(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

                                    One Baxter Parkway

                                    Deerfield, Illinois 60015

March 20, 2007

Dear Shareholder:

You are invited to attend our Annual Meeting of Shareholders on Tuesday, May 1, 2007, at 10:30 a.m., Central Time, at the Chicago Cultural Center, 78 East Washington Street, Chicago, Illinois. Registration will begin at 9:00 a.m., and refreshments will be served.

Details of the business to be conducted at the Annual Meeting are included in the attached Notice of Annual Meeting of Shareholders and Proxy Statement.

Whether or not you plan to attend in person, you can ensure that your shares are represented at the Annual Meeting by promptly voting and submitting your proxy by Internet or by telephone or by signing, dating and returning your proxy card in the enclosed envelope. If you attend the Annual Meeting, you may revoke your proxy and vote in person.

Very truly yours,

Robert L. Parkinson, Jr.

Chairman of the Board,

President and Chief

Executive Officer

                                    One Baxter Parkway

                                    Deerfield, Illinois 60015

March 20, 2007

Notice of Annual Meeting of Shareholders

The 2007 Annual Meeting of Shareholders of Baxter International Inc. will be held at the Chicago Cultural Center, 78 East Washington Street, Chicago, Illinois, on Tuesday, May 1, 2007 at 10:30 a.m., Central Time, for the following purposes:

Shareholders of record at the close of business on March 2, 2007 will be entitled to vote at the meeting.

By order of the Board of Directors,

David P. Scharf

Corporate Secretary

Baxter International Inc.

One Baxter Parkway

Deerfield, Illinois 60015

Proxy Statement

       The accompanying proxy is solicited on behalf of the Board of Directors for use at the Annual Meeting of Shareholders to be held on Tuesday, May 1, 2007. This Proxy Statement and accompanying proxy card are being mailed to shareholders on or about March 20, 2007.

Proposal 1 — Election of Directors

      Baxter’s Board of Directors currently consists of twelve members and is divided into three classes. The directors in each class serve three-year terms. The Board has nominated the four current directors of Baxter whose terms expire at the 2007 Annual Meeting for re-election as directors.

      In October 2006, the Board approved amendments to Baxter’s Bylaws to require directors to be elected by the majority of the votes cast with respect to such director in uncontested elections; that is, the number of shares voted “for” a director must exceed the number of votes cast “against” that director. In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), the standard for election of directors will be a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. If a nominee who is serving as a director is not elected at the annual meeting, under Delaware law the director would continue to serve on the Board as a “holdover director.” However, under our amended Bylaws, any director who fails to be elected must offer to tender his or her resignation to the Board. The Corporate Governance Committee would then make a recommendation to the Board whether to accept or reject the resignation, or whether other action should be taken. The Board would act on the Corporate Governance Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date the election results are certified. The director who tenders his or her resignation would not participate in the Board’s decision.

      All of the nominees have indicated their willingness to serve if elected, but if any should be unable or unwilling to stand for election, proxies may be voted for a substitute nominee designated by the Board of Directors. No nominations for directors were received from shareholders, and no other candidates are eligible for election as directors at the 2007 Annual Meeting. Unless proxy cards are otherwise marked, the persons named as proxies intend to vote the shares represented by proxy in favor of all of the Board’s nominees.

      Set forth below is information concerning the nominees for election as well as information concerning the current directors in each class continuing after the Annual Meeting of Shareholders. The Board of Directors recommends a vote FOR the election of each of the director nominees.

Nominees for Election as Directors (Term Expires 2010)

Directors Continuing in Office (Term Expires 2008)

Directors Continuing in Office (Term Expires 2009)

Board of Directors

      Baxter’s Board of Directors currently consists of twelve members. The Board has determined that each of the following eleven current directors satisfies Baxter’s independence standards and the New York Stock Exchange’s listing standards: Walter E. Boomer, Blake E. Devitt, John D. Forsyth, Gail D. Fosler, James R. Gavin III, M.D., Ph.D., Peter S. Hellman, Joseph B. Martin, M.D., Ph.D., Carole J. Shapazian, Thomas T. Stallkamp, K. J. Storm and Albert P.L. Stroucken. Please refer to the section entitled “Corporate Governance — Director Independence” on page 8 of this Proxy Statement for a discussion of Baxter’s independence standards.

      During 2006, the Board held 9 meetings. All directors attended 93% or more of the aggregate meetings of the Board and Board committees on which they served. In accordance with Baxter’s Corporate Governance Guidelines, which express the company’s expectation that directors attend the annual meeting of shareholders, all of the company’s directors attended the annual meeting of shareholders held on May 9, 2006.

Committees of the Board

      The standing committees of the Board of Directors are the Audit Committee, Compensation Committee, Corporate Governance Committee, Finance Committee, and Public Policy Committee. Each committee consists solely of independent directors, as defined by the rules of the New York Stock Exchange, and is governed by a written charter. All committee charters are available on Baxter’s website at www.baxter.com under “Corporate Governance — Board of Directors — Committees of the Board” and in print upon request by writing to: Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015.

Audit Committee

      The Audit Committee is currently composed of directors Stallkamp (Chair), Devitt, Hellman, Storm and Stroucken, each of whom is independent under the rules of the New York Stock Exchange. The Board has determined that directors Stallkamp, Devitt, Hellman, Storm and Stroucken each qualify as an “audit committee financial expert” as defined by the rules of the Securities and Exchange Commission. The Audit Committee is primarily concerned with the integrity of Baxter’s financial statements, system of internal accounting controls, the internal and external audit process, and the process for monitoring compliance with laws and regulations. Its duties include: (1) reviewing the adequacy and effectiveness of Baxter’s internal control over financial reporting with management and the independent and internal auditors, and reviewing with management Baxter’s disclosure controls and procedures; (2) retaining and evaluating the qualifications, independence and performance of the independent registered public accounting firm; (3) approving audit and permissible non-audit engagements to be undertaken by the independent registered public accounting firm; (4) reviewing the scope of the annual internal and external audits; (5) reviewing and discussing earnings press releases prior to their release; (6) holding separate executive sessions with the independent registered public accounting firm, the internal auditor and management; and (7) discussing guidelines and policies governing the process by which Baxter assesses and manages risk. The Audit Committee met 13 times in 2006. The Audit Committee Report appears on page 30.

