeseeable Emergency shall take into account the additional income available to the Participant as the result of cancellation of such Deferrals. The Administrator may also impose such other conditions upon a distribution as it determines in its discretion to be appropriate and not inconsistent with §409A of the Code.

9

ARTICLE VI — BENEFICIARY DESIGNATION

6.1 Beneficiary Designation.

Each Participant has the right to designate one or more persons, trusts or, with the Administrator’s approval, other entity as the Participant’s Beneficiary, primary as well as secondary, to whom benefits under this Plan will be paid in the event of the Participant’s death prior to complete distribution to the Participant of the benefits due under the Plan. Each Beneficiary designation will be in a written form prescribed by the Administrator and will be effective only when filed with the Administrator during the Participant’s lifetime.

6.2 Amendments to Beneficiary Designation.

Any Beneficiary designation may be changed by a Participant without the consent of any Beneficiary by the filing of a new Beneficiary designation with the Administrator. Filing a Beneficiary designation as to any benefits available under the Plan revokes all prior Beneficiary designations effective as of the date such Beneficiary designation is received by the Administrator. If a Participant’s Account is community property, any Beneficiary designation will be valid or effective only as permitted under applicable law.

6.3 No Beneficiary Designation.

In the absence of an effective Beneficiary designation, or if all Beneficiaries predecease the Participant, the Participant’s estate will be the Beneficiary. If a Beneficiary dies after the Participant and before payment of benefits under this Plan has been completed, and no secondary Beneficiary has been designated to receive such Beneficiary’s share, the remaining benefits will be payable to the Beneficiary’s estate.

10

ARTICLE VII — ADMINISTRATION

7.1 Administration.

The Plan is administered by the Compensation Committee, which shall be the Administrator for all purposes of the Plan. Notwithstanding the foregoing, all authority to administer the Plan on an ongoing basis, including the authority to adopt and implement all rules and procedures for the administration of the Plan, shall be exercised by such persons as may be designated by the Corporate Vice President-Human Resources of Baxter, subject to the authority of the Compensation Committee, and all references to the Administrator herein shall, as appropriate, be construed to refer to such person or persons.

7.2 Administrator Powers.

The Administrator has such powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the power, right and duty to construe, interpret and enforce the Plan provisions and to determine all questions arising under the Plan including, but not by way of limitation, questions of Plan participation, eligibility for Plan benefits and the rights of Outside Directors, Participants, Beneficiaries and other persons to benefits under the Plan and to determine the amount, manner and time of payment of any benefits hereunder, and to adopt procedures, rules, regulations and forms to be utilized in the efficient administration of the Plan which may alter any procedural provision of the Plan without the necessity of an amendment. The Administrator is empowered to employ agents (who may also be employees of Baxter) and to delegate to them any of the administrative duties imposed upon the Administrator or Baxter

7.3 Finality of Decisions.

Any ruling, regulation, procedure or decision of the Administrator will be conclusive and binding upon all persons affected by it. There will be no appeal from any ruling by the Administrator, which is within its authority, except as provided in Section 7.4 below.

7.4 Claims Procedure.

Any claim for benefits by a Participant, his or her Beneficiary or Beneficiaries, or any other person claiming the right to receive any benefit from the Plan by reason of his or her relationship to a Participant or Beneficiary (the “applicant”) shall be in writing and filed in accordance with procedures specified by the Administrator not more than one year after the claimant knows or with the exercise of reasonable diligence should have known of the basis for the claim. If the claim is denied, the Administrator will furnish the applicant within a reasonable period of time with a written notice that specifies the reason for the denial, and explains the claim review procedures of this Section 7.4. If, within 60 days after receipt of such notice, the applicant so requests in writing, the Administrator will review its earlier decision. The Administrator’s decision on review will be in writing, will include specific reasons for the decision, and will be given to the claimant with a reasonable period of time after the request for review is received. By participating in the Plan, each Participant agrees, on behalf of himself or herself and all persons claiming through him or her, not to commence any action or proceeding for payment of any amount claimed to be due under the Plan without first complying with the foregoing procedures.

7.5 Indemnity.

To the extent permitted by applicable law and to the extent that they are not indemnified or saved harmless under any liability insurance contracts, any present or

11

former employees, officers, or directors of Baxter, or its subsidiaries or affiliates, if any, will be indemnified and saved harmless by Baxter from and against any and all liabilities or allegations of liability to which they may be subjected by reason of any act done or omitted to be done in good faith in the administration of the Plan, including all expenses reasonably incurred in their defense in the event that Baxter fails to provide such defense after having been requested in writing to do so.

12

ARTICLE VIII — AMENDMENT AND TERMINATION OF PLAN

8.1 Amendment.

The Compensation Committee may amend the Plan at any time, except that no amendment will decrease the Accounts of Participants and Beneficiaries at the time of the amendment. Notwithstanding the foregoing, the Administrator may adopt any amendment to the Plan that is technical, ministerial or procedural in nature, and any rule or procedure properly adopted by the Administrator that is technical, ministerial or procedural in nature shall be deemed an amendment to the Plan to the extent of any inconsistency between such rule or procedure and the provisions hereof.

8.2 Right to Terminate.

The Compensation Committee may at any time terminate the Plan.

8.3 Payment at Termination.

If the Plan is terminated, the Accounts of Participants shall continue to be held until distributed in accordance with Article V, unless in connection with such termination the Compensation Committee amends the Plan to provide for distribution of all Accounts in lump sum payments, provided that such distributions are permitted by Treasury Regulations issued pursuant to §409A of the Code.

13

ARTICLE IX — MISCELLANEOUS

9.1 Unfunded Plan.

This Plan is intended to be an unfunded deferred compensation plan. All credited amounts are unfunded, general obligations of Baxter. This Plan is not intended to create an investment contract. Participants are members of the Board of Baxter, who, by virtue of their position, are uniquely informed as to Baxter’s operations and have the ability to affect materially Baxter’s profitability and operations.

9.2 Unsecured General Creditor.

In the event of Baxter’s insolvency, Participants and their Beneficiaries, heirs, successors and assigns will have no legal or equitable rights, interest or claims in any property or assets of Baxter or any of its subsidiaries, nor will they be beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by such Baxter (the “Policies”) greater than those of any other unsecured general creditors. In that event, any and all of Baxter’s assets and Policies will be, and remain, the general, unpledged, unrestricted assets of Baxter. Baxter’s obligation under the Plan will be merely that of an unfunded and unsecured promise of Baxter to pay money in the future.

9.3 Nonassignability.

Neither a Participant nor any other person will have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be nonassignable and nontransferable. No part of the amounts payable will, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency. Nothing contained herein will preclude Baxter from offsetting any amount owed to it by a Participant against payments to such Participant or his or her Beneficiary.

9.4 Protective Provisions.

A Participant will cooperate with Baxter by furnishing any and all information requested by Baxter, in order to facilitate the payment of benefits hereunder.

9.5 Governing Law.

The provisions of this Plan will be construed and interpreted according to the laws of the State of Illinois.

9.6 Severability.

In the event any provision of the Plan is held invalid or illegal for any reason, any illegality or invalidity will not affect the remaining parts of the Plan, but the Plan will be construed and enforced as if the illegal or invalid provision had never been inserted, and Baxter will have the privilege and opportunity to correct and remedy such questions of illegality or invalidity by amendment as provided in the Plan, including, but not by way of limitation, the opportunity to construe and enforce the Plan as if such illegal and invalid provision had never been inserted herein.

9.7 Notice.

Any notice or filing required or permitted to be given to Baxter or the Administrator under the Plan will be sufficient if in writing and hand delivered, or sent by

14

registered or certified mail to Baxter’s Chief Financial Officer and, if mailed, will be addressed to the principal executive offices of Baxter. Notice to a Participant or Beneficiary may be hand delivered or mailed to the Participant or Beneficiary at his or her most recent address as listed in the employment records of Baxter. Notices will be deemed given as of the date of delivery or mailing or, if delivery is made by certified or registered mail, as of the date shown on the receipt for registration or certification. Any person entitled to notice hereunder may waive such notice.

9.8 Successors.

The provisions of this Plan will bind and inure to the benefit of Baxter, the Participants and Beneficiaries, and their respective successors, heirs and assigns. The term successors as used herein will include any corporate or other business entity, which, whether by merger, consolidation, purchase or otherwise acquires all or substantially all of the business and assets of Baxter, and successors of any such corporation or other business entity.

9.9 Action by Baxter.

Except as otherwise provided herein, any action required of or permitted by Baxter under the Plan will be by resolution of the Compensation Committee or any person or persons authorized by resolution of the Compensation Committee. Any action required of or permitted by Baxter in its role as Administrator may be taken by the Corporate Vice President-Human Resources of Baxter or persons acting under his or her authority.

9.10 Participant Litigation.

In any action or proceeding regarding the Plan, Outside Directors, Participants, Beneficiaries or any other persons having or claiming to have an interest in this Plan will not be necessary parties and will not be entitled to any notice or process. Any final judgment which is not appealed or appealable and may be entered in any such action or proceeding will be binding and conclusive on the parties hereto and all persons having or claiming to have any interest in this Plan. To the extent permitted by law, if a legal action is begun against Baxter, the Administrator, or any member of the Compensation Committee by or on behalf of any person and such action results adversely to such person or if a legal action arises because of conflicting claims to a Participant’s or other person’s benefits, the costs to such person of defending the action will be charged to the amounts, if any, which were involved in the action or were payable to the Participant or other person concerned. To the extent permitted by applicable law, acceptance of participation in this Plan will constitute a release of Baxter, the Administrator and each member of the Compensation Committee, and their respective agents from any and all liability and obligation not involving willful misconduct or gross neglect.

*     *     *

IN WITNESS WHEREOF, the undersigned duly authorized officer has caused this Amended and Restated Plan to be executed this 18^th day of December 2008.

BAXTER INTERNATIONAL INC.
By:	/s/ Jeanne Mason
	Jeanne Mason, Corporate Vice President - Human Resources

15

EX-10.17

Exhibit 10.17

AMENDED AND RESTATED SEVERANCE AGREEMENT

          THIS AGREEMENT, dated December 19, 2006 (the “Effective Date”), as amended and restated as of December 18, 2008, is made by and between Baxter International Inc., a Delaware corporation (the “Company”), and                      (the “Executive”).

          WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and

          WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders;

          WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company’s management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; and

          NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows:

     1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof.

     2. Term of Agreement. The Term of this Agreement shall commence on the Effective Date and shall continue in effect through the second anniversary of the Effective Date; provided, however, that commencing on the first anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than one year before the end of the then-existing Term, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the date on which such Change in Control occurred.

     3. Company’s Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive’s covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other

payments and benefits described herein. No Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive’s employment with the Company following a Change in Control and during the Term, all subject to the terms and conditions set forth herein and provided that such termination of employment constitutes a “separation from service” for purposes of Section 409A of the Code. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company.

     4. The Executive’s Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) the last day of the Potential Change in Control Period, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive’s employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive’s employment for any reason.

     5. Compensation Other Than Severance Payments.

          5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive’s full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive’s full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive’s employment is terminated by the Company for Disability.

          5.2 If the Executive’s employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive’s full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company’s compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason.

          5.3 If the Executive’s employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive’s normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company’s retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason.

          5.4 Upon the occurrence of a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company (in any case within the meaning of Section 409A of the Code), notwithstanding any provision of any non-qualified defined contribution deferred compensation plans to the contrary, in lieu of any other benefit under such plans attributable to the period before 2009 or for a year commencing after the date of this Agreement, the Company shall pay to the Executive a lump sum amount, in cash, equal to the then present value of the deferred compensation otherwise payable to the Executive pursuant to the terms of such plans. The payments required by this Section 5.4 shall be made not later than the fifth day following the date of such change in ownership or control of the Company or change in asset ownership. The provisions of this Section 5.4 shall survive the termination of this Agreement.

          5.5 For the two-year period commencing immediately following a Change in Control, the Company agrees: (A) to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive’s total compensation, including but not limited to the Company’s equity-based long term incentive plans and annual incentive plans, or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan; (B) to continue the Executive’s participation in the plans described in the foregoing paragraph (A) (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive’s participation relative to other participants, as existed immediately prior to the Change in Control; and (C) to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company’s pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control (except for across the board changes similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company), not to take any other action which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of

the Change in Control, and to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company’s normal vacation policy in effect at the time of the Change in Control.

     6. Severance Payments.

          6.1 Subject to Section 6.2 hereof, if the Executive’s employment is terminated following a Change in Control and during the Term (provided that such termination of employment constitutes a “separation from service” within the meaning of Section 409A of the Code), other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 (“Severance Payments”) and Section 6.2 hereof, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof, provided that the Executive shall have properly executed, within forty-seven (45) days of his Date of Termination, and not revoked a customary release of claims in a form reasonably acceptable to the Company. For purposes of this Agreement, the Executive’s employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive’s employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive’s employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct.

               (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to two times the sum of (i) the Executive’s base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or

circumstance constituting Good Reason, and (ii) the Executive’s target annual bonus under any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination or, if higher, the highest target annual bonus in respect of the fiscal year in which occurs the Change in Control or the first event or circumstance constituting Good Reason.

               (B) (I) For the twenty-four (24) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, accident and health insurance benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater after-tax cost to the Executive than the after-tax cost to the Executive immediately prior to such date or occurrence; provided, however, that such health and welfare benefits shall be provided, as applicable, through an arrangement that satisfies the requirements of Section 105 or 106 of the Code and, to the extent the payments represent a reimbursement of expenses incurred by the Participant, shall be paid not later than the last day of the year following the year in which the underlying expenses were incurred. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be eliminated if benefits of the same type are received by or made available to the Executive during the twenty-four (24) month period following the Executive’s termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive). If the Severance Payments shall be decreased pursuant to Section 6.2 hereof, and the Section 6.1(B) benefits which remain payable after the application of Section 6.2 hereof are thereafter reduced pursuant to the immediately preceding sentence, the Company shall, no later than five (5) business days following such reduction, pay to the Executive the least of (a) the amount of the decrease made in the Severance Payments pursuant to Section 6.2 hereof, (b) the amount of the subsequent reduction in these Section 6.1(B) benefits, or (c) the maximum amount which can be paid to the Executive without being, or causing any other payment to be, nondeductible by reason of section 280G of the Code.

                    (II) In addition, if the Executive would have become entitled to benefits under the Company’s post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive’s employment terminated at any time during the period of twenty-four (24) months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive’s dependents commencing on

the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (I) terminate.

                    (III) To the extent the benefits to be made available under this subsection 6.1(B) are not medical expenses within the meaning of Treas. Reg. § 1.409A-1(b)(9)(v)(B) and are not short-term deferrals within the meaning of Section 409A of the Code, then during the first six months following the Date of Termination the Executive shall pay to the Company, at the time such benefits are provided, the fair market value of such benefits, and the Company shall reimburse the Executive for any such payment not later than the fifth day following the expiration of such six-month period unless the Company reasonably determines, based on the advice of counsel, that the benefits can be provided during such six-month period without causing the Executive to be subject to an “additional tax” under Section 409A(a)(2) of the Code.

               (C) Notwithstanding any provision of any annual or long term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. The provisions of this Section 6.1(C) shall survive the termination of this Agreement in respect of awards granted under any such annual or long-term incentive plans before the date of such termination.

               (D) In addition to the retirement benefits to which the Executive is entitled under each DB Pension Plan or any successor plan thereto, the Company shall pay the Executive a lump sum amount, in cash, equal to the excess of (i) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the second anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive would have accrued under the terms of all DB Pension

Plans (without regard to any amendment to any DB Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated (after the Date of Termination) twenty-four (24) additional months of age and service credit thereunder and had been credited under each DB Pension Plan during such period with compensation equal to the Executive’s compensation (as defined in such DB Pension Plan) during the twelve (12) months immediately preceding Date of Termination or, if higher, during the twelve months immediately prior to the first occurrence of an event or circumstance constituting Good Reason, over (ii) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive had accrued pursuant to the provisions of the DB Pension Plans as of the Date of Termination. For purposes of this Section 6.1(D), “actuarial equivalent” shall be determined using the same assumptions utilized under the Baxter International Inc. and Subsidiaries Pension Plan immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. In addition to the benefits to which the Executive is entitled under each DC Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive’s behalf during the two years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive’s compensation (as defined in the DC Pension Plan) during the twelve (12) months immediately preceding the Date of Termination or, if higher, during the twelve months immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (z) without regard to any amendment to the DC Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive’s account balance under the DC Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the DC Pension Plan.

               (E) The Company shall provide the Executive with outplacement services suitable to the Executive’s position for a period of two years or, if earlier, until the first acceptance by the Executive of an offer of employment, in an aggregate amount not exceeding $50,000. Subject to the foregoing, in no event shall any payment described in this Section 6.1(E) be made after the end of the calendar year following the calendar year in which the services were provided.

               (F) The lump-sum cash payments required pursuant to the preceding provisions of this Section 6.1 hereof shall be made not later than the fifth day following the Date of Termination. Notwithstanding the above, the Executive shall not be considered to have terminated employment with the Company for purposes of this Agreement and no payments shall be due to the Executive under this Agreement unless the Executive would be considered to have incurred a “separation from service” from the Company within the meaning of Section 409A of the Code. Each amount to be paid or benefit to be provided under this Agreement shall be construed as a separate identified payment for purposes of Section 409A of the Code. Any payments described in this Agreement that are due within the “short term deferral period” within the meaning of Section 409A of the Code or that are otherwise exempt from application of Section 409A of the Code, shall not be treated as deferred compensation unless applicable law requires otherwise. If the Executive, at the Date of Termination, is a “specified employee” as defined in the Baxter International Inc. and Subsidiaries Deferred Compensation Plan, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Agreement during the six-month period immediately following the Executive’s termination of employment shall instead be paid on the first business day after the date that is six months following the Executive’s termination of employment (or upon the Executive’s death, if earlier) unless the Company reasonably determines, based on the advice of counsel, that such delayed commencement is not required to avoid an “additional tax” under Section 409A(a)(2) of the Code. In addition, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, in the event that the Executive’s termination of employment occurs within fifty-five (55) days prior to the end of a calendar year, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Agreement on or before December 31 of the year in which the termination of employment occurs shall, subject to the previous sentence of this section, instead be paid on the first business day following January 1 of the first calendar year beginning after the Executive’s termination of employment.

          6.2 The following special payment provisions shall apply:

               (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive’s employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called “Total Payments”) will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes.

               (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the “Safe Harbor”), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that, to the extent it would not result in the imposition of an additional tax under Section 409A of the Code, the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments.

               (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as “parachute payments” within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company’s independent auditor (the “Auditor”), such other payments or benefits (in whole or in part)

do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all “excess parachute payments” within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company’s calculations. If the Executive disputes the Company’s calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail.

               (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A) hereof, (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B) hereof, the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code.

                    (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A) hereof, (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B) hereof, the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive’s taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code.

                    (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) hereof but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B) hereof, and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code.

                    (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) hereof and (2) the aggregate value of Total Payments which are considered “parachute payments” within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code.

          6.3 The payments provided in subsections (A) (C) and (D) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of Section 6.2 hereof), but in any event not later than the end of the taxable year following the year in which the Excise Tax is incurred; provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case

of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall be paid by the Executive to the Company on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). If the Executive at the time of such separation from service is a “specified employee” as defined in the Baxter International Inc. and Subsidiaries Deferred Compensation Plan, no payments shall be made to the Executive prior to the earlier of (a) the expiration of the six (6) month period measured from the date of the Executive’s “separation from service” (as such term is defined in Section 409A of the Code), or (b) the date of the Executive’s death unless the Company reasonably determines, based on the advice of counsel, that such delayed commencement is not required to avoid an “additional tax” under Section 409A(a)(2) of the Code.

          6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing any issue hereunder relating to the termination of the Executive’s employment (provided the Executive shall prevail in such dispute), in seeking to obtain or enforce any benefit or right provided by this Agreement (provided the Executive shall obtain or successfully enforce such benefit or right) or in connection with any tax audit or proceeding to the extent attributable to the application of Section 409A of the Code or Section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive’s written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require; provided that no such payment shall be made in respect of fees or expenses incurred by the Executive after the later of the tenth anniversary of the Date of Termination or the Executive’s death, and provided further, that, upon the Executive’s separation from service with the Company, in no event shall any additional such payments be made prior to the date that is six months after the date of the Executive’s separation from service unless the Company reasonably determines, based on the advice of counsel, that such delay is not required to avoid an “additional tax” under Section 409A(a)(2) of the Code.

     7. Termination Procedures.

          7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive’s employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 11 hereof. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive’s counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail.

          7.2 Date of Termination. “Date of Termination,” with respect to any purported termination of the Executive’s employment after a Change in Control and during the Term, shall mean (i) if the Executive’s employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive’s duties during such thirty (30) day period), and (ii) if the Executive’s employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that Executive shall not be considered to have terminated employment with the Company for purposes of this Agreement and no payments shall be due to the Executive under this Agreement unless the Executive would be considered to have incurred a “separation from service” from the Company within the meaning of Section 409A of the Code.

          7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by

mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence; and further provided, however, that the provisions of this Section 7.3 shall apply only to the extent that, pursuant to Treas. Reg. § 1.409A-3(g), they will not cause an additional tax under Section 409A of the Code.

     8. No Mitigation. The Company agrees that, if the Executive’s employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, except as specifically provided in Section 6.1(B) hereof, no payment or benefit provided for in this Agreement shall be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.

     9. Certain Restrictive Covenants.

          9.1 Noncompetition. The Executive understands that any entrusting of Confidential Information to him by the Company is done in reliance on a confidential relationship arising out of his employment with the Company. The Executive understands that Confidential Information may include, for example, Trade Secrets, inventions, know-how and products, customer, patient, supplier and competitor information, sales, pricing, cost, and financial data, research, development, marketing and sales programs and strategies, manufacturing, marketing and service techniques, processes and practices, and regulatory strategies. The Executive understands that Confidential Information also includes all information received by the Company or the Subsidiaries under an obligation of confidentiality to a third party. The Executive further understands that Confidential Information that the Executive may acquire or to which the Executive may have access, especially with regard to research and development projects and findings, formulae, designs, formulation, processes, the identity of suppliers, customers and patients, methods of manufacture, and cost and pricing data is of great value to the Company. In consequence of such entrusting and such consideration, the Executive shall not, directly or indirectly, for a period of two years after the Date of Termination: (i) render services to any Competing Organization in connection with any Competing Product within such geographic limits as the Company and such Competing Organization are, or would be, in actual competition when such rendering of services might potentially involve the disclosure or use of confidential information

or trade secrets; or (ii) provide advice as to investment in a Competitive Business (including, without limitation, advice with respect to the purchase, sale, or operation of such business, or advice with respect to financing or other economic structuring of such business). The Executive understands that services described in the preceding sentence, including without limitation those rendered to such Competing Organization in an executive, scientific, administrative, or consulting capacity in connection with Competing Products are in support of actual competition in various geographic areas and thus fall within the prohibition of this Agreement regardless of where such services physically are rendered.

          9.2 Solicitation of Customers, Suppliers and Employees. While Executive is employed by the Company, and for a period of twenty-four (24) months after the Date of Termination for any reason:

               (A) The Executive shall not solicit or attempt to solicit any party who is then or, during the 12-month period prior to such solicitation or attempt by the Executive was (or was solicited to become), a customer or supplier of the Company or Affiliate, provided that the restriction in this Section 9.2 shall not apply to any activity on behalf of a business that is not a Competing Organization.

               (B) The Executive shall not solicit, entice, persuade or induce any individual who is employed by the Company or the Subsidiaries (or was so employed within 90 days prior to the Executive’s action) to terminate or refrain from renewing or extending such employment or to become employed by or enter into contractual relations with any other individual or entity other than the Company or the Subsidiaries, and the Executive shall not approach any such employee for any such purpose or authorize or knowingly cooperate with the taking of any such actions by any other individual or entity.

          9.3 Nondisparagement. The Executive agrees that, while he is employed by the Company, and after his Date of Termination, he shall not make any false, defamatory or disparaging statements about the Company, the Subsidiaries, or the officers or directors of the Company or the Subsidiaries that are reasonably likely to cause material damage to the Company, the Subsidiaries, or the officers or directors of the Company or the Subsidiaries. While the Executive is employed by the Company, and after his Date of Termination, the Company agrees, on behalf of itself and the Subsidiaries, that neither the officers nor the directors of the Company or the Subsidiaries shall make any false, defamatory or disparaging statements about the Executive that are reasonably likely to cause material damage to the Executive. Notwithstanding the foregoing, nothing in this paragraph will prevent either the Company or any Executive from (i) responding to incorrect, disparaging or derogatory public statement by the other to the extent necessary to correct or refute such public statement or (ii) making any truthful statement to the extent (x)

necessary in connection with any litigation, arbitration or mediation involving this Agreement or (y) required by law, by any court order or by any arbitrator or mediator in a legal proceeding.

     10. Successors; Binding Agreement.

          10.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.

          10.2 This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive’s estate.

     11. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive’s signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:

To the Company:

Baxter International Inc.
One Baxter Parkway
Deerfield, Illinois 60015
Attention: General Counsel

     12. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other

party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive’s employment with the Company only in the event that the Executive’s employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6, 7 and 9 hereof) shall survive such expiration. To the extent applicable, it is intended that the Agreement comply with the provisions of Section 409A of the Code. The Agreement will be administered and interpreted in a manner consistent with this intent, and any provision that would cause the Agreement to fail to satisfy Section 409A of the Code will have no force and effect until amended to comply therewith (which amendment may be retroactive to the extent permitted by Section 409A of the Code).

     13. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

     14. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

     15. Settlement of Disputes; Arbitration.

          15.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board

within sixty (60) days after notification by the Board that the Executive’s claim has been denied. Notwithstanding the above, in the event of any dispute, any decision by the Board hereunder shall be subject to a de novo review by the arbitrator in accordance with Section 15.2 hereof.

          15.2 Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive’s right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.

          15.3 The Executive acknowledges that the Company would be irreparably injured by a violation of Section 9 hereof, and he agrees that the Company, notwithstanding the foregoing provisions of this Section 15 and in addition to any other remedies available to it for such breach or threatened breach, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, restraining the Executive from any actual or threatened breach of Section 9. If a bond is required to be posted in order for the Company to secure an injunction or other equitable remedy, the parties agree that said bond need not be more than a nominal sum.

     16. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below:

               (A) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.

               (B) “Auditor” shall have the meaning set forth in Section 6.2 hereof.

               (C) “Base Amount” shall have the meaning set forth in section 280G(b)(3) of the Code.

               (D) “Beneficial Owner” shall have the meaning set forth in Rule 13d-3 under the Exchange Act.

               (E) “Board” shall mean the Board of Directors of the Company.

               (F) “Cause” for termination by the Company of the Executive’s employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive’s duties with the Company (other than any such failure resulting from the Executive’s incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) that has not been cured within 30 days after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive’s duties or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive’s part shall be deemed “willful” unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive’s act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists.

               (G) A “Change in Control” shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:

               (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 30% or more of the combined voting power of the Company’s then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of (a) any parent of the Company or the entity surviving such merger or consolidation (b) if there is no such parent, of the Company or such surviving entity;

               (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the

Company) whose appointment or election by the Board or nomination for election by the Company’s stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended;

               (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or other entity, other than a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of (a) any parent of the Company or the entity surviving such merger or consolidation or (b) if there is no such parent, of the Company or such surviving entity; or

               (IV) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of (a) any parent of the Company or of the entity to which such assets are sold or disposed or (b) if there is no such parent, of the Company or such entity.

Notwithstanding the foregoing, a “Change in Control” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.

               (H) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

               (I) “Company” shall mean Baxter International Inc. and, except in determining under Section 16(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes this Agreement by operation of law, or otherwise.

               (J) “Competing Products” shall mean products, processes, or services of any person or organization other than the Company, in existence or under development, which are substantially the same, may be substituted for, or applied to substantially the same end use as the products, processes or services with which the Executive works during the time of his employment with the Company or about which the Executive acquires Confidential Information through his work with the Company.

               (K) “Competing Organization” shall mean persons or organizations engaged in, or about to become engaged in, research or development, production, distribution, marketing, providing or selling of a Competing Product.

               (L) “Competitive Business” means any business in which the Company or any of the Subsidiaries was engaged during the 12-month period prior to the Executive’s Date of Termination, any business if the Company or any Subsidiary has devoted material resources to entering into such business during such 12-month period prior to the Date of Termination, and any business to the extent that it is engaged in the investing in or acquisition of all or a portion of the assets or stock of the Company or the Subsidiaries.

               (M) “Confidential Information” means information relating to the present or planned business of the Company or the Subsidiaries which has not been released publicly by authorized representatives of the Company or the Subsidiaries.

               (N) “DB Pension Plan” shall mean any tax-qualified, supplemental or excess defined benefit pension plan maintained by the Company and any other defined benefit plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits.

               (O) “DC Pension Plan” shall mean any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits.

               (P) “Date of Termination” shall have the meaning set forth in Section 7.2 hereof.

               (Q) “Disability” shall be deemed the reason for the termination by the Company of the Executive’s employment, if, as a result of the Executive’s incapacity due to physical or mental illness, the Executive shall have

been absent from the full-time performance of the Executive’s duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive’s duties.

               (R) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.

               (S) “Excise Tax” shall mean any excise tax imposed under section 4999 of the Code.

               (T) “Executive” shall mean the individual named in the first paragraph of this Agreement.

               (U) “Good Reason” for termination by the Executive of the Executive’s employment shall mean the occurrence (without the Executive’s express written consent which specifically references this Agreement) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (V) below to a “Change in Control” as references to a “Potential Change in Control”), of any one of the following acts by the Company, or failures by the Company to act, unless such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof:

                    (I) the assignment to the Executive of any duties inconsistent with the Executive’s status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive’s responsibilities from those in effect immediately prior to the Change in Control;

                    (II) a material reduction by the Company in the Executive’s annual base salary as in effect on the date hereof or as the same may be increased from time to time;

                    (III) a material change in the location of the Executive’s principal place of employment, including for this purpose any relocation more than fifty (50) miles from the Executive’s principal place of employment immediately prior to the Change in Control or the Company’s requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on

the Company’s business to an extent substantially consistent with the Executive’s present business travel obligations; or

                    (IV) the failure by the Company to pay to the Executive any portion of the Executive’s current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due;

                    (V) any other action or inaction that constitutes a material breach of this Agreement, including without limitation Sections 5.5 and 10.1.

The Executive’s right to terminate the Executive’s employment for Good Reason shall not be affected by the Executive’s incapacity due to physical or mental illness. The Executive’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist.

               (V) “Gross-Up Payment” shall have the meaning set forth in Section 6.2 hereof.

               (W) “Items” include documents, reports, drawings, photographs, designs, specifications, formulae, plans, samples, research or development information, prototypes, tools, equipment, proposals, marketing or sales plans, customer information, customer lists, patient lists, patient information, regulatory files, financial data, costs, pricing information, supplier information, written, printed or graphic matter, or other information and materials that concern the Company’s or the Subsidiaries’ business that come into his possession or about which the Executive has knowledge by reason of his employment.

               (X) “Notice of Termination” shall have the meaning set forth in Section 7.1 hereof.

               (Y) “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation

owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

               (Z) “Potential Change in Control Period” shall mean the period commencing on the occurrence of a Potential Change in Control and ending upon the occurrence of a Change in Control or, if earlier (I) with respect to a Potential Change in Control occurring pursuant to Section 16(AA)(I) hereof, immediately upon the abandonment or termination of the applicable agreement, (ii) with respect to a Potential Change in Control occurring pursuant to Section 16(AA)(II) hereof, immediately upon a public announcement by the applicable party that such party has abandoned its intention to take or consider taking actions which if consummated would result in a Change in Control or (iii) with respect to a Potential Change in Control occurring pursuant to Section 16(AA)(III) or (IV) hereof, upon the eighteen month anniversary of the occurrence of such Potential Change in Control (or such earlier date as may be determined by the Board).

               (AA) “Potential Change in Control” shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:

               (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;

               (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control;

               (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company’s then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or

               (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.

               (BB) “Retirement” shall be deemed the reason for the termination by the Executive of the Executive’s employment if such employment is terminated in accordance with the Company’s retirement policy, including early retirement, generally applicable to its salaried employees.

               (CC) “Severance Payments” shall have the meaning set forth in Section 6.1 hereof.

               (DD) “Subsidiary,” for purposes of Section 9 hereof, shall mean any corporation, partnership, joint venture or other entity during any period in which at least fifty percent in such entity is owned, directly or indirectly, by the Company.

               (EE) “Tax Counsel” shall have the meaning set forth in Section 6.2 hereof.

               (FF) “Term” shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein).

               (GG) “Total Payments” shall mean those payments so described in Section 6.2 hereof.

               (HH) “Trade Secrets” include all information encompassed in all Items, and in all manufacturing processes, methods of production, concepts or ideas, to the extent that such information has not been released publicly by duly authorized representatives of the Company or the Subsidiaries.

          IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

BAXTER INTERNATIONAL INC.
By:
Name:	Robert L. Parkinson, Jr.
Title:	Chairman and Chief Executive Officer
EXECUTIVE
Address:
(Please print carefully)

EX-10.18

Exhibit 10.18

Baxter International Inc. And Subsidiaries
Supplemental Pension Plan

(Amended and Restated Effective January 1, 2009)

TABLE OF CONTENTS

Article I General	1
1.1 Purpose and Effective Date	1
1.2 Plan Administration; Source of Benefit Payments	1
1.3 Limitation on Provisions	1
1.4 Inactive Participation	1
1.5 Plan Supplements	1
Article II Definitions	3
2.1 Accrued Benefit	3
2.2 Administrative Committee	3
2.3 Beneficiary	3
2.4 Benefit	3
2.5 Code	3
2.6 Controlled Group	3
2.7 Corporation	3
2.8 Deferred Compensation Plan	3
2.9 Effective Date	3
2.10 ERISA	3
2.11 Excess Benefit	3
2.12 Non-Participating Employer	3
2.13 Participant	3
2.14 Participating Employer	3
2.15 Pension Make-Whole Benefit	4
2.16 Pension Plan	4
2.17 Plan	4
2.18 Points	4
2.19 Qualified Benefit	4
2.20 Section 409A	4
2.21 Special Supplemental Benefit	4
2.22 Termination of Employment	4
Article III Participation In The Plan	6
3.1 Eligibility	6
3.2 Restricted Participation	6
3.3 No Contract of Employment	6
3.4 Participation Freeze	6
Article IV Amount And Payment Of Plan Benefits	8
4.1 Plan Benefits	8
4.2 Excess Benefit	8
4.3 Pension Make-Whole Benefit	8
4.4 Special Supplemental Benefits	8
4.5 Actuarial Equivalence	9
4.6 Time and Form of Payment	9
4.7 Death Benefits	12
4.8 Withholding Taxes	13
4.9 Compliance with Section 409A	13
Article V Administration	14
5.1 Administrative Committee	14

-i-

5.2 Administrative Committee Powers	14
5.3 Effect of Administrative Committee Decisions	15
5.4 Claims Procedure	15
5.5 Action by Administrative Committee	16
5.6 Indemnity	16
Article VI Amendment And Termination	17
6.1 Amendment and Termination	17
6.2 Successors and Assigns	17
Article VII Miscellaneous	18
7.1 Unfunded Plan	18
7.2 Unsecured General Creditor	18
7.3 Nonassignability	18
7.4 Not a Contract of Employment	18
7.5 Protective Provisions	18
7.6 Governing Law	19
7.7 Severability	19
7.8 Notice	19
7.9 Successors	19
7.10 Action by Corporation	19
7.11 Effect on Benefit Plans	19
7.12 Participant Litigation	19

-ii-

BAXTER INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL PENSION PLAN

(Amended and Restated Effective January 1, 2009)

ARTICLE I — GENERAL

1.1 Purpose and Effective Date.

Baxter International Inc. (the “Corporation”) established the Baxter International Inc. and Subsidiaries Supplemental Pension Plan (the “Plan”), effective as of January 1, 1989, to assist in providing retirement and other benefits to certain employees of the Corporation and its affiliates which are in addition to those provided under the Baxter International Inc. and Subsidiaries Pension Plan (the “Pension Plan”). The Plan was previously amended effective January 1, 2005. The following provisions constitute an amendment and restatement of the Plan effective as of January 1, 2009, the “Effective Date” of the Plan set forth herein. The Plan is intended to constitute an unfunded plan maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees for purposes of ERISA.

1.2 Plan Administration; Source of Benefit Payments.

The authority to control and manage the operation and administration of the Plan shall be vested in the Administrative Committee, as set forth in Article V. A Participating Employer’s obligation under the Plan shall be reduced to the extent that any amounts due under the Plan are paid from one or more trusts, the assets of which are subject to the claims of general creditors of the Participating Employer or any affiliate thereof, provided, however, that nothing in the Plan shall require the Corporation or any Participating Employer to establish any trust to provide benefits under the Plan.

1.3 Limitation on Provisions.

Any benefit payable under the Pension Plan shall be paid solely in accordance with the terms and conditions of the Pension Plan and nothing in the Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan.

1.4 Inactive Participation.

Except as otherwise specifically provided herein, the benefits, if any, payable to or on behalf of Participants who terminated employment with the Corporation and its affiliates prior to the Effective Date shall be determined in accordance with the terms of the Plan as in effect on such Termination of Employment; provided that any provision of the Plan that is required to be effective as of an earlier in order to comply with Section 409A of the Code shall be effective as of such date.

1.5 Plan Supplements.

The provisions of the Plan as applied to any Participating Employer or Participant may be modified and/or supplemented from time to time by the adoption of one or more Supplements. In the event of any inconsistency between a Supplement and the Plan document, the terms of the Supplement shall govern; provided that no Supplement shall alter the provisions of Section 4.9 (except that a Supplement may provide that the portion of any Special Supplemental Benefit is not subject to the provisions of the Plan intended to comply with Section 409A to the extent such portion was accrued and vested on December 31, 2004, and

1

that the Special Supplemental Benefit is not materially modified after October 3, 2004) or otherwise cause the Plan to be administered in a manner that does not comply with Section 409A.

2

ARTICLE II — DEFINITIONS

2.1 Accrued Benefit.

Accrued Benefit shall have the meaning ascribed to such term under the Pension Plan.

2.2 Administrative Committee.

Administrative Committee shall have the meaning ascribed to such term under the Pension Plan.

2.3 Beneficiary.

A Participant’s Beneficiary shall be the Participant’s beneficiary under the Pension Plan (or the person who would be the Participant’s beneficiary under the Pension Plan if the Participant’s Qualified Benefit were paid in the same form and at the same time as his Benefit hereunder).

2.4 Benefit.

A Participant’s Benefit means the sum of the Participant’s Excess Benefit, Make-Whole Benefit, and Special Supplemental Benefit, if any, unless otherwise provided.

2.5 Code.

Code means the Internal Revenue Code of 1986, as amended.

2.6 Controlled Group.

Controlled Group means the Corporation and all other business entities, whether or not incorporated, which, together with the Corporation, would be considered a single employer under section 414(b) or (c) of the Code.

2.7 Corporation.

Corporation has the meaning ascribed to such term in Section 1.1.

2.8 Deferred Compensation Plan.

Deferred Compensation Plan means Baxter International Inc. and Subsidiaries Deferred Compensation Plan.

2.9 Effective Date.

Effective Date means the effective date of this amendment and restatement of the Plan, which January 1, 2009. The original effective date of the Plan was January 1, 2002.

2.10 ERISA.

ERISA means the Employee Retirement Income Security Act of 1974, as amended.

2.11 Excess Benefit.

Excess Benefit means the benefit determined under Section 4.2.

2.12 Non-Participating Employer.

A Non-Participating Employer means any Employer which is not a Participating Employer.

2.13 Participant.

Participant means an employee of a Participating Employer who is eligible for an Excess Benefit, Pension Make-Whole Benefit or Special Supplemental Benefit, as set forth in Section 3.1.

2.14 Participating Employer.

Participating Employer means the Corporation and any affiliate of the Corporation, which is a Participating Employer under the Pension Plan.

3

2.15 Pension Make-Whole Benefit.

Pension Make-Whole Benefit means the benefit determined under Section 4.3.

2.16 Pension Plan.

Pension Plan has the meaning ascribed to such term in Section 1.1.

2.17 Plan.

Plan has the meaning ascribed to such term in Section 1.1.

2.18 Points.

A Participant’s Points shall be equal to the number of Points the Participant has accumulated as of any date under the terms of the Pension Plan as in effect on December 31, 2008, without regard to any amendments to the Pension Plan adopted after such date which directly or indirectly affect the Participant’s Points.

2.19 Qualified Benefit.

Qualified Benefit means the Participant’s actual Accrued Benefit payable under the Pension Plan.

2.20 Section 409A.

Section 409A means Section 409A of the Internal Revenue Code of 1986, as enacted by the American Jobs Creation Act of 2004 and as subsequently amended, and including all Treasury Regulations and other authoritative guidance issued pursuant thereto.

2.21 Special Supplemental Benefit.

Special Supplement Benefit means the benefit determined under Section 4.4.

2.22 Termination of Employment.

     A Termination of Employment occurs on the date on which a Participant incurs a separation from service as defined in Treasury Regulations issued pursuant to Section 409A. The following rules are intended to implement the requirements of Section 409A, and may be adjusted by the Administrative Committee as required to comply with guidance issued under Section 409A:

(a)

The Participant shall not be considered to have separated from service so long as the Participant is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the Participant retains a right to reemployment with a Participating Employer under an applicable statute or by contract.

(b)

Regardless of whether his employment has been formally terminated, the Participant will be considered to have separated from service as of the date it is reasonably anticipated that no further services will be performed by the Participant for any Participating Employer, or that the level of bona fide services the Participant will perform after such date will permanently decrease to no more than 20 percent of the average level of bona fide services performed over the immediately preceding 36-month period (or the full period of employment if the Participant has been employed for less than 36 months). For purposes of the preceding test, during any paid leave of absence the Participant shall be considered to have been performing services at the level commensurate with the amount of compensation received, and unpaid leaves of absence shall be disregarded.

4

(c)

For purposes of determining whether the Participant has separated from service, all services provided for any Employer, or for any entity that is a member of the Controlled Group, shall be taken into account, whether provided as an employee or as a consultant or other independent contractor; provided that the Participant shall not be considered to have not separated from service solely by reason of service as a non-employee director of the Corporation or any other such entity. Solely for purposes of this Section 2.19, the term “Controlled Group” shall be modified by substituting “50 percent” for “80 percent” for all purposes of section 414(b) and (c) of the Code (and Section 1563 to the extent incorporated therein).

(d)

A Participant who is employed by a Participating Employer, and continues to be employed by the Participating Employer following a stock sale, spin-off, or other transaction that causes the Participant’s employer to cease to be a member of the Controlled Group, shall not be considered to have incurred a Termination of Employment as a result of such transaction. A Participant who ceases to be employed by the Corporation or any member of the Controlled Group as a result of a sale of substantially all of the assets constituting a division, facility, or separate line of business, shall be considered to have incurred a Termination of Employment unless the Corporation (or Participating Employer selling such assets) and the purchaser agree in writing, not later than the closing date of such transaction, that all Participants affected by such transaction shall not be considered to have incurred a Termination of Employment, and that the purchaser agrees to assume the obligation for payment of the Benefits of all such Participants in accordance with the Plan.

