Notes to Consolidated Financial Statements 7-9

Note 7 — Litigation and Environmental Matters

Abbott has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under federal and state remediation laws and is investigating potential contamination at a number of company-owned locations. Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable loss exposure. No individual site cleanup exposure is expected to exceed $3 million, and the aggregate cleanup exposure is not expected to exceed $15 million.

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

There are several civil actions pending brought by individuals or entities that allege generally that Abbott and numerous pharmaceutical companies reported false or misleading pricing information relating to the average wholesale price of certain pharmaceutical products in connection with federal, state and private reimbursement. Civil actions have also been brought against Abbott, and in some cases other members of the pharmaceutical industry, by state attorneys general seeking to recover alleged damages on behalf of state Medicaid programs. In May 2006, Abbott was notified that the U.S. Department of Justice intervened in a civil whistle-blower lawsuit alleging that Abbott inflated prices for Medicaid and Medicare reimbursable drugs. The outcome of these investigations and litigation could include the imposition of fines or penalties. Abbott has recorded reserves for its estimated losses in a few of the cases, however, Abbott is unable to estimate the range or amount of possible loss for the majority of the cases, and no loss reserves have been recorded for them. Many of the products involved in these cases are Hospira products. Hospira, Abbott's former hospital products business, was spun off to Abbott's shareholders in 2004. Abbott retained liability for losses that result from these cases and investigations to the extent any such losses both relate to the sale of Hospira's products prior to the spin-off of Hospira and relate to allegations that were made in such pending and future cases and investigations that were the same as allegations existing at the date of the spin-off.

Within the next year, legal proceedings may occur that may result in a change in the estimated reserves recorded by Abbott. For its legal proceedings and environmental exposures, except as noted in the second and third paragraphs of this footnote, Abbott estimates the range of possible loss to be from approximately $110 million to $325 million. The recorded reserve balance at December 31, 2007 for these proceedings and exposures was approximately $165 million. These reserves represent management's best estimate of probable loss, as defined by Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies."

While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott's financial position, cash flows, or results of operations, except for the cases and investigations discussed in the third paragraph of this footnote, the resolution of which could be material to cash flows or results of operations for a quarter.

Note 8 — Incentive Stock Program

The 1996 Incentive Stock Program authorizes the granting of stock options, replacement stock options, stock appreciation rights, limited stock appreciation rights, restricted stock awards, restricted stock units, performance units and foreign qualified benefits. Stock options, replacement stock options and restricted stock awards and units comprise the majority of benefits that have been granted and are currently outstanding under this program. In 2007, Abbott granted 20,263,311 stock options, 16,696,463 replacement stock options, 1,556,770 (net of forfeitures of 87,400) restricted stock awards and 649,530 (net of forfeitures of 23,600) restricted stock units under the program. The purchase price of shares under option must be at least equal to the fair market value of the common stock on the date of grant, and the maximum term of an option is 10 years. Options vest equally over three years except for replacement options, which vest in six months. Options granted before January 1, 2005 included a replacement feature. Except for options outstanding that have a replacement feature, options granted after December 31, 2004 do not include a replacement feature. When an employee tenders mature shares to Abbott upon exercise of a stock option, a replacement stock option may be granted equal to the amount of shares tendered. Replacement options are granted at the then current market price for a term that expires on the date of the underlying option grant. Upon a change in control of Abbott, all outstanding stock options become fully exercisable, and all terms and conditions of all restricted stock awards and units are deemed satisfied. Restricted stock awards granted in 2007 and 2006 generally vest between 3 and 5 years and for restricted stock awards that vest over 5 years, no more than one-third of the award vests in any one year upon Abbott reaching a minimum return on equity target. Restricted stock units granted in 2007 and 2006 vest over three years and upon vesting, the recipient receives one share of Abbott stock for each vested restricted stock unit. The aggregate fair market value of restricted stock awards and units is recognized as expense over the service period. Restricted stock awards and settlement of vested restricted stock units are issued out of treasury shares. Abbott issues new shares for exercises of stock options. Abbott does not have a policy of purchasing its shares relating to its share-based programs. At January 1, 2008, approximately 51 million shares were reserved for future grants under the 1996 Program. Subsequent to year-end, the Board of Directors granted approximately 22 million stock options and restricted stock awards and units from this reserve.

The number of restricted stock awards and units outstanding and the weighted-average grant-date fair value at December 31, 2006 and December 31, 2007 was 3,830,728 and $45.31 and 3,740,341 and $49.04, respectively. The number of restricted stock awards and units, and the weighted-average grant-date fair value, that were granted, vested and lapsed during 2007 were 2,317,300 and $52.73, 2,156,091 and $46.54 and 251,596 and $47.58, respectively. The fair market value of restricted stock awards and units vested in 2007, 2006 and 2005 was $114,170,000, $32,226,000 and $12,949,000, respectively.