Compensation Committee

      The Compensation Committee is currently composed of directors Forsyth (Chair), Boomer, Shapazian and Stallkamp. The Compensation Committee exercises the authority of the Board relating to employee benefit plans and the compensation of Baxter’s executives. The Compensation Committee may delegate its authority to subcommittees when appropriate. Its duties include: (1) making recommendations for consideration by the Board, in executive session, concerning the compensation of the Chief Executive Officer; (2) determining the compensation of executive officers (other than the Chief Executive Officer) and advising the Board of such determination; (3) making recommendations to the Board with respect to incentive compensation plans and equity-based plans and exercising the authority of the Board concerning benefit plans; (4) serving as the administration committee of the company’s equity plans; and (5) making recommendations to the Board concerning director compensation. The Corporate Governance and Compensation Committees work together to establish a link between Mr. Parkinson’s performance and decisions regarding his compensation. All compensation actions relating to Mr. Parkinson are subject to the approval of the independent directors of the Board. For a description of Mr. Parkinson’s role in setting compensation for executive officers, please refer to “Executive Compensation — Compensation Discussion and Analysis — Elements of Executive Compensation — Cash Bonuses” on page 12 of this Proxy Statement. The Compensation Committee met 6 times in 2006. The Compensation Committee Report appears on page 27.

Corporate Governance Committee

      The Corporate Governance Committee is currently composed of directors Boomer (Chair), Devitt, Forsyth and Martin. The Corporate Governance Committee assists and advises the Board on director nominations, corporate governance and general Board organization and planning matters. Its duties include: (1) developing criteria, subject to approval by the Board, for use in evaluating and selecting candidates for election or re-election to the Board and assisting the Board in identifying and attracting qualified director candidates; (2) selecting and recommending that the Board approve the director nominees for the next annual meeting of shareholders and recommending persons to fill any vacancy on the Board; (3) determining Board committee structure and membership; (4) reviewing at least annually the adequacy of Baxter’s Corporate Governance Guidelines; (5) overseeing the succession planning process for management, including the Chief Executive Officer; (6) developing and implementing an annual process for evaluating the performance of the Chief Executive Officer; and (7) developing and implementing an annual process for evaluating Board and committee performance. The Corporate Governance Committee met 4 times in 2006.

Finance Committee

      The Finance Committee is currently composed of directors Storm (Chair), Fosler, Gavin, Hellman and Stroucken. The Finance Committee assists the Board in fulfilling its responsibilities in connection with the company’s financial affairs. The Finance Committee reviews and, subject to the limits specified in its charter, approves or makes recommendations or reports to the Board regarding: (1) proposed financing transactions, capital expenditures, acquisitions, divestitures and other transactions; (2) dividends; (3) results of the management of pension assets; and (4) risk management relating to the company’s hedging activities, use of derivative instruments and insurance coverage. The Finance Committee met 5 times in 2006.

Public Policy Committee

      The Public Policy Committee is currently composed of directors Fosler (Chair), Gavin, Martin and Shapazian. The Public Policy Committee is primarily concerned with the review of the policies and practices of Baxter to ensure that they are consistent with its social responsibility to act with integrity as a global corporate citizen to employees, customers and society. Its duties include: (1) addressing the company’s responsibilities with respect to the health and safety of employees, consumers and the environment; (2) overseeing, reviewing and making recommendations to the Corporate Responsibility

Office as set forth in the company’s Global Business Practice Standards; (3) reviewing and making recommendations regarding Baxter’s Quality and Regulatory programs and performance; and (4) reviewing and making recommendations on the company’s Government Affairs Program, including the company’s positions with respect to pending legislative and other initiatives. The Public Policy Committee met 6 times in 2006.

Corporate Governance

Director Independence

      To be considered independent, the Board must affirmatively determine that a director does not have any direct or indirect material relationship with Baxter (either directly or as a partner, shareholder or officer of an organization that has a relationship with Baxter). Baxter’s Corporate Governance Guidelines require that the Board be composed of a majority of directors who meet the criteria for “independence” established by rules of the New York Stock Exchange.

      In making its independence determinations, the Board considers transactions, relationships and arrangements between Baxter and entities with which directors are associated as executive officers, directors and trustees. When these transactions, relationships and arrangements exist, they are in the ordinary course of business and are of a type customary for a global diversified company such as Baxter. More specifically, with respect to each of the three most recent fiscal years, the Board evaluated for each of directors Fosler, Hellman and Stroucken, the annual amount of purchases from the company where he or she serves as an executive officer by Baxter, and determined that the amount of purchases in each fiscal year was below two percent of the consolidated gross revenues of each of those companies during the companies last completed fiscal year. In addition, with respect to directors Gavin and Martin, the Board considered the amount of Baxter’s payments to tax exempt organizations where he serves as an executive officer or trustee, and determined that Baxter’s payments constituted less than two percent of the organization’s annual consolidated gross revenues during the organization’s last completed fiscal year.

Corporate Governance Guidelines

      Baxter’s Board of Directors has long adhered to corporate governance principles designed to ensure effective corporate governance. Since 1995, the Board of Directors has had in place a set of corporate governance guidelines reflecting these principles. Baxter’s current Corporate Governance Guidelines cover topics including, but not limited to, director qualification standards, director responsibilities, director access to management and independent advisors, director compensation, director orientation and continuing education, succession planning and the annual evaluations of the Board and its committees. Baxter’s Corporate Governance Guidelines are available on Baxter’s website at www.baxter.com under “Corporate Governance — Guidelines” and in print upon request by writing to: Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015.

Global Business Practice Standards

      Baxter has adopted a code of business conduct and ethics, called the Global Business Practice Standards, that applies to all members of Baxter’s Board of Directors and all employees of the company, including the Chief Executive Officer, Chief Financial Officer, Controller and other senior financial officers. Any amendment to, or waiver from, a provision of its Global Business Practice Standards that applies to Baxter’s Chief Executive Officer, Chief Financial Officer, Controller or persons performing similar functions will be disclosed on the company’s website, at www.baxter.com under “Corporate Governance.” Baxter’s Global Business Practice Standards are available on Baxter’s website at www.baxter.com under “Corporate Governance — Business Practices” and in print upon request by writing to: Business Practices, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015.