5

ARTICLE III — PARTICIPATION IN THE PLAN

3.1 Eligibility.

An employee of a Participating Employer shall become a Participant in the Plan on the first date such employee is eligible for an Excess Benefit, Pension Make-Whole Benefit or Special Supplemental Benefit, in accordance with the following:

(a)	Each participant in the Pension Plan who has a fully vested interest in his or her Accrued Benefit under the Pension Plan and whose benefit under the Pension Plan is limited by reason of the application of Section 415 or Section 401(a)(17) of the Code shall be eligible for an Excess Benefit, determined in accordance with Section 4.2.
(b)	Each participant in the Pension Plan who has a fully vested interest in his or her Accrued Benefit under the Pension Plan and who also is a participant in the Deferred Compensation Plan shall be eligible for a Pension Make-Whole Benefit, determined in accordance with Section 4.3.
(c)	The Administrative Committee (or the person or persons delegated such authority by the Administrative Committee), in its sole discretion, shall designate the individuals, if any, who shall be eligible for Special Supplemental Benefits.

3.2 Restricted Participation.

Notwithstanding any other provision of the Plan to the contrary, if the Administrative Committee determines that participation by one or more Participants shall cause the Plan as applied to any Participating Employer to be subject to Part 2, 3 or 4 of Subtitle B of Title I of ERISA, the entire interest of such Participants under the Plan shall be segregated from the Plan, and such Participants shall cease to have any interest under the Plan. In the event the Participant has died, the foregoing provisions of this Section 3.2 shall apply to the Participant’s interest, if any, which is payable to the Participant’s surviving spouse or other beneficiary.

3.3 No Contract of Employment.

The Plan does not constitute a contract of employment, and participation in the Plan will not give any employee the right to be retained in the employ of the Corporation or any Participating Employer nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan.

3.4 Participation Freeze.

Participation in the Plan is frozen effective December 31, 2006, and no Employees shall become Participants after such date, subject to the following:

(a)	No Employee who is hired by a Participating Employer after December 31, 2006, or who was hired by a Non-Participating Employer prior to January 1, 2007, and transferred to a Participating Employer after December 31, 2006, shall be eligible to Participate in the Plan.
(b)	An Eligible Employee who was employed by a Participating Employer on December 31, 2006, but who had not satisfied the requirements of Section 3.1(b)

6

of the Pension Plan on such date, shall become a Participant on the first Entry Date after he satisfies such requirements, unless he elects not to become a Participant as provided in subparagraph (c) below.

(c)	The election of a Participant or Eligible Employee (as defined in the Pension Plan) to either cease accruing benefits as of December 31, 2006, under the Pension Plan, or not to become a Participant in the Pension Plan after December 31, 2006, shall also apply under this Plan. The Plan Benefit of a Participant who elects under the Pension Plan to cease accruing benefits shall thereafter be equal to his Plan Benefit as of December 31, 2006, which shall not be adjusted for subsequent changes in his Average Monthly Compensation, Years of Service, Projected Benefit Service, or Primary Social Security Benefit, but such Participant shall continue to earn Years of Service for purposes of vesting, and Points, and his Benefit shall be payable as otherwise provided herein. An Eligible Employee who elects not to become a Participant in the Pension Plan shall thereafter be ineligible to become a Participant in this Plan.
(d)	Notwithstanding the foregoing, an Employee hired prior to December 31, 2006, and who did not elect to cease accruing benefits under the Pension Plan as of December 31, 2006, but who was not eligible for either an Excess Benefit or a Make-Whole Benefit prior to December 31, 2006, solely because his Qualified Benefit was not limited by the application of Section 415 or Section 401(a)(17) of the Code and he had not deferred any compensation under the Deferred Compensation Plan, shall be eligible to participate beginning with the first year in which he is eligible for either an Excess Benefit or a Make-Whole Benefit.
(e)	To the extent permitted by Section 4.4, an Employee not otherwise eligible to participate in the Plan may be eligible to receive a Special Supplemental Benefit.

7

ARTICLE IV — AMOUNT AND PAYMENT OF PLAN BENEFITS

4.1 Plan Benefits.

Eligible Participants under the Plan shall receive an Excess Benefit, Pension Make-Whole Benefit or Special Supplemental Benefit, in the amount and payable at the times set forth in the following provisions of this Article 4. Effective January 1, 2009, the amount of a Participant’s Excess Benefit and Pension Make-Whole Benefit shall be calculated as if the Participant’s Qualified Benefit had commenced as of the same date, and in the same form, as the Participant’s Excess Benefit and Pension Make-Whole Benefit, regardless of when and in what form the Qualified Benefit is paid, and no adjustment shall be made to the Excess Benefit or Pension Make-Whole Benefit when the Qualified Benefit commences. To the extent a Supplemental Benefit is defined in whole or part by reference to the Qualified Benefit, the preceding sentence shall apply unless the terms of the Supplemental Benefit clearly provide for a different method of calculation.

4.2 Excess Benefit.

As of any date, an eligible Participant’s “Excess Benefit” under the Plan shall be an amount equal to the Qualified Benefit the Participant would be eligible for under the Pension Plan as of such date if such Qualified Benefit were determined without regard to limitations of Section 415 and Section 401(a)(17) of the Code, reduced by the Participant’s Qualified Benefit as of such date. A Participant’s Excess Benefit, if any, shall be paid at the time and in the form provided in Section 4.6.

4.3 Pension Make-Whole Benefit.

As of any date, an eligible Participant’s “Pension Make-Whole Benefit” under the Plan shall be an amount equal to:

(a)	the Qualified Benefit the Participant would be eligible for under the Pension Plan as of such date if such Qualified Benefit were determined (i) without exclusion of compensation deferred under the Deferred Compensation Plan, and (ii) without regard to the limitations of Code Sections 415 and 401(a)(17),
	reduced by
(b)	the sum of (i) the Participant’s actual Qualified Benefit under the Pension Plan as of such date, and (ii) the amount of any Excess Benefit determined under Section 4.2 without regard to such deferred compensation.

A Participant’s Pension Make-Whole Benefit, if any, shall be paid at the time and in the form provided in Section 4.6.

4.4 Special Supplemental Benefits.

The amount, if any, of a Participant’s “Special Supplemental Benefit” shall be determined by the Administrative Committee, shall be subject to such terms and conditions as the Administrative Committee may establish, and shall be payable at the times and in the form determined by the Administrative Committee. Effective as of January 1, 2005, the time and form of payment of any Special Supplemental Benefit shall be specified by the Administrative Committee at the time the Administrative Committee establishes the Participant’s right to the Special Supplemental Benefit. In the event that any right to a Special Supplemental Benefit was not fully vested on December 31, 2004, and is not amended

8

not later than December 31, 2008 to specify the time and form of payment in a manner that satisfies the requirements of Section 409A, such Special Supplemental Benefit shall be paid in the form specified in Section 4.6. The Administrative Committee, in its sole discretion, may delegate its authority under this Section 4.4 to any person or persons in connection with the award of Special Supplemental Benefits to a particular Participant, a class of Participants, or all Participants. All rights to Special Supplemental Benefits shall be set forth in writing, which writing may include an employment contract or similar agreement, and a copy of all actions taken by the Administrative Committee or its delegate with respect to Special Supplemental Benefits under the Plan shall be sent to the Corporate Counsel in charge of the Company’s employee benefit plans. Anything else contained herein to the contrary notwithstanding, no person shall have any right to a Special Supplemental Benefit in the absence of a written instrument setting forth the terms of such Special Supplemental Benefit.

4.5 Actuarial Equivalence.

To the extent applicable, the benefits payable to any person under the Plan shall be determined by applying the appropriate interest rate and other actuarial assumptions set forth in the Pension Plan.

4.6 Time and Form of Payment.

(a)

The Benefit (excluding for all purposes of this Section 4.6 any Special Supplemental Benefit unless otherwise provided in Section 4.4) of a Participant whose Qualified Benefit commences not later than December 31, 2008, shall commence at the same time and be paid in the same manner as the Participant’s Qualified Benefit.

(b)

The Benefit of a Participant whose Qualified Benefit commences after December 31, 2008 shall become payable upon the later of the occurrence of the first day of the month following the Participant’s Termination of Employment or, in the case of a Participant who was a Participant prior to December 31, 2008, a specified date, if any, elected by the Participant in accordance with paragraph (c) (in either case, the “Commencement Date”). Such Benefit shall be paid in the following form:

(i) If the actuarial present value of the Benefit as of the Commencement Date does not exceed $50,000, the Benefit shall be paid in a lump sum equal to the actuarial present value, which payment shall be in full satisfaction of the Participant’s right to the Benefit. Such payment shall be made not later than 90 days following the Commencement Date, subject to paragraph (d). For purposes of determining whether the present value of the Benefit exceeds $50,000, any Special Supplemental Benefit shall be included if and only if the terms of the agreement creating the Special Supplemental Benefit provided for the Special Supplemental Benefit to be paid at the same time and in the same form as remainder of the Benefit not later than the later of the date the Participant first had a legally binding right to the Special Supplemental Benefit or December 31, 2008, and in such event the Special Supplemental Benefit shall be included notwithstanding any change in the terms of the Special Supplemental

9

Benefit after such date. If the preceding sentence does not apply, the Special Supplemental Benefit shall not be included in determining whether the present value exceeds $50,000, and the provisions of this paragraph (b) shall be applied separately to the Special Supplemental Benefit.

(ii) If the actuarial present value of the Benefit exceeds $50,000 as of the Commencement Date, Benefit shall be paid in a monthly life annuity of the type set forth below. The first annuity payment shall be paid, subject to paragraph (d), on the first day of the month following the first month beginning with month that includes the Commencement Date in which the Participant’s has accumulated at least 65 Points (the “Annuity Start Date.”)

(A)	If the Participant’s Qualified Benefit commences as of or prior to the Annuity Start Date, his Benefit shall be paid in the same form of annuity as the Qualified Benefit.
(B)	If the Participant’s Qualified Benefit has not yet commenced by the Annuity Start Date, and the Participant is not married on the Annuity Start Date, his Benefit shall be paid in an annuity for the life of the Participant with no survivor benefits.
(C)	If the Participant’s Qualified Benefit has not yet commenced by the Annuity Start Date, and the Participant is married on Annuity Start Date, his Benefit shall be paid in an annuity that pays an actuarially reduced benefit to the Participant during the Participant’s life, and pays 50% of such annuity to the Participant’s spouse for the balance of the spouse’s life if the spouse survives the Participant. No adjustment to such annuity shall be made if the Participant’s spouse predeceases the Participant or the Participant and this spouse are divorced after the Annuity Start Date.
(D)	The Administrative Committee may permit a Participant to elect a different form of annuity that is treated as a life annuity for purposes of Section 409A. Anything else contained herein to the contrary notwithstanding, all forms of life annuity shall be actuarially equivalent as defined in Section 409A, and any procedures adopted by the Administrative Committee to permit Participant’s to elect different forms of annuity shall comply with the requirements of Section 409A.

(c) Each person who was a Participant prior to January 1, 2009, and who is anticipated to have a Benefit accrued under this Plan as of December 31, 2008 (as determined by the Administrative Committee in its sole discretion) may elect a Commencement Date, which shall be either the first day of a specific month or the first day of the month following the date on which the Participant attains a

10

	specified age. Such elections shall apply to the Participant’s entire Benefit (including any Special Supplemental Benefit to be paid in the same form as the Benefit), and shall be made, in writing, in accordance with procedures specified by the Administrative Committee, not later than December 31, 2008, and shall not thereafter be revoked or changed; provided that no such election shall cause any amount to be paid in 2008 that would otherwise have been paid in a later year, or cause any amount that would otherwise have been paid in 2008 to be paid in a later year, and such elections shall otherwise comply with the requirements for transitional relief under IRS Notice 2007-86. An agreement (including a provision of an employment agreement) entered into between a Participant and the Corporation not later than December 31, 2008, that refers specifically to this Plan and specifies a time and/or form of payment of the Participant’s Benefit shall constitute an election for purposes of this paragraph (c), and, in lieu of a specific date, may provide for the Participant’s Commencement Date to occur upon the Participant’s separation from service or the occurrence of any other event that satisfies the requirements of Section 409A.
(d)	If a Participant’s Commencement Date is the first day of the month following his Termination of Employment, and the Participant is a specified employee as hereinafter defined on the Commencement Date, payment of his Benefit shall be deferred until six months after his Termination of Employment, as described below. If payment is to be made in a lump sum (based on actuarial present value as of the Commencement Date), the lump sum shall be paid on the first day of the seventh month following the month that includes the Termination of Employment, and the amount shall be recalculated as of such date even if such recalculated amount exceeds $50,000. If payment is to be made in an annuity, the first annuity payment shall be paid on the later of the first day of the seventh month following the month that includes the Termination of Employment or the Annuity Start Date, but if such date is later than the Annuity Start Date the annuity payments shall be calculated as of the Annuity Start Date, and the Participant shall receive a supplemental payment, with or following the first annuity payment, equal to the sum, without interest, of the annuity payments that would have been paid prior to such date but for this paragraph (d). For purposes of this paragraph (d), the term “specified employee” shall have the same meaning as in the Baxter International Inc. and Subsidiaries Deferred Compensation Plan.
(e)	Anything else contained herein to the contrary notwithstanding, the Administrative Committee at any time in its sole discretion may distribute to any Participant the entire actuarial present value of his Benefit (including any Special Supplemental Benefit) in a single lump sum in full satisfaction of his rights under the Plan, provided that the entire interest of the Participant in all other plans required to be aggregated with the Plan pursuant to Treas. Reg. §1.409A-1(c)(2) is also distributed and that the total amount distributed does not exceed the limit in effect under Section 402(g) of the Code at the time of distribution.

11

4.7 Death Benefits.

(a)	If a Participant whose Benefit is payable in an annuity dies after the Annuity Start Date, the only death benefit payable shall be the survivorship benefit, if any, payable under the applicable form of annuity.
(b)	If a Participant whose Benefit is payable in a lump sum dies after his Commencement Date but before actual payment of his Benefit (including but not limited to a Participant whose benefit is deferred pursuant to Section 4.6(d)), the lump sum payment shall be made to his Beneficiary as soon as practical, but not more than 90 days after the date of his death.
(c)	If a Participant either dies prior to his Commencement Date, or after his Commencement Date but prior to his Annuity Start Date if his Benefit is payable as an annuity, and if his Beneficiary is entitled to a pre-retirement survivor annuity under the Pension Plan (or would be entitled to a preretirement survivorship benefit but for the fact that payment of his Qualified Benefit had commenced at the time of his death), his Beneficiary shall be entitled to a preretirement survivor benefit (the “Survivor Benefit”) under the terms of this paragraph (c). The Survivor Benefit shall be paid on the first day of the first month following the month that includes the Participant’s death in which the Participant either had completed 65 Points, or would have completed 65 Points had he not died. The Survivor Benefit shall be paid in a single lump sum equal to the actuarial present value of the excess of (i) the amount of the preretirement survivor annuity that would be paid to the Beneficiary under the Pension Plan if the Participant’s Benefit were calculated with the adjustments described in Sections 4.2 and 4.3 (and included the Special Supplemental Benefit, if applicable), over (ii) the amount of pretirement survivor annuity actually payable under the Pension Plan, in both cases calculated as if payment of the preretirement survivor annuity under the Pension Plan commenced on the date of payment of the Survivor Benefit.
(d)	Notwithstanding the foregoing, if a Participant whose benefit is paid in the form of an annuity and whose Benefit is deferred pursuant to Section 4.6(d) dies after his Annuity Start Date but before the date to which payment of his benefit is deferred, his Beneficiary shall not receive a Survivor Benefit under paragraph (c), but shall instead receive whatever survivorship benefits are provided by the Participant’s form of annuity, determined as if payment had commenced on the Annuity Start Date, and in addition shall receive a payment equal to the annuity payments that would have been paid prior to the Participant’s death but for the requirement of Section 4.6(d).
(e)	Except as otherwise provided in this Section 4.7, no person shall receive any form of death or survivorship benefits following the death of a Participant, whether before or after his Commencement Date.

12

4.8 Withholding Taxes.

Benefits and payments under the Plan are subject to the withholding of all applicable taxes. Notwithstanding any provision of the Plan to the contrary, a Participant’s initial benefit payment under the Plan shall be in an amount sufficient pay any remaining employment tax required to be withheld with respect to Plan benefits. To the extent such amount is in excess of the first distribution that would otherwise have been made based on the form of benefit elected by the Participant, subsequent payments will not begin until the aggregated payments that would have been made under the form of benefit elected by the Participant exceed the amount of such initial distribution.

4.9 Compliance with Section 409A.

Anything else in this Plan to the contrary notwithstanding, effective January 1, 2005, the Plan is intended to comply in all regards with Section 409A and shall be so construed and administered. Without limiting the generality of the preceding sentence, (i) in no event shall any benefit under the Plan be paid at any time other than under the terms of the Plan as in effect on the date on which the Participant first acquires a legal right to such benefit (whether or not vested), whether by amendment of the Plan, exercise of the Administrative Committee’s discretion, or otherwise, except as permitted by Section 409A, and (ii) in the event that the Administrative Committee, in its sole discretion, determines that any time or form of payment provided for in the Plan, or the existence of a right to elect a time or form of distribution (including without limitation the payment of benefits in the same form elected by a Participant under the Pension Plan), would cause the Plan to fail to meet the requirements of Section 409A, or otherwise cause Participants to be subject to any adverse federal income tax consequences, such provision shall to the maximum extent permitted by law be deemed amended to the extent required to comply with Section 409A, or the Plan shall be construed as if such provision were not included therein. The restrictions of Section 409A shall apply to the entire benefit of a Participant if any portion of the Participant’s benefit was accrued or vested on or after January 1, 2005, but shall not apply to a Participant whose entire benefit was accrued and vested prior to such date.

13

ARTICLE V — ADMINISTRATION

5.1 Administrative Committee.

The Plan is administered by the Administrative Committee, which is the “administrator” for purposes of Section 3(16)(A) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Baxter has appointed the members of the Administrative Committee to administer the Plan. Members of the Administrative Committee may be Participants in the Plan.

5.2 Administrative Committee Powers.

The Administrative Committee has such powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following powers, rights and duties:

(a)	Interpretation of Plan. The Administrative Committee has the power, right and duty to construe, interpret and enforce the Plan provisions and to determine all questions arising under the Plan including, but not by way of limitation, questions of Plan participation, eligibility for Plan benefits and the rights of employees, Participants, Beneficiaries and other persons to benefits under the Plan and to determine the amount, manner and time of payment of any benefits hereunder;
(b)	Plan Procedures. The Administrative Committee has the power, right and duty to adopt procedures, rules, regulations and forms to be followed by employees, Participants, Beneficiaries and other persons or to be otherwise utilized in the efficient administration of the Plan which may alter any procedural provision of the Plan without the necessity of an amendment, and which procedures may provide for any election or consent to be made, or any other action to be taken (including without limitation filing claims and requesting review of denied claims), by electronic mail, internet website, telephone or voice response system or other electronic method to the extent permitted by applicable law;
(c)	Benefit Determinations. The Administrative Committee has the power, right and duty to make determinations as to the rights of employees, Participants, Beneficiaries and other persons to benefits under the Plan and to afford any Participant or beneficiary dissatisfied with such determination with rights pursuant to a claims procedure adopted by the Committee; and
(d)	Allocation of Duties. The Administrative Committee is empowered to employ agents (who may also be employees of Baxter) and to delegate to them any of the administrative duties imposed upon the Administrative Committee or Baxter.
(e)	Plan Amendments. The Administrative Committee has the power and right, at any time, to amend or supplement the Plan. Notwithstanding the foregoing provisions of this Section 5.2(e), no amendment of the Plan shall reduce the benefit to which a Participant would be entitled if he had terminated employment immediately prior to the adoption of the resolution amending the Plan; provided, however, the Administrative Committee or Corporation, as applicable, may

14

amend the Plan at any time to take effect retroactively or otherwise, as deemed necessary or advisable for purposes of conforming the Plan to any present or future law, regulations or rulings relating to plans of this or a similar nature.

5.3 Effect of Administrative Committee Decisions.

Any ruling, regulation, procedure or decision of the Administrative Committee will be conclusive and binding upon all persons affected by it. There will be no appeal from any ruling by the Administrative Committee which is within its authority, except as provided in Section 5.4 below. When making a determination or a calculation, the Administrative Committee will be entitled to rely on information supplied by any Employer, accountants and other professionals including, but not by way of limitation, legal counsel for Baxter or any Employer.

5.4 Claims Procedure.

Each person entitled to benefits under the Plan (the “Applicant”) must submit a written claim for benefits to the Administrative Committee. Such claim shall be filed not more than one year after the Applicant knows, or with the exercise of reasonable diligence would know, if the basis for the claim. A formal claim shall not be required for the distribution of a Participant’s Accounts in the ordinary course of business, but in any case a claim that relates to a dispute over the amount of a distribution shall be filed not more than one year after payment of the distribution commences. The Administrative Committee may, in its sole discretion accept a claim that is filed late if it determines that special circumstances warrant acceptance of the claim.

If a claim for benefits by the Applicant is denied, in whole or in part, the Administrative Committee, or its delegate, shall furnish the Applicant within 90 days after receipt of such claim, a written notice which specifies the reason for the denial, refers to the pertinent provisions of the Plan on which the denial is based, describes any additional material or information necessary for properly completing the claim and explains why such material or information is necessary, and explains the claim review procedures of this Section 5.4. Such notice will further describe that the Applicant has a right to bring a civil action under Section 502 of ERISA if his claim is denied after an appeal and review. The 90 day period may be extended by up to an additional 90 days if special circumstances required, in which event the Applicant shall be notified in writing by the end of the initial 90 day period of the reason for the extension and an estimate of when the claim will be processed.

Any Applicant whose claim is denied under the provisions described above, or who has not received from the Administrative Committee a response to his claim within the time periods specified in the provisions described above may request a review of the denied claim by written request to the Administrative Committee within 60 days after receiving notice of the denial. If such a request is made, the Administrative Committee shall make a full and fair review of the denial of the claim and shall make a decision not later than 60 days after receipt of the request, unless special circumstances (such as the need to hold a hearing) require an extension of time, in which case a decision shall be made as soon as possible but not later than 120 days after receipt of the request for review, and written notice of the reason for the extension and an estimate of when the review will be complete shall be given to the Applicant before the commencement of the extension. The decision on review shall be in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of the Plan on which the decision

15

is based. Such notice will further describe that the Applicant has a right to bring a civil action under Section 502 of ERISA.

No person entitled to benefits under the Plan shall have any right to seek review of a denial of benefits, or to bring any action to enforce a claim for benefits, in any court or administrative agency prior to his filing a claim for benefits and exhausting all of his rights under this Section 5.4, or more than 180 days after he receives the Administrative Committee’s decision on review of the denial of his claim. Although not required to do so, an Applicant, or his representative, may choose to state the reason or reasons he believes he is entitled to benefits, and may choose to submit written evidence, during the initial claim process or review of claim denial process. However, failure to state any such reason or submit such evidence during the initial claim process or review of claim denial process, shall permanently bar the Applicant, and his successors in interest, from raising such reason or submitting such evidence in any forum at any later date. An Applicant whose claim is denied initially or on review is entitled to receive, on request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to such claim for benefits.

5.5 Action by Administrative Committee.

Action by the Administrative Committee will be subject to the following special rules:

(a)	Meetings and Documents. The Administrative Committee may act by meeting or by document signed without meeting and documents may be signed through the use of a single document or concurrent documents.
(b)	Action by Majority. The Administrative Committee will act by a majority decision which action will be as effective as if such action had been taken by all Administrative Committee members, provided that by majority action one or more Administrative Committee members or other persons may be authorized to act with respect to particular matters on behalf of all Administrative Committee members.
(c)	Resolving Deadlocks. If there is an equal division among the Administrative Committee members with respect to any question a disinterested party may be selected by a majority vote to decide the matter. Any decision by such disinterested party will be binding.

5.6 Indemnity.

To the extent permitted by applicable law and to the extent that they are not indemnified or saved harmless under any liability insurance contracts, any present or former Administrative Committee members, officers, or directors of Baxter, the Employers or their subsidiaries or affiliates, if any, will be indemnified and saved harmless by the Employers from and against any and all liabilities or allegations of liability to which they may be subjected by reason of any act done or omitted to be done in good faith in the administration of the Plan, including all expenses reasonably incurred in their defense in the event that Baxter fails to provide such defense after having been requested in writing to do so.

16

ARTICLE VI — AMENDMENT AND TERMINATION

6.1 Amendment and Termination.

As indicated in Section 5.2 above, the Administrative Committee may, at any time, amend or supplement the Plan. The Board of Directors of the Corporation may, at any time, terminate the Plan. Notwithstanding the foregoing provisions of Sections 5.2 or 6.1, neither an amendment or termination of the Plan shall reduce the benefit to which a Participant would be entitled if he had terminated employment immediately prior to the adoption of the resolution amending or terminating the Plan; provided, however, the Administrative Committee or Corporation, as applicable, may amend or terminate the Plan at any time to take effect retroactively or otherwise, as deemed necessary or advisable for purposes of conforming the Plan to any present or future law, regulations or rulings relating to plans of this or a similar nature. Upon termination of the Plan, all benefits accrued through the date of termination shall be paid as provided herein; provided that the Administrative Committee may, to the extent permitted under Section 409A, provide for the payment of actuarially equivalent lump sums in full satisfaction of some or all of the accrued benefits.

6.2 Successors and Assigns.

The obligations of the Corporation and the Participating Employers under the Plan shall be binding upon any assignee or successor in interest thereto.

17

ARTICLE VII — MISCELLANEOUS

7.1 Unfunded Plan.

This Plan is intended to be an unfunded retirement plan maintained primarily to provide retirement benefits for a select group of management or highly compensated employees. All credited amounts are unfunded, general obligations of the appropriate Participating Employer. This Plan is not intended to create an investment contract, but to provide retirement benefits to eligible employees who participate in the Plan. Eligible employees are members of a select group of management or are highly compensated employees, who, by virtue of their position with a Participating Employer, are uniquely informed as to such Participating Employer’s operations and have the ability to affect materially Participating Employer’s profitability and operations.

7.2 Unsecured General Creditor.

In the event of a Participating Employer’s insolvency, Participants and their Beneficiaries, heirs, successors and assigns will have no legal or equitable rights, interest or claims in any property or assets of such Participating Employer, nor will they be Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by such Participating Employer (the “Policies”) greater than those of any other unsecured general creditors. In that event, any and all of the Participating Employer’s assets and Policies will be, and remain, the general, unpledged, unrestricted assets of Participating Employer. Participating Employer’s obligation under the Plan will be merely that of an unfunded and unsecured promise of Participating Employer to pay money in the future.

7.3 Nonassignability.

Neither a Participant nor any other person will have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be nonassignable and nontransferable. No part of the amounts payable will, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency.

7.4 Not a Contract of Employment.

The terms and conditions of this Plan will not be deemed to constitute a contract of employment between a Participant and such Participant’s Participating Employer, and neither the Participant nor the Participant’s beneficiary will have any rights against such Participant’s Participating Employer except as may otherwise be specifically provided herein. Moreover, nothing in this Plan is deemed to give a Participant the right to be retained in the service of his or her Participating Employer or to interfere with the right of such Participating Employer to discipline or discharge him or her at any time.

7.5 Protective Provisions.

A Participant will cooperate with the Corporation by furnishing any and all information requested by the Corporation, in order to facilitate the payment of benefits hereunder.

18

7.6 Governing Law.

The provisions of this Plan will be construed and interpreted according to the laws of the State of Illinois, to the extent not preempted by ERISA.

7.7 Severability.

In the event any provision of the Plan is held invalid or illegal for any reason, any illegality or invalidity will not affect the remaining parts of the Plan, but the Plan will be construed and enforced as if the illegal or invalid provision had never been inserted, and the Corporation will have the privilege and opportunity to correct and remedy such questions of illegality or invalidity by amendment as provided in the Plan, including, but not by way of limitation, the opportunity to construe and enforce the Plan as if such illegal and invalid provision had never been inserted herein.

7.8 Notice.

Any notice or filing required or permitted to be given to the Corporation or the Administrative Committee under the Plan will be sufficient if in writing and hand delivered, or sent by registered or certified mail to any member of the Administrative Committee, or to the Corporation’s Chief Financial Officer and, if mailed, will be addressed to the principal executive offices of the Corporation. Notice to a Participant or beneficiary may be hand delivered or mailed to the Participant or beneficiary at his or her most recent address as listed in the employment records of the Corporation. Notices will be deemed given as of the date of delivery or mailing or, if delivery is made by certified or registered mail, as of the date shown on the receipt for registration or certification. Any person entitled to notice hereunder may waive such notice.

7.9 Successors.

The obligations of the Corporation and the Participating Employers under the Plan shall be binding upon any assignee or successor in interest thereto. The provisions of this Plan will bind and inure to the benefit of the Corporation and the Participating Employers, the Participants and Beneficiaries, and their respective successors, heirs and assigns. The term successors as used herein will include any corporate or other business entity, which, whether by merger, consolidation, purchase or otherwise acquires all or substantially all of the business and assets of the Corporation, and successors of any such corporation or other business entity.

7.10 Action by Corporation.

Except as otherwise provided herein, any action required of or permitted by the Corporation under the Plan will be by resolution of the Compensation Committee or any person or persons authorized by resolution of the Compensation Committee.

7.11 Effect on Benefit Plans.

Amounts paid under this Plan, will not by operation of this Plan be considered to be compensation for the purposes of any benefit plan maintained by any Participating Employer. The treatment of such amounts under other employee benefit plans will be determined pursuant to the provisions of such plans.

7.12 Participant Litigation.

In any action or proceeding regarding the Plan, employees or former employees of the Corporation or a Participating Employer, Participants, Beneficiaries or any other persons having or claiming to have an interest in this Plan will not be necessary parties and will not be entitled to any notice or process. Any final judgment which is not appealed or appealable and may be entered in any such action or proceeding will be binding and conclusive on the parties hereto and all persons having or claiming to have any interest in this Plan. To the extent permitted by law, if a legal action is begun against the Corporation, a

19

Participating Employer, the Administrative Committee, or any member of the Administrative Committee by or on behalf of any person and such action results adversely to such person or if a legal action arises because of conflicting claims to a Participant’s or other person’s benefits, the costs to such person of defending the action will be charged to the amounts, if any, which were involved in the action or were payable to the Participant or other person concerned. To the extent permitted by applicable law, acceptance of participation in this Plan will constitute a release of the Corporation, each Participating Employer, the Administrative Committee and each member thereof, and their respective agents from any and all liability and obligation not involving willful misconduct or gross neglect.

* * *

     IN WITNESS WHEREOF, the undersigned duly authorized officer has caused this Plan to be executed this 29^th day of December, 2008.

BAXTER INTERNATIONAL INC. ADMINISTRATIVE COMMITTEE
By:	/s/ Jeanne K. Mason
	Jeanne K. Mason
	Corporate Vice President of Human Resources and Administrative Committee Member

20

EX-10.19

Exhibit 10.19

Baxter International Inc. And Subsidiaries

Deferred Compensation Plan

(Amended and restated effective January 1, 2009)

TABLE OF CONTENTS

Table of Contents	1
Article I Purpose, Effective Date, Employer	1
1.1 Purpose	1
1.2 Effective Date	1
1.3 Employer	1
Article II Definitions	2
2.1 Accounts	2
2.2 Administrative Committee	2
2.3 Beneficiary	2
2.4 Bonus	2
2.5 Bonus Deferral	2
2.6 Code	2
2.7 Compensation	2
2.8 Compensation Committee	2
2.9 Deferral Election Form	2
2.10 Distribution Election Form	2
2.11 Eligible Employee	3
2.12 Employer	3
2.13 Employer Non-Matching Contribution	3
2.14 Excess Matching Contribution	3
2.15 Matching Contribution	4
2.16 Participant	4
2.17 Pay Deferral Contribution	4
2.18 Plan Year	4
2.19 Section 409A	4
2.20 Termination of Employment	4
2.21 Unforeseeable Emergency	5
2.22 Vesting	5
Article III Eligibility for Contributions and Deferrals	6
3.1 Eligibility for Excess Matching Contribution	6
3.2 Bonus Deferral Elections	6
3.3 Pay Deferral Elections	7
3.4 Somatogen Acquisition Deferral Election	7
3.5 Discretionary Contributions	8
3.6 Employer Non-Matching Contribution	8
3.7 Contributions Following Military Service	8
Article IV Crediting of Accounts	9
4.1 Crediting of Accounts	9
4.2 Earnings	9
4.3 Account Statements	10

i

4.4 Vesting	10
Article V Distribution of Benefits	11
5.1 Distribution of Benefits	11
5.2 Distribution	11
5.3 Effect of Payment	14
5.4 Taxation of Plan Benefits	14
5.5 Withholding and Payroll Taxes	14
5.6 Distribution Due to Unforeseeable Emergency	14
5.7 Distribution Due to Inclusion in Taxable Income	15
5.8 Distribution of De Minimis Amounts	15
Article VI Beneficiary Designation	16
6.1 Beneficiary Designation	16
6.2 Amendments to Beneficiary Designation	16
6.3 No Beneficiary Designation	16
6.4 Form of Payment to Beneficiary	16
Article VII Administration	17
7.1 Administrative Committee	17
7.2 Administrative Committee Powers	17
7.3 Effect of Administrative Committee Decisions	18
7.4 Claims Procedure	18
7.5 Action by Administrative Committee	19
7.6 Indemnity	20
Article VIII Amendment and Termination of Plan	21
8.1 Amendment	21
8.2 Right to Terminate	22
8.3 Payment at Termination	22
Article IX Miscellaneous	23
9.1 Unfunded Plan	23
9.2 Unsecured General Creditor	23
9.3 Nonassignability	23
9.4 Not a Contract of Employment	23
9.5 Protective Provisions	23
9.6 Governing Law	24
9.7 Severability	24
9.8 Notice	24
9.9 Successors	24
9.10 Action by Baxter	24
9.11 Effect on Benefit Plans	24
9.12 Participant Litigation	24

 ii

BAXTER INTERNATIONAL INC. AND SUBSIDIARIES
DEFERRED COMPENSATION PLAN

(Amended and Restated Effective January 1, 2009)

ARTICLE I — PURPOSE, EFFECTIVE DATE, EMPLOYER

1.1 Purpose.

The Baxter International Inc. and Subsidiaries Deferred Compensation Plan (the “Plan”) has been adopted by Baxter International Inc. (“Baxter”). The Plan is intended to be an unfunded arrangement to provide deferred compensation for the benefit of a select group of management and highly compensated employees. The Plan is designed to enable eligible participants to defer compensation and receive matching contributions under the provisions of the Baxter International Inc. and Subsidiaries Incentive Investment Plan (“IIP”), a tax-qualified defined contribution plan, in excess of the limitations imposed by the Internal Revenue Code (“Code”). Baxter amended and restated the Plan effective January 1, 1998, in part to combine the Plan and the Baxter International Inc. and Subsidiaries Incentive Investment Excess Plan, and amended and restated the Plan again effective January 1, 2002, January 1, 2005, and January 1, 2007. The Plan is hereby further amended and restated effective January 1, 2009, in order to comply with the final regulations issued by the Internal Revenue Service pursuant to Section 409A of the Code and to make certain other changes. Capitalized terms not defined in this Plan are deemed to have the meaning given them in the IIP.

1.2 Effective Date.

The effective date of this restatement is January 1, 2009, except as otherwise provided herein; provided that any provision of the Plan that is required to be effective as of an earlier in order to comply with Section 409A of the Code shall be effective as of such date.

1.3 Employer.

The Plan is adopted for the benefit of a select group of management or highly compensated employees of Baxter or of any subsidiaries or affiliates of Baxter, as set forth below. The Plan may be adopted by any subsidiaries or affiliates of Baxter with the consent of the Administrative Committee. Participating Employers are listed on Appendix A as attached and updated from time to time.

1

ARTICLE II — DEFINITIONS

2.1 Accounts.

Accounts means the sum of the Participant’s Excess Matching Contribution Account balance, Bonus Deferral Account balance, Pay Deferral Account balance, and Deferred Compensation Account balance.

2.2 Administrative Committee.

For purposes of the Plan, Administrative Committee has the same meaning as the Administrative Committee in the IIP.

2.3 Beneficiary.

A Participant’s Beneficiary, as defined in Article VI, is the Beneficiary designated to receive the Participant’s Accounts, if any, from the Plan, upon the death of the Participant.

2.4 Bonus.

The term Bonus means those bonuses that are included in the definition of Compensation in the IIP and also includes any other bonus which is approved by the Administrative Committee and listed on Attachment A to this Plan. Attachment A may be updated from time to time to accurately reflect the approved bonuses for purpose of this definition.

2.5 Bonus Deferral.

The Bonus Deferral is the amount of the Participant’s Bonus which the Participant elected to defer and contribute to the Plan which, but for such election, would have otherwise been paid to him/her.

2.6 Code.

The Code shall mean the Internal Revenue Code of 1986, as amended.

2.7 Compensation.

For purposes of the Plan, Compensation has the same meaning as Compensation in the IIP without regard to Section 401(a)(17) of the Code, except that the Bonuses deferred under the Plan are included in Compensation in the Plan Year in which such amounts would be paid if they were not deferred and not in the Plan Year in which such amounts are actually paid. In no event shall Compensation include any amount payable after a Participant has terminated employment.

2.8 Compensation Committee.

The Compensation Committee of the Board of Directors of Baxter.

2.9 Deferral Election Form.

The form which a Participant must complete and return to the Administrative Committee or its designee, in accordance with the rules and procedures as may be established by the Administrative Committee, in order to elect to defer a portion of his or her Bonus into the Plan and to designate his or her Pay Deferral Election.

2.10 Distribution Election Form.

The form which a Participant must complete and return to the Administrative Committee or its designee, in accordance with the rules and procedures as may be established by the Administrative Committee. This form is to be used by both (a) Participants who are not eligible to defer a portion of their Bonus or make a Pay

2

Deferral Contribution to the Plan; and (b) Participants who are electing distributions with respect to a Deferred Compensation Account.

2.11 Eligible Employee.

For any Plan Year, an Eligible Employee is anyone who:

(a)	is a Corporate Officer of Baxter, a member of Baxter’s Global Leadership Team and/or is participant in the Baxter International Inc. Long Term Incentive Plan for the Plan Year to which deferrals relate;
(b)	is a former participant in the Baxter International Inc. Long Term Incentive Plan;
(c)	for Plan Years prior to 2005, was a participant in the IIP whose Matching Contributions to the IIP for the Plan Year were limited because of the application of the Code, provided he or she met the eligibility rules under Section 3.1 as in effect for such Plan Year;
(d)	solely for purposes of Section 3.5, is designated by the Administrative Committee to be a Participant in the Plan and eligible to receive discretionary benefits under Section 3.5 of the Plan for the Plan Year, subject to the terms and conditions imposed by the Administrative Committee in accordance with Section 3.5; or
(e)	for Plan Years subsequent to 2006, and solely for purposes of Section 3.6, is eligible to receive an Employer Non-Matching Contribution into the IIP for the Plan Year and has Compensation for the Plan Year in excess of the limitations of Section 401(a)(17) of the Code. An Employee who has never previously been an Eligible Employee shall be treated as becoming an Eligible Employee on the last day of the first Plan Year in which he meets the requirements of this paragraph (d).

2.12 Employer.

The term Employer means Baxter and any entity that is a member of a controlled group or affiliated service group that includes Baxter, or is otherwise required to be considered as a single employer with Baxter under Section 414 of the Code. A “Participating Employer” is an Employer that has adopted the Plan for the benefit of its Eligible Employees as provided in Section 1.3, and a Non-Participating Employer is an Employer that is not a Participating Employer.

2.13 Employer Non-Matching Contribution.

The term Employer Non-Matching Contribution has the same meaning in the Plan as it does in the IIP.

2.14 Excess Matching Contribution.

The Excess Matching Contribution is the difference between the Matching Contributions allocated to a Participant’s IIP Account during the Plan Year and the amount that would have been allocated if the limitations of Sections 415, 401(k), 402(g), 401(m) or 401(a)(17) of the Code, were disregarded.

3

2.15 Matching Contribution.

The term Matching Contribution has the same meaning in the Plan as it does in the IIP.

2.16 Participant.

A Participant is any Eligible Employee who has an Account balance in the Plan.

2.17 Pay Deferral Contribution.

The term Pay Deferral Contribution has the same meaning as Pay Deferral Contribution in the IIP. The Pay Deferral Contribution is the amount of the Participant’s Compensation, which the Participant elected to defer into the Plan which, but for such election, would have otherwise been paid to him/her.

2.18 Plan Year.

The Plan Year is the calendar year.

2.19 Section 409A.

Section 409A means Section 409A of the Code, as enacted by the American Jobs Creation Act of 2004 and as interpreted by Treasury Regulations or other authority issued thereunder.

2.20 Termination of Employment.

For purposes of the Plan, Termination of Employment has the same meaning as Termination of Employment in the IIP; provided that for purposes of determining when a Participant’s benefit becomes payable, Termination of Employment shall not be considered to have occurred until the Participant incurs a separation from service as defined in Treasury Regulations issued pursuant to Section 409A. The following rules are intended to implement the requirements of Section 409A, and may be adjusted by the Administrator as required to comply with any guidance issued under Section 409A:

(a)	The Participant shall not be considered to have separated from service so long as the Participant is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the Participant retains a right to reemployment with a Participating Employer under an applicable statute or by contract.
(b)	Regardless of whether his employment has been formally terminated, the Participant will be considered to have separated from service as of the date it is reasonably anticipated that no further services will be performed by the Participant for any Participating Employer, or that the level of bona fide services the Participant will perform after such date will permanently decrease to no more than 20 percent of the average level of bona fide services performed over the immediately preceding 36-month period (or the full period of employment if the Participant has been employed for less than 36 months). For purposes of the preceding test, during any paid leave of absence the Participant shall be considered to have been performing services at the level commensurate with the amount of compensation received, and unpaid leaves of absence shall be disregarded.
(c)	For purposes of determining whether the Participant has separated from service, all services provided for any Employer, or for any entity that is a member of the Controlled Group, shall be taken into account, whether provided as an employee

4

or as a consultant or other independent contractor; provided that the Participant shall not be considered to have not separated from service solely by reason of service as a non-employee director of the Corporation or any other such entity. Solely for purposes of this Section 2.19, the term “Controlled Group” shall be modified by substituting “50 percent” for “80 percent” for all purposes of section 414(b) and (c) of the Code (and Section 1563 to the extent incorporated therein)

(d)

A Participant who is employed by a Participating Employer, and continues to be employed by the Participating Employer following a stock sale, spin-off, or other transaction that causes the Participant’s employer to cease to be a member of the Controlled Group, shall not be considered to have incurred a Termination of Employment as a result of such transaction. A Participant who ceases to be employed by the Corporation or any member of the Controlled Group as a result of a sale of substantially all of the assets constituting a division, facility, or separate line of business, shall be considered to have incurred a Termination of Employment unless the Corporation (or Participating Employer selling such assets) and the purchaser agree in writing, not later than the closing date of such transaction, that all Participants affected by such transaction shall not be considered to have incurred a Termination of Employment, and that the purchaser agrees to assume the obligation for payment of the Benefits of all such Participants in accordance with the Plan.

2.21 Unforeseeable Emergency.

A severe financial hardship resulting from a sudden or unexpected illness or accident of the Participant or one of his or her dependents, loss of the Participant’s property due to casualty or similar extraordinary and unforeseeable circumstances arising as a result of one or more recent events beyond the control of the Participant, as determined by the Administrative Committee.

2.22 Vesting.

For purposes of the Plan, Vesting has the same meaning as Vesting in the IIP.