	Options Outstanding				Exercisable Options
	Shares	Weighted Average Exercise Price	Weighted Average Remaining Life (Years)		Shares	Weighted Average Exercise Price	Weighted Average Remaining Life (Years)
December 31, 2006	146,060,704	$43.80	6.2		100,543,786	$43.51	5.1
Granted	36,959,774	53.71
Exercised	(47,655,849)	41.83
Lapsed	(2,371,779)	47.53
December 31, 2007	132,992,850	$47.19	6.6		88,057,465	$46.22	5.5

The aggregate intrinsic value of options outstanding and exercisable at December 31, 2007 was $1.2 billion and $882 million, respectively. The total intrinsic value of options exercised in 2007, 2006 and 2005 was $613 million, $205 million and $189 million, respectively. The total unrecognized compensation cost related to all share-based compensation plans at December 31, 2007 amounted to approximately $250 million which is expected to be recognized over the next three years.

On January 1, 2006, Abbott adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment," which requires that the fair value of share-based awards be recorded in the results of operations. Abbott used the modified prospective method of adoption. Under this method, prior years' financial results do not include the impact of recording stock options using fair value. Under the revised standard, awards issued after 2005 and the remainder of any unrecognized cost for grants issued prior to 2006 are charged to expense. Total non-cash compensation expense charged against income in 2007 and 2006 for share-based plans totaled approximately $430 million and $330 million, respectively, and the tax benefit recognized was approximately $142 million and $78 million, respectively. Compensation cost capitalized as part of inventory is not significant.

Through December 31, 2005, Abbott measured compensation cost using the intrinsic value-based method of accounting for stock options and replacement options granted to employees. Had compensation cost been determined using the fair value-based accounting method in 2005, pro forma net income would have been $3.2 billion, basic earnings per share would have been $2.04, and diluted earnings per share would have been $2.02.

The fair value of an option granted in 2007, 2006 and 2005 was $12.88, $11.72 and $12.17, respectively. The fair value of an option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:

	2007	2006	2005
Risk-free interest rate	4.5%	4.6%	3.8%
Average life of options (years)	5.9	6.1	5.4
Volatility	25.0%	28.0%	29.0%
Dividend yield	2.5%	2.7%	2.2%

The risk-free interest rate is based on the rates available at the time of the grant for zero-coupon U.S. government issues with a remaining term equal to the option's expected life. The average life of an option granted in 2007 and 2006 is based on both historical and projected exercise and lapsing data. Prior to 2006, the average life of an option granted was based on historical experience. Expected volatility for 2007 and 2006 option grants is based on implied volatilities from traded options on Abbott's stock and historical volatility of Abbott's stock over the expected life of the option. Expected volatility for options granted prior to 2006 was based on historical volatility over a period prior to the option grant equal to the option's expected life. Dividend yield is based on the option's exercise price and annual dividend rate at the time of grant.

Note 9 — Debt and Lines of Credit

(dollars in thousands)

The following is a summary of long-term debt at December 31:

	2007	2006	2005
0.77% Yen notes, due 2007	$—	$—	$83,654
Notes, variable interest above LIBOR	—	—	770,000
British Pound notes, variable interest above LIBOR	—	—	344,000
Euro notes, variable interest above LIBOR, due 2008	—	264,180	638,766
6.0% Notes, due 2008	—	200,000	200,000
5.4% Notes, due 2008	—	200,000	200,000
1.05% Yen notes, due 2008	—	430,775	418,270
3.5% Notes, due 2009	500,000	500,000	500,000
5.375% Notes, due 2009	500,000	500,000	—
1.51% Yen notes, due 2010	135,257	129,232	125,481
3.75% Notes, due 2011	500,000	500,000	500,000
5.6% Notes, due 2011	1,500,000	1,500,000	—
5.15% Notes, due 2012	1,000,000	—	—
1.95% Yen notes, due 2013	225,428	215,387	209,135
4.35% Notes, due 2014	500,000	500,000	500,000
5.875% Notes, due 2016	2,000,000	2,000,000	—
5.6% Notes, due 2017	1,500,000	—	—
6.15% Notes, due 2037	1,000,000	—	—
Other, including fair value adjustments relating to interest rate hedge contracts designated as fair value hedges	127,104	70,090	82,198
Total, net of current maturities	9,487,789	7,009,664	4,571,504
Current maturities of long-term debt	898,554	95,276	1,849,563
Total carrying amount	$10,386,343	$7,104,940	$6,421,067

Principal payments required on long-term debt outstanding at December 31, 2007, are $857,454 in 2008, $1,003,619 in 2009, $138,218 in 2010, $2,001,958 in 2011, $1,000,390 in 2012 and $5,281,102 thereafter.

At December 31, 2007, Abbott had $3,000,000 of unused lines of credit, which support commercial paper borrowing arrangements. The unused lines of credit expire in 2012. Related compensating balances, which are subject to withdrawal by Abbott at its option, and commitment fees are not material. Abbott's weighted-average interest rate on short-term borrowings was 3.7% at December 31, 2007, 5.0% at December 31, 2006 and 1.3% at December 31, 2005.