Executive Sessions

      The non-employee directors of the Board met in executive session without management at every regularly scheduled meeting during 2006 pursuant to Baxter’s Corporate Governance Guidelines. The Audit Committee is required by its charter to hold separate sessions during at least five committee meetings with each of the internal auditor, the independent auditor and management. The Corporate Governance and Compensation Committees also meet in executive session as deemed appropriate.

Lead Director

      Baxter’s lead director is currently Thomas T. Stallkamp. Pursuant to Baxter’s Corporate Governance Guidelines, Mr. Stallkamp presides at all executive sessions of the Board and acts as the liaison between the non-management directors and the Chairman of the Board. In addition, the lead director serves as the contact person to facilitate communications by Baxter employees and shareholders directly with the non-management members of the Board. The Corporate Governance Committee recommends a lead director to the full Board for approval on an annual basis.

Communicating with the Board of Directors

      Shareholders and other interested parties may contact any of Baxter’s directors, including the lead director or the non-management directors as a group, by writing a letter to Baxter Director c/o Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015 or by sending an e-mail to boardofdirectors@baxter.com. Baxter’s Corporate Secretary will forward communications from shareholders and other interested parties directly to the lead director, unless a different director is specified.

Nomination of Directors

      It is the policy of the Corporate Governance Committee to consider candidates for director recommended by shareholders, members of the Board and management. The Corporate Governance Committee also considers directors recommended by the independent search firm retained by the Board to help identify and evaluate potential director nominees. The Corporate Governance Committee evaluates all candidates for director in the same manner regardless of the source of the recommendation. Shareholder recommendations for candidates for director should be sent to the Corporate Governance Committee, c/o Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015.

      Pursuant to Baxter’s Corporate Governance Guidelines, nominees for director must:

The Corporate Governance Guidelines also provide that directors are selected on the basis of talent and experience. Diversity of background, including diversity of gender, race, ethnic or national origin, age, and experience in business, government and education and in healthcare, science, technology and other areas relevant to the company’s activities are factors in the selection process. As a majority of the Board must consist of individuals who are independent, a nominee’s ability to meet the independence criteria established by the New York Stock Exchange is also a factor in the nominee selection process.

      Once a candidate has been identified, the Corporate Governance Committee may collect and review publicly available information regarding the person to assess whether the person should be considered further. If the Corporate Governance Committee or its Chair determines that the candidate warrants further consideration, the Corporate Governance Committee and the external search firm retained by the Committee will engage in a process that includes a thorough investigation of the candidate, an examination of his or her business background and education, research on the individual’s accomplishments and qualifications, an in-person interview and extensive reference checking. If this process generates a positive indication, the lead director, the members of the Committee and the Chairman of the Board will meet separately with the candidate and then confer with each other regarding their respective impressions of the candidate. If the individual was positively received, the Committee will then recommend the individual to the full Board for election. If the full Board agrees, the Chairman of the Board is then authorized to extend an offer to the individual candidate.

Executive Compensation

Compensation Discussion and Analysis

      The purpose of this section of the Proxy Statement is to provide investors and other users with necessary information to gain an understanding of Baxter’s compensation policies and decisions regarding its named executive officers.

Objectives of Baxter’s Compensation Program

      The Compensation Committee of the Board of Directors (for purposes of this analysis, the “Committee”) is responsible for recommending to the Board compensation for the Chief Executive Officer and for determining the compensation of the other named executive officers. The Committee acts pursuant to a charter that has been approved by the Board.

      The Committee bases its compensation policies and decisions on the following principles.

Policies and Practices Related to Baxter’s Compensation Program

      Baxter strives to create an overall compensation package for each named executive officer that satisfies these objectives, recognizing that certain elements of compensation are better suited to reflect different compensation objectives. For example, as base salaries are the only element of compensation that is fixed in amount in advance of the year in which the compensation will be earned, the Committee believes that it is most appropriate to determine base salaries with a focus on the market practices for

similarly situated officers at comparable companies as adjusted to reflect the individual officer’s performance during the preceding year. In contrast, cash bonuses and long-term incentives are better able to reflect Baxter’s performance as measured by financial metrics and are well-suited to motivate officers to achieve specific performance goals that the Committee and management have determined are in the best interest of the company. Equity grants are also well-suited to drive long-term performance and align management’s interests with those of shareholders. As discussed below, the Committee uses these incentives in various proportions and at varying levels relative to the market in order to motivate desired performance. The Committee shares the view that as an officer’s responsibility increases so does his or her ability to influence the performance of the company and accordingly, the proportion of his or her compensation that consists of his or her salary and cash bonus should decrease while the proportion of equity incentives to total compensation should increase.

      Benchmarking. As discussed below, the Committee establishes cash bonuses and long-term incentives to be competitive with the 60th percentile of the comparable companies identified below. The Committee believes that this market positioning is consistent with its goal of attracting and retaining talent and appropriately reflects the risk and leverage of the design of the plans pursuant to which such awards are made. In contrast, the Committee establishes base salaries to be competitive with the 50th percentile of comparable companies. The Committee believes that the 50th percentile is the appropriate market positioning for base salaries in light of the risk associated with this element of compensation and is consistent with providing compensation that is competitive with Baxter’s peers.

      Comparable Companies. In making compensation decisions, including assessing the competitiveness of the total compensation structure for each named executive officer, the Committee considers compensation survey data from companies that the Committee has selected as comparable companies (“comparable companies” or the “comparator group”). The Committee periodically reviews the companies that are included as comparable companies and makes revisions to the group as appropriate. In October 2006 and with the assistance of its compensation consultant, the Committee revised the comparable companies to include general industry peers (i.e., companies with $5 to $15 billion of annual revenues) and selected healthcare peers. These selected healthcare peers generally include all of the companies in the Standard & Poor’s 500 Health Care Index except for distribution companies, insurance providers, hospitals, nursing homes and consultants and pure drug discovery and development companies. The comparator group is comprised of approximately 135 companies, of which approximately 35 are healthcare companies. Prior to that time, the comparable companies included selected companies in the pharmaceutical, medical device, and biotech industries included in the Standard & Poor’s 500 Health Care Index, as well as other large non-healthcare companies of similar size and scope.

      Use of Compensation Consultant. The Compensation Committee has directly engaged George B. Paulin, Chairman and Chief Executive Officer of Frederic W. Cook & Co., Inc. as its compensation consultant. Mr. Paulin reports directly to the Committee and is responsible for reviewing Committee materials, attending Committee meetings, assisting the Committee with program design and generally providing advice and counsel to the Committee as compensation issues arise. The Committee also looks to Mr. Paulin for assistance in determining the competitiveness of Baxter’s total compensation structure. From time to time, Hewitt Associates assists the Committee with the compilation of market data.