5

ARTICLE III — ELIGIBILITY FOR CONTRIBUTIONS AND DEFERRALS

3.1 Excess Matching Contributions.

The Excess Matching Contributions Account of an Eligible Employee who makes either a Bonus Deferral or Pay Deferral Election for a Plan Year shall be credited with Excess Matching Contributions equal to the lesser of the total amount deferred pursuant to Sections 3.2 and 3.3 (not including any Supplemental Pay Deferral) for the Plan Year or three and one half percent (3.5%) of the excess of the Participant’s total Compensation for the Plan Year over the portion of the Participant’s Compensation taken into account under the IIP for the Plan Year. Prior to January 1, 2005, an Employee was an Eligible Employee if the Employee’s Matching Contributions under the IIP were less than 3% of the Employee’s Compensation for the Plan Year, regardless of whether the Employee were eligible to make Bonus Deferral and/or Pay Deferral Elections. A Participant who was an Eligible Employee solely by reason of this Section 3.1 for one or more Plan Years prior to 2005 shall continue to be a Participant with respect to his Excess Matching Contribution Account until it is distributed.

3.2 Bonus Deferral Elections.

An Eligible Employee for a Plan Year may elect to defer all or a portion of his or her Bonus for the Plan Year through the Plan until his or her Termination of Employment, or such other time as specified on his or her Deferral Election Form, by completing a Deferral Election Form in accordance with applicable rules and procedures established by the Administrative Committee. A Participant may elect to defer up to 100% of his or her Bonus, in whole percentages. Beginning January 1 of the year to which the Deferral Election Form applies, the Deferral Election Form is irrevocable, except as provided in Section 5.6. The Deferral Election Form must be filed in accordance with the rules established by the Administrative Committee, at the time set forth below:

(a)	Deferral Election Forms must be filed prior before January 1 of the Plan Year in which the Bonus is earned, except as hereinafter provided.
(b)	The Administrative Committee may permit an employee who becomes an Eligible Employee for the first time during a Plan Year to make an election to defer his or her Bonus for such Plan Year not more than 30 days after becoming an Eligible Employee, which Bonus Deferral Election shall apply only to the portion of the Bonus earned after the election is made. An Eligible Employee shall not be eligible to make the election within the first 30 days after becoming an Eligible Employee if the employee has been a participant (other than through accrual of earnings on amounts previously deferred) in any account balance deferred compensation arrangement sponsored by any Employer during the 24 month period prior to the date he or she becomes an Eligible Employee, unless the employee received a distribution of his or her entire balance in such plan during such 24 month period, and immediately prior to such distribution was not eligible to continue to participate in such plan.
(c)	The Administrative Committee may also permit Eligible Employees to make an election to defer their Bonuses not later than six months prior to

6

the end of the Bonus determination period, provided that the Administrative Committee determines that the Bonus satisfies the requirements for performance based compensation under Section 409A of the Code.

3.3 Pay Deferral Elections.

An Eligible Employee may make a Pay Deferral Election under the Plan if he or she elects to defer a portion of his or her Compensation under the IIP for a Plan Year, and the amount of Compensation that he or she has elected to defer exceeds the amount that is permitted to be deferred under the IIP by reason of the annual contribution limit under Section 415 or 402(g) of the Code (as increased, if applicable, by the limit on catch-up contributions pursuant to Section 414(v) of the Code), or the fact that the Eligible Employee’s Compensation exceeds the annual limit under Section 401(a)(17) of the Code, A Pay Deferral Election shall be made by the last day of the Plan Year preceding the Plan Year to which it relates, in accordance with applicable rules and procedures established by the Administrative Committee, and shall thereafter be irrevocable (except as provided in Section 5.6), except that the Administrative Committee may permit an employee who first becomes an Eligible Employee during a Plan Year, and who meets the requirements of Section 3.2(b), to make an Pay Deferral Election not more than 30 days after becoming an Eligible Employee, which Pay Deferral Election shall apply prospectively only. If an Eligible Employee makes a Pay Deferral Election for a Plan Year, then all amounts that the Eligible Employee elected to defer under the IIP (based upon the Eligible Employee’s IIP deferral election at the beginning of the Plan Year, which cannot be changed during the Plan Year) that exceed one or more of the limits described above shall instead be credited to his or her Account in this Plan, commencing with the first payment of Compensation that would cause the amount deferred to exceed such limits. Notwithstanding the foregoing provisions of this Section 3.3, the Administrative Committee, in its sole discretion, may permit a Participant to defer a percentage of his or her Compensation to the Plan for any Plan Year that exceeds the percentage that the Participant elects to defer under the IIP for such Plan Year (a “Supplemental Pay Deferral”), provided that the Supplemental Pay Deferral election is made when the Participant is otherwise eligible to make a Pay Deferral Election as described above and is thereafter irrevocable (except as provided in Section 5.6). To the extent that the Administrative Committee exercises its discretionary authority under the prior sentence, such exercise shall be reflected in Appendix B to the Plan which shall identify each Participant designated as eligible to make Supplemental Pay Deferrals, specify the Plan Year(s) for which Supplemental Pay Deferrals may be made, and reflect any other conditions and limitations applicable with respect to such Supplemental Pay Deferrals. In no event shall Supplemental Pay Deferrals be eligible for Excess Matching Contributions.

3.4 Somatogen Acquisition Deferral Election.

Any former employee of Somatogen, Inc. who became an employee of Baxter International Inc. as of the closing date of the merger agreement between Baxter and Somatogen and who completed a Special Deferral Enrollment Form shall have such form recognized as a valid election under the Plan. Deferrals authorized under this section shall be treated as deferrals authorized under Section 3.2 for purposes of accounting and distribution.

3.5 Discretionary Contributions.

The Administrative Committee may, in its sole discretion, specify such additional amounts in the form of employer contributions to be credited

7

to the Account of a Participant or another employee who is a member of a select group of management and highly compensated employees, subject to such terms and conditions as the Administrative Committee may establish. To the extent that the Administrative Committee exercises its discretionary authority under this Section 3.5, such exercise shall be reflected in Appendix C to the Plan, which shall identify each Participant credited with such discretionary employer contributions, specify the Plan Year(s) for which contributions relate, and reflect any other limitations applicable with respect to such discretionary contributions, including any applicable Vesting requirements. Discretionary employer contributions authorized under this section shall be treated as deferrals authorized under Section 3.2 for purposes of accounting and distribution.

3.6 Employer Non-Matching Contribution.

For any Plan Year after 2006, an Eligible Employee who (i) is eligible to receive an Employer Non-Matching Contribution into the IIP for the Plan Year and (ii) has Compensation for the Plan Year in excess of the limitations of Section 401(a)(17) of the Code, shall receive a contribution equal to 3% of the Eligible Employee’s Compensation in excess of the limitations of Section 401(a)(17) of the Code.

3.7 Contributions Following Military Service.

A Participant who incurs a Termination of Employment, or a leave of absence, in order to serve in the armed forces of the United States, who is entitled to re-employment rights under the Uniformed Services Employment and Reemployment Rights Act (“USERRA”), and who is re-employed during the period in which such re-employment rights are protected, shall be entitled to increase the percentage of his or her Compensation subject to a Pay Deferral Election in order to make up the Pay Deferral Contributions missed during the period of military service, in accordance with rules established by the Administrative Committee in accordance with USERRA and Section 409A. Such a Participant shall also be entitled to receive the same amount of Excess Matching Contributions he or she would have received had the additional Pay Deferral Contributions been made during the period of military service. A Participant who is otherwise eligible for Employer Non-Matching Contributions shall be entitled to receive the Employer Non-Matching Contributions he or she would received had he or she been employed at the same rate of Compensation during the period of military service, which shall be credited to the Deferred Compensation Account not later than 90 days after re-employment.

8

ARTICLE IV — CREDITING OF ACCOUNTS

4.1 Crediting of Accounts.

          A. Excess Matching Contribution Account. An account equal to the Excess Matching Contributions, if any, of each Participant made for Plan Years prior to 2002, as adjusted for investment return under Section 4.2 and distributions under Article V.

          B. Bonus Deferral Account. An account equal to the Bonus Deferrals, if any, of each Participant made for Plan Years prior to 2002, as adjusted for investment return under Section 4.2 and distributions under Article V.

          C. Pay Deferral Account. An account equal to the Pay Deferral Contributions and Supplemental Pay Deferrals, if any, of each Participant made for Plan Years prior to 2002, as adjusted for investment return under Section 4.2 and distributions under Article V.

          D. Deferred Compensation Account. An account equal to the Excess Matching Contributions, Pay Deferral Contributions, Bonus Deferrals, Supplemental Pay Deferrals and Employer Non-Matching Contributions made for the 2002 Plan Year and thereafter, as adjusted for investment return under Section 4.2 and distributions under Article V.

          Notwithstanding the foregoing provisions of this Section 4.1, if elected by the Participant in accordance with rules established by the Administrative Committee, the Participant may elect to have his or her Excess Matching Contributions, Pay Deferral Contributions, Bonus Deferrals and Supplemental Pay Deferrals made for the 2001 Plan Year, if any, credited to his or her Deferred Compensation Account under paragraph D, instead of to the Excess Matching Contribution Account, Bonus Deferral Account and Pay Deferral Account described in paragraphs A, B and C.

          Further, effective January 1, 2002, notwithstanding the forgoing provisions of this Section 4.1, if elected by the Participant in accordance with rules established by the Administrative Committee, the Participant may make a one-time election to have amounts credited to his or her Excess Matching Contribution Account, Bonus Deferral Account and Pay Deferral Account (including Supplemental Pay Deferrals) credited to his or her Deferred Compensation Account under paragraph D, provided however, that such election is made prior to 2002 and such amounts are not scheduled to be distributed in 2001.

4.2 Earnings.

Each Participant’s Accounts will be adjusted for investment return, on a daily basis, in accordance with the following provisions of this Section 4.2:

          A. Amounts in a Participant’s Excess Matching Account, Bonus Deferral Account and Pay Deferral Account will be credited with earnings at a rate determined by the Administrative Committee from time to time. Until the Administrative Committee determines otherwise, such earnings will be credited at the same rate as the Stable Income Fund in the IIP.

9

          B. Amounts in a Participant’s Deferred Compensation Account shall be adjusted upward or downward to reflect the investment return that would have been realized had such amounts been invested in one or more investments selected by the Participant from among the assumed investment alternatives designated by the Administrative Committee for use under the Plan. Prior to the first day of each month, or at such other times as the Administrative Committee may permit, Participants may change the assumed investment alternatives in which their Deferred Compensation Account will be deemed invested for such Plan Year. Participant elections of assumed investment alternatives shall be made at the time and in the form determined by the Administrative Committee, and shall be subject to such other restrictions and limitations as the Administrative Committee shall determine. In the event that a Participant fails to make an investment election, his or her Deferred Compensation Account shall be credited with earnings in the same manner as provided in paragraph A above.

4.3 Account Statements.

Account Statements will be generated effective at such intervals as the Administrative Committee may determine and transmitted to each Participant as soon as administratively feasible. Account Statements will reflect all Account activity during the reporting period, including Account contributions, distributions and earnings credits.

4.4 Vesting.

Subject to Sections 9.1 and 9.2, and any Vesting requirements specified by the Administrative Committee with respect to Discretionary Contributions, a Participant is always 100% Vested in his or her Accounts in the Plan at all times; provided, however, that if a Participant who incurs a Termination of Employment is not 100% Vested in his or her Employer Non-Matching Contribution Account in the IIP, the portion of his or her Deferred Compensation Account attributable to Employer Non-Matching Contributions and the earnings thereon shall be forfeited, and no Participating Employer shall have any obligation to the Participant with respect to such portion.

10

ARTICLE V — DISTRIBUTION OF BENEFITS

5.1 Distribution of Benefits.

Subject to Section 5.2, distribution of a Participant’s Accounts, if any, will commence in accordance with the Participant’s Distribution Election Form or Deferral Election Form as soon as administratively feasible after the Participant’s Termination of Employment. Any spousal consent requirements under the IIP will not apply to distributions under the Plan.

Anything else in this Plan to the contrary notwithstanding, effective October 22, 2004, (i) in no event shall the distribution of any Account be accelerated to a time earlier than which it would otherwise have been paid, whether by amendment of the Plan, exercise of the Administrative Committee’s discretion, or otherwise, except as permitted by Treasury Regulations issued pursuant to Section 409A, and (ii) in the event that the Administrative Committee, in its sole discretion, determines that any time or form of distribution provided for in the Plan, or the existence of a right to elect a different time or form of distribution, would cause the Plan to fail to meet the requirements of Section 409A, or otherwise cause Participants to be subject to any adverse federal income tax consequences, the Administrative Committee shall amend the Plan to modify or remove the form of distribution or election right. The distribution restrictions under Section 409A shall apply to Participant’s entire account balances under the Plan, whether deferred before or after January 1, 2005. Notwithstanding the foregoing, the Administrative Committee may give Participants a one-time opportunity to change the time and/or form of payment of their Accounts by a written irrevocable election made not later than December 31, 2008, subject to such terms and conditions as the Administrative Committee may require; provided that no such election shall cause any amount to be paid in 2008 that would otherwise have been paid in a later year, or cause any amount that would otherwise have been paid in 2008 to be paid in a later year, and such elections shall otherwise comply with the requirements for transitional relief under IRS Notice 2007-86.

5.2 Distribution.

          A. Deferral Election Form. A Participant’s Excess Matching Contribution Account, Bonus Deferral Account and Pay Deferral Account will be paid in accordance with the form of payment designated in the Participant’s Deferral Election Form. The Deferral Election Form shall not be used to elect forms of distribution with respect to deferrals for Plan Years after 2001 (or 2000, with respect to a Participant electing to have his or her deferrals credited to the Deferred Compensation Account for Plan Year 2000 under Section 4.1).

          B. Distribution Election Form — Termination of Employment. A Participant’s Deferred Compensation Account and, if the Participant is not eligible for Pay Deferrals or Bonus Deferrals, his or her Excess Matching Contribution Account, will be paid after the Participant’s Termination of Employment, in accordance with the form of payment designated in such Participant’s Distribution Election Form. Distribution Election Forms shall be filed in accordance with rules established by the Administrative Committee, subject to the following:

11

(a)	Prior to January 1, 2007, only one Distribution Election Form could be submitted with respect to distribution of a Participant’s Deferred Compensation Account following Termination of Employment. Any such Distribution Election Form filed prior to January 1, 2007, shall remain in effect shall apply to the Participant’s entire Deferred Compensation Account (and Excess Matching Contribution Account if applicable) balance at his or her Termination of Employment.
(b)	Effective January 1, 2007, a Participant who has not previously been described in paragraph (c) may submit a Distribution Election Form at the time he or she first makes a Bonus Deferral or Pay Deferral Election pursuant to Section 3.2 or 3.3. Except as otherwise provided in subparagraph (c) below, only one Distribution Election Form shall be filed, which shall apply to the Participant’s entire Deferred Compensation Account balance at his or her Termination of Employment. A Distribution Election Form must be filed by the end of the period for making the Participant’s first Bonus Deferral or Pay Deferral Election, and if the Participant fails to file a Distribution Election Form at such time his or her entire Deferred Compensation Account balance shall be distributed in a lump sum at his or her Termination of Employment, or in accordance with a Distribution Election Form previously filed pursuant to subparagraph (c) if applicable.
(c)	An Employee who first becomes an Eligible Employee pursuant to Section 3.1, 3.5, or 3.6 on or after January 1, 2007, and who meets the requirements of Section 3.2(b), may file a Distribution Election Form not later than 30 days after his or her first day of eligibility. Except as provided in the following sentence, only one Distribution Election Form shall be filed, which shall apply to the Participant’s entire Deferred Compensation Account balance at his or her Termination of Employment, and if the Participant fails to file a Distribution Election Form at such time his or her entire Deferred Compensation Account balance shall be distributed in a lump sum at his or her Termination of Employment. Notwithstanding the foregoing, if such a Participant subsequently becomes eligible to make a Bonus Deferral or Pay Deferral Election, he or she may file a new Distribution Election Form pursuant to subparagraph (b) above. In such event, the portion of the Participant’s Deferred Compensation Account that represents amounts credited to the Deferred Compensation Account under all provisions of Article III beginning with the first Plan Year to which the Bonus Deferral or Pay Deferral Election applies (and all earnings thereon) shall be distributed in accordance with such Distribution Election Form, and the remaining portion of the Deferred Compensation Account shall continue to be governed by this subparagraph (c).

12

          C. Forms of Distribution. The forms of distribution are:

(a)	a lump sum payment, or
(b)	annual installments of at least 2 years, but not to exceed 15 years.

If annual installments are elected, the amount of each installment will be equal to the remaining balance in the Participant’s Account prior to payment of the installment, divided by the remaining number of installments to be paid (including the installment being calculated).

Except as provided below, effective January 1, 2007, lump sum payments will be paid, and annual installments will commence, in the first quarter of the Plan Year as specified in the Participant’s Deferral Election Form or Distribution Election Form (or, if the Distribution Election Form provides for payments following a Termination of Employment, in the first quarter of the Plan Year following the Plan Year in which the Termination of Employment occurs). Subsequent installments will be paid annually in the first quarter of subsequent Plan Years. In the case of installment payments which commenced prior to January 1, 2007, the installment that would otherwise have been paid in the third quarter of 2007 shall be paid in the first quarter, and all installments shall thereafter be paid in the first quarter of subsequent years.

If a Participant does not elect a form of distribution by the time the Deferral Election Form or the Distribution Election Form is required to be completed, the Participant’s election will default to a lump sum payment in the first quarter of the Plan Year following the Plan Year in which the Participant incurs a Termination of Employment.

          D. Special Rules. Notwithstanding the foregoing:

(a)	A Participant whose Accounts under the Plan total less than $50,000 as of the last day of the Plan Year in which he or she incurs a Termination of Employment will receive lump sum payment of his or her Accounts in the first quarter of the Plan Year following the Plan Year in which the Participant incurs a Termination of Employment.
(b)	If a Participant who has made a Bonus Deferral election for a Plan Year incurs a Termination of Employment during the Plan Year, but is still eligible for a Bonus for the Plan Year, the deferred portion of his or her Bonus shall be distributed during March of the subsequent year, regardless of the form of distribution otherwise elected, and shall not be taken into account in determining whether the Participant’s Account Balance is less than $50,000. Such amount shall not be credited with any earnings unless paragraph (c) applies.
(c)	Anything else contained herein to the contrary notwithstanding, in no event shall any payment of a benefit made in connection with the Termination of Employment of a “specified employee”, as hereinafter defined, be made until at least six months following such Termination of Employment, and any amounts that would otherwise have been paid

13

during such six month period shall be accumulated and paid in a lump sum, without interest, on the first business day following the expiration of such period. For purposes of this Plan, the term “specified employee shall have the meaning set forth in Treas. Reg. §1.409A-1(i), using the safe harbor definition of compensation contained in Treas. Reg. §1.415(c)-2(d)(4) (compensation required to be reported on Form W-2 plus elective deferrals) and excluding compensation paid to a nonresident alien that is not effectively connected with the conduct of a trade or business within the United States shall be excluded. The status of Participants as specified employees shall be determined as of December 31 of each year, and if a Participant is determined to be a specified employee on any December 31, the restriction of clause (ii) shall apply if and only if he incurs a termination of employment at any time during the twelve month period commencing on the following February 1.

5.3 Effect of Payment.

Payment to the person or trust reasonably and in good faith determined by the Administrative Committee to be the Participant’s Beneficiary will completely discharge any obligations Baxter or any other Employer may have under the Plan. If a Plan benefit is payable to a minor or a person declared to be incompetent or to a person the Administrative Committee in good faith believes to be incompetent or incapable of handling the disposition of property, the Administrative Committee may direct payment of such Plan benefit to the guardian, legal representative or person having the care and custody of such minor and such decision by the Administrative Committee is binding on all parties. The Administrative Committee may initiate whatever action it deems appropriate to ensure that benefits are properly paid to an appropriate guardian.

The Administrative Committee may require proof of incompetence, minority, incapacity or guardianship as it may deem appropriate prior to distribution of the Plan benefit. Such distribution will completely discharge the Administrative Committee and the Employer from all liability with respect to such benefit.

5.4 Taxation of Plan Benefits.

It is intended that each Participant will be taxed on amounts credited to him or her under the Plan at the time such amounts are received, and the provisions of the Plan will be interpreted consistent with that intention.

5.5 Withholding and Payroll Taxes.

Baxter will withhold from payments made hereunder any taxes required to be withheld for the payment of taxes to the Federal, or any state or local government.

5.6 Distribution Due to Unforeseeable Emergency.

Upon written request of a Participant and the showing of Unforeseeable Emergency, the Administrative Committee may authorize distribution of all or a portion of the Participant’s Accounts, and or the acceleration of any installment payments being made from the Plan, but only to the extent reasonably necessary to relieve the Unforeseeable Emergency, taking into account the tax imposed on such distribution. In any event, payment may not be made to the extent such Unforeseeable Emergency is or may be satisfied through reimbursement by insurance or otherwise, including, but not limited to, liquidation of the Participant’s assets, to the extent that such liquidation would

14

not in and of itself cause severe financial hardship. If a Participant has an Unforeseeable Emergency, the Participant’s Pay Deferral Election and Bonus Deferral Election, if any, shall be revoked for the Plan Year (and no subsequent Pay Deferral or Bonus Deferral may be made for the same Plan Year), and the additional income resulting from such revocation shall be taken into account in determining the amount of distribution reasonably necessary to relieve the Unforeseeable Emergency. A Participant shall not be required to take any hardship withdrawal or loan to which he is entitled under the IIP or any other tax qualified retirement plan as a condition of receiving a distribution pursuant to this Section 5.6, but if a Participant receives a hardship withdrawal from the IIP or any other tax-qualified §401(k) plan maintained by an Employer and the terms of such plan require a suspension of the Participant’s deferrals for six months following the date of the distribution, then the Participant’s Deferral Elections shall be permanently revoked with respect to any compensation paid or payable to the Participant during such six month period.

5.7 Distribution Due to Inclusion in Taxable Income.

In the event that any portion of a Participant’s Account is included in his or her taxable income prior to distribution pursuant to Section 409A, the amount so included shall be distributed to the Participant as soon as administratively possible.

5.8 Distribution of De Minimis Amounts.

The Administrative Committee may at any time direct that the entire balance of a Participant’s Account be distributed to the Participant in full liquidation of his or her benefit under the Plan; provide that the Participant’s entire account balance in all other separate account nonqualified deferred compensation plans maintained by any Employer is also distributed at the same time, and that the total amount so distributed (including all such other plans) does not exceed the limit in effect under Section 402(g) of the Code at the time of the distribution.

15

ARTICLE VI — BENEFICIARY DESIGNATION

6.1 Beneficiary Designation.

Each Participant has the right to designate one or more persons or trusts as the Participant’s Beneficiary, primary as well as secondary, to whom benefits under this Plan will be paid in the event of the Participant’s death prior to complete distribution to the Participant of the benefits due under the Plan. Each Beneficiary designation will be in a written form prescribed by the Administrative Committee and will be effective only when filed with the Administrative Committee during the Participant’s lifetime.

6.2 Amendments to Beneficiary Designation.

Any Beneficiary designation may be changed by a Participant without the consent of any Beneficiary by the filing of a new Beneficiary designation with the Administrative Committee. Filing a Beneficiary designation as to any benefits available under the Plan revokes all prior Beneficiary designations effective as of the date such Beneficiary designation is received by the Administrative Committee. If a Participant’s Accounts are community property, any Beneficiary designation will be valid or effective only as permitted under applicable law.

6.3 No Beneficiary Designation.

In the absence of an effective Beneficiary designation, or if all Beneficiaries predecease the Participant, the Participant’s estate will be the Beneficiary. If a Beneficiary dies after the Participant and before payment of benefits under this Plan has been completed, and no secondary Beneficiary has been designated to receive such Beneficiary’s share, the remaining benefits will be payable to the Beneficiary’s estate.

6.4 Form of Payment to Beneficiary.

The Account of a Participant who dies prior to Termination of Employment shall be paid to his or her Beneficiary in a single lump sum as soon as administratively feasible following the date of death, regardless of the form of payment elected by the Participant The Account of a Participant who dies after Termination of Employment, but before his or her Account has been fully distributed, shall be distributed in the same manner and at the same time as it would have been distributed to the Participant, except that the six month delay in distributions to a specified employee pursuant to the last paragraph of Section 5.2 shall not apply to the Beneficiary of a specified employee who dies during the six month period following his or her Termination of Employment.

16

ARTICLE VII — ADMINISTRATION

7.1 Administrative Committee.

The Plan is administered by the Administrative Committee, which is the Plan Administrator for purposes of Section 3(16)(A) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Baxter has appointed the members of the Administrative Committee to administer the Plan. Members of the Administrative Committee may be Participants in the Plan.

7.2 Administrative Committee Powers.

The Administrative Committee has such powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following powers, rights and duties:

(a)	Interpretation of Plan. The Administrative Committee has the power, right and duty to construe, interpret and enforce the Plan provisions and to determine all questions arising under the Plan including, but not by way of limitation, questions of Plan participation, eligibility for Plan benefits and the rights of employees, Participants, Beneficiaries and other persons to benefits under the Plan and to determine the amount, manner and time of payment of any benefits hereunder;
(b)	Plan Procedures. The Administrative Committee has the power, right and duty to adopt procedures, rules, regulations and forms to be followed by employees, Participants, Beneficiaries and other persons or to be otherwise utilized in the efficient administration of the Plan which may alter any procedural provision of the Plan without the necessity of an amendment, and which procedures may provide for any election or consent to be made (including without limitation the filing of a Deferral Election Form or Distribution Election Form), or any other action to be taken (including without limitation filing claims and requesting review of denied claims), by electronic mail, internet website, telephone or voice response system or other electronic method to the extent permitted by applicable law;
(c)	Benefit Determinations. The Administrative Committee has the power, right and duty to make determinations as to the rights of employees, Participants, Beneficiaries and other persons to benefits under the Plan and to afford any Participant or Beneficiary dissatisfied with such determination with rights pursuant to a claims procedure adopted by the Committee; and
(d)	Allocation of Duties. The Administrative Committee is empowered to employ agents (who may also be employees of Baxter) and to delegate to them any of the administrative duties imposed upon the Administrative Committee or Baxter.

17

(e) Plan Amendments. The Administrative Committee is empowered to amend the Plan as provided in Section 8.1(b).

7.3 Effect of Administrative Committee Decisions.

Any ruling, regulation, procedure or decision of the Administrative Committee will be conclusive and binding upon all persons affected by it. There will be no appeal from any ruling by the Administrative Committee which is within its authority, except as provided in Section 7.4 below. When making a determination or a calculation, the Administrative Committee will be entitled to rely on information supplied by any Employer, accountants and other professionals including, but not by way of limitation, legal counsel for Baxter or any Employer.

7.4 Claims Procedure.

Each person entitled to benefits under the Plan (the “Applicant”) must submit a written claim for benefits to the Administrative Committee. Such claim shall be filed not more than one year after the Applicant knows, or with the exercise of reasonable diligence would know, if the basis for the claim. A formal claim shall not be required for the distribution of a Participant’s Accounts in the ordinary course of business, but in any case a claim that relates to a dispute over the amount of a distribution shall be filed not more than one year after the distribution is paid. The Administrative Committee may, in its sole discretion (and notwithstanding the first sentence of Section 7.3) accept a claim that is filed late if it determines that special circumstances warrant acceptance of the claim.

If a claim for benefits by the Applicant is denied, in whole or in part, the Administrative Committee, or its delegate, shall furnish the Applicant within 90 days after receipt of such claim, a written notice which specifies the reason for the denial, refers to the pertinent provisions of the Plan on which the denial is based, describes any additional material or information necessary for properly completing the claim and explains why such material or information is necessary, and explains the claim review procedures of this Section 7.4. Such notice will further describe that the Applicant has a right to bring a civil action under Section 502 of ERISA if his or her claim is denied after an appeal and review. The 90 day period may be extended by up to an additional 90 days if special circumstances required, in which event the Applicant shall be notified in writing by the end of the initial 90 day period of the reason for the extension and an estimate of when the claim will be processed.

18

Any Applicant whose claim is denied under the provisions described above, or who has not received from the Administrative Committee a response to his or her claim within the time periods specified in the provisions described above may request a review of the denied claim by written request to the Administrative Committee within 60 days after receiving notice of the denial. If such a request is made, the Administrative Committee shall make a full and fair review of the denial of the claim and shall make a decision not later than 60 days after receipt of the request, unless special circumstances (such as the need to hold a hearing) require an extension of time, in which case a decision shall be made as soon as possible but not later than 120 days after receipt of the request for review, and written notice of the reason for the extension and an estimate of when the review will be complete shall be given to the Applicant before the commencement of the extension. The decision on review shall be in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of the Plan on which the decision is based. Such notice will further describe that the Applicant has a right to bring a civil action under Section 502 of ERISA.

No person entitled to benefits under the Plan shall have any right to seek review of a denial of benefits, or to bring any action to enforce a claim for benefits, in any court or administrative agency prior to his or her filing a claim for benefits and exhausting all of his or her rights under this Section 7.4, or more than 180 days after he receives the Administrative Committee’s decision on review of the denial of his or her claim. Although not required to do so, an Applicant, or his or her representative, may choose to state the reason or reasons he believes he is entitled to benefits, and may choose to submit written evidence, during the initial claim process or review of claim denial process. However, failure to state any such reason or submit such evidence during the initial claim process or review of claim denial process, shall permanently bar the Applicant, and his or her successors in interest, from raising such reason or submitting such evidence in any forum at any later date. An Applicant whose claim is denied initially or on review is entitled to receive, on request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to such claim for benefits.

7.5 Action by Administrative Committee.

Action by the Administrative Committee will be subject to the following special rules:

(a)	Meetings and Documents. The Administrative Committee may act by meeting or by document signed without meeting and documents may be signed through the use of a single document or concurrent documents.
(b)	Action by Majority. The Administrative Committee will act by a majority decision which action will be as effective as if such action had been taken by all Administrative Committee members, provided that by majority action one or more Administrative Committee members or other persons may be authorized to act with respect to particular matters on behalf of all Administrative Committee members.
(c)	Resolving Deadlocks. If there is an equal division among the Administrative Committee members with respect to any question a disinterested party may be selected by a majority vote to decide the matter. Any decision by such disinterested party will be binding.

19

7.6 Indemnity.

To the extent permitted by applicable law and to the extent that they are not indemnified or saved harmless under any liability insurance contracts, any present or former Administrative Committee members, officers, or directors of Baxter, the Employers or their subsidiaries or affiliates, if any, will be indemnified and saved harmless by the Employers from and against any and all liabilities or allegations of liability to which they may be subjected by reason of any act done or omitted to be done in good faith in the administration of the Plan, including all expenses reasonably incurred in their defense in the event that Baxter fails to provide such defense after having been requested in writing to do so.

20

ARTICLE VIII — AMENDMENT AND TERMINATION OF PLAN

8.1 Amendment.

(a)

The Compensation Committee may amend the Plan at any time, except that no amendment will decrease or restrict the Accounts of Participants and Beneficiaries at the time of the amendment. The Company’s authority to amend the Plan has been delegated to the Administrative Committee to the extent provided in Section 8.1(b). The authority to amend the Plan in any respect (whether or not such amendment is within the authority delegated to the Administrative Committee) may also be exercised by the Board of Directors, the Compensation Committee or any other person to whom the Board or Compensation Committee delegates such authority.

(b)

The Administrative Committee has been delegated the authority to adopt any amendments to the Plan as the Administrative Committee may determine to be necessary or appropriate, except that no amendment shall be made to any Plan without approval of the Compensation Committee unless the Administrative Committee determines that such amendment will not significantly change the overall level of benefits provided by such Plan; significantly change the requirements for eligibility for participation in the Plan; or add any material new benefit that would significantly increase the cost of the Plan. In illustration but not limitation of the foregoing, the Administrative Committee is authorized to adopt any amendment to a Plan that it determines to be:

(i)	an amendment that provides for the Plan to be adopted by any business entity acquired by the Company, including providing any special rules applicable to the employees of such business entity;
(ii)	an amendment that the Administrative Committee determines to be of an administrative, ministerial or technical nature only;
(iii)	an amendment that the Administrative Committee determines to be necessary or appropriate to carry out any amendment approved by, or other resolution adopted by, the Board;
(iv)	an amendment that the Administrative Committee determines to be necessary or appropriate to comply with any applicable law, or necessary to conform the terms of the Plan to established administrative practices or procedures; or
(v)	an amendment that the Administrative Committee determines to be necessary or appropriate to clarify or to resolve any inconsistency or ambiguity in the terms of the Plan.

21

The adoption by the Administrative Committee of any amendment to the Plan shall constitute conclusive evidence that the Administrative Committee has determined such amendment to be authorized under the terms of the foregoing resolution, which determination shall be conclusive and binding on all employees, participants, beneficiaries and other persons claiming any benefit under the Plan.

8.2 Right to Terminate.

The Compensation Committee may at any time terminate the Plan. Any Employer may terminate its participation in the Plan by notice to Baxter. The Plan may also be terminated with respect to a group of Eligible Employees only (including, effective January 1, 2005, Participants who are Eligible Employees solely by reason of Section 3.1), and the provisions of Section 8.3 shall apply to such group of Eligible Employees only.

8.3 Payment at Termination.

If the Plan is terminated all Accounts shall continue to be held and distributed in accordance with the terms of the Plan; provided that the Administrative Committee may, to the extent permitted under Section 409A, provide for the immediate distribution of Accounts.

22

ARTICLE IX — MISCELLANEOUS

9.1 Unfunded Plan.

This Plan is intended to be an unfunded retirement plan maintained primarily to provide retirement benefits for a select group of management or highly compensated employees. All credited amounts are unfunded, general obligations of the appropriate Employer. This Plan is not intended to create an investment contract, but to provide retirement benefits to eligible employees who participate in the Plan. Eligible employees are members of a select group of management or are highly compensated employees, who, by virtue of their position with an Employer, are uniquely informed as to such Employer’s operations and have the ability to affect materially Employer’s profitability and operations.

9.2 Unsecured General Creditor.

In the event of an Employer’s insolvency, Participants and their Beneficiaries, heirs, successors and assigns will have no legal or equitable rights, interest or claims in any property or assets of such Employer, nor will they be Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by such Employer (the “Policies”) greater than those of any other unsecured general creditors. In that event, any and all of the Employer’s assets and Policies will be, and remain, the general, unpledged, unrestricted assets of Employer. Employer’s obligation under the Plan will be merely that of an unfunded and unsecured promise of Employer to pay money in the future.

9.3 Nonassignability.

Neither a Participant nor any other person will have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be nonassignable and nontransferable. No part of the amounts payable will, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency. Nothing contained herein will preclude an Employer from offsetting any amount owed to it by a Participant against payments to such Participant or his or her Beneficiary.

9.4 Not a Contract of Employment.

The terms and conditions of this Plan will not be deemed to constitute a contract of employment between a Participant and such Participant’s Employer, and neither the Participant nor the Participant’s Beneficiary will have any rights against such Participant’s Employer except as may otherwise be specifically provided herein. Moreover, nothing in this Plan is deemed to give a Participant the right to be retained in the service of his or her Employer or to interfere with the right of such Employer to discipline or discharge him or her at any time.

9.5 Protective Provisions.

A Participant will cooperate with Baxter by furnishing any and all information requested by Baxter, in order to facilitate the payment of benefits hereunder.

9.6 Governing Law.

The provisions of this Plan will be construed and interpreted according to the laws of the State of Illinois, to the extent not preempted by ERISA.

23

9.7 Severability.

In the event any provision of the Plan is held invalid or illegal for any reason, any illegality or invalidity will not affect the remaining parts of the Plan, but the Plan will be construed and enforced as if the illegal or invalid provision had never been inserted, and Baxter will have the privilege and opportunity to correct and remedy such questions of illegality or invalidity by amendment as provided in the Plan, including, but not by way of limitation, the opportunity to construe and enforce the Plan as if such illegal and invalid provision had never been inserted herein.

9.8 Notice.

Any notice or filing required or permitted to be given to Baxter or the Administrative Committee under the Plan will be sufficient if in writing and hand delivered, or sent by registered or certified mail to any member of the Administrative Committee, or to Baxter’s Chief Financial Officer and, if mailed, will be addressed to the principal executive offices of Baxter. Notice to a Participant or Beneficiary may be hand delivered or mailed to the Participant or Beneficiary at his or her most recent address as listed in the employment records of Baxter. Notices will be deemed given as of the date of delivery or mailing or, if delivery is made by certified or registered mail, as of the date shown on the receipt for registration or certification. Any person entitled to notice hereunder may waive such notice.

9.9 Successors.

The provisions of this Plan will bind and inure to the benefit of Baxter, each Employer, the Participants and Beneficiaries, and their respective successors, heirs and assigns. The term successors as used herein will include any corporate or other business entity, which, whether by merger, consolidation, purchase or otherwise acquires all or substantially all of the business and assets of Baxter, and successors of any such corporation or other business entity.

9.10 Action by Baxter.

Except as otherwise provided herein, any action required of or permitted by Baxter under the Plan will be by resolution of the Compensation Committee or any person or persons authorized by resolution of the Compensation Committee.

9.11 Effect on Benefit Plans.

Amounts paid under this Plan, will not by operation of this Plan be considered to be compensation for the purposes of any benefit plan maintained by any Employer. The treatment of such amounts under other employee benefit plans will be determined pursuant to the provisions of such plans.

9.12 Participant Litigation.

In any action or proceeding regarding the Plan, employees or former employees of Baxter or an Employer, Participants, Beneficiaries or any other persons having or claiming to have an interest in this Plan will not be necessary parties and will not be entitled to any notice or process. Any final judgment which is not appealed or appealable and may be entered in any such action or proceeding will be binding and conclusive on the parties hereto and all persons having or claiming to have any interest in this Plan. To the extent permitted by law, if a legal action is begun against Baxter, an Employer, the Administrative Committee, or any member of the Administrative Committee by or on behalf of any person and such action results adversely to such person or if a legal action arises because of conflicting claims to a Participant’s or other person’s benefits, the costs to such person of defending the action will be charged to the amounts, if any, which were involved in the action or were payable to the Participant or other person concerned. To the extent permitted by applicable law, acceptance of participation in this Plan will constitute a release of Baxter, each Employer, the

24

Administrative Committee and each member thereof, and their respective agents from any and all liability and obligation not involving willful misconduct or gross neglect.

*      *      *

IN WITNESS WHEREOF, the undersigned duly authorized officer has caused this Plan to be executed this 18^th day of December 2008.

BAXTER INTERNATIONAL INC. ADMINISTRATIVE COMMITTEE
By	/s/ Jeanne K. Mason Jeanne K. Mason
	Administrative Committee Member

25

APPENDIX A

PARTICIPATING EMPLOYERS

Participating Employers in the Plan include all participating Employers in the Baxter International Inc. and Subsidiaries Incentive Investment Plan.

26

EX-10.21

Exhibit 10.21

BAXTER INTERNATIONAL INC.
Non-Employee Director Compensation Plan

(As amended and restated effective January 1, 2009)
Terms and Conditions

1. Purpose

This Non-Employee Director Compensation Plan (the “Plan”) is adopted by the Board of Directors (the “Board”) of Baxter International Inc. (“Baxter”). This Plan is adopted pursuant to the Baxter International Inc. 2003 Incentive Compensation Program (the “Program”), for the purposes stated in the Program. Capitalized terms defined in the Program that are used without being defined in the Plan will have the same meaning as in the Program.

2. Participants

Each member of the Board who is not an employee of Baxter or any of its subsidiaries shall participate in the Plan (a “Participant”).

3. Restricted Stock Units

3.1 On the date of Baxter’s annual meeting of stockholders (the “Annual Meeting”) in each year beginning with the Annual Meeting held in May 2007, and subject to availability of shares of Common Stock under the Program, each Participant upon completion of the Annual Meeting shall, automatically and without necessity of any action by the Board or any committee thereof, receive the number of Restricted Stock Units equal to the quotient of (A) $65,000 divided by (B) the Fair Market Value of a share of Common Stock on the date of grant (rounded to the nearest whole number which is a multiple of ten) (the “Annual Restricted Stock Unit Grant Amount”).

3.2 Each Participant elected or appointed on a date other than the date of an Annual Meeting shall, on the date of such election or appointment and automatically and without necessity of any action by the Board or any committee thereof, receive the number of Restricted Stock Units equal to the product of (A) the Annual Restricted Stock Unit Grant Amount (as defined in Section 3.1, subject to adjustment in accordance with the Program) for the Restricted Stock Units awarded on the date of the immediately preceding Annual Meeting, multiplied by (B) the quotient of (i) the number of full calendar months before the next Annual Meeting divided by (ii) 12 (rounded to the nearest whole number which is a multiple of ten). The number of Restricted Stock Units granted under this Section 3.2 shall not exceed the number available under the Program on the date of grant.

3.3 Restricted Stock Units may not be sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed of, whether voluntarily, involuntarily or by operation of law.

3.4 Subject to Section 11.10 of the Program and except as expressly provided in Sections 3.6 and 3.7, all Restricted Stock Units shall vest on the date of and immediately prior to the next Annual Meeting following the date of grant.

3.5 Except as provided in Sections 3.6 and 3.7, if a Participant ceases service as a member of the Board before his or her Restricted Stock Units vest, the Participant will forfeit his or her unvested Restricted Stock Units immediately upon ceasing service as a member of the Board.

3.6 If a Participant dies while serving as a member of the Board, his or her unvested Restricted Stock Units will not be forfeited and will be fully vested immediately.

3.7 If a Participant becomes disabled and unable to continue service as a member of the Board, his or her Restricted Stock Units will not be forfeited and will, when the Participant ceases to serve as member of the Board, be fully vested.

3.8 No Participant receiving Restricted Stock Units shall have the rights of a stockholder with respect to those shares of Common Stock underlying the Restricted Stock Units. Participants shall not be permitted to vote the Restricted Stock Units. Participants shall be permitted to receive cash payments equal to the dividends and distributions paid on shares of Common Stock to the same extent as if each Restricted Stock Unit was a share of Common Stock, and those shares were not subject to the restrictions imposed by this Plan; provided, however, that no dividends or distributions shall be payable to or for the benefit of the Participant with respect to the record dates for such dividends or distributions occurring on or after the date, if any, on which the Participant has forfeited the Restricted Stock Units. Cash dividend and distribution equivalents paid on those shares of Common Stock underlying the Restricted Stock Units pursuant hereto shall be reinvested in additional Restricted Stock Units.

3.9 Participants shall be eligible to defer payment and taxation of those shares of Common Stock underlying the Restricted Stock Units otherwise payable under this Section 3 pursuant to the terms and conditions of the Baxter Non-Employee Director Deferred Compensation Plan.

3.10 If requested by Baxter, each Participant receiving Restricted Stock Units shall enter into an agreement with Baxter incorporating the terms and conditions of this Plan. Subject to the terms of the Program, after the Restricted Stock Units vest, shares of Common Stock free and clear of all restrictions will be delivered to the Participant (or to the Participant’s legal representative, beneficiary or heir).

4. Stock Options

4.1 On the date of Baxter’s Annual Meeting in each year beginning with the Annual Meeting on May 6, 2003, and subject to availability of shares of Common Stock under the Program, upon completion of the Annual Meeting each Participant shall be granted Stock Options having a value equal to $65,000, to be

determined by the Board or the Compensation Committee of the Board (the “Committee”) based on a Black-Scholes or other option valuation model in the discretion of the Board or the Committee (rounded to the nearest whole number which is a multiple of ten) (the “Annual Stock Option Grant Amount”).

4.2 Each Participant elected or appointed on a date other than the date of an Annual Meeting shall, on the date of such election or appointment and automatically and without necessity of any action by the Board or any committee thereof, be granted a Stock Option to purchase that number of shares of Common Stock equal to the product of (A) the Annual Stock Option Grant Amount (as defined in Section 4.1, subject to adjustment in accordance with the Program) for each Stock Option granted on the date of the immediately preceding Annual Meeting, multiplied by (B) the quotient of (i) the number of full calendar months before the next Annual Meeting divided by (ii) 12 (rounded to the nearest whole number which is a multiple of ten). The number of             shares of Common Stock subject to any Stock Option granted under this Section 4.2 shall not exceed the number available under the Program on the date of grant.