      Tally Sheets. In setting compensation for each of the named executive officers, the Committee reviews the total annual compensation received by each such officer, including base salary, cash bonuses, long-term incentives, perquisites and post-employment obligations in establishing each element of compensation. The Committee uses Tally Sheets for each of the named executive officers to facilitate this review.

      Stock Ownership Guidelines. The Committee recognizes the importance of equity ownership in the alignment of shareholder and management interests. Accordingly, Baxter’s stock ownership guidelines provide that the Chief Executive Officer is required to achieve ownership of Baxter common stock valued at six times annual base salary, while the multiple for Baxter’s other executive officers is four times annual base salary. All executive officers are expected to satisfy their respective guidelines within five years of

becoming an executive officer. As of December 31, 2006, Mr. Parkinson, Mr. Davis, Ms. Amundson, Mr. Arduini and Mr. Greisch were at approximately 142%, 43%, 138%, 104%, and 147% of their respective stock ownership goals. Mr. Davis became an executive officer in May 2006 and is on track to meet his stock ownership requirement within the applicable five-year period.

      Equity Grant Practices. The exercise price of each stock option awarded to our executive officers under our incentive compensation programs is the closing price of our common stock on the date of grant, which is the date when the Compensation Committee acts to approve equity awards for senior executives. Performance-based equity awards are also granted to our named executive officers at this time. The date that the Compensation Committee approves these equity awards is scheduled in advance and is based on the timing of the completion of annual performance reviews and the internal compensation review process.

Elements of Executive Compensation

      Baxter’s compensation program for its named executive officers consists of the following components:

      The Committee establishes base salaries each year based on each officer’s individual performance within a structure intended to be competitive with the 50th percentile of salaries paid to officers of the comparable companies. At its February 2006 meeting, the Committee reviewed market data provided by Hewitt Associates that indicated that the 50th percentile salary for the position of Chairman and Chief Executive Officer at the comparable companies was $1,198,300 and that the general market salary increase for executives for 2006 was estimated to be 3.7%. In addition to this market data, the Committee discussed and reviewed the individual performances of each of the executive officers. In particular, the Committee reflected on how each individual contributed to improving the financial position of the company as well as its overall organizational development. Based on all of these factors, in February 2006, the Board increased Mr. Parkinson’s salary from $1,140,000 to $1,200,000, a 5.3% increase, and approved salary increases for Mr. Davis, Ms. Amundson, Mr. Arduini and Mr. Greisch that represented increases of 5.3%, 2.5%, 7.1% and 10%, respectively. On May 17, 2006, Mr. Davis was elevated to the role of Chief Financial Officer of the company. In order to reflect this change in responsibilities, the Committee increased Mr. Davis’s salary from $300,000 to $400,000 effective as of such date. The Committee set Mr. Davis’s initial salary below the 50th percentile of salaries paid to Chief Financial Officers at comparable companies to reflect the fact that he is new to this role.

      Cash bonuses are intended to provide officers with an opportunity to receive additional cash compensation through the achievement of specified company and individual performance goals. Cash bonuses earned for 2006 performance are shown in the column entitled “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table. Cash bonus targets for 2006 were intended to be competitive with the 60th percentile of cash bonus targets for officers at the comparable companies subject to adjustments where appropriate. For example, officers who are new in their roles generally have a target below the 60th percentile. The cash bonuses that are awarded to named executive officers are determined by (i) individual bonus targets, (ii) the funding of Baxter’s Management Incentive Compensation Program (MICP) and (iii) an assessment of each officer’s individual performance. The Committee establishes annual bonus targets for each officer by utilizing market data from the comparable companies. These targets are typically set at the February meeting of the Compensation Committee (or the Board in the case of Mr. Parkinson). The funding of Baxter’s MICP is based on the company’s achievement of certain predetermined annual performance goals. After year-end results are reported, the Committee determines each officer’s bonus based on an assessment of the officer’s individual performance. Individual performance is measured by the officer’s performance compared to the goals and objectives set by the executive at the beginning of the year. Using these measurements, adjustments are made to each officer’s compensation that differentiate individual compensation based on relative performance.

      For 2006, the Committee selected earnings per share, sales and return on invested capital as the performance measures on which to base the company’s performance under the MICP. The relative weight assigned to each of these measures was 50%, 25%, and 25%, respectively. As Baxter met its sales target and exceeded its earnings per share and return on invested capital targets for 2006 by 5.7% and 14.7%, respectively, the Committee approved officer cash bonus funding of 138% of each named executive officer’s target bonus. Actual bonus amounts for 2006 were then adjusted to reflect each officer’s individual performance in 2006. For 2006, the individual assessment adjustments ranged from 120% to 140% of the actual bonus amounts.

      More specifically, at the February 2007 meeting, the Corporate Governance Committee and then the Board reviewed Mr. Parkinson’s performance against the goals approved by the Board at its February 2006 meeting. This review included a discussion of the performance evaluation that Mr. Parkinson submitted to the Corporate Governance Committee, the input of all members of the Board as to Mr. Parkinson’s performance relative to his objectives, as well as a discussion among Mr. Parkinson and the Corporate Governance and Compensation Committees led by the lead director regarding Mr. Parkinson’s performance. As a result of this review, the Board awarded Mr. Parkinson a cash bonus of $3,000,000 for his 2006 performance. This amount reflects cash bonus funding of 138% of Mr. Parkinson’s target bonus as well as upward adjustments that were made by the Board to reflect Mr. Parkinson’s individual performance. In January 2007, each of the other named executive officers completed an evaluation of his or her performance against the performance measurement objectives set by such officer and approved by Mr. Parkinson in February 2006. Mr. Parkinson then met with each of these named executive officers to review the evaluation and provide performance feedback to the officers. Based on these reviews and his own assessment of the officer’s performance, Mr. Parkinson recommended adjustments to each officer’s compensation at the February 2007 meeting of the Compensation Committee. Using the individual performance information that had been gathered in this process, the Compensation Committee then adjusted each officer’s compensation upward to reflect his or her individual performance in 2006.

      To further align management and shareholder interests and to continue to promote a pay-for-performance philosophy, Baxter maintains a Long-Term Incentive (LTI) plan for its senior executives, including the Chief Executive Officer and the other named executive officers. Awards are made pursuant to the LTI plan in March of each year. The awards granted to the named executive officers in March 2006 provided for a mix of stock options (70%) and restricted stock units (30%). The Committee weighted the mix of these awards to be consistent with the company’s objective of providing compensation that is appropriately balanced from an at-risk compensation perspective. The competitive positioning of the LTI plan ranks at the 60th percentile of the long-term incentive opportunities provided to LTI participants’ counterparts in the comparable companies.

      The awards granted to the named executive officers in March 2006 were calculated using a Total Shareholder Return (TSR) multiplier that could increase or decrease a participant’s stock option and restricted stock unit targets, depending on Baxter’s relative TSR performance in 2005. A participant’s stock option and restricted stock unit targets were intended to equal the 60th percentile of the long-term incentive grant values provided by the comparable companies. The TSR multiplier measures the annual percentage change in Baxter’s TSR compared to the TSR for the Standard & Poor’s 500 Health Care Index. Based on this comparison, a participant’s target LTI award in 2006 could increase up to a maximum of 150% or decrease to a minimum of 75% of target. Actual awards were based on a combination of the participant’s target award, the TSR multiplier and the participant’s individual performance. Baxter’s strong relative TSR performance in 2005 drove increased LTI grants for 2006. For the period of January to December 2005, Baxter’s TSR was 10.63% compared to a TSR of 6.46% for the Standard & Poor’s 500 Health Care Index. In accordance with the TSR multiplier incorporated in the LTI Plan, the participants’ stock option and restricted stock unit targets for 2006 were adjusted to the maximum of 150% of target. Actual stock option and restricted stock unit awards for Baxter’s named executive officers ranged from 80% to 120% of the adjusted targets due to individual performance. The

stock option and restricted stock unit awards granted to Mr. Parkinson in March 2006 represented 80% of his adjusted targets, or 120% of his targets.

      For 2007, the Committee amended the LTI plan design to provide for a mix of stock options (50%) and performance share units (50%). The Committee adjusted the mix of the stock options downward in order to reflect the market shift away from stock options in favor of full-value shares. The decision to replace restricted stock units with performance share units was made as a result of the Committee’s interest in more effectively tying these equity awards to company performance on a prospective basis. The performance component of the performance share units will be measured based on Baxter’s Growth in Shareholder Value (GSV). The payout resulting from the vesting of the performance share units will be based on Baxter’s GSV versus the GSV of the healthcare peers included in Baxter’s comparator group during the three-year performance period commencing with the year in which the performance share units are awarded. As discussed above, in October 2006, the Committee reviewed and revised the group of companies included in Baxter’s comparator group. Accordingly, the healthcare companies that Baxter’s GSV will be measured against differ from those companies against which Baxter’s TSR was measured. Depending on how Baxter’s GSV compares, the payout will range from 0% to 200% of the targeted number of performance share units awarded. In order to transition to the amended LTI plan design, the Committee supplemented the March 2007 LTI grants with one-time transitional awards of restricted stock units to the named executive officers (other than Mr. Parkinson) that will vest ratably over three years. The number of restricted stock units in this supplemental grant was determined by estimating the value of the additional equity awards that the officers would have received under the former LTI plan design as a result of Baxter’s 2006 TSR performance relative to its comparator group and then dividing this value in half.

      Baxter has historically provided its named executive officers with certain perquisites that the Committee believes are reasonable, competitive and consistent with Baxter’s overall compensation philosophy. In 2006, these perquisites included: car and financial planning allowances, annual physical exams and home security systems. Named executive officers were also eligible to use the company aircraft for personal travel on a limited basis and only if such aircraft usage had been pre-approved by the Chief Executive Officer. Any such aircraft usage is reviewed annually by the Committee. Effective as of January 1, 2007, Baxter eliminated these perquisites, with the exception of annual physical exams and pre-approved use of the company aircraft for personal travel on a limited basis. This decision was made in response to changes in market practices as well as to address shareholder concerns surrounding the provision of perquisites.

      Each of the named executive officers participates in Baxter’s U.S. pension plan and supplemental pension plans. U.S. tax regulations limit the benefit available to highly compensated employees under qualified pensions plans. As a result, certain amounts of the named executive officers’ eligible compensation are disallowed as pensionable earnings under the pension plan. The supplemental pension plan was put in place to provide a benefit for the amount of eligible compensation that is disallowed under the pension plan. The supplemental pension plan is available to all employees whose benefit under the pension plan is limited by U.S. tax regulations. The company believes that maintaining the supplemental pension plan is appropriate in light of the level of responsibility carried by the plan participants and the retirement benefits provided by competitors. Pursuant to his employment agreement, if Mr. Parkinson remains employed for at least three years his pension benefit will be determined as if he had completed an additional two years of service, and if he remains employed for at least five years, his pension benefit will be determined as if he had completed an additional four years of service. The other named executive officers participate in the pension plan to the same extent and on the same terms as any other eligible Baxter employee. A more detailed discussion of these plans is provided under the caption “Pension Benefits” on page 22 of this Proxy Statement.

      Each of the named executive officers is eligible to participate in Baxter’s deferred compensation plan, the terms of which are more fully described under the caption “Nonqualified Deferred Compensation” on page 23 of this Proxy Statement. The company maintains a deferred compensation plan to further its objective of providing officers with compensation that is competitive with that provided by comparable companies.

      In December 2006, each of the named executive officers (other than Mr. Parkinson) entered into a severance agreement with the company that provides for certain payments in the event of a Change in Control of the company. Mr. Parkinson did not enter into a severance agreement as his current employment agreement provides for payments to him in the event of the termination of his employment including as a result of a Change in Control. For a more detailed discussion of these agreements, please refer to information under the captions “Employment Agreement with Chairman and Chief Executive Officer — Termination of Employment” and “Potential Payments Upon Termination Following A Change-in-Control” on pages 18 and 24 of this Proxy Statement, respectively.

Summary Compensation Table

      The following table shows for the year ended December 31, 2006 the compensation provided by Baxter and its subsidiaries to its Chief Executive Officer, Chief Financial Officer and the three next most highly compensated executive officers. The five individuals identified in the Summary Compensation Table are referred to as the “named executive officers” throughout this Proxy Statement.