4.3 The purchase price for each share of Common Stock subject to a Stock Option shall be the Fair Market Value of a share of Common Stock on the date of grant. The terms of each Stock Option will be as set forth in this Plan and the Program. To the extent that any provision of the Plan is inconsistent with the Program, the Program shall control. The Stock Options are not intended to qualify as Incentive Stock Options within the meaning of Section 422 of the United States Internal Revenue Code.

4.4 Subject to Section 11.10 of the Program and except as expressly provided in Sections 4.8, 4.9 and 4.10, Stock Options shall first become exercisable on the date of and immediately prior to the next Annual Meeting following the date of grant.

4.5 After a Stock Option becomes exercisable and until it expires, it may be exercised in whole or in part, in the manner specified by the Company. Under no circumstances may a Stock Option be exercised after it has expired. Shares of Common Stock may be used to pay the purchase price for shares of Common Stock to be acquired upon exercise of a Stock Option or fulfill any tax withholding obligation, subject to any requirements or restrictions specified by the Company.

4.6 Except as provided in Sections 4.8, 4.9 and 4.10, if a Participant ceases service as a member of the Board before his or her Stock Option becomes exercisable, the Stock Option will expire when the Participant ceases service as a member of the Board.

4.7 If a Participant ceases service as a member of the Board after his or her Stock Option becomes exercisable, the Stock Option will not expire but will remain exercisable. Subject to Sections 4.8, 4.9, 4.10 and 4.11, the Stock Option will expire three months after the Participant ceases service as a member of the Board, unless the Participant dies or becomes disabled during such three month

period in which case the Stock Option will expire on the first anniversary of the date the Participant ceased serving as a member of the Board.

4.8 If a Participant dies while serving as a member of the Board, his or her Stock Option will not expire and will remain, or immediately become, fully exercisable, as the case may be. Subject to Sections 4.10 and 4.11, the Stock Option will expire on the first anniversary of the Participant’s death.

4.9 If a Participant becomes disabled and unable to continue service as a member of the Board, his or her Stock Option will not expire and will remain, or when the Participant ceases to serve as member of the Board become, fully exercisable, as the case may be. Subject to Sections 4.10 and 4.11, the Stock Option will expire on the first anniversary of the date the Participant ceases service as a member of the Board.

4.10 If a Participant who has served as a member of the Board for a continuous period of at least ten years or who is at least 72 years of age ceases to serve as a member of the Board (including without limitation by reason of death or disability), his or her Stock Option will not expire and will remain, or when the Participant ceases to serve as member of the Board become, fully exercisable, as the case may be. Subject to Section 4.11, the Stock Option will expire on the fifth anniversary of the date the Participant ceases service as a member of the Board.

4.11 Stock Options that have not previously expired will expire at the close of business on the tenth anniversary of the date of grant. If a Stock Option would expire on a date that is not a Business Day, it will expire at the close of business on the last Business Day preceding that date. A “Business Day” is any day on which the Common Stock is traded on the New York Stock Exchange.

4.12 An exercisable Stock Option may only be exercised by the Participant, his or her legal representative, or a person to whom the Participant’s rights in the Stock Option are transferred by will or the laws of descent and distribution or in accordance with rules and procedures established by the Committee.

4.13 The Board or the Committee may, in its sole discretion and without receiving permission from any Participant, substitute stock appreciation rights (“SARs”) for any or all outstanding Stock Options granted on or after May 4, 2004. Upon the grant of substitute SARs, the related Stock Options replaced by the substitute SARs shall be cancelled. The grant price of the substitute SAR shall be equal to the Option Price of the related Stock Option, the term of the substitute SAR shall not exceed the term of the related Stock Option, and the terms and conditions applicable to the substitute SAR shall otherwise be substantially the same as those applicable to the related Stock Option replaced by the substitute SAR.

5. Cash Compensation

5.1 Baxter shall pay each Participant a meeting fee of $1,500 for each meeting of the Board or any committee thereof attended, and a Participant acting as the

chairperson of any meeting of a committee of the Board shall receive an additional $1,500 for each meeting chaired by him or her. Fees shall be paid quarterly in arrears and are payable if the Participant attends in person, by conference telephone, or by any other means permitted by the Delaware General Corporation Law and Baxter’s Bylaws, as amended.

5.2 Baxter shall pay each Participant a total annual cash retainer of $65,000 per calendar year (“Annual Cash Retainer”). Baxter shall pay an additional annual cash retainer of $30,000 per calendar year to the Lead Director (“Lead Director Retainer”). Both the Annual Cash Retainer and Lead Director Retainer shall be paid quarterly in arrears. For purposes of determining the amount of such quarterly payment(s), a Participant and/or the Lead Director must be a member of the Board on or prior to the 15^th day of a month in order to be entitled to receive such payment(s) with respect to that month.

5.3 Participants shall be eligible to defer payment of cash compensation otherwise payable under this Section 5 pursuant to the terms and conditions of the Baxter Non-Employee Director Deferred Compensation Plan.

6. Availability of Shares

If on any grant date, the number of shares of Common Stock which would otherwise be granted in the form of Restricted Stock Units or subject to Stock Options granted under the Plan shall exceed the number of shares of Common Stock then remaining available under the Program, the available shares shall be allocated among the Stock Options and Restricted Stock Units to be granted Participants in proportion to the number of shares subject to Stock Options and Restricted Stock Units that Participants would otherwise be entitled to receive, and allocated evenly between Restricted Stock Units and Stock Options.

7. General Provisions

7.1 Subject to the limitations contained in Section 11.9 of the Program, the Board or the Committee may, at any time and in any manner, amend, suspend, or terminate the Plan or any Stock Option outstanding under the Plan.

7.2 Participation in the Plan does not give any Participant any right to continue as a member of the Board for any period of time or any right or claim to any benefit unless such right or claim has specifically accrued hereunder.

EX-12

EXHIBIT 12

Baxter International Inc. and Subsidiaries

Computation of Ratio of Earnings to Fixed Charges
(unaudited — in millions, except ratios)

Years ended December 31,	2008			2007			2006			2005			2004
Income from continuing operations before income taxes	$	2,451		$	2,114		$	1,746		$	1,444		$	430
Fixed charges
Interest costs (1)		165			136			116			184			144
Estimated interest in rentals (2)		54			52			49			46			50
Fixed charges as defined		219			188			165			230			194
Adjustments to income
Interest costs capitalized		(17	)		(12	)		(15	)		(18	)		(18	)
Net losses (gains) of less than majority-owned affiliates, net of dividends		1			—			(2	)		(6	)		(5	)
Income as adjusted	$	2,654		$	2,290		$	1,894		$	1,650		$	601
Ratio of earnings to fixed charges (3)		12.12			12.18			11.48			7.17			3.10

(1)	Excludes interest on uncertain tax positions under Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109.”
(2)	Represents the estimated interest portion of rents.
(3)	Excluding the following pre-tax special charges included in “Income from continuing operations,” the ratio of earnings to fixed charges was 12.92, 13.18, 11.94, 7.47 and 7.98 in 2008, 2007, 2006, 2005 and 2004, respectively.
	2008:	$125 million charge relating to infusion pumps, $31 million impairment charge and $19 million of charges relating to acquired in-process and collaboration research and development (IPR&D).
	2007:	$70 million charge for restructuring, $56 million charge relating to litigation and $61 million of charges relating to acquired IPR&D.
	2006:	$76 million charge relating to infusion pumps.
	2005:	$109 million benefit relating to restructuring charge adjustments, $126 million of charges relating to infusion pumps and a $50 million charge relating to the exit of hemodialysis instrument manufacturing.
	2004:	$543 million charge for restructuring, $289 million charge for impairments and $115 million for other special charges.

27

EX-13

Management’s Discussion and Analysis

The following commentary should be read in conjunction with the consolidated financial statements and accompanying notes.

EXECUTIVE OVERVIEW

Description of the Company and Business Segments

Baxter International Inc. (Baxter or the company) develops, manufactures and markets products that save and sustain the lives of people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. As a global, diversified healthcare company, Baxter applies a unique combination of expertise in medical devices, pharmaceuticals and biotechnology to create products that advance patient care worldwide. The company operates in three segments. BioScience manufactures recombinant and plasma-based proteins to treat hemophilia and other bleeding disorders; plasma-based therapies to treat immune deficiencies, alpha 1-antitrypsin deficiency, burns and shock, and other chronic and acute blood-related conditions; products for regenerative medicine, such as biosurgery products and technologies used in adult stem-cell therapies; and vaccines. Medication Delivery manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filled vials and syringes for injectable drugs, IV nutrition products, infusion pumps, and inhalation anesthetics, as well as products and services related to pharmacy compounding, drug formulation and packaging technologies. Renal provides products to treat end-stage renal disease, or irreversible kidney failure. The business manufactures solutions and other products for peritoneal dialysis (PD), a home-based therapy, and also distributes products for hemodialysis (HD), which is generally conducted in a hospital or clinic.

Baxter has approximately 48,500 employees and conducts business in over 100 countries. The company generates approximately 60% of its revenues outside the United States, and maintains manufacturing and distribution facilities in a number of locations in the United States, Europe, Canada, Asia, Latin America and Australia.

Financial Results

The company’s global net sales totaled $12.3 billion in 2008, increasing 10% over 2007, including 4 percentage points of benefit relating to the impact of foreign currency. International sales totaled $7.3 billion, and represented approximately 60% of the company’s total sales in 2008, reflecting the company’s continued focus on global expansion as a growth strategy, as well as solid fundamentals in many of the markets in which the company participates. Net sales for the company grew in 2008, reflecting solid sales growth across all geographic regions and most major product categories. Sales were particularly strong in the company’s BioScience segment, reflecting the continued increase in customer conversion to the company’s advanced recombinant therapy, ADVATE (Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method) rAHF-PFM, which is used in the treatment of hemophilia A, a bleeding disorder caused by a deficiency in blood clotting factor VIII, and GAMMAGARD LIQUID (marketed as KIOVIG in most markets outside the United States), the liquid formulation of the antibody-replacement therapy IGIV (immune globulin intravenous), used to treat immune deficiencies. Also, in the Medication Delivery segment, sales of nutrition and anesthesia products continued to generate solid sales growth.

Baxter’s net income for 2008 totaled $2.0 billion, or $3.16 per diluted share, increasing 18% and 21%, respectively, compared to the prior year. As further discussed below, results of operations for 2008 included special charges associated with the company’s COLLEAGUE infusion pumps, the discontinuation of the CLEARSHOT pre-filled syringe program and acquired in-process and collaboration research and development (IPR&D). Results of operations for 2007 included special charges associated with litigation, restructuring and IPR&D.

The increase in earnings in 2008 can be attributed to higher sales, gross margin improvements, leverage of general and administrative costs and a lower tax rate. Consistent with the company’s strategic priority to accelerate its investment in research and development (R&D), R&D expenses in 2008 increased 14% to $868 million, the highest level of R&D spending in the company’s history.

Despite the challenging global economic environment and the recent unprecedented volatility in the global financial markets, the company’s financial position remains strong. At December 31, 2008, Baxter had $2.1 billion in cash and equivalents, and the company’s net debt represented 26% of shareholders’ equity. Net cash provided by operating activities totaled $2.5 billion in 2008, an increase of $210 million over 2007, including contributions of over $285 million to the company’s pension plans in 2008.

The company continues to make capital investments, with spending in 2008 totaling $954 million, an increase of $262 million over the prior year. These investments were focused on projects that enhance the company’s cost structure and manufacturing capabilities across the three businesses, particularly as they relate to the company’s nutritional, anesthesia and peritoneal dialysis products, and plasma and recombinant manufacturing platforms. In addition, the company continues to invest to support its strategy of geographic expansion with select investments in growing markets, and continues to invest to support the company’s ongoing strategic focus on R&D with the expansion of research facilities, pilot manufacturing sites and laboratories.

The company’s strong cash flow generation also provided the company with the flexibility to continue to return value to its shareholders in the form of share repurchases and dividends. During 2008, the company repurchased 32 million shares of common stock for $2.0 billion, and paid cash dividends to its shareholders totaling $546 million. The company increased the quarterly dividend rate by 30% in late 2007 and by an additional 20% in late 2008. The company also settled all of its remaining net investment hedges in 2008, with net payments totaling $528 million during the year.

Strategic Objectives

Baxter is focused on leveraging the operational strength of its businesses to achieve sustainable growth and deliver shareholder value, while making appropriate investments for the future. Baxter’s diversified healthcare model, its broad portfolio of products that treat life-threatening acute or chronic conditions, and its global presence

33

Management’s Discussion and Analysis

are core components of the company’s strategy to achieve these objectives. The company is committed to providing critical therapies to patients worldwide, particularly in regions where many people with life-threatening conditions go untreated or are under-treated, leveraging its capabilities across the company to create synergies and optimize the performance of each of its businesses, and strengthening its overall global presence and market-leading positions.

The company seeks to expand gross margins by improving product and business mix, maximizing pricing opportunities and controlling costs and enhancing productivity throughout the company’s global manufacturing footprint. As part of its approach to disciplined financial management, Baxter is focused on controlling general and administrative costs while continuing to invest in select marketing programs and promotional activities directed toward higher-growth and higher-margin products.

The strength of the company’s financial position has enabled Baxter to accelerate its R&D initiatives and selectively pursue business development opportunities to capitalize on growth opportunities. The company advanced its internal R&D pipeline in 2008 with several regulatory approvals and product launches, as well as the initiation of a number of Phase III clinical trials. The company also made progress with several of its collaborative arrangements with third parties, and formed new strategic partnerships. Refer to the R&D section below for more information on these activities. In 2009, Baxter plans to continue to make substantial investments in its R&D pipeline, with a focus on increasing R&D productivity and innovation. This involves disciplined prioritization and product development processes that ensure R&D expenditures match business growth strategies and key financial return metrics. The company also plans to continue to pursue business development initiatives, collaborations and alliances as part of the execution of its long-term growth strategy.

The company’s ability to sustain long-term growth and successfully execute the strategies discussed above depends in part on the company’s ability to manage the competitive landscape, the current challenges in the commercial and credit environment, and other risk factors described under the caption “Item 1A. Risk Factors” in the company’s Form 10-K for the year ended December 31, 2008.

RESULTS OF OPERATIONS

Net Sales

							Percent change
years ended December 31 (in millions)	2008		2007		2006		2008		2007
BioScience	$	5,308	$	4,649	$	4,396		14%		6%
Medication Delivery		4,560		4,231		3,917		8%		8%
Renal		2,306		2,239		2,065		3%		8%
Transition services to Fenwal Inc.		174		144		—		21%		n/a
Total net sales	$	12,348	$	11,263	$	10,378		10%		9%

							Percent change
years ended December 31 (in millions)	2008		2007		2006		2008		2007
United States	$	5,044	$	4,820	$	4,589		5%		5%
International		7,304		6,443		5,789		13%		11%
Total net sales	$	12,348	$	11,263	$	10,378		10%		9%

The impact of foreign currency benefited sales growth by 4 and 5 percentage points in 2008 and 2007, respectively, principally due to the weakening of the U.S. Dollar relative to other currencies, including the Euro.

The following table presents the company’s sales results excluding Transfusion Therapies (TT).

							Percent change
years ended December 31 (in millions)	2008		2007		2006		2008			2007
Total net sales	$	12,348	$	11,263	$	10,378		10%			9%
Pre-divestiture sales of TT products (included in the BioScience segment through the February 28, 2007 divestiture date)		—		79		516		(100%	)		(85%	)
Transition services to Fenwal Inc. (subsequent to the February 28, 2007 divestiture date)		174		144		—		21%			n/a
Total net sales excluding TT	$	12,174	$	11,040	$	9,862		10%			12%

Net sales excluding TT increased 10% in 2008 and 12% in 2007 (including a 3 and 4 percentage point favorable impact from foreign currency in 2008 and 2007, respectively). Management believes that net sales and sales growth excluding TT facilitates a more meaningful analysis of the company’s net sales growth due to the divestiture of this business in 2007. See Note 3 for further information regarding the divestiture of the TT business.

34

Management’s Discussion and Analysis

BioScience  Net sales in the BioScience segment increased 14% in 2008 and 6% in 2007 (with a 3 and 4 percentage point favorable impact from foreign currency in 2008 and 2007, respectively).

The following is a summary of sales by significant product line.

							Percent change
years ended December 31 (in millions)	2008		2007		2006		2008			2007
Recombinants	$	1,966	$	1,714	$	1,523		15%			13%
Plasma Proteins		1,219		1,015		881		20%			15%
Antibody Therapy		1,217		985		785		24%			25%
Regenerative Medicine		408		346		298		18%			16%
Transfusion Therapies		—		79		516		(100%	)		(85%	)
Other		498		510		393		(2%	)		30%
Total net sales	$	5,308	$	4,649	$	4,396		14%			6%

Recombinants

The primary driver of sales growth in the Recombinants product line during both 2008 and 2007 was increased sales volume of the company’s advanced recombinant therapy, ADVATE. Sales growth of ADVATE was fueled by the continuing adoption of this therapy by customers, with strong patient conversion in both the United States and international markets, and increased demand for new dosage forms that provide more precise dosing and convenience for patients. Sales of ADVATE exceeded $1.5 billion in 2008.

Plasma Proteins

Plasma Proteins includes specialty therapeutics, such as FEIBA, an anti-inhibitor coagulant complex, and ARALAST (alpha 1-proteinase inhibitor (human)) for the treatment of hereditary emphysema, plasma-derived hemophilia treatments and albumin. Sales growth in 2008 and 2007 was driven by strong demand for several plasma protein products and improved pricing, particularly for albumin.

Antibody Therapy

Antibody Therapy includes products that bolster the immune systems of people with immune-system disorders. Higher sales of Baxter’s GAMMAGARD LIQUID contributed significantly to sales growth during both 2008 and 2007, with increased volume driven by strong global demand and patient conversion from lyophilized IGIV to the liquid formulation, and continuing improvements in pricing in the United States and Europe. The higher-yielding liquid formulation offers added convenience for clinicians and patients because it does not need to be reconstituted prior to infusion.

Regenerative Medicine

This product line principally includes plasma-based and non-plasma-based biosurgery products for hemostasis (the stoppage of bleeding), wound-sealing and tissue regeneration. Growth in 2008 and 2007 was principally driven by increased sales volume of the company’s portfolio of fibrin sealant products, FLOSEAL, COSEAL and TISSEEL.

Transfusion Therapies

The TT product line included products and systems for use in the collection and preparation of blood and blood components. On February 28, 2007, the company sold substantially all of the assets and liabilities of this business. Refer to Note 3 for further information.

Other

Other BioScience products primarily consist of vaccines and sales of plasma to third parties. Impacting both years were strong international sales of FSME-IMMUN (for the prevention of tick-borne encephalitis) and influenza vaccines, particularly in 2008 when the company recognized approximately $50 million of revenue relating to a large pandemic influenza vaccine tender. Also impacting 2007 were higher sales of NEISVAC-C (for the prevention of meningitis C) and increased milestone revenue associated with the development of a candidate pandemic vaccine and a seasonal influenza vaccine for the U.S. government. Negatively impacting both years was the transfer of marketing and distribution rights for BENEFIX back to Wyeth effective June 30, 2007. Sales of BENEFIX were approximately $110 million in 2007 through the June 30, 2007 transfer date and approximately $180 million for all of 2006.

Medication Delivery  Net sales for the Medication Delivery segment increased 8% in both 2008 and 2007 (with a 3 and 4 percentage point favorable impact from foreign currency in 2008 and 2007, respectively).

The following is a summary of sales by significant product line.

							Percent change
years ended December 31 (in millions)	2008		2007		2006		2008			2007
IV Therapies	$	1,575	$	1,402	$	1,285		12%			9%
Global Injectables		1,584		1,504		1,453		5%			4%
Infusion Systems		906		860		817		5%			5%
Anesthesia		464		422		317		10%			33%
Other		31		43		45		(28%	)		(4%	)
Total net sales	$	4,560	$	4,231	$	3,917		8%			8%

35

Management’s Discussion and Analysis

IV Therapies

This product line principally consists of IV solutions and nutritional products. Growth in 2008 and 2007 was driven by strong international sales of nutritional products, particularly for the company’s proprietary multi-chamber container, increased demand for IV therapy products globally and pricing improvements for IV therapy products in the United States.

Global Injectables

This product line primarily consists of the company’s enhanced packaging, premixed drugs, pharmacy compounding and the pharmaceutical partnering business, as well as generic injectables. Sales growth in 2008 was driven by strong international sales in the pharmacy compounding business, while sales growth in 2007 benefited from strong sales in the pharmaceutical partnering business. Partially offsetting this growth in both years were decreased sales of generic injectables, primarily driven by the decline of generic propofol and heparin. The decline in generic propofol sales was due to the transfer of marketing and distribution rights for propofol back to Teva Pharmaceutical Industries Ltd. effective July 1, 2007. Sales of propofol totaled approximately $40 million in 2007 and $100 million in 2006. The decline in heparin sales was due to the company’s recall of heparin sodium injection products in the United States in 2008. Sales of these heparin products totaled approximately $30 million in 2007. Refer to Note 5 for further information.

Infusion Systems

This product line primarily consists of the IV infusion pumps and administration sets that control the delivery of IV fluids and drugs to patients. Sales growth in 2008 and 2007 was primarily driven by an increase in revenue from international sales of COLLEAGUE infusion pumps and increased sales of disposable tubing sets used in the administration of IV solutions. The company began to hold shipments of new COLLEAGUE infusion pumps in July 2005 as a result of pump design issues, and continues to hold shipments of new pumps in the United States. Refer to Note 5 and the Certain Regulatory Matters section below for additional information regarding the COLLEAGUE infusion pump, including charges recorded relating to this matter.

Anesthesia

This product line primarily consists of inhaled anesthetics for general anesthesia. Sales growth in both 2008 and 2007 was due to strong sales of SUPRANE (desflurane) and sevoflurane, as a result of increased demand and launches in a number of geographies. The company continues to benefit from its position as the only global supplier of all three modern inhaled anesthetics (SUPRANE, sevoflurane and isoflurane).

Renal  Net sales in the Renal segment increased 3% in 2008 and 8% in 2007 (with a 5 and 4 percentage point favorable impact from foreign currency in 2008 and 2007, respectively).

The following is a summary of sales by significant product line.

							Percent change
years ended December 31 (in millions)	2008		2007		2006		2008			2007
PD Therapy	$	1,862	$	1,791	$	1,634		4%			10%
HD Therapy		444		448		431		(1%	)		4%
Total net sales	$	2,306	$	2,239	$	2,065		3%			8%

PD Therapy

Peritoneal dialysis, or PD Therapy, is a dialysis treatment for end-stage renal disease. PD Therapy, which is used primarily at home, uses the peritoneal membrane, or abdominal lining, as a natural filter to remove waste from the bloodstream. Excluding the impact of foreign currency, sales declined slightly in 2008 and increased in 2007. Increased penetration of PD Therapy products continues to be strong in emerging markets, where many people with end-stage renal disease are currently under-treated. In both years, growth was driven by an increase in the number of patients in Asia (particularly in China), Central and Eastern Europe and the United States. While growth in Latin America was also strong in 2007, growth in the region in 2008 was impacted by the loss of a government tender in Mexico, in the first quarter of 2008. The impact of the lost Mexican tender was estimated to be approximately $100 million.

HD Therapy

Hemodialysis, or HD Therapy, is another form of end-stage renal disease dialysis therapy that is generally performed in a hospital or outpatient center. In HD Therapy, the patient’s blood is pumped outside the body to be cleansed of wastes and fluid using a machine and an external filter, also known as a dialyzer. Lower saline sales in 2008 more than offset the favorable impact of foreign currency and higher revenues from the company’s Renal Therapy Services (RTS) business, which operates dialysis centers in partnership with local physicians in select countries. Sales levels in 2007 were favorably impacted by higher revenues relating to the RTS business.

Transition Services to Fenwal Inc.  Net sales in this category represent revenues associated with manufacturing, distribution and other services provided by the company to Fenwal Inc. (Fenwal) subsequent to the divestiture of the TT business on February 28, 2007. These revenues are expected to decline in 2009 as certain of the transition services agreements terminated in 2008. See Note 3 for further information.

36

Management’s Discussion and Analysis

Gross Margin and Expense Ratios

years ended December 31 (as a percent of net sales)	2008		2007		2006
Gross margin		49.6%		49.0%		45.6%
Marketing and administrative expenses		21.8%		22.4%		22.0%

Gross Margin

The improvement in gross margin in 2008 and 2007 was principally driven by an improvement in sales mix, with increased sales of higher-margin products, as well as manufacturing efficiencies and yield improvements. Contributing to the gross margin improvement was the continued customer conversion to ADVATE and GAMMAGARD LIQUID, strong sales of vaccines and increased demand and improved pricing for certain plasma protein products.

Included in the company’s gross margin in 2008, 2007 and 2006 were $125 million, $14 million, and $94 million, respectively, of charges and other costs related to the COLLEAGUE and SYNDEO infusion pumps, which decreased the gross margin by approximately 1.1, 0.1 and 1.0 percentage points in 2008, 2007 and 2006, respectively. Refer to Note 5 for additional information on these special charges and costs.

Marketing and Administrative Expenses

The marketing and administrative expense ratio declined in 2008 and increased modestly in 2007. The ratio in both years was favorably impacted by leverage from higher sales, stronger cost controls and reduced pension plan costs, as discussed below. These factors were partially offset in 2008, and more than offset in 2007, by spending relating to new marketing programs. Also unfavorably impacting the marketing and administrative expense ratio in 2007 was a charge of $56 million to establish reserves related to the average wholesale pricing (AWP) litigation, as discussed in Note 11.

Pension Plan Costs

Fluctuations in pension plan costs impacted the company’s gross margin and expense ratios. Pension plan costs decreased $15 million in 2008 and $31 million in 2007, as detailed in Note 9. The $15 million decrease in 2008 was principally due to an increase in the interest rate used to discount the plans’ projected benefit obligations and lower amortization related to asset returns from prior years, partially offset by the impact of changes to certain other assumptions. The $31 million decrease in 2007 was principally due to an increase in the interest rates used to discount the plans’ projected benefit obligations, coupled with the impact of the divestiture of the TT business, partially offset by changes in demographic assumptions and experience.

The company’s pension plan costs are expected to increase by approximately $17 million in 2009, from $137 million in 2008 to approximately $154 million in 2009, principally due to an increase in amortization related to asset returns, which were partially offset by the impact of the company’s contributions to its pension plans and higher interest rates used to discount the plans’ projected benefit obligations. For the domestic plans, the discount rate will increase to 6.5% from 6.35% and the expected return on plan assets will remain at 8.5% for 2009. Refer to the Critical Accounting Policies section below for a discussion of how the pension plan assumptions are developed, mortality tables are selected, and actuarial losses are amortized, and the impact of these factors on pension plan expense.

Research and Development

							Percent change
years ended December 31 (in millions)	2008		2007		2006		2008		2007
Research and development expenses		$868		$760		$614		14%		24%
as a percent of net sales		7.0%		6.7%		5.9%

R&D expenses increased in both 2008 and 2007, reflecting the company’s strategy to accelerate R&D investments with respect to both the company’s internal pipeline as well as collaborations with partners.

R&D expenses in 2008 included IPR&D charges of $12 million related to an in-licensing agreement with Innocoll Pharmaceuticals Ltd. (Innocoll) to market and distribute Innocoll’s gentamicin surgical implant in the United States, and $7 million related to the acquisition of certain technology applicable to the BioScience business. R&D expenses in 2007 included IPR&D charges totaling $61 million, comprised of an $11 million charge related to the acquisition of substantially all of the assets of MAAS Medical, LLC (MAAS Medical); a $25 million charge related to a collaboration with HHD, LLC (HHD) and DEKA Products Limited Partnership and DEKA Research and Development Corp. (collectively, DEKA); a $10 million charge related to one of the company’s arrangements with Halozyme Therapeutics, Inc. (Halozyme); a $10 million charge related to a distribution agreement with Nycomed Pharma AS (Nycomed); and a $5 million charge related to an amendment of the company’s collaboration with Nektar Therapeutics (Nektar). Refer to Note 4 for more information regarding the agreement with Innocoll, as well as the investments made in 2007.

37

Management’s Discussion and Analysis

In 2008, the company had a number of product launches and continued to make progress with respect to its internal R&D pipeline and R&D collaborations with partners. Key developments included the following:

Product Submissions, Approvals and Launches

•  U.S. Food and Drug Administration (FDA) approval and launch of ARTISS [Fibrin Sealant (Human)], the first and only slow-setting fibrin sealant indicated for use in adhering skin grafts in adult and pediatric burn patients;

•  Regulatory approval of ADVATE factor VIII therapy in six additional countries and sevoflurane in nine additional countries;

•  Launch of GELFOAM Plus Hemostasis Kit (absorbable gelatin sponge, USP and human thrombin), a hemostatic product for use in controlling bleeding during surgical procedures;

•  Launch of the V-Link Luer-activated device with VitalShield protective coating, the first needleless IV connector containing an antimicrobial coating;

•  Clearance by the FDA for expanded labeling of V-Link with VitalShield based on the device’s ability to combat three additional pathogens: vancomycin-resistant Enterococcus faecalis, Escherichia coli (E. coli) and Staphylococcus epidermidis; and

•  Receipt of a positive opinion from the Committee for Medical Products for Human Use of the European Medicines Agency for the marketing authorization of CELVAPAN, the first cell culture-based H5N1 pandemic vaccine to undergo licensing in the European Union.

Other Developments

•  Commencement of a Phase III trial combining GAMMAGARD LIQUID with ENHANZE, Halozyme’s proprietary drug delivery technology, for the subcutaneous delivery of IGIV for patients with Primary Immune Deficiency, which could allow patients to administer their dose of IGIV once monthly at home;

•  Initiation of two additional Phase III clinical trials evaluating the use of GAMMAGARD LIQUID for the treatment of multifocal motor neuropathy (MMN), a neurological disorder characterized by progressive limb weakness, and for the treatment of mild-to-moderate Alzheimer’s disease;

•  Completion of a 50 patient study using HYLENEX to facilitate subcutaneous pediatric hydration, the results of which are expected to be published in 2009; HYLENEX enables the dispersion and absorption of other subcutaneously administered fluids and drugs;

•  Continued progress with the company’s hemophilia franchise, including:

•   Initiation of a Phase I clinical trial evaluating the safety and tolerability of recombinant von Willebrand factor for the treatment of von Willebrand disease, the most common type of inherited bleeding disorder;

•   Initiation of pre-clinical programs to develop recombinant factor IX proteins to treat hemophilia B, the second most common type of hemophilia; and

•   Investigation of longer-acting versions of hemophilia therapy to extend the “half life” of factor VIII — the amount of time the clotting factor remains active in the bloodstream — which may result in fewer infusions for patients.

•  Completion of a Phase II clinical trial investigating the use of adult, autologous CD34+ stem cells as a potential treatment for patients suffering from chronic myocardial ischemia, a severe form of coronary artery disease, and initiation of a Phase II trial utilizing CD34+ stem cells as a potential treatment for patients with critical limb ischemia, a severe form of peripheral arterial disease; and

•  Completion of a home hemodialysis device prototype with the company’s partner DEKA.

Restructuring Charge

In 2007, the company recorded a restructuring charge of $70 million principally associated with the consolidation of certain commercial and manufacturing operations outside of the United States. Based on a review of current and future capacity needs, the company decided to integrate several facilities to reduce the company’s cost structure and optimize operations, principally in the Medication Delivery segment.

Included in the charge was $17 million related to asset impairments, principally to write down property, plant and equipment based on market data for the assets. Also included in the charge was $53 million for cash costs, principally pertaining to severance and other employee-related costs associated with the elimination of approximately 550 positions, or approximately 1% of the company’s total workforce. The reserve for severance and other costs is expected to be substantially utilized by the end of 2009.

The company estimates that these initiatives will yield savings of approximately $0.02 per diluted share when the programs are fully implemented in 2009. The savings from these actions impact cost of goods sold, general and administrative expenses and R&D, principally in the company’s Medication Delivery segment.

Refer to Note 5 for additional information, including details regarding reserve utilization. The company believes the reserve at December 31, 2008 is adequate. However, adjustments may be recorded in the future as the program is completed. The restructuring program is being funded from cash generated from operations.

Net Interest Expense

Net interest expense increased $54 million in 2008, principally due to lower interest income resulting from lower U.S. interest rates and a lower average cash balance, a higher average debt balance and the termination of the company’s cross-currency swap agreements. The higher average debt balance in 2008 was principally due to the December 2007 issuance of $500 million of senior unsecured notes and the May 2008 issuance of $500 million of senior unsecured notes. Net interest expense decreased $12 million in 2007, principally due to a lower average net debt balance, partially offset by higher weighted-average interest rates. Refer to Note 2 for a summary of the

38

Management’s Discussion and Analysis

components of net interest expense for the three years ended December 31, 2008.

Other Expense, Net

Other expense, net was $37 million in 2008, $32 million in 2007 and $61 million in 2006. Refer to Note 2 for a table that details the components of other expense, net for the three years ended December 31, 2008. Other expense, net in each year included amounts relating to minority interests, equity method investments and foreign currency fluctuations, principally relating to intercompany receivables, payables and loans denominated in a foreign currency. In 2008, other expense, net included a charge of $31 million associated with the discontinuation of the company’s CLEARSHOT pre-filled syringe program and $16 million of income related to the finalization of the net assets transferred in the TT divestiture. In 2007, other expense, net included a gain on the sale of the TT business of $58 million less a charge of $35 million associated with severance and other employee-related costs. Refer to Note 3 for further information regarding the divestiture and Note 5 for further information on the CLEARSHOT charge.

Pre-Tax Income

Refer to Note 12 for a summary of financial results by segment. Certain items are maintained at the company’s corporate level and are not allocated to the segments. The following is a summary of significant factors impacting the segments’ financial results.

BioScience  Pre-tax income increased 21% in 2008 and 22% in 2007. The primary drivers of the increase in pre-tax income in both 2008 and 2007 were strong sales of higher-margin products, fueled by the continued adoption by customers of ADVATE, customer conversion to GAMMAGARD LIQUID and strong demand for certain specialty therapies and vaccines; improved pricing for certain products; continued cost and yield improvements; and the favorable impact of foreign currency. Partially offsetting the growth in both years was the impact of higher spending on new marketing programs and product launches, as well as increased R&D spending related to clinical trials and milestone payments to collaboration partners.

Medication Delivery  Pre-tax income decreased 15% in 2008 and increased 23% in 2007. Included in pre-tax income in 2008, 2007 and 2006, and impacting the earnings trend, were $125 million, $14 million and $94 million, respectively, of charges and other costs relating to the COLLEAGUE and SYNDEO infusion pumps, as discussed above. Also included in pre-tax income in 2008 was $31 million related to the discontinuation of the CLEARSHOT pre-filled syringe program and $19 million related to the company’s recall of its heparin sodium injection products in the United States. Aside from the impact of these items, pre-tax earnings in 2008 and 2007 benefited from increased sales of certain higher-margin products such as SUPRANE (desflurane), nutritional products, certain premixed injectables, access sets and sevoflurane; improved pricing; and the impact of favorable foreign currency. These increases in pre-tax income were partially offset by the unfavorable impact of generic competition and increased spending on R&D. Refer to Note 5 for further information on the COLLEAGUE, CLEARSHOT and heparin charges.

Renal  Pre-tax income decreased 17% in 2008 and increased 2% in 2007. The pre-tax earnings decline in 2008 was principally due to the loss of a PD tender in Mexico and increased spending on new product development, including a next-generation home HD device. The pre-tax earnings growth in 2007 was driven by continued PD patient growth in developing countries and an improved mix of sales, partially offset by increased spending on marketing programs and new product development, including investments related to the development of a next-generation home HD device. The Renal segment’s revenues are generated principally outside the United States, and the impact of foreign currency was favorable to pre-tax income in 2008 and 2007.

Other  As mentioned above, certain income and expense amounts are not allocated to the segments. These amounts are detailed in the table in Note 12 and include net interest expense, certain foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of the foreign currency and interest rate hedging activities, corporate headquarters costs, stock compensation expense, income and expense related to certain non-strategic investments, certain employee benefit plan costs, certain nonrecurring gains and losses, certain charges (such as certain restructuring, litigation-related and IPR&D charges), and the revenues and costs related to the manufacturing, distribution and other transition agreements with Fenwal.

Refer to the previous discussions for further information regarding net interest expense, the 2007 restructuring charge, IPR&D charges, the charge associated with the AWP litigation, the net divestiture gain and ongoing arrangements with Fenwal related to the sale of the TT business, and Note 8 for further information regarding stock compensation expense.

Income Taxes

Effective Income Tax Rate

The effective income tax rate was 18% in 2008, 19% in 2007 and 20% in 2006. The company anticipates that the effective income tax rate, calculated in accordance with generally accepted accounting principles (GAAP), will be approximately 19% in 2009, excluding any impact from additional audit developments or other special items.

The company’s effective tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, as discussed further below, the company’s effective income tax rate can be impacted in each year by discrete factors or events. Refer to Note 10 for further information regarding the company’s income taxes.

2008

The effective tax rate for 2008 was impacted by $29 million of valuation allowance reductions on net operating loss carryforwards in foreign jurisdictions due to profitability improvements, $8 million of income tax benefit related to the extension of R&D tax credits in the United States and $14 million of additional U.S. income tax expense related to foreign earnings which are no longer considered indefinitely reinvested outside of the United States because the company

39

Management’s Discussion and Analysis

planned to remit these earnings to the United States in the foreseeable future.

2007

The effective tax rate for 2007 was impacted by a $38 million net reduction of the valuation allowance on net operating loss carryforwards primarily due to profitability improvements in a foreign jurisdiction, a $12 million reduction in tax expense due to legislation reducing corporate income tax rates in Germany, the extension of tax incentives, and the settlement of tax audits in jurisdictions outside of the United States. Partially offsetting these items was $82 million of U.S. income tax expense related to foreign earnings which are no longer considered permanently reinvested outside of the United States because the company planned to remit these earnings to the United States in the foreseeable future.

2006

In 2006, the company reached a favorable settlement with the Internal Revenue Service relating to the company’s U.S. federal tax audits for the years 2002 through 2005, resulting in a $135 million reduction of tax expense. In combination with this settlement, the company reorganized its Puerto Rico manufacturing assets and repatriated funds from other subsidiaries, resulting in tax expense of $113 million ($86 million related to the repatriations and $27 million related to operations subject to tax incentives). The effect of these items was the utilization and realization of deferred tax assets that were previously subject to valuation allowances, as well as a modest reduction in the company’s reserves for uncertain tax positions, resulting in a net $22 million benefit and minimal cash impact.

Income From Continuing Operations and Related per Diluted Share Amounts

Income from continuing operations was $2.0 billion in 2008, $1.7 billion in 2007 and $1.4 billion in 2006. The corresponding net earnings per diluted share were $3.16 in 2008, $2.61 in 2007 and $2.13 in 2006. The significant factors and events causing the net changes from 2007 to 2008 and from 2006 to 2007 are discussed above.

Loss From Discontinued Operations

In 2002, the company decided to divest certain businesses, principally the majority of the services businesses included in the Renal segment. The results of operations of these businesses are reported as discontinued operations. In 2006, net revenues relating to the discontinued operations were insignificant, and the divestiture plan was completed.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows from Operations

Cash flows from operations increased in both 2008 and 2007, totaling $2.5 billion in 2008, $2.3 billion in 2007 and $2.2 billion in 2006. The increases in cash flows in 2008 and 2007 were primarily due to higher earnings (before non-cash items) and the other factors discussed below. Included in cash flows from operations were outflows of $112 million in 2008 and $29 million in 2006 related to realized excess tax benefits from stock compensation. Realized excess tax benefits are required to be presented in the statement of cash flows as an outflow within the operating section and an inflow within the financing section.

Accounts Receivable

Cash outflows relating to accounts receivable decreased in 2008 and increased in 2007. Days sales outstanding decreased from 53.3 days at December 31, 2007 to 50.6 days at December 31, 2008, primarily due to an improvement in the collection of receivables in the United States and in certain international locations. The increase in cash outflows from accounts receivable in 2007 was primarily due to a shift in the geographic mix of sales to certain international locations with longer collection periods, partially offset by an improvement in the collection of receivables in the United States. Proceeds from factoring of receivables increased in both 2008 and 2007. Net operating cash outflows relating to the company’s securitization arrangements totaled $3 million in 2008, $15 million in 2007 and $123 million in 2006. Refer to Note 7 for information regarding the company’s receivable securitization programs. The company’s U.S. and European securitization facilities matured in late 2007 and were not renewed.

Inventories

Cash outflows from inventories decreased in 2008 and increased in 2007. The following is a summary of inventories at December 31, 2008 and 2007, as well as inventory turns for 2008, 2007 and 2006, by segment. Inventory turns for the year are calculated as the annualized fourth quarter cost of goods sold divided by the year-end inventory balance.

	Inventories				Inventory turns
(in millions, except inventory turn data)	2008		2007		2008		2007		2006
BioScience	$	1,346	$	1,234		1.46		1.61		1.96
Medication Delivery		771		826		3.68		3.26		3.24
Renal		227		236		4.53		4.81		4.72
Other		17		38		—		—		—
Total company	$	2,361	$	2,334		2.48		2.53		2.68

Other

Cash flows related to liabilities, restructuring payments and other decreased in 2008. This decrease was principally driven by contributions to the company’s pension plans of $287 million in 2008 compared to $47 million in 2007, the timing of payments of trade accounts payable and income taxes payable, and increased payments related to the company’s restructuring programs. Cash flows decreased slightly in 2007 principally due to the timing of payments of payables, partially offset by $52 million of cash inflows resulting from a prepayment relating to the Fenwal manufacturing, distribution and other transition agreements, lower cash payments relating to the company’s restructuring programs and lower contributions to the company’s pension plans. Included in both 2008 and 2007 were cash outflows related to the settlement of mirror cross-currency swaps, which resulted in operating cash inflows of $12 million in 2008 as compared to $31 million of cash outflows in 2007. There were no settlements of cross-currency swaps during 2006.

40

Management’s Discussion and Analysis

Cash Flows from Investing Activities

Capital Expenditures

Capital expenditures totaled $954 million in 2008, $692 million in 2007 and $526 million in 2006. The investments in 2008 were focused on projects that enhance the company’s cost structure and manufacturing capabilities across the three businesses, particularly as it relates to the company’s nutritional, anesthesia and peritoneal dialysis products, and plasma and recombinant manufacturing platforms. In addition, the company continues to invest to support its strategy of geographic expansion with select investments in growing markets, and continues to invest to support the company’s ongoing strategic focus on R&D with the expansion of research facilities, pilot manufacturing sites and laboratories.

The company makes investments in capital expenditures at a level sufficient to support the strategic and operating needs of the businesses, and continues to improve capital allocation discipline in making investments to enhance long-term growth. The company expects to spend approximately $1 billion in capital expenditures in 2009.

Acquisitions of and Investments in Businesses and Technologies

Net cash outflows relating to acquisitions of and investments in businesses and technologies were $99 million in 2008, $112 million in 2007 and $5 million in 2006. The cash outflows in 2008 principally related to an IV solutions business in China, the company’s in-licensing agreement to market and distribute Innocoll’s gentamicin surgical implant in the United States, the acquisition of certain technology applicable to the BioScience business, payments related to the company’s fourth quarter 2007 agreements with Nycomed and Nektar, and certain smaller acquisitions and investments. The cash outflows in 2007 principally related to a new arrangement and the expansion of the company’s existing agreements with Halozyme, the company’s collaboration with DEKA and the acquisition of certain assets of MAAS Medical. Refer to Note 4 for further information regarding these investments. In addition, the 2007 outflows included an investment in a parenteral nutrition products joint venture in China, an investment in an IV solutions manufacturing business in Poland and certain smaller investments.