Grants of Plan-Based Awards

Description of Certain Awards Granted in 2006

      As discussed above, Baxter grants equity awards to its senior managers under the LTI Plan in March of each year. In March 2006, the named executive officers received awards of restricted stock units and stock options. The restricted stock units granted in 2006 vest ratably over three-year terms from the date of grant. During the restricted period, the named executive officers do not have any of the rights of shareholders other than the right to receive dividend equivalent payments. The stock options granted in 2006 become exercisable three years from the date of grant or earlier upon death, disability or a specified change in control. The exercise price for stock options granted under the LTI Plan is the price at which Baxter’s common stock was last sold on the New York Stock Exchange on the grant date.

      Except in the case of death or disability, if a named executive officer’s employment is terminated before the 2006 restricted stock unit and stock option awards vest or become exercisable, as applicable, the awards will be forfeited or expire, as applicable. If a named executive officer’s employment is terminated due to death or disability, his or her unvested restricted stock units will vest immediately and his or her unexercisable options will become exercisable for a period of one year from the date of termination (assuming the date of death or disability is after March 14, 2007). If a named executive officer’s

employment is terminated after his or her stock options become exercisable (other than by reason of death or disability or as set forth in the next sentence), the options will remain exercisable for a period of three months from the date of termination unless either (i) the officer dies or becomes disabled during this three-month period, in which case the options will expire one year from the date of termination or (ii) the officer is at least 50 years of age and has completed 15 or more years of employment with Baxter, in which case the options will remain exercisable for a period of five years from the date of termination. If a named executive officer’s employment is terminated due to death or disability after his or her stock options become exercisable, the options will expire one year from the date of termination. Any stock options granted on March 14, 2006 that have not previously expired will expire on March 14, 2016.

Employment Agreement with Chairman and Chief Executive Officer

      On April 19, 2004, Baxter entered into an employment agreement with Robert L. Parkinson, Jr. Mr. Parkinson was appointed Chief Executive Officer and was elected as Chairman of the Board in April 2004. There are no other employment agreements between Baxter and its named executive officers.

      Term. The agreement provides for Mr. Parkinson’s employment through April 19, 2007, subject to an automatic day-to-day extension, such that at any time after April 19, 2007, the agreement term shall be two years (subject to earlier termination as described below).

      Salary and Incentive Bonus. Under the agreement, Mr. Parkinson is to receive an annual base salary of not less than $1,100,000, subject to possible increase by the independent directors of the Board. Mr. Parkinson is also eligible to participate in Baxter’s officer bonus program.

      Options and Restricted Stock. Under the agreement, Mr. Parkinson is eligible for equity awards under the LTI Plan. All such awards to Mr. Parkinson shall be commensurate with his position as Chief Executive Officer as determined by the independent directors of the Board.

      Benefits and Perquisites. The agreement also provides for benefits to the same extent and on the same terms as those benefits provided by the company to its other senior executives including, but not limited to, health, disability, insurance and retirement benefits. Under the agreement, if Mr. Parkinson remains employed for at least three years, his pension benefit will be determined as if he had completed an additional two years of service. If Mr. Parkinson remains employed for at least five years, his pension benefit will be determined as if he had completed an additional four years of service. Mr. Parkinson is also entitled to perquisites that are customarily provided in connection with his position.

      Non-Competition and Non-Solicitation. Mr. Parkinson has agreed that he will not, directly or indirectly, for a period of two years after the termination of his employment, render services to any competing organization in connection with any competing product within such geographic limits as the company and such competing organizations 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. Similarly, Mr. Parkinson may not provide advice as to investment in a competitive business. During his employment and for a period of two years after the termination of his employment, Mr. Parkinson may not solicit or attempt to solicit any party who is then, or during the twelve-month period prior to such solicitation was, a customer or supplier of the company, nor may Mr. Parkinson solicit, entice, persuade or induce any individual who is employed by the company or subsidiaries 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.

      Confidentiality. The agreement contains confidentiality provisions prohibiting Mr. Parkinson from using any “Confidential Information” or “Items” (each as defined in the agreement) in any way except in the course of his employment and for the benefit of Baxter. Mr. Parkinson is also precluded from using any Confidential Information or any copy or notes made from any Item embodying Confidential Information for his own benefit or purposes or disclosing such to others. The agreement requires Mr. Parkinson to preserve all Confidential Information that has been or may be obtained by him during

his employment as well as after the termination of his employment. Upon termination of his employment, Mr. Parkinson has agreed to turn over all Items to the company.

      Donation to Loyola University Chicago. As an additional condition of his employment, the company agreed to make a $1.5 million donation to Loyola University Chicago over a three-year period. These funds will support certain capital improvements to the School of Business Administration and the development of new curriculum initiatives in the Graduate School of Business. In 2006, Baxter satisfied its commitment with respect to this donation by making its final payment of $500,000 to Loyola University Chicago.

      Termination of Employment. The agreement provides for termination in the event of his death, permanent disability, termination for “Cause” (as defined in the agreement), or “Constructive Discharge” (as defined in the agreement). The agreement also allows for termination by the company or by Mr. Parkinson, including in the event of a “Change in Control” as defined in the company’s 2003 Incentive Compensation Program. The employment agreement also provides for termination upon written notice by either Baxter or Mr. Parkinson.

      In the event of termination, Mr. Parkinson is entitled to his salary for the period ending on his termination date, payment for any unused vacation days as determined in accordance with company policy, any other payments or benefits due from the company in accordance with the terms of any employee benefit plans or arrangements, and any pension benefit earned (“base benefits”).

      In the event of termination due to death or disability, in addition to the base benefits previously described, all restricted stock awards and stock options shall fully vest immediately, with the stock options remaining exercisable for the lesser of five years or the term of the grant. Mr. Parkinson and his family members will be entitled to 18 months (36 months in the case of death) of paid COBRA coverage. In the case of disability, Mr. Parkinson will be entitled to the payment of his salary through the commencement of any payments to him under the company’s long-term disability plan.