Divestitures and Other

Net cash inflows relating to divestitures and other activities were $60 million in 2008, $499 million in 2007 and $189 million in 2006. Cash inflows in 2008 principally consisted of cash collections from customers relating to previously securitized receivables under the European facility. In 2007, the company purchased the third party interest in previously sold receivables under the European receivables securitization facility, resulting in net cash outflows of $157 million. Cash inflows in 2007 included $421 million of cash proceeds from the divestiture of the TT business. The $421 million represented the $473 million total cash received upon divestiture less the $52 million prepayment related to the manufacturing, distribution and other transition agreements, which was classified in the operating section of the consolidated statement of cash flows. Cash inflows in 2008, 2007 and 2006 also included normal collections on retained interests associated with securitization arrangements and, in 2006, cash proceeds related to asset dispositions.

Cash Flows from Financing Activities

Debt Issuances, Net of Payments of Obligations

Debt issuances, net of payments of obligations, were net outflows totaling $79 million in 2008, $51 million in 2007 and $543 million in 2006. Included in these totals in 2008 and 2007 were $540 million and $303 million, respectively, of cash outflows related to the settlement of cross-currency swap agreements, resulting in the termination of the company’s remaining net investment hedges. There were no settlements of cross-currency swap agreements in 2006.

The company repaid its 5.196% notes, which approximated $250 million, upon their maturity in February 2008. In May 2008, the company issued $500 million of senior unsecured notes, maturing in June 2018 and bearing a 5.375% coupon rate. In addition, during 2008, the company issued commercial paper, of which $200 million was outstanding as of December 31, 2008, with a weighted-average interest rate of 2.55%. In December 2007, the company issued $500 million of senior unsecured notes, maturing in December 2037 and bearing a 6.25% coupon rate. In August 2006, the company issued $600 million of senior unsecured notes, maturing in September 2016 and bearing a 5.9% coupon rate. The net proceeds from these issuances were used for general corporate purposes, including the settlement of cross-currency swaps and the repayment of outstanding indebtedness. Also, using the cash proceeds from the settlement of the equity units purchase contracts in February 2006 (further discussed below), the company paid down certain maturing debt during 2006.

Other Financing Activities

Cash dividend payments totaled $546 million in 2008, $704 million in 2007 and $364 million in 2006. The company’s dividend amounts and payment schedule changed in 2007. Beginning in 2007, the company converted from an annual to a quarterly dividend and increased the dividend by 15% on an annualized basis, to $0.1675 per share per quarter. In November 2007, the board of directors declared a quarterly dividend of $0.2175 per share ($0.87 per share on an annualized basis), representing an increase of 30% over the previous quarterly rate. In November 2008, the board of directors declared a quarterly dividend of $0.26 per share ($1.04 per share on an annualized basis), which was paid on January 6, 2009 to shareholders of record as of December 10, 2008. This dividend represented an increase of 20% over the previous quarterly rate of $0.2175 per share.

Proceeds and realized excess tax benefits from stock issued under employee benefit plans totaled $680 million in 2008, $639 million in 2007 and $272 million in 2006. The increase in 2008 was primarily due to increased participation in the company’s employee stock purchase plan and an increase in realized excess tax benefits from stock compensation (as further discussed above), partially offset by a decrease in stock option exercises. The increase in 2007 was primarily due to an increase in stock option exercises, as well as a higher average exercise price.

In February 2006, the company issued approximately 35 million shares of common stock for $1.3 billion in conjunction with the settlement of the purchase contracts included in the company’s equity units, which were issued in December 2002. The company used these proceeds to

41

Management’s Discussion and Analysis

pay down maturing debt, for stock repurchases and for other general corporate purposes.

As authorized by the board of directors, the company repurchases its stock from time to time depending on the company’s cash flows, net debt level and current market conditions. The company purchased 32 million shares for $2.0 billion in 2008, 34 million shares for $1.9 billion in 2007 and 18 million shares for $737 million in 2006. At December 31, 2008, $1.2 billion remained available under the March 2008 board of directors’ authorization, which provides for the repurchase of up to $2.0 billion of the company’s common stock.

Credit Facilities, Access to Capital, Credit Ratings and Net Investment Hedges

Credit Facilities

The company’s primary revolving credit facility has a maximum capacity of $1.5 billion and matures in December 2011. As of December 31, 2008, there were no outstanding borrowings under this facility. The company also maintains a Euro-denominated credit facility with a maximum capacity of approximately $410 million at December 31, 2008, which matures in January 2013. As of December 31, 2008, there was $164 million outstanding under this facility, with a weighted-average interest rate of 3.4%. The company’s facilities enable the company to borrow funds on an unsecured basis at variable interest rates, and contain various covenants, including a maximum net-debt-to-capital ratio. At December 31, 2008, the company was in compliance with the financial covenants in these agreements. The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by each institution’s respective commitment. The company also maintains other credit arrangements, as described in Note 6.

Access to Capital

The company intends to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations, or by issuing additional debt or common stock. The company had $2.1 billion of cash and equivalents at December 31, 2008. The company invests its excess cash in certificates of deposit and money market funds, and diversifies the concentration of cash among different financial institutions.

The global financial markets have recently experienced unprecedented levels of volatility. The company’s ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for the company’s products or in the solvency of its customers or suppliers, deterioration in the company’s key financial ratios or credit ratings, or other significantly unfavorable changes in economic conditions. In addition, continuing volatility in the global financial markets could increase borrowing costs or affect the company’s ability to access the capital markets. However, the company believes it has sufficient financial flexibility in the future to issue debt, enter into other financing arrangements, and attract long-term capital on acceptable terms to support the company’s growth objectives.

Credit Ratings

The company’s credit ratings at December 31, 2008 were as follows.

	Standard & Poor’s	Fitch	Moody’s
Ratings
Senior debt	A+	A	A3
Short-term debt	A1	F1	P2
Outlook	Positive	Stable	Stable

There were no changes to the company’s credit ratings in 2008. Standard & Poor’s upgraded the company’s outlook from Stable to Positive in 2008.

If Baxter’s credit ratings or outlooks were to be downgraded, the company’s financing costs related to its credit arrangements and any future debt issuances could be unfavorably impacted. However, any future credit rating downgrade or change in outlook would not affect the company’s ability to draw on its credit facilities, and would not result in an acceleration of the scheduled maturities of any of the company’s outstanding debt, unless, with respect to certain debt instruments, preceded by a change in control of the company.

Net Investment Hedges

In 2008, the company terminated its remaining net investment hedge portfolio and, as of December 31, 2008, no longer has any outstanding net investment hedges. The company historically hedged the net assets of certain of its foreign operations using a combination of foreign currency denominated debt and cross-currency swaps. The cross-currency swaps served as effective hedges for accounting purposes and reduced volatility in the company’s shareholders’ equity balance. In 2004, the company reevaluated its net investment hedge strategy and elected to reduce the use of these instruments as a risk management tool. In order to reduce financial risk and uncertainty through the maturity (or cash settlement) dates of the cross-currency swaps, the company executed offsetting, or mirror, cross-currency swaps relating to over half of the existing portfolio. As of the date of execution, these mirror swaps effectively fixed the net amount that the company would ultimately pay to settle the cross-currency swap agreements subject to this strategy. After execution, as the market value of the fixed portion of the original portfolio changed, the market value of the mirror swaps changed by an approximately offsetting amount. The net after-tax losses related to net investment hedge instruments recorded in other comprehensive income were $33 million, $48 million, and $93 million in 2008, 2007 and 2006, respectively.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” when the cross-currency swaps are settled, the cash flows are reported within the financing section of the consolidated statement of cash flows. When the mirror swaps are settled, the cash flows are reported in the operating section of the consolidated statement of cash flows. Of the $528 million of net settlement payments in 2008, $540 million of cash outflows were included in the financing section and $12 million of cash inflows were included in the operating section. Of the $334 million of settlement payments in 2007, $303 million of cash outflows were included in the

42

Management’s Discussion and Analysis

financing section and $31 million of cash outflows were included in the operating section. There were no settlements of cross-currency swaps or mirror swaps in 2006.

Refer to Note 7 for additional discussion of the cross-currency swaps and related mirror swaps.

Contractual Obligations

As of December 31, 2008, the company had contractual obligations (excluding accounts payable, accrued liabilities — other than the current portion of unrecognized tax benefits — and contingent liabilities) payable or maturing in the following periods.

			Less than		One to		Three to		More than
(in millions)	Total		one year		three years		five years		five years
Short-term debt	$	388	$	388	$	—	$	—	$	—
Long-term debt and capital lease obligations, including current maturities		3,240		6		687		162		2,385
Interest on short- and long-term debt and capital lease obligations1		1,698		131		237		215		1,115
Operating leases		667		147		230		175		115
Other long-term liabilities2		890		—		235		74		581
Purchase obligations3		1,419		542		437		238		202
Unrecognized tax benefits4		234		234		—		—		—
Contractual obligations	$	8,536	$	1,448	$	1,826	$	864	$	4,398

1	Interest payments on debt and capital lease obligations are calculated for future periods using interest rates in effect at the end of 2008. Projected interest payments include the related effects of interest rate and cross-currency swap agreements. Certain of these projected interest payments may differ in the future based on changes in floating interest rates, foreign currency fluctuations, or other factors or events. The projected interest payments only pertain to obligations and agreements outstanding at December 31, 2008. Refer to Notes 6 and 7 for further discussion regarding the company’s debt instruments and related cross-currency and interest rate agreements outstanding at December 31, 2008.
2	The primary components of Other Long-Term Liabilities in the company’s consolidated balance sheet are liabilities relating to pension and other postemployment benefit plans, cross-currency swaps, foreign currency hedges, litigation and certain income tax-related liabilities. The company projected the timing of the future cash payments based on contractual maturity dates (where applicable), and estimates of the timing of payments (for liabilities with no contractual maturity dates). The actual timing of payments could differ from the estimates.
	The company contributed $287 million, $47 million and $73 million to its defined benefit pension plans in 2008, 2007 and 2006, respectively. Most of the company’s plans are funded. The timing of funding in the future is uncertain, and is dependent on future movements in interest rates and investment returns, changes in laws and regulations, and other variables. Refer to the discussion below regarding the Pension Protection Act of 2006. Therefore, the table above excludes pension plan cash outflows. The pension plan balance included in other long-term liabilities (and excluded from the table above) totaled $1.1 billion at December 31, 2008.
3	Includes the company’s significant contractual unconditional purchase obligations. For cancelable agreements, includes any penalty due upon cancellation. These commitments do not exceed the company’s projected requirements and are in the normal course of business. Examples include firm commitments for raw material purchases, utility agreements and service contracts.
4	Due to the uncertainty related to the timing of the reversal of uncertain tax positions, the long-term liability relating to unrecognized tax benefits of $203 million at December 31, 2008 has been excluded from the table above.

Off-Balance Sheet Arrangements

Baxter periodically enters into off-balance sheet arrangements where economical and consistent with the company’s business strategy. Certain contingencies arise in the normal course of business, and are not recorded in the consolidated balance sheet in accordance with GAAP (such as contingent joint development and commercialization arrangement payments). Also, upon resolution of uncertainties, the company may incur charges in excess of presently established liabilities for certain matters (such as contractual indemnifications). The following is a summary of significant off-balance sheet arrangements and contingencies.

Receivable Securitizations

Where economical, the company securitizes an undivided interest in certain pools of receivables. Refer to Note 7 for a description of these arrangements. The Japanese securitization arrangement includes limited recourse provisions, which are not material to the consolidated financial statements. Neither the buyers of the receivables nor the investors in the U.S. securitization arrangement have recourse to assets other than the transferred receivables.

In certain cases, the company retains a subordinated interest in each securitized portfolio. The subordinated interests retained in the transferred receivables are carried as assets in Baxter’s consolidated balance sheet, and totaled $7 million at December 31, 2008. Credit losses on these retained interests have historically been immaterial.

Joint Development and Commercialization Arrangements

In the normal course of business, Baxter enters into joint development and commercialization arrangements with third parties, sometimes with companies in which the company has invested. The

43

Management’s Discussion and Analysis

arrangements vary but generally provide that Baxter will receive certain rights to manufacture, market or distribute a specified technology or product under development in exchange for up-front payments and contingent payments relating to the achievement of specified pre-clinical, clinical, regulatory approval or sales milestones. The company also has similar contingent payment arrangements relating to certain asset and business acquisitions. At December 31, 2008, the unfunded milestone payments under these arrangements totaled $843 million. This total excludes any contingent royalties. Based on the company’s projections, any contingent payments made in the future will be more than offset over time by the estimated net future cash flows relating to the rights acquired for those payments. The majority of the contingent payments relate to arrangements in the BioScience segment. Refer to Note 6 for further information.

Indemnifications

During the normal course of business, Baxter makes indemnities, commitments and guarantees pursuant to which the company may be required to make payments related to specific transactions. These include: (i) intellectual property indemnities to customers in connection with the use, sale or license of products and services; (ii) indemnities to customers in connection with losses incurred while performing services on their premises; (iii) indemnities to vendors and service providers pertaining to claims based on negligence or willful misconduct; and (iv) indemnities involving the representations and warranties in certain contracts. In addition, under Baxter’s Amended and Restated Certificate of Incorporation, and consistent with Delaware General Corporation Law, the company has agreed to indemnify its directors and officers for certain losses and expenses upon the occurrence of prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum potential for future payments that the company could be obligated to make. To help address these risks, the company maintains various insurance coverages. Based on historical experience and evaluation of the agreements, the company does not believe that any significant payments related to its indemnifications will result, and therefore the company has not recorded any associated liabilities.

Legal Contingencies

Refer to Note 11 for a discussion of the company’s legal contingencies. Upon resolution of any of these uncertainties, the company may incur charges in excess of presently established liabilities. While the liability of the company in connection with the claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters could have a significant impact on the company’s results of operations for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on the company’s consolidated financial position. While the company believes that it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may in the future incur material judgments or enter into material settlements of claims.

Funding of Pension and Other Postemployment Benefit Plans

The company’s funding policy for its pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the company may determine to be appropriate considering the funded status of the plans, tax deductibility, the cash flows generated by the company, and other factors. Continued volatility in the global financial markets could have an unfavorable impact on future funding requirements. The company is not legally obligated to fund its principal plans in the United States and Puerto Rico in 2009. The company continually reassesses the amount and timing of any discretionary contributions. The company expects to make discretionary cash contributions to its pension plan in the United States of at least $100 million in 2009.

The table below details the funded status percentage of the company’s pension plans as of December 31, 2008, including certain plans that are unfunded in accordance with the guidelines of the company’s funding policy outlined above. Refer to Note 9 for further information.

	United States and
	Puerto Rico				International
	Qualified		Nonqualified		Funded		Unfunded
as of December 31, 2008 (in millions)	plans		plan		plans		plans		Total
Fair value of plan assets	$	2,052		n/a	$	329		n/a	$	2,381
Projected benefit obligation		2,670	$	139		470	$	196		3,475
Funded status percentage		77%		n/a		70%		n/a		69%

The Pension Protection Act of 2006 (PPA) was signed into law on August 17, 2006. It is likely that the PPA will accelerate minimum funding requirements in the future.

Insurance Coverage

The company discontinued its practice of buying product liability insurance coverage effective May 1, 2007. The unavailability of insurance coverage with meaningful limits at a reasonable cost reflects current trends in product liability insurance for healthcare manufacturing companies generally. The company continues to evaluate available coverage levels and costs as market conditions change. The company’s net income and cash flows may be adversely affected in the future as a result of losses sustained.

FINANCIAL INSTRUMENT MARKET RISK

The company operates on a global basis, and is exposed to the risk that its earnings, cash flows and shareholders’ equity could be adversely impacted by fluctuations in foreign exchange and interest rates. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs. Refer to Note 7 for further information regarding the company’s financial instruments and hedging strategies.

Currency Risk

The company is primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar and certain Latin American currencies. The company manages its foreign currency

44

Management’s Discussion and Analysis

exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses derivative and nonderivative financial instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and shareholders’ equity volatility relating to foreign exchange.

The company uses options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions denominated in foreign currencies and recognized assets and liabilities. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions at December 31, 2008 is 18 months. The company also enters into derivative instruments to hedge certain intercompany and third-party receivables and payables and debt denominated in foreign currencies. The company historically hedged certain of its net investments in international affiliates, using a combination of debt denominated in foreign currencies and cross-currency swap agreements. As further discussed in Note 7, in 2008, the company terminated all of its remaining net investment hedges. The recent financial market and currency volatility may reduce the benefits of the company’s natural hedges and limit the company’s ability to cost-effectively hedge these exposures.

As part of its risk-management program, the company performs sensitivity analyses to assess potential changes in the fair value of its foreign exchange instruments relating to hypothetical and reasonably possible near-term movements in foreign exchange rates.

Foreign exchange option and forward contracts  A sensitivity analysis of changes in the fair value of foreign exchange option, forward and cross-currency swap contracts outstanding at December 31, 2008, while not predictive in nature, indicated that if the U.S. Dollar uniformly fluctuated unfavorably by 10% against all currencies, on a net-of-tax basis, the net asset balance of $40 million with respect to those contracts, which principally related to a hedge of U.S. Dollar-denominated debt issued by a foreign subsidiary, would decrease by $65 million, resulting in a net liability position. A similar analysis performed with respect to option and forward contracts outstanding at December 31, 2007 indicated that, on a net-of-tax basis, the net liability balance of $52 million would increase by $52 million.

The sensitivity analysis model recalculates the fair value of the foreign exchange option, forward and cross-currency swap contracts outstanding at December 31, 2008 by replacing the actual exchange rates at December 31, 2008 with exchange rates that are 10% unfavorable to the actual exchange rates for each applicable currency. All other factors are held constant. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances.

Interest Rate and Other Risks

The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company’s policy is to manage interest costs using a mix of fixed- and floating-rate debt that the company believes is appropriate. To manage this mix in a cost-efficient manner, the company periodically enters into interest rate swaps, in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. The company also periodically uses forward-starting interest rate swaps and treasury rate locks to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of term debt.

As part of its risk management program, the company performs sensitivity analyses to assess potential gains and losses in earnings relating to hypothetical movements in interest rates. A 67 basis-point increase in interest rates (approximately 10% of the company’s weighted-average interest rate during 2008) affecting the company’s financial instruments, including debt obligations and related derivatives, would have an immaterial effect on the company’s 2008 and 2007 earnings and on the fair value of the company’s fixed-rate debt as of the end of each fiscal year.

As discussed in Note 7, the fair values of the company’s long-term litigation liabilities and related insurance receivables were computed by discounting the expected cash flows based on currently available information. A 10% movement in the assumed discount rate would have an immaterial effect on the fair values of those assets and liabilities.

With respect to the company’s investments in affiliates, the company believes any reasonably possible near-term losses in earnings, cash flows and fair values would not be material to the company’s consolidated financial position.

CHANGES IN ACCOUNTING PRINCIPLES

FIN No. 48

On January 1, 2007, the company adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN No. 48), which prescribes a two-step process for the financial statement measurement and recognition of a tax position taken or expected to be taken in a tax return. The first step involves the determination of whether it is more likely than not (greater than 50% likelihood) that a tax position will be sustained upon examination, based on the technical merits of the position. The second step requires that any tax position that meets the more-likely-than-not recognition threshold be measured and recognized in the financial statements at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The adoption of FIN No. 48 by the company on January 1, 2007 had no impact on the company’s opening balance of retained earnings. Refer to Note 10 for further information regarding the adoption of FIN No. 48, including a summary of the company’s unrecognized tax benefit activity.

45

Management’s Discussion and Analysis

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157), which clarifies the definition of fair value whenever another standard requires or permits assets or liabilities to be measured at fair value. Specifically, the standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 does not expand the use of fair value to any new circumstances, and must be applied on a prospective basis except in certain cases. The standard also requires expanded financial statement disclosures about fair value measurements, including disclosure of the methods used and the effect on earnings.

In February 2008, FASB Staff Position (FSP) FAS No. 157-2, “Effective Date of FASB Statement No. 157” (FSP No. 157-2) was issued. FSP No. 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods), and long-lived assets, such as property, plant and equipment and intangible assets measured at fair value for an impairment assessment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

The partial adoption of SFAS No. 157 on January 1, 2008 with respect to financial assets and financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis did not have a material impact on the company’s consolidated financial statements. See Note 7 for further information regarding the partial adoption of SFAS No. 157 and the fair value measurement disclosures for these assets and liabilities. The company’s January 1, 2009 adoption of SFAS No. 157 with respect to the items within the scope of FSP No. 157-2 is not expected to have a material impact on the company’s consolidated financial statements at the adoption date.

SFAS No. 158

On December 31, 2006, the company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS No. 158). The standard requires companies to fully recognize the overfunded or underfunded status of each of their defined benefit pension and other postemployment benefit (OPEB) plans as an asset or liability in the consolidated balance sheet. The asset or liability equals the difference between the fair value of the plan’s assets and its benefit obligation. SFAS No. 158 has no impact on the amount of expense recognized in the consolidated statement of income.

SFAS No. 158 was required to be adopted on a prospective basis. The adoption of SFAS No. 158 was recorded as an adjustment to assets and liabilities to reflect the plans’ funded status, with a corresponding adjustment to the ending balance of accumulated other comprehensive income (AOCI), which is a component of shareholders’ equity. The net-of-tax decrease to AOCI at December 31, 2006 relating to the adoption of SFAS No. 158 was $235 million.

As required by SFAS No. 158, on December 31, 2008, the company changed the measurement date for its defined benefit pension and OPEB plans from September 30 to December 31, the company’s fiscal year-end. The company elected to use the 15-month remeasurement approach pursuant to SFAS No. 158, whereby a net-of-tax decrease to retained earnings of $27 million was recognized on December 31, 2008 equal to three-fifteenths of the net cost determined for the period from September 30, 2007 to December 31, 2008. The adjustment resulted in a net-of-tax increase to AOCI of $12 million. The remaining twelve-fifteenths of the net cost was recognized as expense in 2008 as part of the net periodic benefit cost.

Refer to Note 9 for further information regarding the adoption of SFAS No. 158.

SFAS No. 159

On January 1, 2008, the company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115” (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, which are not otherwise currently required to be measured at fair value. Under SFAS No. 159, the decision to measure items at fair value is made at specified election dates on an instrument-by-instrument basis and is irrevocable. Entities electing the fair value option are required to recognize changes in fair value in earnings and to expense upfront costs and fees associated with the item for which the fair value option is elected. The new standard did not impact the company’s consolidated financial statements, as the company did not elect the fair value option for any instruments existing as of the adoption date. However, the company will evaluate the fair value measurement election with respect to financial instruments the company enters into in the future.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with GAAP requires the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of the company’s significant accounting policies is included in Note 1. Certain of the company’s accounting policies are considered critical because these policies are the most important to the depiction of the company’s financial statements and require significant, difficult or complex judgments by the company, often requiring the use of estimates about the effects of matters that are inherently uncertain. Actual results that differ from the company’s estimates could have an unfavorable effect on the company’s results of operations and financial position. The company applies estimation methodologies consistently from year to year. Other than changes required due to the issuance of new accounting pronouncements, there have been no significant changes in the company’s application of its critical accounting policies during 2008. The company’s critical accounting policies have been reviewed with the Audit Committee of the Board of Directors. The

46

Management’s Discussion and Analysis

following is a summary of accounting policies that the company considers critical to the consolidated financial statements.

Revenue Recognition and Related Provisions and Allowances

The company’s policy is to recognize revenues from product sales and services when earned. Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectibility is reasonably assured. The shipping terms for the majority of the company’s revenue arrangements are FOB destination. The recognition of revenue is delayed if there are significant post-delivery obligations, such as training, installation or customer acceptance.

The company enters into certain arrangements in which it commits to provide multiple elements (i.e., deliverables) to its customers. In accordance principally with Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables,” when the specified criteria are met, total revenue for these arrangements is allocated among the deliverables based on the estimated fair values of the individual deliverables. Fair values are generally determined based on sales of the individual deliverables to other third parties. It is not possible to determine how reported amounts would change if different fair values were used.

Provisions for discounts, rebates to customers, chargebacks to wholesalers, and returns are provided for at the time the related sales are recorded, and are reflected as a reduction of sales. These estimates are reviewed periodically and, if necessary, revised, with any revisions recognized immediately as adjustments to sales.

The company periodically and systematically evaluates the collectibility of accounts receivable and determines the appropriate reserve for doubtful accounts. In determining the amount of the reserve, the company considers historical credit losses, the past-due status of receivables, payment history and other customer-specific information, and any other relevant factors or considerations. Because of the nature of the company’s customer base and the company’s credit and collection policies and procedures, write-offs of accounts receivable have historically not been significant (generally less than 2% of gross receivables).

The company also provides for the estimated costs that may be incurred under its warranty programs when the cost is both probable and reasonably estimable, which is at the time the related revenue is recognized. The cost is determined based on actual company experience for the same or similar products as well as other relevant information. Estimates of future costs under the company’s warranty programs could change based on developments in the future. The company is not able to estimate the probability or amount of any future developments that could impact the reserves, but believes presently established reserves are adequate.

Pension and OPEB Plans

The company provides pension and other postemployment benefits to certain of its employees. These employee benefit expenses are reported in the same line items in the consolidated income statement as the applicable employee’s compensation expense. The valuation of the funded status and net benefit cost for the plans are calculated using actuarial assumptions. These assumptions are reviewed annually, and revised if appropriate. The significant assumptions include the following:

•  interest rates used to discount pension and OPEB plan liabilities;

•  the long-term rate of return on pension plan assets;

•  rates of increases in employee compensation (used in estimating liabilities);

•  anticipated future healthcare costs (used in estimating the OPEB plan liability); and

•  other assumptions involving demographic factors such as retirement, mortality and turnover (used in estimating liabilities).

Selecting assumptions involves an analysis of both short-term and long-term historical trends and known economic and market conditions at the time of the valuation (also called the measurement date). The use of different assumptions would result in different measures of the funded status and net cost. Actual results in the future could differ from expected results. The company is not able to estimate the probability of actual results differing from expected results, but believes its assumptions are appropriate.

The company’s key assumptions are listed in Note 9. The most critical assumptions relate to the plans covering U.S. and Puerto Rico employees, because these plans are the most significant to the company’s consolidated financial statements.

As required by SFAS No. 158, on December 31, 2008, the company changed its measurement date for its pension and OPEB plans from September 30 to December 31, the company’s fiscal year-end, using the 15-month remeasurement approach pursuant to SFAS No. 158. Refer to Note 9 for further information on the impact of the measurement date change.

Discount Rate Assumption

For the U.S. and Puerto Rico plans, at the measurement date (December 31, 2008) the company used a discount rate of 6.5% to measure its benefit obligations for the pension plans and OPEB plan. This discount rate will be used in calculating the net periodic benefit cost for these plans for 2009. The company used a broad population of approximately 250 Aa-rated corporate bonds as of December 31, 2008 to determine the discount rate assumption. All bonds were U.S. issues, with a minimum amount outstanding of $50 million. This population of bonds was narrowed from a broader universe of over 300 Moody’s Aa rated, non-callable (or callable with make-whole provisions) bonds by eliminating the top and bottom 10th percentile to adjust for any pricing anomalies, and then selecting the bonds Baxter would most likely select if it were to actually annuitize its pension and OPEB plan liabilities. This portfolio of bonds was used to generate a yield curve and associated spot rate curve, to discount the projected benefit payments for the U.S. and Puerto Rico plans. The discount rate is the single level rate that produces the same result as the spot rate curve.

For plans in Canada, Japan, the United Kingdom and the Eurozone, the company uses a method essentially the same as that described for the U.S. and Puerto Rico plans. For the company’s other international

47

Management’s Discussion and Analysis

plans, the discount rate is generally determined by reviewing country- and region-specific government and corporate bond interest rates.

To understand the impact of changes in discount rates on pension and OPEB plan cost, the company performs a sensitivity analysis. Holding all other assumptions constant, for each 50 basis point (i.e., one-half of one percent) increase (decrease) in the discount rate, global pre-tax pension and OPEB plan cost would decrease (increase) by approximately $28 million.

Return on Plan Assets Assumption

In measuring net periodic cost for 2008, the company used a long-term expected rate of return of 8.5% for the pension plans covering U.S. and Puerto Rico employees. This assumption will also be used to measure net pension cost for 2009. This assumption is not applicable to the company’s OPEB plan because it is not funded.

The company establishes the long-term asset return assumption based on a review of historical compound average asset returns, both company-specific and relating to the broad market (based on the company’s asset allocation), as well as an analysis of current market and economic information and future expectations. The current asset return assumption is supported by historical market experience for both the company’s actual and targeted asset allocation. In calculating net pension cost, the expected return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years. The difference between this expected return and the actual return on plan assets is a component of the total net unrecognized gain or loss and is subject to amortization in the future.

To understand the impact of changes in the expected asset return assumption on net cost, the company performs a sensitivity analysis. Holding all other assumptions constant, for each 50 basis point increase (decrease) in the asset return assumption, global pre-tax pension plan cost would decrease (increase) by approximately $13 million.

Other Assumptions

The company’s uses the Retirement Plan 2000 mortality table to calculate the pension and OPEB plan benefit obligations. The company periodically analyzes and updates its assumptions concerning demographic factors such as retirement, mortality and turnover, considering historical experience as well as anticipated future trends.

The assumptions relating to employee compensation increases and future healthcare costs are based on historical experience, market trends, and anticipated future company actions. Refer to Note 9 for information regarding the sensitivity of the OPEB plan obligation and the total of the service and interest cost components of OPEB plan cost to potential changes in future healthcare costs.

Legal Contingencies

The company is involved in product liability, patent, commercial, regulatory and other legal proceedings that arise in the normal course of business. Refer to Note 11 for further information. The company records a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. The company has established reserves for certain of its legal matters. The company is not able to estimate the amount or range of any loss for certain of the legal contingencies for which there is no reserve or additional loss for matters already reserved. The company also records any insurance recoveries that are probable of occurring. At December 31, 2008 total legal liabilities were $137 million and total insurance receivables were $87 million.

The company’s loss estimates are generally developed in consultation with outside counsel and are based on analyses of potential results. With respect to the recording of any insurance recoveries, after completing the assessment and accounting for the company’s legal contingencies, the company separately and independently analyzes its insurance coverage and records any insurance recoveries that are probable of occurring at the gross amount that is expected to be collected. In performing the assessment, the company reviews available information, including historical company-specific and market collection experience for similar claims, current facts and circumstances pertaining to the particular insurance claim, the financial viability of the applicable insurance company or companies, and other relevant information.

While the liability of the company in connection with the claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters could have a significant impact on the company’s results of operations for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on the company’s consolidated financial position. While the company believes it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may in the future incur material judgments or enter into material settlements of claims.

Inventories

The company values its inventories at the lower of cost, determined using the first-in, first-out method, or market value. Market value for raw materials is based on replacement costs and market value for work in process and finished goods is based on net realizable value. The company reviews inventories on hand at least quarterly and records provisions for estimated excess, slow-moving and obsolete inventory, as well as inventory with a carrying value in excess of net realizable value. The regular and systematic inventory valuation reviews include a current assessment of future product demand, anticipated release of new products into the market (either by the company or its competitors), historical experience and product expiration. Uncertain timing of product approvals, variability in product launch strategies, product recalls and variation in product utilization all impact the estimates related to inventory valuation. Additional inventory provisions may be required if future demand or market conditions are less favorable than the company has estimated. The company is not able to estimate the probability of actual results differing from expected results, but believes its estimates are appropriate.

48

Management’s Discussion and Analysis

Deferred Tax Asset Valuation Allowances and Reserves for Uncertain Tax Positions

The company maintains valuation allowances unless it is more likely than not that all or a portion of the deferred tax asset will be realized. Changes in valuation allowances are included in the company’s tax provision in the period of change. In determining whether a valuation allowance is warranted, the company evaluates factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The realizability assessments made at a given balance sheet date are subject to change in the future, particularly if earnings of a subsidiary are significantly higher or lower than expected, or if the company takes operational or tax planning actions that could impact the future taxable earnings of a subsidiary.

In the normal course of business, the company is audited by federal, state and foreign tax authorities, and is periodically challenged regarding the amount of taxes due. These challenges relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. The company believes the company’s tax positions comply with applicable tax law and the company intends to defend its positions. In evaluating the exposure associated with various tax filing positions, the company records reserves for uncertain tax positions in accordance with GAAP, based on the technical support for the positions, the company’s past audit experience with similar situations, and potential interest and penalties related to the matters. The company’s effective tax rate in a given period could be impacted if, upon final resolution with taxing authorities, the company prevailed in positions for which reserves have been established, or was required to pay amounts in excess of established reserves.

Fair Value Measurements of Financial Assets and Liabilities

Effective January 1, 2008, the company adopted SFAS No. 157 for financial assets and financial liabilities recognized or disclosed at fair value in the consolidated financial statements on a recurring basis.

For assets that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The majority of the derivatives entered into by the company are valued using internal valuation techniques as no quoted market prices exist for such instruments. The principal techniques used to value these instruments are discounted cash flow and Black-Scholes models. The key inputs, which are observable, depend on the type of derivative, and include contractual terms, counterparty credit risk, interest rate yield curves, foreign exchange rates and volatility. Refer to the Financial Instrument Market Risk section above for disclosures regarding sensitivity analyses performed by the company and Note 7 for further information regarding the company’s financial instruments.

Valuation of Intangible Assets, Including IPR&D

The company acquires intangible assets and records them at fair value. Those assets related to products that have not yet received regulatory approval and for which there is no alternative use are expensed as IPR&D, and those that have received regulatory approval are capitalized and amortized over their expected economic useful life. Valuations are frequently completed using a discounted cash flow analysis, incorporating the stage of completion. The most significant estimates and assumptions inherent in the discounted cash flow analysis include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle, and the competitive and other trends impacting the asset, including consideration of technical, legal, regulatory, economic and other factors. Each of these factors and assumptions can significantly affect the value of the intangible asset.

With respect to IPR&D, there is no assurance that the underlying assumptions used to prepare discounted cash flow analyses will not change or the timely completion of a project to commercial success will occur. Actual results may differ from the company’s estimates due to the inherent uncertainty associated with R&D projects.

Impairment of Assets

Goodwill is subject to impairment reviews annually, and whenever indicators of impairment exist. Intangible assets other than goodwill and other long-lived assets (such as fixed assets) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Refer to Note 1 for further information. The company’s impairment reviews are based on a cash flow approach that requires significant judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, foreign currency exchange rates, the selection of an appropriate discount rate, asset groupings, and other assumptions and estimates. The estimates and assumptions used are consistent with the company’s business plans. The use of alternative estimates and assumptions could increase or decrease the estimated fair values of the assets, and potentially result in different impacts to the company’s results of operations. Actual results may differ from the company’s estimates.

Stock-Based Compensation Plans

Under SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123-R), stock compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the substantive vesting period. Determining the appropriate fair value model to use requires judgment. Determining the assumptions that enter into the model is highly subjective and also requires judgment. The company’s stock compensation costs principally relate to awards of stock options, and the significant assumptions include long-term projections regarding stock price volatility, employee exercise, post-vesting termination, and pre-vesting forfeiture behaviors, interest rates and dividend yields.

The company uses the Black-Scholes model for estimating the fair value of stock options. Under SFAS No. 123-R, the company’s expected volatility assumption is based on an equal weighting of the historical volatility of Baxter’s stock and the implied volatility from traded options on Baxter’s stock. The expected life assumption is primarily based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected life of the option is based on the

49

Management’s Discussion and Analysis

U.S. Treasury yield curve in effect at the time of grant. The dividend yield reflects historical experience as well as future expectations over the expected life of the option. The forfeiture rate used to calculate compensation expense is primarily based on historical pre-vesting employee forfeiture patterns. In finalizing its assumptions, the company also reviews comparable companies’ assumptions, as available in published surveys and in publicly available financial filings.

The pre-vesting forfeitures assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeitures assumption would not impact the total amount of expense ultimately recognized over the vesting period. Estimated forfeitures are reassessed each period based on historical experience and current projections for the future.

The use of different assumptions would result in different amounts of stock compensation expense. The fair value of an option is particularly impacted by the expected volatility and expected life assumptions. To understand the impact of changes in these assumptions on the fair value of an option, the company performs sensitivity analyses. Holding all other variables constant, if the expected volatility assumption used in valuing the stock options granted in 2008 was increased by 100 basis points (i.e., one percent), the fair value of a stock option relating to one share of common stock would increase by approximately 4%, from $11.85 to $12.28. Holding all other variables constant (including the expected volatility assumption), if the expected life assumption used in valuing the stock options granted in 2008 was increased by one year, the fair value of a stock option relating to one share of common stock would increase by approximately 9%, from $11.85 to $12.95.

The company began granting performance share units (PSUs) in 2007. PSUs are earned by comparing the company’s growth in shareholder value relative to a performance peer group over a three-year period. Based on the company’s relative performance, the recipient of a PSU may earn a total award ranging from 0% to 200% of the initial grant. The fair value of a PSU is estimated by the company at the grant date using a Monte Carlo model. A Monte Carlo model uses stock price volatility and other variables to estimate the probability of satisfying the market conditions and the resulting fair value of the award. The four primary inputs for the Monte Carlo model are the risk-free rate, expected dividend, volatility of returns and correlation of returns. The determination of the risk-free rate and expected dividend is similar to that described above relating to the valuation of stock options. The expected volatility and correlation assumptions are based on historical information.

The company is not able to estimate the probability of actual results differing from expected results, but believes the company’s assumptions are appropriate, based upon the requirements of SFAS No. 123-R and the company’s historical and expected future experience.

Hedging Activities

As further discussed in Note 7 and in the Financial Instrument Market Risk section above, the company uses derivative instruments to hedge certain risks. As Baxter operates on a global basis, there is a risk to earnings associated with foreign exchange relating to the company’s recognized assets and liabilities and forecasted transactions denominated in foreign currencies. Compliance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS No. 133) as amended, and the company’s hedging policies require the company to make judgments regarding the probability of anticipated hedged transactions. In making these estimates and assessments of probability, the company analyzes historical trends and expected future cash flows and plans. The estimates and assumptions used are consistent with the company’s business plans. If the company were to make different assessments of probability or make the assessments during a different fiscal period, the company’s results of operations for a given period would be different.

NEW ACCOUNTING STANDARDS

SFAS No. 141-R

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141-R). The new standard changes the accounting for business combinations in a number of significant respects. The key changes include the expansion of transactions that will qualify as business combinations, the capitalization of IPR&D as an indefinite-lived asset, the recognition of certain acquired contingent assets and liabilities at fair value, the expensing of acquisition costs, the expensing of costs associated with restructuring the acquired company, the recognition of contingent consideration at fair value on the acquisition date, and the recognition of post-acquisition date changes in deferred tax asset valuation allowances and acquired income tax uncertainties as income tax expense or benefit. SFAS No. 141-R is effective for business combinations that close in years beginning on or after December 15, 2008, with early adoption prohibited. The company will adopt this standard at the beginning of 2009.

SFAS No. 160

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS No. 160). The new standard changes the accounting and reporting of noncontrolling interests, which have historically been referred to as minority interests. SFAS No. 160 requires that noncontrolling interests be presented in the consolidated balance sheets within shareholders’ equity, but separate from the parent’s equity, and that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented in the consolidated statements of income. Any losses in excess of the noncontrolling interest’s equity interest will continue to be allocated to the noncontrolling interest. Purchases or sales of equity interests that do not result in a change of control will be accounted for as equity transactions. Upon a loss of control, the interest sold, as well as any interest retained, will be measured at fair value, with any gain or loss recognized in earnings. In partial acquisitions, when control is obtained, the acquiring company will recognize, at fair value, 100% of the assets and liabilities, including goodwill, as if the entire target company had been acquired. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. The new standard will be applied prospectively, except for the presentation and

50

Management’s Discussion and Analysis

disclosure requirements, which will be applied retrospectively for all periods presented. This standard will result in a change in the presentation of noncontrolling interests, which totaled less than $75 million for the company at December 31, 2008, in the consolidated financial statements. The company will adopt this standard at the beginning of 2009.

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS No. 161). The standard expands the disclosure requirements of SFAS No. 133 and requires qualitative disclosures about the objectives and strategies for using derivatives, quantitative disclosures about the fair value amounts of and gains and losses on derivative instruments, and disclosures about credit risk-related contingent features in derivative agreements. The company will adopt this disclosures standard beginning in the first quarter of 2009.

FSP FAS No. 132(R)-1

In December 2008, the FASB issued FSP FAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” This FSP expands the disclosure requirements relating to pension and other postretirement benefits to require enhanced disclosures about how investment allocation decisions are made and the investment policies and strategies that support those decisions, major categories of plan assets, the input and valuation techniques used in measuring plan assets at fair value, and significant concentrations of credit risk within plan assets. The company will adopt this disclosures standard beginning with its year-end 2009 consolidated financial statements.

CERTAIN REGULATORY MATTERS

The company began to hold shipments of COLLEAGUE infusion pumps in July 2005, and continues to hold shipments of new pumps in the United States. Following a number of Class I recalls (recalls at the highest priority level for the FDA) relating to the performance of the pumps, as well as the seizure litigation described in Note 11, the company entered into a Consent Decree in June 2006 outlining the steps the company must take to resume sales of new pumps in the United States. Additional Class I recalls related to remediation and repair and maintenance activities were addressed by the company in 2007. The Consent Decree provides for reviews of the company’s facilities, processes and controls by the company’s outside expert, followed by the FDA. In December 2007, following the outside expert’s review, the FDA inspected and remains in a dialogue with the company with respect to observations from its inspection as well as the validation of modifications to the pump required to be completed in order to secure approval for recommercialization. As discussed in Note 5, the company has recorded a number of charges in connection with its COLLEAGUE infusion pumps. It is possible that additional charges related to COLLEAGUE may be required in future periods, based on new information, changes in estimates, and modifications to the current remediation plan as a result of ongoing dialogue with the FDA.

The company received a Warning Letter from the FDA in March 2005 regarding observations, primarily related to dialysis equipment, that arose from the FDA’s inspection of the company’s manufacturing facility located in Largo, Florida. During 2007, the FDA re-inspected the Largo manufacturing facility and, in a follow-up regulatory meeting, indicated that a number of observations remain open.

In the first quarter of 2008, the company identified an increasing level of allergic-type and hypotensive adverse reactions occurring in patients using its heparin sodium injection products in the United States. The company initiated a field corrective action with respect to the products; however, due to users’ needs for the products, the company and the FDA concluded that public health considerations warranted permitting selected dosages of the products to remain in distribution for use where medically necessary until alternate sources became available in the quarter, at which time the company’s products were removed from distribution.

While the company continues to work to resolve the issues described above, there can be no assurance that additional costs or civil and criminal penalties will not be incurred, that additional regulatory actions with respect to the company will not occur, that the company will not face civil claims for damages from purchasers or users, that substantial additional charges or significant asset impairments may not be required, that sales of any other product may not be adversely affected, or that additional legislation or regulation will not be introduced that may adversely affect the company’s operations. Please see “Item 1A. Risk Factors” in the company’s Form 10-K for the year ended December 31, 2008 for additional discussion of regulatory matters.