      If Mr. Parkinson’s employment is terminated without Cause, or due to Constructive Discharge, a Change in Control or non-renewal of his employment agreement, pursuant to the terms of his employment agreement, in addition to base benefits, Mr. Parkinson will be eligible for an annual bonus payment for the performance period in which such termination of employment occurs. In addition, Mr. Parkinson will receive severance payments from the company equal to his annual salary in effect on the date immediately prior to the date of his termination of employment plus the target annual bonus amount for the year in which the termination occurs for a period of at least two years from his date of termination or the last day of his agreement, whichever is greater. All exercise restrictions with respect to stock options will lapse and become fully vested and fully exercisable as of the date of the termination of employment, and all restricted stock awards will fully vest immediately and all restrictions would lapse. The stock options will remain exercisable for the greater of five years after his termination date or the number of days that Mr. Parkinson was employed prior to his termination; however, in no event will the exercise period be greater than the original expiration date of the grant. Mr. Parkinson and his family members will be entitled to 18 months of paid COBRA coverage.

      The following table shows Baxter’s potential payment and benefit obligations to Mr. Parkinson upon his termination under the various circumstances specified in his employment agreement assuming such termination occurred on December 31, 2006.

Outstanding Equity Awards At Fiscal Year-End

Option Exercises and Stock Vested

Pension Benefits

      The Baxter International Inc. and Subsidiaries Pension Plan (the “Pension Plan”) is a broad-based retirement income plan. The normal retirement (age 65) benefit equals (i) 1.75 percent of a participant’s Final Average Pay multiplied by the participant’s number of years of Pension Plan participation, minus (ii) 1.75 percent of a participant’s estimated primary social security benefit, multiplied by the participant’s years of Pension Plan participation. The Final Average Pay is equal to the average of a participant’s five highest consecutive calendar years of earnings out of his or her last ten calendar years of earnings. In general, the compensation considered in determining the pension payable to the named executive officer includes salary and cash bonuses awarded under the officer bonus program. Although age 65 is the normal retirement age under the Pension Plan, the Pension Plan has early retirement provisions based on a point system. Under the point system, each participant is awarded one point for each year of Pension Plan participation and one point for each year of age. Participants who terminate employment after accumulating at least 65 points, and who wait to begin receiving their Pension Plan benefits until they have 85 points, receive an unreduced Pension Plan benefit regardless of their actual age when they begin receiving their Pension Plan benefits.

      The Baxter International Inc. and Subsidiaries Supplemental Pension Plan (the “Supplemental Plan”) is available to all participants in the Pension Plan. It restores benefits that would otherwise be limited by statutory pay and benefit limits. All eligibility and payment conditions are the same as for the Pension Plan. Deferred salary and bonus amounts that may not be included under the Pension Plan are included in the Supplemental Plan.

      As discussed under the caption “Employment Agreement with Chairman and Chief Executive Officer” on page 18 of this Proxy Statement, Mr. Parkinson is eligible for additional benefits under the Pension Plan formula pursuant to his employment agreement. If he remains employed for at least three years, he will be vested under the agreement and his pension benefit will be determined as if he had completed an additional two years of service. If Mr. Parkinson remains employed for at least five years, his pension benefit will be determined as if he had completed an additional four years of service. The employment agreement also provides that Mr. Parkinson is eligible for unreduced early retirement upon vesting with an offset for benefits received under the Pension Plan. The table above reflects the portion of the present value of these additional benefits that has been accrued by Baxter as of December 31, 2006.

      The present value of accumulated benefits has been determined as follows: the accrued benefit was calculated using pensionable earnings and benefit service through 2006; present value of this accrued benefit payable at the earlier of normal retirement (age 65) or the earliest point where it would be unreduced (85 points) was calculated as an annuity payable for the life of the participant only; the present value of the benefit at the assumed payment age was discounted with interest only to the current age as of measurement date.

      The present value of the accrued benefits disclosed in the table above are based on the following assumptions:

      Other assumptions not explicitly mentioned are the same as those assumptions used for financial reporting. Please refer to Note 8 to our Consolidated Financial Statements for the year ended December 31, 2006 for more information on those assumptions.

Nonqualified Deferred Compensation

      Each participant in the Deferred Compensation Plan may elect to defer up to 20% of his or her eligible compensation during the calendar year as long as the participant makes such election prior to the beginning of the calendar year. For named executive officers, eligible compensation under the Deferred Compensation Plan includes a participant’s base salary and any cash bonus. Participants in the Deferred Compensation Plan may select a subset of investment elections available to all eligible employees under Baxter’s Incentive Investment Plan (a tax-qualified section 401(k) profit sharing plan). Amounts in a participant’s account are adjusted on a daily basis upward or downward to reflect the investment return that would have been realized had such amounts been invested in the investments selected by the participant. Participants may elect to change their investment elections once each calendar month. Baxter is also required to match contributions to the Deferred Compensation Plan dollar-for-dollar up to 3% of a participant’s eligible compensation. Deferrals under the Plan are not recognized as eligible compensation for the qualified pension plan or in calculating benefit pay under Baxter’s welfare benefit plan and result in lower compensation recognized for company matching under the Incentive Investment Plan.

      Participants may elect to be paid distributions either in a lump sum payment or in annual installment payments over two to fifteen years. Distributions will be paid in the first quarter of the plan year following such participant’s termination of employment unless such participant is a “key employee” as defined in Section 409A of the Internal Revenue Code of 1986, as amended. No distributions will be paid in connection with the termination of a key employee until at least six months following such termination and any amounts that would have otherwise been paid during such six month period shall be accumulated and paid in a lump sum, without interest, at the expiration of such period.

Potential Payments Upon Termination Following A Change-in-Control

      In December 2006, each of the named executive officers (other than Mr. Parkinson) entered into a severance agreement with the company that provides for certain payments in the event of certain terminations of employment following a Change in Control of the company. Mr. Parkinson did not enter into a severance agreement as his current employment agreement provides for payments to him in the event of the termination of his employment including as a result of a Change in Control. For a description of the payments to be made to Mr. Parkinson upon termination of his employment, please see “Employment Agreement with Chairman and Chief Executive Officer” on page 18 of this Proxy Statement.