51

Management’s Discussion and Analysis

FORWARD-LOOKING INFORMATION

This annual report includes forward-looking statements, including statements with respect to accounting estimates and assumptions, future litigation outcomes, the company’s efforts to remediate its infusion pumps and other regulatory matters, expectations with respect to restructuring programs (including expected cost savings), strategic plans, product mix, promotional efforts, geographic expansion, sales and pricing forecasts, expectations with respect to business development activities, the divestiture of low margin businesses, potential developments with respect to credit and credit ratings, interest expense in 2009, estimates of liabilities, ongoing tax audits and related tax provisions, deferred tax assets, future pension plan expense, expectations with respect to the company’s exposure to foreign currency risk, the company’s internal R&D pipeline, future capital and R&D expenditures, the sufficiency of the company’s financial flexibility and the adequacy of credit facilities and reserves, the effective tax rate in 2009, expected revenues from the Fenwal transition services agreements, and all other statements that do not relate to historical facts. The statements are based on assumptions about many important factors, including assumptions concerning:

•  demand for and market acceptance risks for new and existing products, such as ADVATE and IGIV, and other therapies;

•  the company’s ability to identify business development and growth opportunities for existing products and to exit low-margin businesses or products;

•  product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, sanctions, seizures, litigation, or declining sales, including with respect to the company’s heparin products;

•  future actions of regulatory bodies and other government authorities that could delay, limit or suspend product development, manufacturing or sale or result in seizures, injunctions, monetary sanctions or criminal or civil liabilities, including any sanctions available under the Consent Decree entered into with the FDA concerning the COLLEAGUE and SYNDEO pumps;

•  foreign currency fluctuations, particularly due to reduced benefits from the company’s natural hedges and limitations on the ability to cost-effectively hedge resulting from the recent financial market and currency volatility;

•  fluctuations in the balance between supply and demand with respect to the market for plasma protein products;

•  reimbursement policies of government agencies and private payers;

•  product development risks, including satisfactory clinical performance, the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle;

•  the ability to enforce the company’s patent rights or patents of third parties preventing or restricting the company’s manufacture, sale or use of affected products or technology;

•  the impact of geographic and product mix on the company’s sales;

•  the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies;

•  inventory reductions or fluctuations in buying patterns by wholesalers or distributors;

•  the availability and pricing of acceptable raw materials and component supply;

•  global regulatory, trade and tax policies;

•  any changes in law concerning the taxation of income, including income earned outside the United States;

•  actions by tax authorities in connection with ongoing tax audits;

•  the company’s ability to realize the anticipated benefits of restructuring initiatives;

•  change in credit agency ratings;

•  any impact of the commercial and credit environment on the company and its customers;

•  continued developments in the market for transfusion therapies products and Fenwal’s ability to execute with respect to the acquired business; and

•  other factors identified elsewhere in this report and other filings with the Securities and Exchange Commission, including those factors described under the caption “Item 1A. Risk Factors” in the company’s Form 10-K for the year ended December 31, 2008, all of which are available on the company’s website.

Actual results may differ materially from those projected in the forward-looking statements. The company does not undertake to update its forward-looking statements.

52

Management’s Responsibility for Consolidated Financial Statements

Management is responsible for the preparation of the company’s consolidated financial statements and related information appearing in this report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements reasonably present the company’s financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Management has also included in the company’s consolidated financial statements amounts that are based on estimates and judgments, which it believes are reasonable under the circumstances.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the company’s consolidated financial statements in accordance with the standards established by the Public Company Accounting Oversight Board and provides an opinion on whether the consolidated financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of the company.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The company’s internal control over financial reporting is a process designed under the supervision of the principal executive and financial officers, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

We performed an assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2008. In making this assessment, management used the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on that assessment under the framework in Internal Control-Integrated Framework, management concluded that the company’s internal control over financial reporting was effective as of December 31, 2008. The effectiveness of the company’s internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Robert L. Parkinson, Jr. Chairman of the Board and Chief Executive Officer	Robert M. Davis Corporate Vice President and Chief Financial Officer

53

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Baxter International Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of shareholder’s equity and comprehensive income present fairly, in all material respects, the financial position of Baxter International Inc. and its subsidiaries at December 31, 2008 and December 31, 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1 to the consolidated financial statements, the company changed the manner in which it accounts for uncertain tax positions in 2007 and for defined pension and other postretirement plans in 2006 and 2008.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

Chicago, Illinois

February 19, 2009

54

Consolidated Balance Sheets

as of December 31 (in millions, except share information)		2008			2007
Current Assets	Cash and equivalents	$	2,131		$	2,539
	Accounts and other current receivables		1,980			2,026
	Inventories		2,361			2,334
	Short-term deferred income taxes		251			261
	Prepaid expenses and other		425			395
	Total current assets		7,148			7,555
Property, Plant and Equipment, Net			4,609			4,487
Other Assets	Goodwill		1,654			1,690
	Other intangible assets, net		390			455
	Other		1,604			1,107
	Total other assets		3,648			3,252
	Total assets	$	15,405		$	15,294
Current Liabilities	Short-term debt	$	388		$	45
	Current maturities of long-term debt and lease obligations		6			380
	Accounts payable and accrued liabilities		3,241			3,387
	Total current liabilities		3,635			3,812
Long-Term Debt and Lease Obligations			3,362			2,664
Other Long-Term Liabilities			2,179			1,902
Commitments and Contingencies
Shareholders’ Equity	Common stock, $1 par value, authorized 2,000,000,000 shares, issued 683,494,944 shares in 2008 and 2007		683			683
	Common stock in treasury, at cost, 67,501,988 shares in 2008 and 49,857,061 shares in 2007		(3,897	)		(2,503	)
	Additional contributed capital		5,533			5,297
	Retained earnings		5,795			4,379
	Accumulated other comprehensive loss		(1,885	)		(940	)
	Total shareholders’ equity		6,229			6,916
	Total liabilities and shareholders’ equity	$	15,405		$	15,294

The accompanying notes are an integral part of these consolidated financial statements.

55

Consolidated Statements of Income

years ended December 31 (in millions, except per share data)		2008		2007		2006
Operations	Net sales	$	12,348	$	11,263	$	10,378
	Costs and expenses
	Cost of goods sold		6,218		5,744		5,641
	Marketing and administrative expenses		2,698		2,521		2,282
	Research and development expenses		868		760		614
	Restructuring charge		—		70		—
	Net interest expense		76		22		34
	Other expense, net		37		32		61
	Total costs and expenses		9,897		9,149		8,632
	Income from continuing operations before income taxes		2,451		2,114		1,746
	Income tax expense		437		407		348
	Income from continuing operations		2,014		1,707		1,398
	Loss from discontinued operations		—		—		(1	)
	Net income	$	2,014	$	1,707	$	1,397
Per Share Data	Earnings per basic common share
	Continuing operations	$	3.22	$	2.65	$	2.15
	Discontinued operations		—		—		—
	Net income	$	3.22	$	2.65	$	2.15
	Earnings per diluted common share
	Continuing operations	$	3.16	$	2.61	$	2.13
	Discontinued operations		—		—		—
	Net income	$	3.16	$	2.61	$	2.13
	Weighted-average number of common shares outstanding
	Basic		625		644		651
	Diluted		637		654		656
	Cash dividends declared per common share	$	0.913	$	0.720	$	0.582

The accompanying notes are an integral part of these consolidated financial statements.

56

Consolidated Statements of Cash Flows

years ended December 31 (in millions) (brackets denote cash outflows)		2008			2007			2006
Cash Flows from	Net income	$	2,014		$	1,707		$	1,397
Operations	Adjustments
	Depreciation and amortization		631			581			575
	Deferred income taxes		280			126			8
	Stock compensation		146			136			94
	Realized excess tax benefits from stock compensation		(112	)		—			(29	)
	Infusion pump charges		125			—			76
	Impairment and restructuring charges		31			70			—
	Average wholesale pricing litigation charge		—			56			—
	Acquired in-process and collaboration research and development		19			61			—
	Other		51			(5	)		34
	Changes in balance sheet items
	Accounts and other current receivables		(98	)		(278	)		(16	)
	Inventories		(163	)		(211	)		(35	)
	Accounts payable and accrued liabilities		(239	)		1			30
	Restructuring payments		(50	)		(27	)		(42	)
	Other		(120	)		88			91
	Cash flows from operations		2,515			2,305			2,183
Cash Flows from Investing Activities	Capital expenditures (including additions to the pool of equipment placed with or leased to customers of $146 in 2008, $166 in 2007 and $124 in 2006)		(954	)		(692	)		(526	)
	Acquisitions of and investments in businesses and technologies		(99	)		(112	)		(5	)
	Divestitures and other		60			499			189
	Cash flows from investing activities		(993	)		(305	)		(342	)
Cash Flows from	Issuances of debt		671			584			751
Financing Activities	Payments of obligations		(950	)		(635	)		(1,294	)
	Increase in debt with original maturities of three months or less, net		200			—			—
	Cash dividends on common stock		(546	)		(704	)		(364	)
	Proceeds and realized excess tax benefits from stock issued under employee benefit plans		680			639			272
	Other issuances of stock		—			—			1,249
	Purchases of treasury stock		(1,986	)		(1,855	)		(737	)
	Cash flows from financing activities		(1,931	)		(1,971	)		(123	)
Effect of Foreign Exchange Rate Changes on Cash and Equivalents			1			25			(74	)
(Decrease) Increase in Cash and Equivalents			(408	)		54			1,644
Cash and Equivalents at Beginning of Year			2,539			2,485			841
Cash and Equivalents at End of Year		$	2,131		$	2,539		$	2,485
Other supplemental information
Interest paid, net of portion capitalized		$	159		$	119		$	108
Income taxes paid		$	247		$	304		$	296

The accompanying notes are an integral part of these consolidated financial statements.

57

Consolidated Statements of Shareholders’ Equity and Comprehensive Income

	2008						2007						2006
as of and for the years ended December 31 (in millions)	Shares			Amount			Shares			Amount			Shares			Amount
Common Stock
Beginning of year		683		$	683			683		$	683			648		$	648
Common stock issued		—			—			—			—			35			35
End of year		683			683			683			683			683			683
Common Stock in Treasury
Beginning of year		50			(2,503	)		33			(1,433	)		24			(1,150	)
Purchases of common stock		32			(1,986	)		34			(1,855	)		18			(737	)
Stock issued under employee benefit plans and other		(14	)		592			(17	)		785			(9	)		454
End of year		68			(3,897	)		50			(2,503	)		33			(1,433	)
Additional Contributed Capital
Beginning of year					5,297						5,177						3,867
Common stock issued					—						—						1,214
Stock issued under employee benefit plans and other					236						120						96
End of year					5,533						5,297						5,177
Retained Earnings
Beginning of year					4,379						3,271						2,430
Net income					2,014						1,707						1,397
Cash dividends declared on common stock					(571	)					(463	)					(380	)
Stock issued under employee benefit plans and other					—						(136	)					(176	)
Adjustment to change measurement date pursuant to SFAS No. 158, net of tax benefit of ($15)					(27	)					—						—
End of year					5,795						4,379						3,271
Accumulated Other Comprehensive Loss
Beginning of year					(940	)					(1,426	)					(1,496	)
Other comprehensive (loss) income					(957	)					486						305
Adjustment to initially apply SFAS No. 158, net of tax benefit of ($117)					—						—						(235	)
Adjustment to change measurement date pursuant to SFAS No. 158, net of tax expense of $8					12						—						—
End of year					(1,885	)					(940	)					(1,426	)
Total shareholders’ equity				$	6,229					$	6,916					$	6,272
Comprehensive Income
Net income				$	2,014					$	1,707					$	1,397
Currency translation adjustments, net of tax (benefit) expense of ($125) in 2008, $89 in 2007 and ($14) in 2006					(356	)					247						227
Hedges of net investments in foreign operations, net of tax benefit of ($19) in 2008, ($27) in 2007 and ($33) in 2006					(33	)					(48	)					(93	)
Other hedging activities, net of tax expense of $2 in 2008, $6 in 2007 and $8 in 2006					25						23						19
Marketable equity securities, net of tax benefit of ($1) in each of 2008, 2007 and 2006					(2	)					(2	)					—
Pension and other employee benefits, net of tax (benefit) expense of ($319) in 2008 and $144 in 2007					(591	)					266						—
Additional minimum pension liability, net of tax expense of $87 in 2006					—						—						152
Other comprehensive (loss) income					(957	)					486						305
Total comprehensive income				$	1,057					$	2,193					$	1,702

The accompanying notes are an integral part of these consolidated financial statements.

58

Notes to Consolidated Financial Statements

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Baxter International Inc. (Baxter or the company) develops, manufactures and markets products that save and sustain the lives of people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. As a global, diversified healthcare company, Baxter applies a unique combination of expertise in medical devices, pharmaceuticals and biotechnology to create products that advance patient care worldwide. The company operates in three segments, which are described in Note 12.

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles (GAAP) requires the company to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.

Basis of Consolidation

The consolidated financial statements include the accounts of Baxter and its majority-owned subsidiaries, any minority-owned subsidiaries that Baxter controls, and variable interest entities in which Baxter is the primary beneficiary, after elimination of intercompany transactions.

Discontinued Operations

In 2002, management decided to divest certain businesses, principally the majority of the services businesses included in the Renal segment. The results of operations of these businesses are reported as discontinued operations. In 2006, net revenues relating to the discontinued operations were insignificant, and the divestiture plan was completed.

Revenue Recognition

The company recognizes revenues from product sales and services when earned. Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectibility is reasonably assured. For product sales, revenue is not recognized until title and risk of loss have transferred to the customer. The shipping terms for the majority of the company’s revenue arrangements are FOB destination. The recognition of revenue is delayed if there are significant post-delivery obligations, such as training, installation or customer acceptance. In certain circumstances, the company enters into arrangements in which it commits to provide multiple elements to its customers. In these cases, total revenue is first allocated among the elements based on the estimated fair values of the individual elements, then recognized for each element in accordance with the principles described above. Fair values are generally determined based on sales of the individual elements to other third parties. Provisions for discounts, rebates to customers, chargebacks to wholesalers and returns are provided for at the time the related sales are recorded, and are reflected as a reduction of net sales.

Allowance for Doubtful Accounts

In the normal course of business, the company provides credit to its customers, performs credit evaluations of these customers and maintains reserves for potential credit losses. In determining the amount of the allowance for doubtful accounts, the company considers, among other items, historical credit losses, the past due status of receivables, payment histories and other customer-specific information. Receivables are written off when the company determines they are uncollectible. Credit losses, when realized, have been within the range of the company’s allowance for doubtful accounts. The allowance for doubtful accounts was $103 million at December 31, 2008 and $134 million at December 31, 2007.

Product Warranties

The company provides for the estimated costs relating to product warranties at the time the related revenue is recognized. The cost is determined based on actual company experience for the same or similar products, as well as other relevant information. Product warranty liabilities are adjusted based on changes in estimates.

Receivable Securitizations

When the company sells receivables in a securitization arrangement, the historical carrying value of the sold receivables is allocated between the portion sold and the portion retained by Baxter based on their relative fair values. The fair values of the retained interests are estimated based on the present values of expected future cash flows. The difference between the net cash proceeds received and the value of the receivables sold is recognized immediately as a gain or loss. The retained interests are subject to impairment reviews and are classified in current or noncurrent assets, as appropriate.

Cash and Equivalents

Cash and equivalents include cash, certificates of deposit and money market funds with an original maturity of three months or less.

Inventories

as of December 31 (in millions)	2008		2007
Raw materials	$	600	$	624
Work in process		737		710
Finished goods		1,024		1,000
Inventories	$	2,361	$	2,334

Inventories are stated at the lower of cost (first-in, first-out method) or market value. Market value for raw materials is based on replacement costs, and market value for work in process and finished goods is based on net realizable value. The inventory amounts above are stated net of reserves for excess and obsolete inventory, which totaled $247 million at December 31, 2008 and $212 million at December 31, 2007.

59

Notes to Consolidated Financial Statements

Property, Plant and Equipment, Net

as of December 31 (in millions)	2008			2007
Land	$	154		$	148
Buildings and leasehold improvements		1,743			1,758
Machinery and equipment		5,425			5,319
Equipment with customers		916			946
Construction in progress		783			653
Total property, plant and equipment, at cost		9,021			8,824
Accumulated depreciation and amortization		(4,412	)		(4,337	)
Property, plant and equipment, net (PP&E)	$	4,609		$	4,487

Depreciation and amortization expense is calculated using the straight-line method over the estimated useful lives of the related assets, which range from 20 to 50 years for buildings and improvements and from three to 15 years for machinery and equipment. Leasehold improvements are amortized over the life of the related facility lease (including any renewal periods, if appropriate) or the asset, whichever is shorter. Straight-line and accelerated methods of depreciation are used for income tax purposes. Depreciation and amortization expense was $553 million in 2008, $501 million in 2007 and $488 million in 2006. Repairs and maintenance expense was $242 million in 2008, $227 million in 2007 and $215 million in 2006.

Acquisitions

Results of operations of acquired companies are included in the company’s results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. Any purchase price in excess of these net assets is recorded as goodwill. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values. Contingent purchase price payments are recorded when the contingencies are resolved. The contingent consideration, if paid, is recorded as an additional element of the cost of the acquired company or as compensation, as appropriate.

Research and Development

Research and development (R&D) costs are expensed as incurred. Acquired in-process and collaboration R&D (IPR&D) is the value assigned to acquired technology or products under development which have not received regulatory approval and have no alternative future use. Valuations are generally completed using a discounted cash flow analysis, incorporating the stage of completion. The most significant estimates and assumptions inherent in a discounted cash flow analysis include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle, and the competitive and other trends impacting the asset, including consideration of technical, legal, regulatory, economic and other factors. Each of these factors can significantly affect the value of the IPR&D.

Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.

Impairment Reviews

Goodwill

Goodwill is not amortized, but is subject to an impairment review annually and whenever indicators of impairment exist. An impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. The company measures goodwill for impairment based on its reportable segments, which are BioScience, Medication Delivery and Renal. An impairment charge would be recorded for the difference between the carrying value and the present value of estimated future cash flows, which represents the estimated fair value of the reporting unit.

Other Long-Lived Assets

The company reviews the carrying amounts of long-lived assets other than goodwill for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Examples of such a change in circumstances include a significant decrease in market price, a significant adverse change in the extent or manner in which an asset is being used, or a significant adverse change in the legal or business climate. In evaluating recoverability, the company groups assets and liabilities at the lowest level such that the identifiable cash flows relating to the group are largely independent of the cash flows of other assets and liabilities. The company then compares the carrying amounts of the assets or asset groups with the related estimated undiscounted future cash flows. In the event impairment exists, an impairment charge would be recorded as the amount by which the carrying amount of the asset or asset group exceeds the fair value. Depending on the asset and the availability of information, fair value may be determined by reference to estimated selling values of assets in similar condition, or by using a discounted cash flow model. In addition, the remaining amortization period for the impaired asset would be reassessed and, if necessary, revised.

Earnings Per Share

The numerator for both basic and diluted earnings per share (EPS) is net income. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The dilutive effect of outstanding employee stock options, performance share units, restricted stock units, restricted stock and the purchase contracts in the company’s equity units (which were settled in February 2006) is reflected in the denominator for diluted EPS using the treasury stock method. Refer to Note 6 for further information regarding the company’s equity units.

The following is a reconciliation of basic shares to diluted shares.

years ended December 31 (in millions)	2008		2007		2006
Basic shares		625		644		651
Effect of dilutive securities
Employee stock options		10		9		4
Performance share units and other		2		1		1
Diluted shares		637		654		656

60

Notes to Consolidated Financial Statements

The computation of diluted EPS excludes employee stock options to purchase 8 million, 11 million and 36 million shares in 2008, 2007 and 2006, respectively, because the assumed proceeds were greater than the average market price of the company’s common stock, resulting in an anti-dilutive effect on diluted EPS.

Shipping and Handling Costs

Shipping costs, which are costs incurred to physically move product from Baxter’s premises to the customer’s premises, are classified as marketing and administrative expenses. Handling costs, which are costs incurred to store, move and prepare products for shipment, are classified as cost of goods sold. Approximately $237 million in 2008, $231 million in 2007 and $224 million in 2006 of shipping costs were classified in marketing and administrative expenses.

Income Taxes

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. The company maintains valuation allowances unless it is more likely than not that all or a portion of the deferred tax asset will be realized. With respect to uncertain tax positions, the company determines whether the position is more likely than not to be sustained upon examination, based on the technical merits of the position. Any tax position that meets the more-likely-than-not recognition threshold is measured and recognized in the consolidated financial statements at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The liability relating to uncertain tax positions is classified as current in the consolidated balance sheets to the extent the company anticipates making a payment within one year. Interest and penalties associated with income taxes are classified in the income tax expense line in the consolidated statements of income.

Foreign Currency Translation

Currency translation adjustments (CTA) related to foreign operations are principally included in other comprehensive income (OCI). For foreign operations in highly inflationary economies, translation gains and losses are included in other income or expense, and are not material.

Accumulated Other Comprehensive Income

Comprehensive income includes all changes in shareholders’ equity that do not arise from transactions with shareholders, and consists of net income, CTA, unrealized gains and losses on certain hedging activities, pension and other employee benefits, and unrealized gains and losses on unrestricted available-for-sale marketable equity securities. The net-of-tax components of accumulated other comprehensive income (AOCI), a component of shareholders’ equity, were as follows.

as of December 31 (in millions)	2008			2007			2006
CTA	$	(30	)	$	326		$	79
Hedges of net investments in foreign operations		(757	)		(724	)		(676	)
Pension and other employee benefits		(1,134	)		(555	)		(821	)
Other hedging activities		39			14			(9	)
Marketable equity securities		(3	)		(1	)		1
Accumulated other comprehensive loss	$	(1,885	)	$	(940	)	$	(1,426	)

Derivatives and Hedging Activities

All derivative instruments subject to Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting For Derivative Instruments and Hedging Activities” (SFAS No. 133) and its amendments are recognized in the consolidated balance sheets at fair value.

For a derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is accumulated in AOCI and then recognized in earnings consistent with the underlying hedged item. Cash flow hedges are classified in other expense, net, cost of goods sold and net interest expense, and primarily relate to a hedge of U.S. Dollar-denominated debt issued by a foreign subsidiary, forecasted intercompany sales denominated in foreign currencies and anticipated issuances of debt, respectively.

For a derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets the gain or loss on the underlying hedged item. Fair value hedges are classified in net interest expense, as they hedge the interest rate risk associated with certain of the company’s fixed-rate debt.

For a derivative or nonderivative instrument that is designated and effective as a hedge of a net investment in a foreign operation, the gain or loss is recorded in OCI, with any hedge ineffectiveness recorded immediately in net interest expense. As with CTA, upon sale or liquidation of an investment in a foreign entity, the amount attributable to that entity and accumulated in AOCI would be removed from AOCI and reported as part of the gain or loss in the period during which the sale or liquidation of the investment occurs.

Changes in the fair value of derivative instruments not designated as hedges are reported directly to earnings. Undesignated derivative instruments are recorded in other income or expense (forward agreements) or net interest expense (cross-currency interest-rate swap agreements). The company does not hold any instruments for trading purposes.

If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, the company discontinues hedge accounting prospectively. If the company removes the designation for cash flow hedges because the hedged forecasted transactions are no longer probable of occurring, any gains or losses are immediately reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash flow hedges are deferred and recognized consistent with the income or loss recognition of the underlying hedged items.

61

Notes to Consolidated Financial Statements

Derivatives are classified in the consolidated balance sheets in other assets or other liabilities, as applicable, and are classified as short-term or long-term based on the scheduled maturity of the instrument.

Derivatives, including those that are not designated as a hedge under SFAS No. 133, are principally classified in the operating section of the consolidated statements of cash flows, in the same category as the related consolidated balance sheet account. Cross-currency swap agreements that included a financing element at inception were classified in the financing section of the consolidated statements of cash flows when settled. Cross-currency swap agreements that did not include a financing element at inception were classified in the operating section.

Reclassifications

Certain reclassifications have been made to conform prior period consolidated financial statements and notes to the current period presentation.

New Accounting Standards

Refer to Note 7 for information on the company’s partial adoption of SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) and the adoption of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115” (SFAS No. 159) in 2008. Refer to Note 9 for information on the company’s December 31, 2006 adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS No. 158) and the December 31, 2008 change in measurement date for its defined benefit pension and other postemployment benefit (OPEB) plans. Refer to Note 10 for information on the company’s adoption of Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN No. 48) in 2007.

SFAS No. 141-R

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141-R). The new standard changes the accounting for business combinations in a number of significant respects. The key changes include the expansion of transactions that will qualify as business combinations, the capitalization of IPR&D as an indefinite-lived asset, the recognition of certain acquired contingent assets and liabilities at fair value, the expensing of acquisition costs, the expensing of costs associated with restructuring the acquired company, the recognition of contingent consideration at fair value on the acquisition date, and the recognition of post-acquisition date changes in deferred tax asset valuation allowances and acquired income tax uncertainties as income tax expense or benefit. SFAS No. 141-R is effective for business combinations that close in years beginning on or after December 15, 2008, with early adoption prohibited. The company will adopt this standard at the beginning of 2009.

SFAS No. 160

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS No. 160). The new standard changes the accounting and reporting of noncontrolling interests, which have historically been referred to as minority interests. SFAS No. 160 requires that noncontrolling interests be presented in the consolidated balance sheets within shareholders’ equity, but separate from the parent’s equity, and that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented in the consolidated statements of income. Any losses in excess of the noncontrolling interest’s equity interest will continue to be allocated to the noncontrolling interest. Purchases or sales of equity interests that do not result in a change of control will be accounted for as equity transactions. Upon a loss of control, the interest sold, as well as any interest retained, will be measured at fair value, with any gain or loss recognized in earnings. In partial acquisitions, when control is obtained, the acquiring company will recognize, at fair value, 100% of the assets and liabilities, including goodwill, as if the entire target company had been acquired. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. The new standard will be applied prospectively, except for the presentation and disclosure requirements, which will be applied retrospectively for all periods presented. This standard will result in a change in the presentation of noncontrolling interests, which totaled less than $75 million for the company at December 31, 2008, in the consolidated financial statements. The company will adopt this standard at the beginning of 2009.

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS No. 161). The standard expands the disclosure requirements of SFAS No. 133 and requires qualitative disclosures about the objectives and strategies for using derivatives, quantitative disclosures about the fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The company will adopt this disclosures standard beginning in the first quarter of 2009.

FSP FAS No. 132(R)-1

In December 2008, the FASB issued FASB Staff Position (FSP) FAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” This FSP expands the disclosure requirements relating to pension and other postretirement benefits to require enhanced disclosures about how investment allocation decisions are made and the investment policies and strategies that support those decisions, major categories of plan assets, the input and valuation techniques used in measuring benefit plan assets at fair value, and significant concentrations of credit risk within plan assets. The company will adopt this disclosures standard beginning with its year-end 2009 consolidated financial statements.

62

Notes to Consolidated Financial Statements

NOTE 2

SUPPLEMENTAL FINANCIAL INFORMATION

Goodwill and Other Intangible Assets

Goodwill

The following is a summary of the activity in goodwill by business segment.

				Medication
(in millions)	BioScience			Delivery			Renal			Total
December 31, 2006	$	579		$	898		$	141		$	1,618
Divestiture of Transfusion Therapies business		(12	)		—			—			(12	)
Other		20			50			14			84
December 31, 2007		587			948			155			1,690
Other		(2	)		(31	)		(3	)		(36	)
December 31, 2008	$	585		$	917		$	152		$	1,654

Refer to Note 3 for further information about the divestiture of the Transfusion Therapies (TT) business. The Other category in the table principally consists of foreign currency fluctuations and individually insignificant acquisitions.

Other Intangible Assets, Net

Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives. Intangible assets with indefinite useful lives are not material to the company. The following is a summary of the company’s intangible assets subject to amortization.

	Developed
	technology,
	including
(in millions)	patents			Other			Total
December 31, 2008
Gross other intangible assets	$	777		$	117		$	894
Accumulated amortization		(444	)		(67	)		(511	)
Other intangible assets, net	$	333		$	50		$	383
December 31, 2007
Gross other intangible assets	$	848		$	130		$	978
Accumulated amortization		(458	)		(72	)		(530	)
Other intangible assets, net	$	390		$	58		$	448

The amortization expense for intangible assets was $53 million in 2008, $57 million in 2007 and $56 million in 2006. At December 31, 2008, the anticipated annual amortization expense for intangible assets recorded as of December 31, 2008 is $51 million in 2009, $48 million in 2010, $44 million in 2011, $40 million in 2012 and $37 million in 2013.

Other Long-Term Assets

as of December 31 (in millions)				2008			2007
Deferred income taxes				$	1,132		$	689
Insurance receivables					58			77
Other long-term receivables					87			130
Other					327			211
Other long-term assets				$	1,604		$	1,107
Accounts Payable and Accrued Liabilities
as of December 31 (in millions)				2008			2007
Accounts payable, principally trade				$	829		$	920
Income taxes payable					255			333
Deferred income taxes					265			122
Common stock dividends payable					161			139
Employee compensation and withholdings					478			420
Property, payroll and certain other taxes					177			197
Other					1,076			1,256
Accounts payable and accrued liabilities				$	3,241		$	3,387
Other Long-Term Liabilities
as of December 31 (in millions)				2008			2007
Pension and other employee benefits				$	1,595		$	858
Net investment hedges					—			320
Litigation reserves					63			120
Other					521			604
Other long-term liabilities				$	2,179		$	1,902
Net Interest Expense
years ended December 31 (in millions)	2008			2007			2006
Interest costs	$	165		$	136		$	116
Interest costs capitalized		(17	)		(12	)		(15	)
Interest expense		148			124			101
Interest income		(72	)		(102	)		(67	)
Net interest expense	$	76		$	22		$	34
Other Expense, Net
years ended December 31 (in millions)	2008			2007			2006
Equity method investments and minority interests	$	25		$	27		$	23
Foreign exchange		(29	)		3			15
Legal settlements, net		—			9			8
Securitization and factoring arrangements		19			14			18
Impairment charge		31			—			—
Gain on sale of TT business, related charges and adjustments		(16	)		(23	)		—
Other		7			2			(3	)
Other expense, net	$	37		$	32		$	61

NOTE 3

SALE OF TRANSFUSION THERAPIES BUSINESS

On February 28, 2007, the company divested substantially all of the assets and liabilities of its TT business to an affiliate of TPG Capital, L.P. (TPG), which established the new company as Fenwal Inc. (Fenwal), for $540 million. This purchase price was subject to customary adjustments based upon the finalization of the net

63

Notes to Consolidated Financial Statements

assets transferred. Prior to the divestiture, the TT business was part of the BioScience segment. Under the terms of the sale agreement, TPG acquired the net assets of the TT business, including its product portfolio of manual and automated blood-collection products and storage equipment, as well as five manufacturing facilities located in Haina, Dominican Republic; La Chatre, France; Maricao and San German, Puerto Rico; and Nabeul, Tunisia. The decision to sell the TT net assets was based on the results of strategic and financial reviews of the company’s business portfolio, and allows the company to increase its focus and investment on businesses with more long-term strategic value to the company.

Under transition agreements, the company is providing manufacturing and support services to Fenwal for a period of time after divestiture, which varies based on the product or service provided and other factors, but generally approximates two years. Due to the company’s actual and expected significant continuing cash flows associated with this business, the company continued to include the results of operations of TT in the company’s results of continuing operations through the February 28, 2007 sale date. No facts or circumstances arose subsequent to the divestiture date that changed the initial expectation of significant continuing cash flows. TT business sales, which were reported in the BioScience segment, were $79 million in 2007 through the February 28 sale date and $516 million in 2006. Revenues associated with the manufacturing, distribution and other transition services provided by the company to Fenwal post-divestiture, which were $174 million in 2008 and $144 million in 2007, are reported at the corporate headquarters level and not allocated to a segment. Included in these revenues were $25 million and $23 million in 2008 and 2007, respectively, of deferred revenue related to these arrangements. As of December 31, 2008, deferred revenue that will be recognized in the future as the services under these arrangements are performed totaled $4 million.

The company recorded a gain on the sale of the TT business of $58 million during 2007. The net assets sold were $315 million, consisting of $149 million of current assets, $224 million of noncurrent assets and $58 million of liabilities. Cash proceeds were $473 million, representing the $540 million net of certain items, principally international receivables that were retained by the company post-divestiture. The gain on the sale was recorded net of transaction-related expenses and other costs of $36 million, and a $12 million allocation of a portion of BioScience segment goodwill. In addition, $52 million of the cash proceeds were allocated to the manufacturing, distribution and other transition agreements because these arrangements provide for below-market consideration for those services. In 2008, the company recorded an income adjustment to the gain of $16 million as a result of the finalization of the net assets transferred in the divestiture.

In connection with the TT divestiture, the company recorded a $35 million charge principally associated with severance and other employee-related costs. Reserve utilization through December 31, 2008 was $12 million. The reserve is expected to be substantially utilized by the end of 2009, and the company believes that the reserves are adequate. However, adjustments may be recorded in the future as the transition is completed.

The gain on the sale of the TT business and the related charges and adjustments in 2008 and 2007 were recorded in other expense, net on the consolidated statements of income. The amounts were reported at the corporate headquarters level and were not allocated to a segment.

NOTE 4

ACQUISITIONS OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES

In 2008 and 2007, cash outflows related to the acquisition of and investments in businesses and technologies totaled $99 million and $112 million, respectively. The following description includes acquisitions and investments entered into in 2008 and 2007 involving significant contingent milestone payments and a collaboration entered into in 2007 involving a call option permitting the company to acquire assets of a business.

Innocoll Pharmaceuticals Ltd.

In July 2008, the company entered into an in-licensing agreement with Innocoll Pharmaceuticals Ltd. (Innocoll), a division of Innocoll, Inc., granting Baxter exclusive rights to market and distribute Innocoll’s gentamicin surgical implant in the United States. The gentamicin surgical implant is a biodegradable, leave-behind antibiotic surgical sponge used as an adjunct (add-on) therapy for the prevention and treatment of surgical site infections. This BioScience segment arrangement included an up-front cash obligation of $12 million, which was expensed as IPR&D as the licensed technology had not received regulatory approval in the United States and had no alternative future use. The company will also contribute to the funding of Innocoll’s clinical trial costs. In addition, the company may be required to make additional payments of up to $89 million based on the successful completion of specified development, regulatory and sales milestones.

Nycomed Pharma AS

In December 2007, the company entered into an in-licensing agreement with Nycomed Pharma AS (Nycomed) that grants Baxter exclusive rights to market and distribute Nycomed’s TACHOSIL surgical patch in the United States. TACHOSIL is a fixed combination of a collagen patch coated with human thrombin and fibrinogen, which is used in a variety of surgical procedures to seal tissue and control bleeding. This BioScience segment arrangement included an up-front cash obligation of $10 million, which was expensed as IPR&D in 2007 as the licensed technology had not received regulatory approval in the United States and had no alternative future use. The payment was made in January 2008. The company may be required to make additional payments of up to $39 million based on the successful completion of specified development and sales milestones.

Nektar Therapeutics

In December 2007, the company amended its exclusive R&D, license and manufacturing agreement with Nektar Therapeutics (Nektar), expanding its existing BioScience business relationship to include the use of Nektar’s proprietary PEGylation technology in the development of longer-acting forms of blood clotting proteins. The arrangement included an up-front cash obligation of $5 million, which was expensed as IPR&D in 2007 as the licensed technology had not received regulatory approval and had no alternative future use. The payment was made in January 2008. The company may be required to

64

Notes to Consolidated Financial Statements

make additional payments of up to $38 million based on the successful completion of specified development and sales milestones, in addition to royalty payments on future sales of the related products.

HHD/DEKA

In August 2007, the company entered into a collaboration with HHD, LLC (HHD) and DEKA Products Limited Partnership and DEKA Research and Development Corp. (collectively, DEKA) for the development of a next-generation home hemodialysis (HD) machine. HHD owns certain intellectual property and licensing rights that are being used to develop the next-generation home HD machine. In addition, pursuant to an R&D and license agreement between HHD and DEKA, DEKA is performing R&D activities for HHD in exchange for compensation for the R&D services and licensing rights, plus royalties on any commercial sales of the developed product.

In connection with this Renal segment collaboration, the company purchased an option for $25 million to acquire the assets of HHD, and is reimbursing HHD for the R&D services performed by DEKA, as well as other of HHD’s costs associated with developing the home HD machine. Pursuant to the option agreement with HHD, as amended, the company can exercise the option at any time between the effective date of the agreement and the earlier of U.S. Food and Drug Administration (FDA) approval of the product for home use or June 30, 2011. The company may be required to pay $18 million in advance of the exercise of the option, as specified in the amended agreement. Upon exercise of the option, the company would pay an additional $16 million (or $34 million in total to exercise the option), as well as additional payments of up to approximately $5 million based on contractual relationships between HHD and third parties. The company estimates that FDA approval will be received toward the end of the option exercise period, with commercialization to immediately follow. Because the company is the primary beneficiary of the risks and rewards of HHD’s activities, the company is consolidating the financial results of HHD from the date of the option purchase.

HHD’s assets and technology have not yet received regulatory approval and no alternative future use has been identified. In conjunction with the execution of the option agreement with HHD and the related payment of $25 million, the company recognized a net IPR&D charge of $25 million in 2007. The project was principally valued through discounted cash flow analysis, utilizing the income approach, and was discounted at a 19% rate, which was considered commensurate with the project’s risks and stage of development. The most significant estimates and assumptions inherent in the discounted cash flow analysis include the amount and timing of projected future cash inflows, the amount and timing of projected costs to develop the IPR&D into a commercially viable product, the discount rate used to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle, and the competitive and other trends impacting the asset, including consideration of technical, legal, regulatory, economic and other factors. Assumed additional R&D expenditures prior to the date of product introduction totaled over $35 million. Material net cash inflows were forecasted in the valuation to commence in 2011. While there have been no significant changes in estimates, there is no assurance that the underlying assumptions used to prepare the discounted cash flow analysis will not change or that the timely completion of the project to commercial success will occur. Actual results may differ from the company’s estimates due to the inherent uncertainties associated with R&D projects.

MAAS Medical, LLC

In June 2007, the company acquired substantially all of the assets of MAAS Medical, LLC (MAAS Medical), a company that specializes in infusion systems technology. The acquisition expanded Baxter’s R&D capabilities, as the talent and technology acquired has been incorporated into Baxter’s R&D organization and applied in the development of infusion systems and related technologies within the Medication Delivery segment. The purchase price of $11 million was principally allocated to IPR&D, and expensed at the acquisition date. The IPR&D relates to products under development, which had not achieved regulatory approval and had no alternative future use. The company may be required to make additional payments of up to $13 million based on the successful completion of specified milestones, principally associated with the regulatory approval of products.

Halozyme Therapeutics, Inc.

In February 2007, the company entered into an arrangement to expand the company’s existing arrangements with Halozyme Therapeutics, Inc. (Halozyme) to include the use of HYLENEX recombinant (hyaluronidase human injection) with the company’s proprietary and non-proprietary small molecule drugs. Under the terms of this Medication Delivery segment arrangement, the company made an initial payment of $10 million for license and other rights, which was capitalized as an intangible asset, and made a $20 million investment in the common stock of Halozyme. The company assumes the development, manufacturing, clinical, regulatory, and sales and marketing costs associated with the products included in the arrangement.

In September 2007, the company entered into an arrangement with Halozyme to apply Halozyme’s ENHANZE technology to the development of a subcutaneous route of administration for Baxter’s liquid formulation of IGIV (immune globulin intravenous). Under the terms of this BioScience segment arrangement, the company made an initial payment of $10 million, which was expensed as IPR&D as the licensed technology had not received regulatory approval and had no alternative future use.

With respect to both of these arrangements with Halozyme, the company may be required to make additional payments of up to $62 million based on the successful completion of specified development and sales milestones, in addition to royalty payments on future sales of the related products.

NOTE 5

RESTRUCTURING AND OTHER CHARGES

Restructuring Charges

The following is a summary of restructuring charges recorded by the company in 2007 and 2004.

65

Notes to Consolidated Financial Statements

2007 Restructuring Charge

In 2007, the company recorded a restructuring charge of $70 million principally associated with the consolidation of certain commercial and manufacturing operations outside of the United States. Based on a review of current and future capacity needs, the company decided to integrate several facilities to reduce the company’s cost structure and optimize operations, principally in the Medication Delivery segment.

Included in the charge was $17 million related to asset impairments, principally to write down PP&E based on market data for the assets. Also included in the charge was $53 million for cash costs, principally pertaining to severance and other employee-related costs associated with the elimination of approximately 550 positions, or approximately 1% of the company’s total workforce.

2004 Restructuring Charge

In 2004, the company recorded a $543 million restructuring charge principally associated with the company’s decision to implement actions to reduce the company’s overall cost structure and to drive sustainable improvements in financial performance. Included in the 2004 charge was $196 million relating to asset impairments, almost all of which was to write down PP&E. Also included in the 2004 charge was $347 million for cash costs, principally pertaining to severance and other employee-related costs.

Restructuring Reserves

The following summarizes cash activity in the reserves related to the 2007 and 2004 restructuring charges.

	Employee-			Contractual
	related			and other
(in millions)	costs			costs			Total
2004 Charge	$	212		$	135		$	347
Utilization and adjustments in 2004 and 2005		(167	)		(87	)		(254	)
December 31, 2005		45			48			93
Utilization		(31	)		(7	)		(38	)
December 31, 2006		14			41			55
2007 Charge		46			7			53
Utilization		(15	)		(12	)		(27	)
December 31, 2007		45			36			81
Utilization		(20	)		(22	)		(42	)
December 31, 2008	$	25		$	14		$	39

Restructuring reserve utilization in 2008 totaled $42 million, with $14 million relating to the 2007 program and $28 million relating to the 2004 program. The 2007 and 2004 reserves are expected to be substantially utilized by the end of 2009. The company believes that the reserves are adequate. However, adjustments may be recorded in the future as the programs are completed.

Other Charges

The COLLEAGUE and SYNDEO infusion pump and heparin charges discussed below were classified in cost of goods sold in the company’s consolidated statements of income, and were included in the Medication Delivery segment’s pre-tax income. Actual costs relating to these matters may differ from the company’s estimates.

With respect to COLLEAGUE, the company remains in active dialogue with the FDA about various matters, including the company’s remediation plan and reviews of the company’s facilities, processes and quality controls by the company’s outside expert pursuant to the requirements of the company’s Consent Decree. The outcome of these discussions with the FDA is uncertain and may impact the nature and timing of the company’s actions and decisions with respect to the COLLEAGUE pump. The company’s estimates of the costs related to these matters are based on the current remediation plan and information currently available. It is possible that additional charges related to COLLEAGUE may be required in future periods, based on new information, changes in estimates, and modifications to the current remediation plan as a result of ongoing dialogue with the FDA.

While the company continues to work to resolve the issues associated with COLLEAGUE infusion pumps and its heparin products described below, there can be no assurance that additional costs or civil and criminal penalties will not be incurred, that additional regulatory actions with respect to the company will not occur, that the company will not face civil claims for damages from purchasers or users, that substantial additional charges or significant asset impairments may not be required, that sales of any other product may not be adversely affected, or that additional legislation or regulation will not be introduced that may adversely affect the company’s operations.

COLLEAGUE and SYNDEO Infusion Pumps

The company recorded charges and other costs of $125 million, $14 million, $94 million and $77 million in 2008, 2007, 2006 and 2005, respectively, related to issues associated with its COLLEAGUE and SYNDEO infusion pumps.

The company began to hold shipments of COLLEAGUE infusion pumps in July 2005, and continues to hold shipments of new pumps in the United States. Following a number of Class I recalls (recalls at the highest priority level for the FDA) relating to the performance of the pumps, as well as the seizure litigation described in Note 11, the company entered into a Consent Decree in June 2006 outlining the steps the company must take to resume sales of new pumps in the United States. Additional Class I recalls related to remediation and repair and maintenance activities were addressed by the company in 2007. The Consent Decree provides for reviews of the company’s facilities, processes and controls by the company’s outside expert, followed by the FDA. In December 2007, following the outside expert’s review, the FDA inspected and remains in a dialogue with the company with respect to observations from its inspection as well as the validation of modifications to the pump required to be completed in order to secure approval for recommercialization.

Included in the 2005 charge was $4 million relating to asset impairments and $73 million for cash costs, representing an estimate of the cash expenditures for the materials, labor and freight costs expected to be incurred to remediate the design issues. Included in the 2006 charge was $3 million relating to asset impairments and $73 million for cash costs, which related to additional customer accommodations and adjustments to the previously

66

Notes to Consolidated Financial Statements

established reserves for remediation costs based on further definition of the potential remediation requirements and the company’s experience remediating pumps outside of the United States. Also, in 2006, the company recorded an additional $18 million of expense, of which $7 million related to asset impairments and $11 million related to additional warranty and other commitments made to customers. The $14 million of costs recorded in 2007 represented changes in estimates relating to the previously established reserves for cash costs based on the company’s experience executing the remediation plan.

As a result of delays in the remediation plan, principally due to additional software modifications and validation and testing required to remediate the pumps, and other changes in the estimated costs to execute the remediation plan, the company recorded a charge associated with the COLLEAGUE infusion pump of $53 million in the first quarter of 2008. This charge consisted of $39 million for cash costs and $14 million principally relating to asset impairments. The reserve for cash costs principally related to customer accommodations, including extended warranties, and other costs associated with the delay in the recommercialization timeline.

In the third quarter of 2008, as a result of the company’s decision to upgrade the global pump base to a standard software platform and other changes in the estimated costs to execute the remediation plan, the company recorded a charge of $72 million. This charge consisted of $46 million for cash costs and $26 million principally relating to asset impairments and inventory used in the remediation plan. The reserve for cash costs primarily consisted of costs associated with the deployment of the new software and additional repair and warranty costs.

Reserves  The following summarizes cash activity in the company’s COLLEAGUE and SYNDEO infusion pump reserves through December 31, 2008.

(in millions)
Charges	$	73
Utilization		(4	)
December 31, 2005		69
Charges		84
Utilization		(42	)
December 31, 2006		111
Utilization		(55	)
Adjustments		14
December 31, 2007		70
Charges		85
Utilization		(40	)
December 31, 2008	$	115

The remaining infusion pump reserves are expected to be substantially utilized by 2010.

Heparin

In 2008, the company recorded a charge of $19 million related to the company’s recall of its heparin sodium injection products in the United States. During the first quarter of 2008, the company identified an increasing level of allergic-type and hypotensive adverse reactions occurring in patients using its heparin sodium injection products in the United States, and initiated a field corrective action with respect to these products. The charge was recorded in cost of goods sold and was included in the Medication Delivery segment’s pre-tax income.

Included in the charge were $14 million of asset impairments, primarily heparin inventory that will not be sold, and $5 million of cash costs related to the recall. The reserve for cash costs has been substantially utilized as of December 31, 2008.

The company’s sales of these heparin products totaled approximately $30 million in 2007.

CLEARSHOT Pre-Filled Syringes

During 2008, the company recorded a $31 million charge related to the company’s decision to discontinue its CLEARSHOT pre-filled syringe program based on management’s assessment of the market demand and expected profitability for this product. Substantially all of the charge related to asset impairments, principally to write off equipment used to manufacture the CLEARSHOT syringes. The charge was recorded in other expense, net on the consolidated statement of income, and was included in the Medication Delivery segment’s pre-tax income.

NOTE 6

DEBT, CREDIT FACILITIES, AND COMMITMENTS AND CONTINGENCIES

Debt Outstanding

At December 31, 2008 and 2007, the company had the following debt outstanding.

	Effective
as of December 31 (in millions)	interest rate			1	2008		2	2007		2
7.25% notes due 2008		7.3	%		$	—		$	29
9.5% notes due 2008		9.5	%			—			76
5.196% notes due 2008		5.2	%			—			251
4.75% notes due 2010		4.0	%			499			499
Variable-rate loan due 2010		1.1	%			177			143
Variable-rate loan due 2012		0.9	%			155			125
4.625% notes due 2015		4.8	%			675			599
5.9% notes due 2016		6.0	%			661			598
5.375% notes due 2018		5.0	%			499			—
6.625% debentures due 2028		6.7	%			154			155
6.25% notes due 2037		6.3	%			499			499
Other		—				49			70
Total debt and capital lease obligations						3,368			3,044
Current portion						(6	)		(380	)
Long-term portion					$	3,362		$	2,664

1	Excludes the effect of related interest rate swaps, as applicable.
2	Book values include discounts, premiums and adjustments related to hedging instruments, as applicable.

In addition, as further discussed below, the company had short-term debt totaling $388 million at December 31, 2008 and $45 million at December 31, 2007.

67

Notes to Consolidated Financial Statements

Significant Debt Issuances, Repurchases and Redemptions

Significant Debt Issuances

In May 2008, the company issued $500 million of senior unsecured notes, maturing in June 2018 and bearing a 5.375% coupon rate. In December 2007, the company issued $500 million of senior unsecured notes, maturing in December 2037, and bearing a 6.25% coupon rate. In August 2006, the company issued $600 million of senior unsecured notes, maturing in September 2016 and bearing a 5.9% coupon rate. The notes are redeemable, in whole or in part, at the company’s option, subject to a make-whole redemption price. In addition, during 2008, the company issued commercial paper, of which $200 million was outstanding as of December 31, 2008, with a weighted-average interest rate of 2.55%.

The net proceeds were used for general corporate purposes, including the settlement of cross-currency swaps (including swaps originally designated as net investment hedges and mirror, or offsetting, swaps) and the repayment of outstanding indebtedness, as further described below. The debt instruments include certain covenants, including restrictions relating to the company’s creation of secured debt.

Repurchase of Notes Included in Equity Units

In 2002, the company issued equity units for $1.3 billion in an underwritten public offering. Each equity unit consisted of senior notes ($1.3 billion in total) that were scheduled to mature in February 2008, and a purchase contract. The purchase contracts obligated the holders to purchase between 35.0 and 43.4 million shares (based on a specified exchange ratio) of Baxter common stock in February 2006 for $1.3 billion.

As originally scheduled, in November 2005 the $1.3 billion of notes were remarketed, and the 3.6% annual interest rate was reset to 5.196%. At that time, the company purchased and retired $1.0 billion of the remarketed notes. In February 2008, the company repaid the remaining remarketed notes, which totaled approximately $250 million, upon their maturity.

In February 2006, the purchase contracts matured and Baxter issued approximately 35 million shares of Baxter common stock for $1.3 billion. The company used the cash proceeds from the settlement of the equity units purchase contracts to pay down its 5.75% notes, which approximated $780 million, upon their maturity in February 2006. The company used the remaining cash proceeds for stock repurchases and for other general corporate purposes.

Future Minimum Lease Payments and Debt Maturities

			Debt maturities
	Operating		and capital
as of and for the years ended December 31 (in millions)	leases		leases
2009	$	147	$	6
2010		122		683
2011		108		4
2012		94		159
2013		81		3
Thereafter		115		2,385
Total obligations and commitments		667		3,240
Interest on capital leases, discounts and premiums, and adjustments relating to hedging instruments		n/a		128
Long-term debt and lease obligations	$	667	$	3,368

Credit Facilities

The company had $2.1 billion of cash and equivalents at December 31, 2008. The company’s primary revolving credit facility has a maximum capacity of $1.5 billion and matures in December 2011. As of December 31, 2008, there were no outstanding borrowings under this facility. The company also maintains a Euro-denominated credit facility with a maximum capacity of approximately $410 million at December 31, 2008, which matures in January 2013. As of December 31, 2008, there was $164 million outstanding under this facility, with a weighted-average interest rate of 3.4%. The company’s facilities enable the company to borrow funds on an unsecured basis at variable interest rates, and contain various covenants, including a maximum net-debt-to-capital ratio. At December 31, 2008, the company was in compliance with the financial covenants in these agreements. The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by each institution’s respective commitment.

The company also maintains other credit arrangements, which totaled $409 million at December 31, 2008 and $421 million at December 31, 2007. Borrowings outstanding under these facilities totaled $24 million at December 31, 2008 and $45 million at December 31, 2007.

Leases

The company leases certain facilities and equipment under capital and operating leases expiring at various dates. The leases generally provide for the company to pay taxes, maintenance, insurance and certain other operating costs of the leased property. Most of the operating leases contain renewal options. Operating lease rent expense was $161 million in 2008, $157 million in 2007 and $146 million in 2006.

Other Commitments and Contingencies

Joint Development and Commercialization Arrangements

In the normal course of business, Baxter enters into joint development and commercialization arrangements with third parties, sometimes with companies in which the company has invested. The arrangements vary but generally provide that Baxter will receive certain rights to manufacture, market or distribute a specified technology or product under development in exchange for up-front

68

Notes to Consolidated Financial Statements

payments and contingent payments relating to the achievement of specified pre-clinical, clinical, regulatory approval or sales milestones. The company also has similar contingent payment arrangements relating to certain asset and business acquisitions. At December 31, 2008, the unfunded milestone payments under these arrangements totaled $843 million. This total excludes any contingent royalties. Based on the company’s projections, any contingent payments made in the future will be more than offset over time by the estimated net future cash flows relating to the rights acquired for those payments. The majority of the contingent payments relate to arrangements in the BioScience segment. Included in the total were contingent milestone payments of $241 million relating to the significant arrangements entered into during 2008 and 2007 that are discussed in Note 4. Aside from the items discussed in Note 4, significant collaborations relate to the development of hard and soft tissue-repair products to position the company to enter the orthobiologic market, the development of longer-acting forms of blood clotting proteins to treat hemophilia A and other arrangements.

Indemnifications

During the normal course of business, Baxter makes indemnities, commitments and guarantees pursuant to which the company may be required to make payments related to specific transactions. These include: (i) intellectual property indemnities to customers in connection with the use, sales or license of products and services; (ii) indemnities to customers in connection with losses incurred while performing services on their premises; (iii) indemnities to vendors and service providers pertaining to claims based on negligence or willful misconduct; and (iv) indemnities involving the representations and warranties in certain contracts. In addition, under Baxter’s Amended and Restated Certificate of Incorporation, and consistent with Delaware General Corporation Law, the company has agreed to indemnify its directors and officers for certain losses and expenses upon the occurrence of certain prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum potential for future payments that the company could be obligated to make. To help address these risks, the company maintains various insurance coverages. Based on historical experience and evaluation of the agreements, the company does not believe that any significant payments related to its indemnifications will result, and therefore the company has not recorded any associated liabilities.

Legal Contingencies

Refer to Note 11 for a discussion of the company’s legal contingencies.

NOTE 7

FINANCIAL INSTRUMENTS AND RELATED FAIR VALUE MEASUREMENTS

Receivable Securitizations

Where economical, the company has entered into agreements with various financial institutions in which undivided interests in certain pools of receivables are sold. The securitized receivables have principally consisted of hardware lease receivables originated in the United States, and trade receivables originated in Europe and Japan. In November 2007, the company purchased the third party interest in the previously sold receivables under the European securitization agreement, resulting in a net cash outflow of $157 million, consisting of $225 million of receivables and $68 million of retained interests. The $157 million net cash outflow was classified as an investing activity in the consolidated statement of cash flows. Subsequent cash collections from customers relating to these receivables are also classified in the investing section of the consolidated statements of cash flows, and totaled $46 million and $161 million for the years ended December 31, 2008 and December 31, 2007, respectively. The European facility matured in November 2007 and was not renewed.

The U.S. securitization facility matured in December 2007 and was not renewed. The company continues to service the receivables in its U.S. and Japanese securitization arrangements. Servicing assets or liabilities are not recognized because the company receives adequate compensation to service the sold receivables. The Japanese securitization arrangement includes limited recourse provisions, which are not material. Neither the buyers of the receivables nor the investors in the U.S. securitization arrangement have recourse to assets other than the transferred receivables.

A subordinated interest in each securitized portfolio is generally retained by the company. The amount of the retained interests and the costs of certain of the securitization arrangements vary with the company’s credit ratings and other factors. The fair values of the retained interests are estimated taking into consideration both historical experience and current projections with respect to the transferred assets’ future credit losses. The key assumptions used when estimating the fair values of the retained interests include the discount rate (which generally averages approximately 5%), the expected weighted-average life (which averages approximately 9 months for lease receivables) and anticipated credit losses (which are expected to be immaterial). The subordinated interests retained in the transferred receivables are carried as assets in Baxter’s consolidated balance sheets, and totaled $7 million at December 31, 2008 and $22 million at December 31, 2007. An immediate 20% adverse change in these assumptions would not have a material impact on the fair value of the retained interests at December 31, 2008. These sensitivity analyses are hypothetical. Changes in fair value based on a 20% variation in assumptions generally cannot be extrapolated because the relationship of the change in each assumption to the change in fair value may not be linear.

As detailed in the following table, the securitization arrangements resulted in net cash outflows of $3 million, $240 million (of which $225 million was classified as an investing activity and $15 million as an operating activity in the consolidated statement of cash flows) and $123 million in 2008, 2007 and 2006, respectively. A summary of the securitization activity is as follows.

69

Notes to Consolidated Financial Statements

as of and for the years ended December 31 (in millions)	2008			2007			2006
Sold receivables at beginning of year	$	129		$	348		$	451
Proceeds from sales of receivables		467			1,395			1,405
Purchase of interest in receivables in the European securitization facility		—			(225	)		—
Cash collections (remitted to the owners of the receivables)		(470	)		(1,410	)		(1,528	)
Foreign exchange		28			21			20
Sold receivables at end of year	$	154		$	129		$	348
Credit losses, net of recoveries, relating to the retained interests, and the net gains and losses relating to the sales of receivables were immaterial for each year. Concentrations of Risk The company invests excess cash in certificates of deposit or money market funds and diversifies the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, the company has diversified its selection of counterparties, and has arranged collateralization and master-netting agreements to minimize the risk of loss. Foreign Currency and Interest Rate Risk Management The company operates on a global basis and is exposed to the risk that its earnings, cash flows and shareholders’ equity could be adversely impacted by fluctuations in foreign exchange and interest rates. The company’s hedging policy manages these risks based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs. The company is primarily exposed to foreign currency risk related to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar and certain Latin American currencies. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses derivative and nonderivative instruments to further reduce the exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions to reduce the earnings and shareholders’ equity volatility resulting from foreign exchange. The recent financial market and currency volatility may reduce the benefits of the company’s natural hedges and limit the company’s ability to cost-effectively hedge these exposures. The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company’s policy is to manage interest costs using a mix of fixed- and floating-rate debt that the company believes is appropriate. To manage this mix in a cost-efficient manner, the company periodically enters into interest rate swaps, in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. Cash Flow Hedges The company uses options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions denominated in foreign currencies and recognized assets and liabilities. The company periodically uses forward-starting interest rate swaps and treasury rate locks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt. Certain other firm commitments and forecasted transactions are also periodically hedged. The following table summarizes net-of-tax activity in AOCI, a component of shareholders’ equity, related to the company’s cash flow hedges.
as of and for the years ended December 31 (in millions)	2008			2007			2006
Accumulated other comprehensive income (loss) balance at beginning of year	$	14		$	(9	)	$	(28	)
Net income (loss) in fair value of derivatives during the year		93			(43	)		(65	)
Net (loss) income reclassified to earnings during the year		(68	)		66			84
Accumulated other comprehensive income (loss) balance at end of year	$	39		$	14		$	(9	)

As of December 31, 2008, $43 million of deferred net after-tax gains on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.

The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions at December 31, 2008 is 18 months.

Fair Value Hedges

The company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. These instruments hedge the company’s earnings from fluctuations in interest rates. No portion of the change in fair value of the company’s fair value hedges was ineffective during the three years ended December 31, 2008.

Hedges of Net Investments in Foreign Operations

In 2008, the company terminated its remaining net investment hedge portfolio and, as of December 31, 2008, no longer has any outstanding net investment hedges. The company historically hedged the net assets of certain of its foreign operations using a combination of foreign currency denominated debt and cross-currency swaps. The cross-currency swaps served as effective hedges for accounting purposes and reduced volatility in the company’s shareholders’ equity balance. In 2004, the company reevaluated its net investment hedge strategy and elected to reduce the use of these instruments as a risk management tool. In order to reduce financial risk and uncertainty through the maturity (or cash settlement) dates of the cross-currency swaps, the company executed offsetting, or mirror, cross-currency swaps relating to over half of the existing portfolio. As of the date of execution, these mirror swaps effectively fixed the net amount that the company would ultimately pay to settle the cross-currency swap agreements

70

Notes to Consolidated Financial Statements

subject to this strategy. After execution, as the market value of the fixed portion of the original portfolio changed, the market value of the mirror swaps changed by an approximately offsetting amount. The net after-tax losses related to net investment hedge instruments recorded in OCI were $33 million, $48 million and $93 million in 2008, 2007 and 2006, respectively.

In accordance with SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” when the cross-currency swaps are settled, the cash flows are reported within the financing section of the consolidated statement of cash flows. When the mirror swaps are settled, the cash flows are reported in the operating section of the consolidated statement of cash flows. Of the $528 million of net settlement payments in 2008, $540 million of cash outflows were included in the financing section and $12 million of cash inflows were included in the operating section. Of the $334 million of settlement payments in 2007, $303 million of cash outflows were included in the financing section and $31 million of cash outflows were included in the operating section. There were no settlements of cross-currency swaps or mirror swaps in 2006.

Other Foreign Currency Hedges

The company primarily uses forward contracts to hedge earnings from the effects of foreign exchange relating to certain of the company’s intercompany and third-party receivables and payables denominated in a foreign currency. These derivative instruments are generally not formally designated as hedges, and the change in fair value of the instruments, which substantially offsets the change in book value of the hedged items, is recorded directly to other income or expense.

Fair Value Measurements

The company partially adopted SFAS No. 157 on January 1, 2008. SFAS No. 157 clarifies the definition of fair value whenever another standard requires or permits assets or liabilities to be measured at fair value. Specifically, the standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

In February 2008, FSP FAS No. 157-2, “Effective Date of FASB Statement No. 157” (FSP No. 157-2) was issued. FSP No. 157-2 defers the effective date of SFAS No. 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods), and long-lived assets, such as PP&E and intangible assets measured at fair value for an impairment assessment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The company’s January 1, 2009 adoption of SFAS No. 157 with respect to the items within the scope of FSP No. 157-2 is not expected to have a material impact on the company’s consolidated financial statements at the adoption date.

On January 1, 2008, the company adopted SFAS No. 159. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, which are not otherwise currently required to be measured at fair value. Under SFAS No. 159, the decision to measure items at fair value is made at specified election dates on an instrument-by-instrument basis and is irrevocable. Entities electing the fair value option are required to recognize changes in fair value in earnings and to expense upfront costs and fees associated with the item for which the fair value option is elected. The new standard did not impact the company’s consolidated financial statements, as the company did not elect the fair value option for any instruments existing as of the adoption date. However, the company will evaluate the fair value measurement election with respect to financial instruments the company enters into in the future.

The fair value hierarchy under SFAS No. 157 consists of the following three levels:

•  Level 1 — Quoted prices in active markets that the company has the ability to access for identical assets or liabilities;

•  Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market; and

•  Level 3 — Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability.

The following table summarizes the bases used to measure financial assets and liabilities that are carried at fair value on a recurring basis in the consolidated balance sheet.

			Basis of fair value measurement
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	Balance at		identical assets		inputs		inputs
(in millions)	December 31, 2008		(Level 1)		(Level 2)		(Level 3)
Assets
Foreign currency hedges	$	148	$	—	$	148	$	—
Interest rate hedges		140		—		140		—
Equity securities		14		14		—		—
Total assets	$	302	$	14	$	288	$	—
Liabilities
Foreign currency hedges	$	77	$	—	$	77	$	—
Interest rate hedges		43		—		43		—
Total liabilities	$	120	$	—	$	120	$	—

For assets that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The majority of the derivatives entered into by the company are valued using internal valuation techniques as no quoted market prices exist for such instruments. The principal techniques used to value these instruments are discounted cash flow and Black-Scholes models. The key inputs, which are observable, depend on the type of derivative,

71

Notes to Consolidated Financial Statements

and include contractual terms, counterparty credit risk, interest rate yield curves, foreign exchange rates and volatility.

Book Values and Fair Values of Financial Instruments

In addition to the financial instruments that the company is required to recognize at fair value on the consolidated balance sheets, the company has certain financial instruments that are recognized at historical cost or some basis other than fair value. For these financial instruments, the following table provides the value recognized on the consolidated balance sheets and the approximate fair value. For 2008, the fair values are based upon the valuation guidance of SFAS No. 157.

	Book values				Approximate fair values
as of December 31 (in millions)	2008		2007		2008		2007
Assets
Long-term insurance receivables	$	58	$	77	$	54	$	75
Cost basis investments		20		8		20		8
Liabilities
Short-term debt		388		45		388		45
Current maturities of long-term debt and lease obligations		6		380		6		382
Other long-term debt and lease obligations		3,362		2,664		3,409		2,677
Long-term litigation liabilities		63		120		60		117

The estimated fair values of insurance receivables and long-term litigation liabilities were computed by discounting the expected cash flows based on currently available information, which in many cases does not include final orders or settlement agreements. The discount factors used in the calculations reflect the non-performance risk of the insurance providers and the company, respectively. The estimated fair values of current and long-term debt and lease obligations were computed by multiplying price by the notional amount of the respective debt instrument. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with the company’s credit risk. The carrying values of all other financial instruments approximate their fair values due to the short-term maturities of these assets and liabilities.

NOTE 8

COMMON AND PREFERRED STOCK

Stock-Based Compensation

The company’s stock-based compensation generally includes stock options, performance share units (PSUs) (beginning in 2007), restricted stock units (to be settled in stock) (RSUs) and employee stock purchases. Shares issued relating to the company’s stock-based plans are generally issued out of treasury stock. As of December 31, 2008, approximately 34 million authorized shares are available for future awards under the company’s stock-based compensation plans. The following is a summary of the company’s significant stock compensation plans.

Stock Compensation Expense

Stock compensation expense recognized in the consolidated statements of income was $146 million, $136 million and $94 million in 2008, 2007 and 2006, respectively. The related tax benefit recognized was $46 million, $46 million and $31 million in 2008, 2007 and 2006, respectively.

Stock compensation expense is recorded at the corporate level and is not allocated to the segments. Approximately three-quarters of stock compensation expense is classified in marketing and administrative expenses, with the remainder classified in cost of goods sold and R&D expenses. Costs capitalized in the consolidated balance sheet at December 31, 2008 were not significant.

Stock compensation expense measured pursuant to SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123-R) is based on awards expected to vest, and therefore has been reduced by estimated forfeitures. SFAS No. 123-R requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

Stock Options

Stock options are granted to employees and non-employee directors with exercise prices at least equal to 100% of the market value on the date of grant. Beginning in 2007, stock options granted generally vest in one-third increments over a three-year period. Options granted prior to 2007 generally cliff-vest 100% three years from the grant date. Stock options granted to non-employee directors generally cliff-vest 100% one year from the grant date. Stock options granted typically have a contractual term of 10 years. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the substantive vesting period.

The fair value of stock options is determined using the Black-Scholes model. The weighted-average assumptions used in estimating the fair value of stock options granted during each year, along with the weighted-average grant date fair values, were as follows.

years ended December 31	2008	2007	2006
Expected volatility	24%	23%	28%
Expected life (in years)	4.5	4.5	5.5
Risk-free interest rate	2.4%	4.5%	4.7%
Dividend yield	1.5%	1.2%	1.5%
Fair value per stock option	$12	$13	$11

The company’s expected volatility assumption is based on an equal weighting of the historical volatility of Baxter’s stock and the implied volatility from traded options on Baxter’s stock. The expected life assumption is primarily based on the vesting terms of the stock option, historical employee exercise patterns and employee post-vesting termination behavior. The expected life for grants made after 2006 decreased primarily due to the above-mentioned change in vesting terms from three-year cliff vesting to vesting in one-third increments over a three-year period. The risk-free interest rate for the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield reflects historical experience as well as future expectations over the expected life of the option.

72

Notes to Consolidated Financial Statements

The following table summarizes stock option activity for the year ended December 31, 2008 and stock option information at December 31, 2008.

						Weighted-
						average
				Weighted-		remaining
				average		contractual		Aggregate
				exercise		term		intrinsic
(options and aggregate intrinsic values in thousands)	Options			price		(in years)		value
Outstanding at January 1, 2008		51,150		$	40.90
Granted		7,673			58.32
Exercised		(13,374	)		39.66
Forfeited		(1,422	)		46.35
Outstanding at December 31, 2008		44,027		$	44.13		5.9	$	456,637
Vested or expected to vest as of December 31, 2008		42,680		$	43.84		5.8	$	452,732
Exercisable at December 31, 2008		23,993		$	40.07		4.1	$	328,094

The aggregate intrinsic value in the table above represents the difference between the exercise price and the company’s closing stock price on the last trading day of the year. The total intrinsic value of options exercised was $328 million, $294 million and $101 million in 2008, 2007 and 2006, respectively.

As of December 31, 2008, $89 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over a weighted-average period of approximately 1.8 years.

PSUs

In 2007, the company restructured its stock compensation program for senior management to include PSUs with market-based conditions rather than RSUs in the company’s annual equity awards. This change reflects the company’s view that as senior management has more responsibility for the company’s performance, the payout of a portion of their equity awards should be completely “at-risk”. The company also changed the overall mix of stock compensation, from a weighting of 70% stock options and 30% RSUs, to 50% stock options and 50% PSUs. The mix of stock options was adjusted downward in order to reflect the market shift away from stock options in favor of alternative performance-based awards. Certain members of senior management received a one-time transitional award of RSUs in 2007 as part of their annual equity awards.

The payout resulting from the vesting of the PSUs is based on Baxter’s growth in shareholder value versus the growth in shareholder value of the healthcare companies in Baxter’s peer group during the three-year performance period commencing with the year in which the PSUs are granted. Depending on Baxter’s growth in shareholder value relative to the peer group, a holder of PSUs is entitled to receive a number of shares of common stock equal to a percentage, ranging from 0% to 200%, of the PSUs granted. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the substantive service period.

The fair value of PSUs is determined using a Monte Carlo model. A Monte Carlo model uses stock price volatility and other variables to estimate the probability of satisfying the market conditions and the resulting fair value of the award. The assumptions used in estimating the fair value of PSUs granted during each year, along with the fair values, were as follows.

years ended December 31	2008		2007
Expected volatility		20%		18%
Peer group volatility		12%-37%		13%-39%
Correlation of returns		0.12-0.40		0.09-0.34
Risk-free interest rate		1.9%		4.5%
Dividend yield		1.5%		1.2%
Fair value per PSU		$64		$64

The company granted approximately 650,000 and 780,000 PSUs in 2008 and 2007, respectively. Pre-tax unrecognized compensation cost related to all unvested PSUs of $35 million at December 31, 2008 is expected to be recognized as expense over a weighted-average period of 1.7 years.

RSUs

The company grants RSUs to key employees and non-employee directors. RSUs principally vest in one-third increments over a three-year period. However, awards for non-employee directors vest one year from the grant date. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the substantive vesting period. Prior to 2007, the company granted restricted stock to non-employee directors, which also vested one year from the grant date.

The fair value of RSUs is determined based on the number of shares granted and the quoted price of the company’s common stock on the date of grant.

The following table summarizes nonvested RSU activity for the year ended December 31, 2008.

				Weighted-average
	Shares or			grant-date
(shares and share units in thousands)	share units			fair value
Nonvested RSUs at January 1, 2008		1,131		$	43.09
Granted		162			62.55
Vested		(594	)		40.41
Forfeited		(44	)		44.90
Nonvested RSUs at December 31, 2008		655		$	50.19

As of December 31, 2008, $15 million of unrecognized compensation cost related to RSUs is expected to be recognized as expense over a weighted-average period of approximately 1.7 years. The weighted-average grant-date fair value of RSUs and restricted stock in 2008, 2007 and 2006 was $62.55, $52.41 and $39.10, respectively. The fair value of RSUs and restricted stock vested in 2008, 2007 and 2006 was $34 million, $26 million and $10 million, respectively.

Employee Stock Purchase Plans

Nearly all employees are eligible to participate in the company’s employee stock purchase plan (ESPP). Effective January 1, 2008,

73

Notes to Consolidated Financial Statements

the ESPP was amended and restated as a result of the company’s periodic reassessments of the nature and level of employee benefits.

For subscriptions beginning on or after January 1, 2008, the employee purchase price is 85% of the closing market price on the purchase date. For subscriptions that began on or after April 1, 2005 through the end of 2007, the employee purchase price was 95% of the closing market price on the purchase date.

Under SFAS No. 123-R, no compensation expense was recognized for subscriptions that began on or after April 1, 2005 through the end of 2007. The company is recognizing compensation expense relating to subscriptions beginning on or after January 1, 2008.

During 2008, 2007 and 2006, the company issued 726,709, 192,533 and 552,493 shares, respectively, under employee stock purchase plans. The number of shares under subscription at December 31, 2008 totaled approximately 930,000.

Realized Excess Income Tax Benefits and the Impact on the Statement of Cash Flows

Under SFAS No. 123-R, realized excess tax benefits associated with stock compensation are presented in the statement of cash flows as an outflow within the operating section and an inflow within the financing section. Realized excess tax benefits from stock-based compensation were $112 million in 2008 and $29 million in 2006. No income tax benefits were realized from stock-based compensation during 2007. The company is using the alternative transition method, as provided in FASB FSP No. 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards,” for calculating the tax effects of stock-based compensation, and applies the tax law ordering approach.

Stock Repurchase Programs

As authorized by the board of directors, the company repurchases its stock from time to time depending upon the company’s cash flows, net debt level and current market conditions. The company purchased 32 million shares for $2.0 billion in 2008, 34 million shares for $1.9 billion in 2007 and 18 million shares for $737 million in 2006. At December 31, 2008, $1.2 billion remained available under the March 2008 board of directors’ authorization, which provides for the repurchase of up to $2.0 billion of the company’s common stock.

Issuance of Stock

Refer to Note 6 regarding the February 2006 issuance of approximately 35 million shares of common stock for $1.3 billion in conjunction with the settlement of the purchase contracts included in the company’s December 2002 issuance of equity units. The company used these proceeds to pay down maturing debt, for stock repurchases and for other general corporate purposes.

Cash Dividends

Beginning in 2007, the company converted from an annual to a quarterly dividend and increased the dividend by 15% on an annualized basis, to $0.1675 per share per quarter. In November 2007, the board of directors declared a quarterly dividend of $0.2175 per share ($0.87 per share on an annualized basis), representing an increase of 30% over the previous quarterly rate. In November 2008, the board of directors declared a quarterly dividend of $0.26 per share ($1.04 per share on an annualized basis), which was paid on January 6, 2009 to shareholders of record as of December 10, 2008. This dividend represented an increase of 20% over the previous quarterly rate of $0.2175 per share.

Other

The board of directors is authorized to issue up to 100 million shares of no par value preferred stock in series with varying terms as it determines. In March 1999, common shareholders received a dividend of one preferred stock purchase right (collectively, the Rights) for each share of common stock. As a result of the two-for-one split of the company’s common stock in May 2001, each outstanding share of common stock is now accompanied by one-half of one Right. The Rights may become exercisable at a specified time after (1) the acquisition by a person or group of 15% or more of the company’s common stock or (2) a tender or exchange offer for 15% or more of the company’s common stock. Once exercisable, the holder of each Right is entitled to purchase, upon payment of the exercise price, an amount of shares of the company’s common stock the aggregate market value of which equals two times the exercise price of the Rights. The Rights have a current exercise price of $275. The Rights are scheduled to expire on March 23, 2009, unless earlier redeemed by the company under certain circumstances at a price of $0.01 per Right. The company does not presently intend to extend the term of the Rights.

NOTE 9

RETIREMENT AND OTHER BENEFIT PROGRAMS

The company sponsors a number of qualified and nonqualified pension plans for its employees. The company also sponsors certain unfunded contributory healthcare and life insurance benefits for substantially all domestic retired employees.

Adoption of SFAS No. 158

The company adopted SFAS No. 158 on December 31, 2006. As discussed further below, the measurement date provisions of the standard were adopted on December 31, 2008. The standard requires companies to fully recognize the overfunded or underfunded status of each of its defined benefit pension and OPEB plans as an asset or liability in the consolidated balance sheet. The asset or liability equals the difference between the fair value of the plan’s assets and its benefit obligation. SFAS No. 158 has no impact on the amount of expense recognized in the consolidated statement of income.

SFAS No. 158 was required to be adopted on a prospective basis. The adoption of SFAS No. 158 was recorded as an adjustment to assets and liabilities to reflect the plans’ funded status, with a corresponding adjustment to the ending balance of AOCI, which is a component of shareholders’ equity. The net-of-tax decrease to AOCI at December 31, 2006 relating to the adoption of SFAS No. 158 was $235 million.

As required by SFAS No. 158, assets associated with overfunded plans are classified as noncurrent in the consolidated balance sheet. Liabilities associated with underfunded plans are classified as noncurrent, except to the extent the fair value of the plan’s assets

74

Notes to Consolidated Financial Statements

is less than the plan’s estimated benefit payments over the next 12 months.

The net total after-tax decrease in AOCI in 2006 relating to defined benefit pension and OPEB plans was $83 million, consisting of a net-of-tax increase in OCI of $152 million relating to the adjustment of the additional minimum pension liability (AML) for the year and the above-mentioned decrease to the ending balance of AOCI of $235 million relating to the adoption of SFAS No. 158. Prior to the adoption of SFAS No. 158, if the accumulated benefit obligation (ABO) relating to a pension plan exceeded the fair value of the plan’s assets, the liability established for that pension plan was required to be at least equal to that excess. The AML that was required to be recorded to state the plan’s pension liability at this unfunded ABO amount was charged directly to OCI. In 2006, prior to recording the end-of-year adjustment associated with adopting SFAS No. 158, the company first recorded the current year adjustment of the AML. Both of these entries had no impact on the company’s results of operations for the year. Because SFAS No. 158 requires that the full funded status of pension plans be recorded in the consolidated balance sheet, the AML concept no longer existed as of December 31, 2006, and therefore no AML adjustment was recorded during 2007 or 2008.

Each year, unrecognized amounts included in AOCI are reclassified from AOCI to retained earnings as the amounts are recognized in the consolidated income statement pursuant to SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.”

As required by SFAS No. 158, on December 31, 2008, the company changed the measurement date for its defined benefit pension and OPEB plans from September 30 to December 31, the company’s fiscal year-end. The company elected to use the 15-month remeasurement approach pursuant to SFAS No. 158, whereby a net-of-tax decrease to retained earnings of $27 million was recognized on December 31, 2008 equal to three-fifteenths of the net cost determined for the period from September 30, 2007 to December 31, 2008. The adjustment resulted in a net-of-tax increase to AOCI of $12 million. The remaining twelve-fifteenths of the net cost was recognized as expense in 2008 as part of the net periodic benefit cost.

Reconciliation of Pension and OPEB Plan Obligations, Assets and Funded Status

The benefit plan information in the table below pertains to all of the company’s pension and OPEB plans, both in the United States and in other countries.

	Pension benefits						OPEB
as of and for the years ended December 31 (in millions)	2008			2007			2008			2007
Benefit obligations
Beginning of period	$	3,307		$	3,220		$	479		$	511
Effect of eliminating early measurement date		39			—			3			—
Service cost		86			86			5			6
Interest cost		202			185			30			30
Participant contributions		8			6			12			12
Actuarial loss (gain)		53			(98	)		(17	)		(46	)
Benefit payments		(153	)		(134	)		(35	)		(34	)
Foreign exchange and other		(67	)		42			—			—
End of period		3,475			3,307			477			479
Fair value of plan assets
Beginning of period		2,998			2,668			—			—
Effect of eliminating early measurement date		33			—			—			—
Actual return on plan assets		(744	)		383			—			—
Employer contributions		287			47			23			22
Participant contributions		8			6			12			12
Benefit payments		(153	)		(134	)		(35	)		(34	)
Foreign exchange and other		(48	)		28			—			—
End of period		2,381			2,998			—			—
Funded status
Funded status at end of period		(1,094	)		(309	)		(477	)		(479	)
Fourth quarter contributions and benefit payments		n/a			9			n/a			5
Net amount recognized at December 31	$	(1,094	)	$	(300	)	$	(477	)	$	(474	)
Amounts recognized in the consolidated balance sheets
Noncurrent asset	$	7		$	63		$	—		$	—
Current liability		(15	)		(14	)		(25	)		(24	)
Noncurrent liability		(1,086	)		(349	)		(452	)		(450	)
Net liability recognized at December 31	$	(1,094	)	$	(300	)	$	(477	)	$	(474	)

75

Notes to Consolidated Financial Statements

Accumulated Benefit Obligation Information

The pension obligation information in the table above represents the projected benefit obligation (PBO). The PBO incorporates assumptions relating to future compensation levels. The ABO is the same as the PBO except that it includes no assumptions relating to future compensation levels. The ABO relating to all of the company’s pension plans was $3.0 billion at both the 2008 and 2007 measurement dates.

The information in the funded status table above represents the totals for all of the company’s pension plans. The following is information relating to the individual plans in the funded status table above that have an ABO in excess of plan assets.

(in millions)	2008		2007
ABO	$	3,017	$	473
Fair value of plan assets		2,168		171
The following is information relating to the individual plans in the funded status table above that have a PBO in excess of plan assets (many of which also have an ABO in excess of assets, and are therefore also included in the table directly above).
(in millions)	2008		2007
PBO	$	3,424	$	736
Fair value of plan assets		2,323		365
Expected Net Pension and OPEB Plan Payments for the Next 10 Years
(in millions)	Pension benefits		OPEB
2009	$	148	$	25
2010		157		28
2011		174		30
2012		183		32
2013		196		33
2014 through 2018		1,188		183
Total expected net benefit payments for next 10 years	$	2,046	$	331
The expected net benefit payments above reflect the company’s share of the total net benefits expected to be paid from the plans’ assets (for funded plans) or from the company’s assets (for unfunded plans). The total expected OPEB benefit payments for the next ten years are net of approximately $57 million of expected federal subsidies relating to the Medicare Prescription Drug, Improvement and Modernization Act, including $3 million, $4 million, $5 million, $5 million and $6 million in each of the years 2009, 2010, 2011, 2012 and 2013, respectively. Amounts Recognized in AOCI As discussed above, with the adoption of SFAS No. 158 on December 31, 2006, the pension and OPEB plans’ gains or losses, prior service costs or credits, and transition assets or obligations not yet recognized in net periodic cost are recognized on a net-of-tax basis in AOCI. These amounts will be subject to amortization in net periodic benefit cost in the future. The following is a summary of the pre-tax losses included in AOCI at December 31, 2008 and December 31, 2007.
(in millions)	Pension benefits		OPEB
Actuarial loss	$	1,674	$	52
Prior service cost (credit) and transition obligation		4		(7	)
Total pre-tax loss recognized in AOCI at December 31, 2008	$	1,678	$	45
Actuarial loss	$	766	$	72
Prior service cost (credit) and transition obligation		5		(10	)
Total pre-tax loss recognized in AOCI at December 31, 2007	$	771	$	62
Refer to Note 1 for the net-of-tax balances included in AOCI as of each of the year-end dates relating to the company’s pension and OPEB plans. The total net-of-tax amount recorded in OCI relating to pension and OPEB plans during 2008 was $591 million (net of tax of $319 million), consisting of a $641 million charge (net of tax of $348 million) arising during the year and a $50 million credit (net of tax of $29 million) relating to the amortization of loss to earnings. The total net-of-tax amount recorded in OCI relating to pension and OPEB plans during 2007 was $266 million (net of tax of $144 million), consisting of a $200 million credit (net of tax of $106 million) arising during the year and a $66 million credit (net of tax of $38 million) relating to the amortization of loss to earnings. The activity related almost entirely to actuarial gains and losses. Activity relating to prior service costs and credits and transition obligations was insignificant. Amounts Expected to be Amortized From AOCI to Net Periodic Benefit Cost in 2009 With respect to the AOCI balance at December 31, 2008, the following is a summary of the pre-tax amounts expected to be amortized to net periodic benefit cost in 2009.
(in millions)	Pension benefits		OPEB
Actuarial loss	$	98	$	1
Prior service cost (credit) and transition obligation		1		(3	)
Total pre-tax amount expected to be amortized from AOCI to net pension and OPEB cost in 2009	$	99	$	(2	)

76

Notes to Consolidated Financial Statements

Net Periodic Benefit Cost

years ended December 31 (in millions)	2008			2007			2006
Pension benefits
Service cost	$	86		$	86		$	91
Interest cost		202			185			174
Expected return on plan assets		(230	)		(216	)		(199	)
Amortization of net loss and other deferred amounts		79			97			117
Net periodic pension benefit cost	$	137		$	152		$	183
OPEB
Service cost	$	5		$	6		$	7
Interest cost		30			30			29
Amortization of net loss and other deferred amounts		—			5			6
Net periodic OPEB cost	$	35		$	41		$	42

Weighted-Average Assumptions Used in Determining Benefit Obligations at the Measurement Date

	Pension benefits				OPEB
	2008		2007		2008		2007
Discount rate
U.S. and Puerto Rico plans		6.50%		6.35%		6.50%		6.30%
International plans		5.17%		5.10%		n/a		n/a
Rate of compensation increase
U.S. and Puerto Rico plans		4.50%		4.50%		n/a		n/a
International plans		3.57%		3.69%		n/a		n/a
Annual rate of increase in the per-capita cost		n/a		n/a		7.50%		8.00%
Rate decreased to		n/a		n/a		5.00%		5.00%
by the year ended		n/a		n/a		2014		2014

The assumptions above, which were used in calculating the December 31, 2008 measurement date benefit obligations, will be used in the calculation of net periodic benefit cost in 2009.

Weighted-Average Assumptions Used in Determining Net Periodic Benefit Cost

	Pension benefits						OPEB
	2008		2007		2006		2008		2007		2006
Discount rate
U.S. and Puerto Rico plans		6.35%		6.00%		5.75%		6.30%		6.00%		5.75%
International plans		5.10%		4.48%		4.12%		n/a		n/a		n/a
Expected return on plan assets
U.S. and Puerto Rico plans		8.50%		8.50%		8.50%		n/a		n/a		n/a
International plans		7.00%		7.50%		7.20%		n/a		n/a		n/a
Rate of compensation increase
U.S. and Puerto Rico plans		4.50%		4.50%		4.50%		n/a		n/a		n/a
International plans		3.69%		3.64%		3.46%		n/a		n/a		n/a
Annual rate of increase in the per-capita cost		n/a		n/a		n/a		8.00%		9.00%		10.00%
Rate decreased to		n/a		n/a		n/a		5.00%		5.00%		5.00%
by the year ended		n/a		n/a		n/a		2014		2011		2011

The company establishes the expected return on plan assets assumption primarily based on a review of historical compound average asset returns, both company-specific and relating to the broad market (based on the company’s asset allocation), as well as an analysis of current market and economic information and future expectations. The company plans to continue to use an 8.50% assumption for its U.S. and Puerto Rico plans for 2009.

77

Notes to Consolidated Financial Statements

Effect of a One-Percent Change in Assumed Healthcare Cost Trend Rate on the OPEB Plan

	One percent				One percent
	increase				decrease
years ended December 31 (in millions)	2008		2007		2008		2007
Effect on total of service and interest cost components of OPEB cost	$	5	$	5	$	4	$	4
Effect on OPEB obligation	$	52	$	56	$	44	$	47

Pension Plan Assets

An investment committee of members of senior management is responsible for supervising, monitoring and evaluating the invested assets of the company’s funded pension plans. The investment committee, which meets at least quarterly, abides by documented policies and procedures relating to investment goals, targeted asset allocations, risk management practices, allowable and prohibited investment holdings, diversification, use of derivatives, the relationship between plan assets and benefit obligations, and other relevant factors and considerations.

The investment committee’s documented goals and guidelines include the following.

•  Ability to pay all benefits when due;

•  Targeted long-term performance expectations relative to applicable market indices, such as Standard & Poor’s, Russell, MSCI EAFE, and other indices;

•  Targeted asset allocation percentage ranges (summarized in the table below), and periodic reviews of these allocations;

•  Diversification of assets among third-party investment managers, and by geography, industry, stage of business cycle and other measures;

•  Specified investment holding and transaction prohibitions (for example, private placements or other restricted securities, securities that are not traded in a sufficiently active market, short sales, certain derivatives, commodities and margin transactions);

•  Specified portfolio percentage limits on holdings in a single corporate or other entity (generally 5%, except for holdings in U.S. government or agency securities);

•  Specified average credit quality for the fixed-income securities portfolio (at least AA- by Standard & Poor’s or AA3 by Moody’s);

•  Specified portfolio percentage limits on foreign holdings; and

•  Periodic monitoring of investment manager performance and adherence to the Investment Committee’s policies.

Pension Plan Asset Allocations

		Allocation of plan
		assets at
		measurement date
	Target allocation ranges	2008		2007
Equity securities	65% to 75%		50%		71%
Fixed-income securities and other holdings	25% to 35%		50%		29%
Total	100%		100%		100%

As a result of recent company contributions to its pension plans, as well as investment performance, the pension plan assets have become over-allocated in fixed-income securities and other holdings. Given the recent volatility in the global financial markets, the investment committee has determined that the over-allocation of the pension plan assets in fixed-income securities and other holdings is appropriate at this time. A future reallocation of the pension plan assets within the targeted allocation ranges will occur based upon the guidelines of the investment committee.

Expected Pension and OPEB Plan Funding

The company’s funding policy for its pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the company may determine to be appropriate considering the funded status of the plans, tax deductibility, the cash flows generated by the company, and other factors. Continued volatility in the global financial markets could have an unfavorable impact on future funding requirements. The company has no obligation to fund its principal plans in the United States and Puerto Rico in 2009. The company continually reassesses the amount and timing of any discretionary contributions. The company expects to make discretionary cash contributions to its pension plan in the United States of at least $100 million in 2009. The company expects to have net cash outflows relating to its OPEB plan of approximately $25 million in 2009.

The table below details the funded status percentage of the company’s pension plans as of December 31, 2008, including certain plans that are unfunded in accordance with the guidelines of the company’s funding policy outlined above.

	United States and Puerto Rico				International
	Qualified		Nonqualified		Funded		Unfunded
as of December 31, 2008 (in millions)	plans		plan		plans		plans		Total
Fair value of plan assets	$	2,052		n/a	$	329		n/a	$	2,381
PBO		2,670	$	139		470	$	196		3,475
Funded status percentage		77%		n/a		70%		n/a		69%

The Pension Protection Act of 2006 (PPA) was signed into law on August 17, 2006. It is likely that the PPA will accelerate minimum funding requirements in the future.

78

Notes to Consolidated Financial Statements

Amendments to Defined Benefit Pension Plans

Certain of the company’s defined benefit pension plans have been amended in the three-year period ended December 31, 2008. In 2006 the company amended its U.S. qualified defined benefit pension plan and U.S. qualified defined contribution plan. Employees hired on or after January 1, 2007 receive a higher level of company contributions in the defined contribution plan but are not eligible to participate in the pension plan. Employees hired prior to January 1, 2007 who were not fully vested in the pension plan as of December 31, 2006 were required to elect to either continue their current participation in the pension and defined contribution plans, or to cease to earn additional service in the pension plan as of December 31, 2006 and participate in the higher level of company contributions in the defined contribution plan. There was no change to the plans for employees who were fully vested in the pension plan as of December 31, 2006.

In 2007 the company amended its Puerto Rico defined benefit pension plan. Employees hired on or after January 1, 2008 receive a higher level of company contributions in the defined contribution plan but are not eligible to participate in the pension plan.

These amendments did not result in a curtailment gain or loss, nor a remeasurement of the plans’ assets or obligations. The amendments reduce future pension cost as fewer employees will be covered by the plans, and increase future expense associated with the defined contribution plans due to the higher contribution for certain participants.

U.S. Defined Contribution Plan

Most U.S. employees are eligible to participate in a qualified defined contribution plan. Company contributions were $36 million in 2008, $26 million in 2007 and $23 million in 2006.

NOTE 10

INCOME TAXES

Income Before Income Tax Expense by Category

years ended December 31 (in millions)	2008		2007			2006
United States	$	262	$	96		$	187
International		2,189		2,018			1,559
Income from continuing operations before income taxes	$	2,451	$	2,114		$	1,746
Income Tax Expense
years ended December 31 (in millions)	2008		2007			2006
Current
United States
Federal	$	—	$	7		$	3
State and local		2		1			26
International		155		273			311
Current income tax expense		157		281			340
Deferred
United States
Federal		174		196			6
State and local		29		24			(5	)
International		77		(94	)		7
Deferred income tax expense		280		126			8
Income tax expense	$	437	$	407		$	348
Deferred Tax Assets and Liabilities
as of December 31 (in millions)			2008			2007
Deferred tax assets
Accrued expenses			$	190		$	332
Retirement benefits				549			245
Alternative minimum tax credit				71			71
Tax credits and net operating losses				433			463
Asset basis differences				46			14
Valuation allowances				(140	)		(196	)
Total deferred tax assets				1,149			929
Deferred tax liabilities
Subsidiaries’ unremitted earnings				159			273
Other				21			25
Total deferred tax liabilities				180			298
Net deferred tax asset			$	969		$	631

At December 31, 2008, the company had U.S. operating loss carryforwards totaling $23 million and foreign tax credit carryforwards totaling $145 million. The operating loss carryforwards expire between 2018 and 2027. The foreign tax credits principally expire in 2018. In 2007, the company generated a U.S. net operating loss in the amount of $189 million. During 2008, $19 million of the 2007 benefits from net operating losses were realized and recorded as windfall benefits from stock option exercises. The remaining benefits have not yet been realized and when realized will result in additions to the pool of windfall benefits from stock option exercises. At December 31, 2008, the company had foreign net operating loss carryforwards totaling $865 million. Of this amount, $292 million expires in 2009, $49 million expires in 2010, $19 million expires in 2011, $14 million expires in 2012, $24 million expires in 2013, $3 million expires in 2014, $43 million expires after 2014 and $421 million has no expiration date. Realization of these operating loss and tax credit carryforwards depends on generating sufficient taxable income in future periods. A valuation allowance of $140 million and $196 million was recorded at December 31, 2008 and December 31, 2007, respectively, to reduce the deferred tax assets associated with operating loss and tax credit carryforwards, as

79

Notes to Consolidated Financial Statements

well as amortizable assets in loss entities, because the company does not believe it is more likely than not that these assets will be fully realized prior to expiration.

The company will continue to evaluate the need for additional valuation allowances and, as circumstances change, the valuation allowance may change.

Income Tax Expense Reconciliation

years ended December 31 (in millions)	2008			2007			2006
Income tax expense at U.S. statutory rate	$	858		$	740		$	611
Operations subject to tax incentives		(402	)		(438	)		(263	)
State and local taxes		20			11			14
Foreign tax expense		(26	)		25			35
Tax on repatriations of foreign earnings		14			82			86
Tax settlements		(23	)		(19	)		(135	)
Valuation allowance reductions, net		(29	)		(38	)		—
Other factors		25			44			—
Income tax expense	$	437		$	407		$	348

The company recognized income tax expense of $75 million during 2008 relating to certain 2008 and prior earnings outside the United States that were previously deemed indefinitely reinvested, of which $14 million related to earnings from years prior to 2008. In addition, the company recorded a tax benefit of $103 million to the CTA component of OCI during 2008 relating to earnings outside the United States that are not deemed indefinitely reinvested. The company will continue to evaluate whether to indefinitely reinvest earnings in certain foreign jurisdictions as it continues to analyze the company’s global financial structure. Currently, aside from the items mentioned above, management intends to continue to reinvest earnings in several jurisdictions outside of the United States for the foreseeable future, and therefore has not recognized U.S. income tax expense on these earnings. U.S. federal and state income taxes, net of applicable credits, on these foreign unremitted earnings of $5.7 billion as of December 31, 2008, would be approximately $1.7 billion. As of December 31, 2007 the foreign unremitted earnings and U.S. federal income tax amounts were $4.8 billion and $1.3 billion, respectively.

Effective Income Tax Rate

The effective income tax rate was 18% in 2008, 19% in 2007 and 20% in 2006. As detailed in the income tax expense reconciliation table above, the company’s effective tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, as discussed further below, the company’s effective income tax rate can be impacted in each year by discrete factors or events.

2008

The effective tax rate for 2008 was impacted by $29 million of valuation allowance reductions on net operating loss carryforwards in foreign jurisdictions due to profitability improvements, $8 million of income tax benefit related to the extension of R&D tax credits in the United States and $14 million of additional U.S. income tax expense related to foreign earnings which are no longer considered indefinitely reinvested outside of the United States because the company planned to remit these earnings to the United States in the foreseeable future.

2007

The effective tax rate for 2007 was impacted by a $38 million net reduction of the valuation allowance on net operating loss carryforwards primarily due to profitability improvements in a foreign jurisdiction, a $12 million reduction in tax expense due to legislation reducing corporate income tax rates in Germany, the extension of tax incentives, and the settlement of tax audits in jurisdictions outside of the United States. Partially offsetting these items was $82 million of U.S. income tax expense related to foreign earnings which are no longer considered indefinitely reinvested outside of the United States because the company planned to remit these earnings to the United States in the foreseeable future.

2006

In 2006, the company reached a favorable settlement with the Internal Revenue Service relating to the company’s U.S. federal tax audits for the years 2002 through 2005, resulting in a $135 million reduction of tax expense. In combination with this settlement, the company reorganized its Puerto Rico manufacturing assets and repatriated funds from other subsidiaries, resulting in tax expense of $113 million ($86 million related to the repatriations and $27 million included in the operations subject to tax incentives line in the table above). The effect of these items was the utilization and realization of deferred tax assets that were subject to valuation allowances, as well as a modest reduction in the company’s reserves for uncertain tax positions, resulting in a net $22 million benefit and minimal cash impact.

Adoption of FIN No. 48

On January 1, 2007, the company adopted FIN No. 48, which prescribes a two-step process for the financial statement measurement and recognition of a tax position taken or expected to be taken in a tax return. The first step involves the determination of whether it is more likely than not (greater than 50% likelihood) that a tax position will be sustained upon examination, based on the technical merits of the position. The second step requires that any tax position that meets the more-likely-than-not recognition threshold be measured and recognized in the financial statements at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The adoption of FIN No. 48 by the company on January 1, 2007 had no impact on the company’s opening balance of retained earnings.

The company has historically classified interest and penalties associated with income taxes in the income tax expense line in the consolidated statements of income, and this treatment is unchanged under FIN No. 48. Interest and penalties recorded during 2008 and 2007 were not material, and are included in the table below. The liability recorded at December 31, 2008 and 2007 related to interest and penalties was $40 million and $35 million, respectively.

80

Notes to Consolidated Financial Statements

The following is a reconciliation of the company’s unrecognized tax benefits for the years ended December 31, 2008 and 2007.

(in millions)	2008			2007
Balance at January 1	$	490		$	481
Increase associated with tax positions taken during the current year		15			26
Increase associated with tax positions taken during a prior year		34			6
Settlements		(23	)		(15	)
Decrease associated with lapses in statutes of limitations		(7	)		(8	)
Balance at December 31	$	509		$	490

Of the gross unrecognized tax benefits, $437 million and $422 million were recognized as liabilities in the consolidated balance sheets as of December 31, 2008 and 2007, respectively.

None of the positions included in the liability for uncertain tax positions related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

Tax Incentives

The company has received tax incentives in Puerto Rico, Switzerland, and certain other taxing jurisdictions outside the United States. The financial impact of the reductions as compared to the U.S. federal statutory rate is indicated in the Income Tax Expense Reconciliation table above. The tax reductions as compared to the local statutory rate favorably impacted earnings per diluted share by $0.45 in 2008, $0.51 in 2007 and $0.29 in 2006. The Puerto Rico grant provides that the company’s manufacturing operations will be partially exempt from local taxes until the year 2013. The Switzerland grant provides the company’s manufacturing operations will be partially exempt from local taxes until the year 2014. The tax incentives in the other jurisdictions continue until at least 2011.

Examinations of Tax Returns

As of December 31, 2008, Baxter had ongoing audits in the United States, Austria, Canada, Germany, Italy, Switzerland and the United Kingdom, as well as bilateral Advance Pricing Agreement proceedings that the company voluntarily initiated between the U.S. government and the government of Switzerland with respect to intellectual property, product, and service transfer pricing arrangements. Baxter expects to settle these proceedings within the next 12 months. While the final outcome of these matters is inherently uncertain, the company believes it has made adequate tax provisions for all years subject to examination. There is a reasonable possibility that the ultimate settlements will be more or less than the amounts reserved for these unrecognized tax benefits.

NOTE 11

LEGAL PROCEEDINGS

Baxter is involved in product liability, patent, commercial, and other legal proceedings that arise in the normal course of the company’s business. The company records a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded.

Baxter has established reserves for certain of the matters discussed below. Refer to Note 2 for the company’s litigation reserve balances. The company is not able to estimate the amount or range of any loss for certain of the legal contingencies for which there is no reserve or additional loss for matters already reserved. While the liability of the company in connection with the claims cannot be estimated with any certainty and although the resolution in any reporting period of one or more of these matters could have a significant impact on the company’s results of operations for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on the company’s consolidated financial position. While the company believes that it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may in the future incur material judgments or enter into material settlements of claims.

In addition to the matters described below, the company remains subject to other potential administrative and legal actions. With respect to regulatory matters, these actions may lead to product recalls, injunctions to halt manufacture and distribution, and other restrictions on the company’s operations and monetary sanctions. With respect to intellectual property, the company may be exposed to significant litigation concerning the scope of the company’s and others’ rights. Such litigation could result in a loss of patent protection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations.

Patent Litigation

Sevoflurane Litigation

In September 2005, the U.S.D.C. for the Northern District of Illinois ruled that a patent owned by Abbott Laboratories and the Central Glass Company, U.S. Patent No. 5,990,176, was not infringed by Baxter’s generic version of sevoflurane. Abbott and Central Glass appealed and Baxter filed a cross-appeal as to the validity of the patent. In November 2006, the Court of Appeals for the Federal Circuit granted Baxter’s cross-appeal and held the patent invalid. Abbott’s motions to have that appeal re-heard were denied in January 2007.

In June 2005, Baxter filed suit in the High Court of Justice in London, England seeking revocation of the U.K. part of the related European patent and a declaration of non-infringement. In March 2007, the High Court ruled in Baxter’s favor, concluding that the U.K. portion of the European patent was invalid. In December 2008, the Board of Appeals for the European Patent Office similarly revoked this European patent in its entirety.

Related actions remain pending in the U.S., Japan and Colombia. Another patent infringement action against Baxter is pending in the U.S.D.C. for the Northern District of Illinois on a second patent owned by Abbott and Central Glass. Baxter has filed a motion asserting that judgment of non-infringement and invalidity should be entered based in part on findings made in the earlier case. In May 2005, Abbott and

81

Notes to Consolidated Financial Statements

Central Glass filed suit in the Tokyo District Court on a counterpart Japanese patent and in September 2006, the Tokyo District Court ruled in favor of Abbott and Central Glass on this matter. Baxter has appealed this decision. A parallel proceeding to revoke a second related Japanese patent is also pending. In 2007, Abbott brought a patent infringement action against Baxter in the Cali Circuit Court of Colombia based on a Colombian counterpart patent, and obtained an injunction preliminarily prohibiting the approval of Baxter’s generic sevoflurane in Colombia during the pendency of the infringement suit. In May 2008, the Court issued a decision maintaining the injunction, but suspending it during an appeal of the Court’s decision, which appeal is pending.

Peritoneal Dialysis Litigation

On October 16, 2006, Baxter Healthcare Corporation and DEKA Products Limited Partnership (DEKA) filed a patent infringement lawsuit against Fresenius Medical Care Holdings, Inc. and Fresenius USA, Inc. The complaint alleges that Fresenius’s sale of the Liberty Cycler peritoneal dialysis systems and related disposable items and equipment infringes nine U.S. patents owned by Baxter, as to which DEKA has granted Baxter an exclusive license in the peritoneal dialysis field. The case is pending in the U.S.D.C. for the Northern District of California with a trial anticipated in late 2009 or early 2010.

Hemodialysis Litigation

Since April 2003, Baxter has been pursuing a patent infringement action against Fresenius Medical Care Holdings, Inc. for infringement of certain Baxter patents. The patents cover Fresenius’ 2008K hemodialysis instrument. In 2007, the court entered judgment in Baxter’s favor holding the patents valid and infringed, and a jury assessed damages at $14 million for past sales only. On April 4, 2008, the U.S.D.C. for the Northern District of California granted Baxter’s motion for permanent injunction, and granted Baxter’s request for royalties on Fresenius’ sales of the 2008K hemodialysis machines during a nine-month transition period before the permanent injunction takes effect. The order also granted a royalty on disposables, which Fresenius has appealed. A decision is expected in the second quarter of 2009.

Other

In October 2004, a purported class action was filed in the U.S.D.C. for the Northern District of Illinois against Baxter and its current Chief Executive Officer and then current Chief Financial Officer and their predecessors for alleged violations of the Employee Retirement Income Security Act of 1974, as amended. Plaintiff alleges that these defendants, along with the Administrative and Investment Committees of the company’s 401(k) plans, breached their fiduciary duties to the plan participants by offering Baxter common stock as an investment option in each of the plans during the period of January 2001 to October 2004. In March 2006, the trial court certified a class of plan participants who elected to acquire Baxter common stock through the plans between January 2001 and the present. In April 2008, the Court of Appeals for the Seventh Circuit denied Baxter’s interlocutory appeal and upheld the trial court’s denial of Baxter’s motion to dismiss. Baxter has filed a motion for judgment on the pleadings. Fact discovery has been completed in this matter; expert discovery is ongoing.

On October 12, 2005 the United States filed a complaint in the U.S.D.C. for the Northern District of Illinois to effect the seizure of COLLEAGUE and SYNDEO pumps that were on hold in Northern Illinois. Customer-owned pumps were not affected. On June 29, 2006, Baxter Healthcare Corporation, a direct wholly-owned subsidiary of Baxter, entered into a Consent Decree for Condemnation and Permanent Injunction with the United States to resolve this seizure litigation. The Consent Decree also outlines the steps the company must take to resume sales of new pumps in the United States. Additional third party claims may be filed in connection with the COLLEAGUE matter.

In connection with the recall of heparin products in the United States described in Note 5, approximately 100 lawsuits, some of which are purported class actions, have been filed alleging that plaintiffs suffered various reactions to a heparin contaminant, in some cases resulting in fatalities. In June 2008, a number of these federal cases were consolidated in the U.S.D.C. for the Northern District of Ohio for pretrial case management under the Multi District Litigation rules. In September 2008, a number of state court cases were consolidated in Cook County, Illinois for pretrial case management. Discovery is ongoing.

The company is a defendant, along with others, in over 50 lawsuits brought in various state and U.S. federal courts, which allege that Baxter and other defendants reported artificially inflated average wholesale prices for Medicare and Medicaid eligible drugs. These cases have been brought by private parties on behalf of various purported classes of purchasers of Medicare and Medicaid eligible drugs, as well as by state attorneys general. A number of these cases were consolidated in the U.S.D.C. for the District of Massachusetts for pretrial case management under Multi District Litigation rules. In April 2008, the court preliminarily approved a class settlement resolving Medicare Part B claims and independent health plan claims against Baxter and others, which had previously been reserved for by the company. Final approval of this settlement is expected in April 2009. Remaining lawsuits against Baxter include a number of cases brought by state attorneys general and New York entities, which seek unspecified damages, injunctive relief, civil penalties, disgorgement, forfeiture and restitution. Various state and federal agencies are conducting civil investigations into the marketing and pricing practices of Baxter and others with respect to Medicare and Medicaid reimbursement. These investigations may result in additional cases being filed by various state attorneys general.

Baxter currently is a defendant in a number of lawsuits and subject to additional claims brought by individuals who have hemophilia and their families, all seeking damages for injuries allegedly caused by anti-hemophilic factor concentrates VIII or IX derived from human blood plasma (factor concentrates) processed by the company and other acquired entities from the late 1970s to the mid-1980s. The typical case or claim alleges that the individual was infected with the HIV or HCV virus by factor concentrates that contained one or the other or both viruses. None of these cases involves factor concentrates currently processed by the company.

As of December 31, 2008, the company has been named as a defendant, along with others, in approximately 125 lawsuits filed in

82

Notes to Consolidated Financial Statements

various state and U.S. federal courts, seeking damages, injunctive relief and medical monitoring for claimants alleged to have contracted autism or attention deficit disorders as a result of exposure to vaccines for childhood diseases containing the preservative, thimerosal. These vaccines were formerly manufactured and sold by North American Vaccine, Inc., which was acquired by Baxter in June 2000, as well as by other companies.

NOTE 12

SEGMENT INFORMATION

Baxter operates in three segments, each of which is a strategic business that is managed separately because each business develops, manufactures and markets distinct products and services. The segments and a description of their products and services are as follows:

The BioScience business manufactures recombinant and plasma-based proteins to treat hemophilia and other bleeding disorders; plasma-based therapies to treat immune deficiencies, alpha 1-antitrypsin deficiency, burns and shock, and other chronic and acute blood-related conditions; products for regenerative medicine, such as biosurgery products and technologies used in adult stem-cell therapies; and vaccines. Prior to the divestiture of the TT business on February 28, 2007, the business also manufactured manual and automated blood and blood-component separation and collection systems.

The Medication Delivery business manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filled vials and syringes for injectable drugs, IV nutrition products, infusion pumps, and inhalation anesthetics, as well as products and services related to pharmacy compounding, drug formulation and packaging technologies.

The Renal business provides products to treat end-stage renal disease, or irreversible kidney failure. The business manufactures solutions and other products for peritoneal dialysis, a home-based therapy, and also distributes products for hemodialysis, which is generally conducted in a hospital or clinic.

The company uses more than one measurement and multiple views of data to measure segment performance and to allocate resources to the segments. However, the dominant measurements are consistent with the company’s consolidated financial statements and, accordingly, are reported on the same basis herein. The company evaluates the performance of its segments and allocates resources to them primarily based on pre-tax income along with cash flows and overall economic returns. Intersegment sales are generally accounted for at amounts comparable to sales to unaffiliated customers, and are eliminated in consolidation. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies in Note 1.

Certain items are maintained at the corporate level (Corporate) and are not allocated to the segments. They primarily include most of the company’s debt and cash and equivalents and related net interest expense, certain foreign exchange fluctuations (principally relating to intercompany receivables, payables and loans denominated in a foreign currency) and the majority of the foreign currency and interest rate hedging activities, corporate headquarters costs, stock compensation expense, certain non-strategic investments and related income and expense, certain employee benefit plan costs, certain nonrecurring gains and losses, IPR&D charges, certain other charges (such as certain restructuring and litigation-related charges), deferred income taxes, certain litigation liabilities and related insurance receivables, and the revenues and costs related to the manufacturing, distribution and other transition agreements with Fenwal. All of the company’s Other revenues in the table below relate to the agreements with Fenwal. With respect to depreciation and amortization and expenditures for long-lived assets, the difference between the segment totals and the consolidated totals principally relate to assets maintained at Corporate.

Significant charges not allocated to a segment in 2008 included IPR&D charges of $12 million related to the company’s in-licensing agreement with Innocoll, as further discussed in Note 4, and $7 million related to the acquisition of certain technology applicable to the BioScience business. Significant charges not allocated to a segment in 2007 included a charge of $56 million related to the average wholesale pricing litigation, as further discussed in Note 11, a restructuring charge of $70 million, as further discussed in Note 5, and IPR&D charges totaling $61 million, as further discussed in Note 4.

Included in the Medication Delivery segment’s pre-tax income in 2008, 2007 and 2006 were $125 million, $14 million, and $94 million, respectively, of charges and costs relating to COLLEAGUE and SYNDEO infusion pumps and an impairment charge of $31 million in 2008 associated with the discontinuation of the CLEARSHOT pre-filled syringe program, as further discussed in Note 5.

83

Notes to Consolidated Financial Statements

Segment Information

			Medication
as of and for the years ended December 31 (in millions)	BioScience		Delivery		Renal		Other			Total
2008
Net sales	$	5,308	$	4,560	$	2,306	$	174		$	12,348
Depreciation and amortization		177		271		115		68			631
Pre-tax income (loss)		2,173		586		314		(622	)		2,451
Assets		4,344		5,051		1,613		4,397			15,405
Capital expenditures		298		352		134		170			954
2007
Net sales	$	4,649	$	4,231	$	2,239	$	144		$	11,263
Depreciation and amortization		157		242		114		68			581
Pre-tax income (loss)		1,801		688		377		(752	)		2,114
Assets		4,158		5,182		1,644		4,310			15,294
Capital expenditures		172		303		109		108			692
2006
Net sales	$	4,396	$	3,917	$	2,065	$	—		$	10,378
Depreciation and amortization		181		219		122		53			575
Pre-tax income (loss)		1,473		559		368		(654	)		1,746
Assets		4,194		4,599		1,541		4,352			14,686
Capital expenditures		129		244		106		47			526

Pre-Tax Income Reconciliation

years ended December 31 (in millions)	2008			2007			2006
Total pre-tax income from segments	$	3,073		$	2,866		$	2,400
Unallocated amounts
Net interest expense		(76	)		(22	)		(34	)
Certain foreign exchange fluctuations and hedging activities		57			(5	)		(41	)
Stock compensation		(146	)		(136	)		(94	)
Restructuring charge		—			(70	)		—
Average wholesale pricing litigation charge		—			(56	)		—
IPR&D		(19	)		(61	)		—
Other Corporate items		(438	)		(402	)		(485	)
Consolidated income from continuing operations before income taxes	$	2,451		$	2,114		$	1,746

Assets Reconciliation

as of December 31 (in millions)	2008		2007
Total segment assets	$	11,008	$	10,984
Cash and equivalents		2,131		2,539
Deferred income taxes		1,383		950
Insurance receivables		87		85
PP&E, net		359		307
Other Corporate assets		437		429
Consolidated total assets	$	15,405	$	15,294

Geographic Information

Net sales are based on product shipment destination and assets are based on physical location.

years ended December 31 (in millions)	2008		2007		2006
Net sales
United States	$	5,044	$	4,820	$	4,589
Europe		4,386		3,845		3,443
Latin America		1,001		950		866
Canada		473		424		373
Asia and other countries		1,444		1,224		1,107
Consolidated net sales	$	12,348	$	11,263	$	10,378

84

Notes to Consolidated Financial Statements

as of December 31 (in millions)	2008		2007		2006
Total assets
United States	$	6,765	$	6,544	$	7,204
Europe		5,935		6,358		5,170
Latin America		1,054		1,080		1,235
Canada		235		223		183
Asia and other countries		1,416		1,089		894
Consolidated total assets	$	15,405	$	15,294	$	14,686

as of December 31 (in millions)	2008		2007		2006
PP&E, net
United States	$	1,987	$	1,838	$	1,747
Austria		650		608		502
Other countries		1,972		2,041		1,980
Consolidated PP&E, net	$	4,609	$	4,487	$	4,229

Significant Product Sales

The following is a summary of net sales as a percentage of consolidated net sales for the company’s principal product lines.

years ended December 31	2008		2007		2006
Recombinants		16%		15%		15%
PD Therapy		15%		16%		16%
Global Injectables1		13%		13%		14%
IV Therapies2		13%		12%		12%
Plasma Proteins3		10%		9%		8%
Antibody Therapy		10%		9%		8%

1	Primarily consists of the company’s enhanced packaging, premixed drugs, pharmacy compounding, pharmaceutical partnering business and generic injectables.
2	Principally includes IV solutions and nutritional products.
3	Includes plasma-derived hemophilia (FVII, FVIII, FIX and FEIBA), albumin and other plasma-based products.

NOTE 13

QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANY’S STOCK (UNAUDITED)

	First		Second		Third		Fourth
years ended December 31 (in millions, except per share data)	quarter		quarter		quarter		quarter		Full year
2008
Net sales	$	2,877	$	3,189	$	3,151	$	3,131	$	12,348
Gross profit		1,380		1,627		1,521		1,602		6,130
Net income1		429		544		472		569		2,014
Earnings per common share1
Basic		0.68		0.87		0.76		0.92		3.22
Diluted		0.67		0.85		0.74		0.91		3.16
Dividends declared		0.2175		0.2175		0.2175		0.26		0.9125
Market price
High		64.91		63.94		71.15		67.30		71.15
Low		55.41		59.33		63.83		48.50		48.50
2007
Net sales	$	2,675	$	2,829	$	2,750	$	3,009	$	11,263
Gross profit		1,266		1,392		1,376		1,485		5,519
Net income2		403		431		395		478		1,707
Earnings per common share2
Basic		0.62		0.66		0.62		0.75		2.65
Diluted		0.61		0.65		0.61		0.74		2.61
Dividends declared		0.1675		0.1675		0.1675		0.2175		0.72
Market price
High		53.22		57.96		58.78		61.09		61.09
Low		46.33		52.80		50.16		55.30		46.33

1

The first quarter of 2008 included a $53 million charge related to COLLEAGUE infusion pumps. The third quarter of 2008 included a $72 million charge related to COLLEAGUE infusion pumps, a $31 million impairment charge associated with the discontinuation of the CLEARSHOT pre-filled syringe program and a $12 million IPR&D charge. Refer to Notes 4 and 5 for further information regarding these charges. The fourth quarter of 2008 included a $7 million IPR&D charge.

2

The second quarter of 2007 included a $70 million restructuring charge principally associated with the consolidation of certain commercial and manufacturing operations outside of the United States and an $11 million IPR&D charge. The third quarter of 2007 included a $56 million litigation charge and $35 million of IPR&D charges. The fourth quarter of 2007 included $15 million of IPR&D charges. Refer to Notes 4, 5 and 11 for further information regarding these charges.

Baxter common stock is listed on the New York, Chicago and SWX Swiss stock exchanges. The New York Stock Exchange is the principal market on which the company’s common stock is traded. At January 31, 2009, there were 48,869 holders of record of the company’s common stock.

85

Directors and Officers

Board of Directors

Walter E. Boomer

Former Chairman and Chief Executive Officer

Rogers Corporation

Blake E. Devitt

Former Senior Audit Partner and Director,

Pharmaceutical and Medical Device Industry Practice

Ernst & Young LLP

John D. Forsyth

Chairman and Chief Executive Officer

Wellmark Blue Cross and Blue Shield

Gail D. Fosler

President

The Conference Board

James R. Gavin III, M.D., Ph.D.

Chief Executive Officer and Chief Medical Officer

Healing Our Village, Inc.

Peter S. Hellman

Former President and Chief Financial and

Administrative Officer

Nordson Corporation

Wayne T. Hockmeyer, Ph.D.

Founder and Former Chairman of the Board

MedImmune, Inc.

Joseph B. Martin, M.D., Ph.D.

Professor of Neurobiology and

Former Dean of the Faculty of Medicine

Harvard Medical School

Robert L. Parkinson, Jr.

Chairman and Chief Executive Officer

Baxter International Inc.

Carole J. Shapazian

Former Executive Vice President

Maytag Corporation

Thomas T. Stallkamp

Industrial Partner

Ripplewood Holdings L.L.C.

Kees J. Storm

Former Chairman of the Executive Board

AEGON N.V. (The Netherlands)

Albert P.L. Stroucken

Chairman, President and Chief Executive Officer

Owens-Illinois, Inc.

Executive Management

Carlos Alonso

President, Latin America

Joy A. Amundson*

President, BioScience

Peter J. Arduini*

President, Medication Delivery

Michael J. Baughman

Controller

Robert M. Davis*

Chief Financial Officer

J. Michael Gatling*

Vice President, Manufacturing

John J. Greisch*

President, International

Robert J. Hombach

Treasurer

Gerald Lema

President, Asia Pacific

Susan R. Lichtenstein*

General Counsel

Jeanne K. Mason*

Vice President, Human Resources

Bruce McGillivray*

President, Renal

Peter Nicklin

President, Europe

Robert L. Parkinson, Jr.*

Chairman and Chief Executive Officer

Norbert G. Riedel, Ph.D.*

Chief Scientific Officer

David P. Scharf

Corporate Secretary

Karenann K. Terrell*

Chief Information Officer

Cheryl L. White*

Vice President, Quality

* executive officer

86

Company Information

Corporate Headquarters

Baxter International Inc.
One Baxter Parkway
Deerfield, IL 60015-4633
Telephone: (847) 948-2000
Website: www.baxter.com

Stock Exchange Listings

The New York Stock Exchange is the principal market on which the company’s common stock is traded (Ticker Symbol: BAX). The company’s common stock is also listed on the Chicago and SWX Swiss stock exchanges.

Annual Meeting

The 2009 Annual Meeting of Shareholders will be held on Tuesday, May 5, at 10:30 a.m. at the Chicago Cultural Center, located at 78 East Washington in Chicago, Illinois.

Transfer Agent and Registrar

Correspondence concerning Baxter International Inc. common stock holdings, lost or missing certificates or dividend checks, duplicate mailing or changes of address should be directed to:

Computershare Trust Company, N.A.
P.O. Box 43069
Providence, RI 02940-3069
Telephone: (888) 359-8645
Hearing Impaired Telephone: (800) 952-9245
Website: www.computershare.com

Dividend Reinvestment

The company offers an automatic dividend-reinvestment program to all holders of Baxter International Inc. common stock. The company has appointed Computershare Trust Company, N.A. to administer the program.

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP, Chicago, IL

Information Resources

Please visit Baxter’s website for information on the company and its products and services.

Information regarding corporate governance at Baxter, including Baxter’s corporate governance guidelines, code of conduct, and the charters for the committees of Baxter’s board of directors, is available on Baxter’s website at www.baxter.com under “Corporate Governance” and in print upon request by writing to Baxter International Inc., Corporate Secretary, One Baxter Parkway, Deerfield, Illinois 60015-4633.

Investor Relations

Securities analysts, investment professionals and investors seeking additional investor information should contact:

Mary Kay Ladone	Clare Trachtman
Vice President, Investor Relations	Manager, Investor Relations
Telephone: (847) 948-3371	Telephone: (847) 948-3085
Fax: (847) 948-4498	Fax: (847) 948-4498

Customer Inquiries

Customers who would like general information about Baxter’s products and services may call the Center for One Baxter toll free in the United States at (800) 422-9837 or by dialing (847) 948-4770.

Form 10-K and Other Reports

A paper copy of the company’s Form 10-K for the year ended December 31, 2008, may be obtained without charge by writing to Baxter International Inc., Investor Relations, One Baxter Parkway, Deerfield, IL 60015-4633. A copy of the company’s Form 10-K and other filings with the U.S. Securities and Exchange Commission (SEC) may be obtained from the SEC’s website at www.sec.gov or the company’s website at www.baxter.com

Certifications

Baxter has filed certifications of its Chief Executive Officer and Chief Financial Officer regarding the quality of the company’s public disclosure as exhibits to its Annual Report on Form 10-K for the year ended December 31, 2008. Baxter’s Chief Executive Officer also has submitted to the New York Stock Exchange an annual certification stating that he is not aware of any violation by the company of the New York Stock Exchange corporate governance listing standards.

Trademarks

Baxter, Advate, Artiss, Aviva, Celvapan, Ceprotin, Clearshot, Colleague, Extraneal, Feiba, Flexbumin, Floseal, Gammagard, Homechoice, Homechoice Navia, Hylenex, Isolex, Kiovig, NeisVac-C, Nutrineal, Suprane, Syndeo, Tisseel, Tissucol, V-Link, Viaflex, Viaflo and VitalShield are trademarks of Baxter International Inc., its subsidiaries or affiliates. Coseal is a trademark of AngioTech International GmbH, used under license. Tachosil is a trademark of Nycomed Pharma, used under license. All other products or trademarks appearing herein are the property of their respective owners.

^® Baxter International Inc., 2009. All rights reserved. References in this report to Baxter are intended to refer collectively to Baxter International Inc. and its U.S. and international subsidiaries.

87

Five-Year Summary of Selected Financial Data

as of or for the years ended December 31		2008		1,6	2007		2,6	2006		3,6	2005		4,6	2004		5,6
Operating Results	Net sales	$	12,348			11,263			10,378			9,849			9,509
(in millions)	Income from continuing operations	$	2,014			1,707			1,398			958			383
	Depreciation and amortization	$	631			581			575			580			601
	Research and development expenses	$	868			760			614			533			517
Balance Sheet and	Capital expenditures	$	954			692			526			444			558
Cash Flow Information	Total assets	$	15,405			15,294			14,686			12,727			14,147
(in millions)	Long-term debt and lease obligations	$	3,362			2,664			2,567			2,414			3,933
Common Stock Information	Average number of common shares outstanding (in millions)7		625			644			651			622			614
	Income from continuing operations per common share
	Basic	$	3.22			2.65			2.15			1.54			0.62
	Diluted	$	3.16			2.61			2.13			1.52			0.62
	Cash dividends declared per common share	$	0.913			0.720			0.582			0.582			0.582
	Year-end market price per common share	$	53.59			58.05			46.39			37.65			34.54
Other Information	Total shareholder return8		(6.3%	)		26.8%			24.8%			10.7%			15.1%
	Common shareholders of record at year-end		48,492			47,661			49,097			58,247			61,298

1	Income from continuing operations included charges of $125 million relating to infusion pumps, an impairment charge of $31 million and charges totaling $19 million relating to acquired in-process and collaboration research and development (IPR&D).
2	Income from continuing operations included a restructuring charge of $70 million, a charge of $56 million relating to litigation and IPR&D charges of $61 million.
3	Income from continuing operations included a charge of $76 million relating to infusion pumps.
4	Income from continuing operations included a benefit of $109 million relating to restructuring charge adjustments, charges of $126 million relating to infusion pumps, and a charge of $50 million relating to the exit of hemodialysis instrument manufacturing.
5	Income from continuing operations included a restructuring charge of $543 million and other special charges of $289 million.
6	Refer to the notes to the consolidated financial statements for information regarding other charges and income items.
7	Excludes common stock equivalents.
8	Represents the total of (decline) appreciation in market price plus cash dividends declared on common shares.

Performance Graph

The following graph compares the change in Baxter’s cumulative total shareholder return on its common stock with the Standard & Poor’s 500 Composite Index and the Standard & Poor’s 500 Health Care Index as of December 31 of each year.

88

EX-21

Exhibit 21

Subsidiaries of Baxter International Inc.

		% owned by
		immediate
Subsidiary	Organized under laws of	parent (1)
Baxter International Inc.	Delaware
Baxter Healthcare Corporation	Delaware		100
Baxter Pharmaceutical Solutions LLC	Delaware		100
BioLife Plasma Services L.P.	Pennsylvania		99	(2)
Baxter World Trade Corporation	Delaware		100
Baxter Corporation	Canada		100
Baxter Export Corporation	Nevada		100
Baxter Sales and Distribution Corp.	Delaware		100	(3)
Baxter Healthcare Corporation of Puerto Rico	Alaska		100
Baxter Global Holdings II Inc.	Delaware		100
Baxter Holding B.V.	The Netherlands		100
Baxter AG	Switzerland		100
Baxter Healthcare (Holdings) Limited	United Kingdom		100
Baxter Healthcare Limited	United Kingdom		100
Baxter (Hellas) EPE	Greece		99.8	(2)
Baxter Healthcare Holding GmbH	Switzerland		100
Baxter Handel GmbH	Switzerland		100
Baxter Healthcare SA	Switzerland		100
Baxter Mexico, S. de R.L. de C.V.	Mexico		99.9	(2)
Baxter Pacific Investments Pte Ltd	Singapore		100
Baxter (China) Investment Co., Ltd.	China		100
Baxter Trading GmbH	Switzerland		100
Baxter BioScience, s.r.o.	Czech Republic		93.4	(2)
Baxter Innovations GmbH	Austria		100
Baxter AG	Austria		100
Baxter BioScience Manufacturing Sarl	Switzerland		100
Baxter Hospitalar Ltda.	Brazil		99.999	(2)
Baxter Netherlands Holding B.V.	The Netherlands		100
Baxter Deutschland Holding GmbH	Germany		94	(2)
Baxter Deutschland GmbH	Germany		100
Baxter S.A.	Belgium		99.64	(2)
Eczacibasi-Baxter Hastane Urunleri Sanayi ve Ticaret A.S.	Turkey		49.99	(4)
Baxter S.A.S.	France		64.58	(2)
Baxter Travenol S.A.S.	France		99.99	(2)
Baxter S.A.S.	France		35.42	(2)
Baxter World Trade SPRL	Belgium		99.99	(2)
Baxter Global Holdings Inc.	Delaware		100
Baxter Healthcare Pty Ltd	Australia		99.999	(2)
Baxter Holding Mexico, S. de R.L. de C.V.	Mexico		99.999	(2)
Baxter S.A. de C.V.	Mexico		99.99	(2)
Baxter Holdings Limited	Japan		100
Baxter Limited	Japan		100
Baxter Manufacturing S.p.A.	Italy		98.98	(2)
Bieffe Medital S.p.A.	Italy		99.30
Laboratorios Baxter S.A.	Delaware		100

Subsidiaries omitted from this list, considered in aggregate as a single subsidiary, would not constitute a significant subsidiary.

All subsidiaries set forth herein are reported in the Company’s financial statements through consolidation or under the equity method of accounting.

(1)	Including nominee shares.
(2)	Remaining shares owned by other subsidiaries of the Company.
(3)	Of common stock, with preferred stock held by Baxter Healthcare Corporation.
(4)	Baxter’s total ownership in this joint venture is 50%. The remaining .01% is owned by other Baxter entities.

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-28428, 33-54069, 333-43563, 333-47019, 333-71553, 333-80403, 333-88257, 333-48906, 333-62820, 333-102140, 333-104420, 333-104421, 333-105032 and 333-143063), on Form S-3 (Nos. 333-106041, 333-123811 and 333-136224) and on Form S-4 (No. 333-133449-01) of Baxter International Inc. of our report dated February 19, 2009 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 19, 2009 relating to the financial statement schedule, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 19, 2009

28

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer
Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as Amended

I, Robert L. Parkinson, Jr., certify that:

1.	I have reviewed this Annual Report on Form 10-K of Baxter International Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/  Robert L. Parkinson, Jr.

Robert L. Parkinson, Jr.

Chairman of the Board and

Chief Executive Officer

Date: February 19, 2009

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer
Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as Amended

I, Robert M. Davis, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Baxter International Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/  Robert M. Davis

Robert M. Davis

Corporate Vice President and

Chief Financial Officer

Date: February 19, 2009

EX-32.1

EXHIBIT 32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Robert L. Parkinson, Jr., as Chairman of the Board and Chief Executive Officer of Baxter International Inc. (the “Company”), certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  Robert L. Parkinson, Jr.

Name: Robert L. Parkinson, Jr.

Title:  Chairman of the Board and
Chief Executive Officer

February 19, 2009

EX-32.2

EXHIBIT 32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Robert M. Davis, as Corporate Vice President and Chief Financial Officer of Baxter International Inc. (the “Company”), certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  Robert M. Davis

Name:     Robert M. Davis

Title:  Corporate Vice President and
Chief Financial Officer

February 19, 2009