      The severance agreements provide that if a Change in Control of the company occurs and as a result the named executive officer either is terminated or terminates his employment for Good Reason (as defined in the agreement), such named executive officer will receive a lump sum cash payment generally equal to twice the aggregate amount of such officer’s salary and target bonus, and the named executive officer also will be entitled to two years of continued welfare benefit coverage, a pro-rata annual incentive bonus, continued retirement and savings plan accruals for two years, two years of additional age and service credit for retiree welfare benefit purposes, and outplacement expense reimbursement in an amount not exceeding $50,000. The severance agreements also contain non-competition, non-solicitation and non-disparagement covenants binding the named executive officers for two years. A condition for receiving any severance payments under the agreement is the execution by the named executive officer of a customary release of claims in a form reasonably acceptable to the company. In the event that the total payments to a named executive officer under the agreement exceed 110% of the largest amount that would result in no portion of the total payments being subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended, the company will gross-up the severance payments to the officer to cover such excise tax. In the event that the total payments to a named executive officer under the agreement do not exceed 110% of the largest amount that would result in no portion of the total payments being subject to excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended, then the severance payments will be reduced until no portion of the payments is subject to such excise tax.

      The following table shows Baxter’s potential payment and benefit obligations to each of the named executive officers (other than Mr. Parkinson) assuming that a Change in Control of the company had occurred and as a result the named executive officer either was terminated or terminated his or her employment for Good Reason on December 31, 2006.

Director Compensation

      Under Baxter’s non-employee director compensation plan (the “Director Compensation Plan”), non-employee director compensation consists of a combination of cash compensation, stock options and restricted stock, as described below. The summary set forth below describes the Director Compensation Plan as in effect during 2006 unless otherwise indicated.

Cash Compensation

      Under the Director Compensation Plan, each non-employee director receives a $45,000 annual cash retainer (increased to $50,000 effective January 1, 2007). In addition, each non-employee director also receives a $1,000 fee for each Board and each committee meeting attended (increased to $1,500 effective January 1, 2007), and each non-employee director who acts as the chair of any committee meeting receives an additional $1,000 for each meeting chaired by him or her (increased to $1,500 effective January 1, 2007). The lead director receives an additional annual cash retainer of $25,000. Non-employee directors are eligible to participate in a deferred compensation plan that allows deferral of all or any portion of cash payments until Board service ends and provides participants with a select sub-set of investment elections available to all eligible employees under Baxter’s Incentive Investment Plan (a tax-qualified section 401(k) profit sharing plan).

Stock Options

      Each non-employee director receives a grant of stock options annually on the date of the annual meeting of shareholders. Under the Director Compensation Plan, the annual stock option grant to each non-employee director has a target value on the grant date based on a Black-Scholes valuation of $60,000. The stock options become exercisable on the date of the next annual meeting of shareholders, and may become exercisable earlier in the event of the death, disability, or a change in control of Baxter.

Restricted Stock

      Each non-employee director also receives an annual grant of restricted shares of Baxter common stock on the date of the annual meeting of shareholders. The number of restricted shares to be granted to each non-employee director each year equals the quotient of $60,000 divided by the closing sale price for a share of Baxter common stock on the date of the annual meeting. The restricted shares vest on the date of the next annual meeting of shareholders and will be forfeited if the non-employee director leaves the Board for any reason other than death or disability prior to that date. In the event of a change in control of Baxter, all restrictions on the shares will terminate. Until vested, the restricted stock cannot be transferred or sold. During the restriction period, the directors have all of the other rights of a shareholder, including the right to receive dividends and vote the shares. As a result of the amendments discussed above, effective May 2007, directors will receive annual awards of restricted stock units instead of restricted stock and will have the option of deferring the receipt of the shares of stock underlying such restricted stock units until the earlier of three years from the grant date or termination from service as a director.

Director Stock Ownership Guidelines

      Baxter’s Corporate Governance Guidelines require that after five years of Board service, each director is to hold common stock equal to five times the annual cash retainer provided to directors.

Director Compensation Table

      The following table provides information on 2006 compensation for non-employee directors who served during 2006.

Compensation Committee Report

      The Compensation Committee is responsible for the oversight of Baxter’s compensation programs on behalf of the Board of Directors. In fulfilling its oversight responsibilities, the Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis set forth in this Proxy Statement.

      Based on the review and discussions referred to above, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Baxter’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and Proxy Statement for the 2007 Annual Meeting of Shareholders, each of which will be filed with the Securities and Exchange Commission.

Security Ownership by Directors and Executive Officers

      The following table sets forth information as of January 31, 2007 regarding beneficial ownership of Baxter common stock by executive officers, directors and director nominees.

Security Ownership by Certain Beneficial Owners

      As of February 14, 2007, the following entity was the only person known to Baxter to be the beneficial owner of more than five percent of Baxter common stock:

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of our common stock, as well as certain affiliates of such persons, to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely on our review of the reports that have been filed by or on behalf of such persons in this regard and written representations from them that no other reports were required, we believe that all persons filed the reports required by such Section 16(a) of the Securities Exchange Act of 1934, as amended, on a timely basis during or with respect to 2006, other than for two purchases with respect to Peter S. Hellman. The purchases were made by a fiduciary on behalf of Mr. Hellman’s spouse and the resulting shares were held in her brokerage account. Promptly after discovering the omission, Mr. Hellman filed a Form 4 reporting these transactions.

Certain Relationships and Related Transactions

      The Board of Directors recognizes that related person transactions present a heightened risk of conflicts of interest. Accordingly, pursuant to Baxter’s Corporate Governance Guidelines, the Corporate Governance Committee has been charged with reviewing related person transactions regardless of whether the transactions are reportable pursuant to Item 404 of Regulation S-K under the Securities Exchange Act of 1934, as amended. For purposes of this policy, a “related person transaction” is any transaction in which the company was or is to be a participant and in which any related person has a direct or indirect material interest other than transactions that involve less than $50,000 when aggregated with all similar transactions. For any related person transaction to be consummated or to continue, the Corporate Governance Committee must approve or ratify the transaction. Related person transactions are reviewed as they arise and are reported to the Committee. The Committee also reviews materials prepared by the Corporate Secretary to determine whether any related person transactions have occurred that have not been reported. It is Baxter’s policy to disclose all related person transactions in the company’s applicable filings to the extent required by the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules and regulations thereunder.

Audit Committee Report

      Management is responsible for the preparation, presentation and integrity of Baxter’s consolidated financial statements and Baxter’s internal control over financial reporting. The independent registered public accounting firm of PricewaterhouseCoopers LLP (PwC) is responsible for performing an independent integrated audit of Baxter’s consolidated financial statements, management’s assessment of Baxter’s internal control over financial reporting and the effectiveness of Baxter’s internal control over financial reporting. The Audit Committee’s responsibility is to monitor and oversee these processes.

      In this context, the Audit Committee reports as follows:

      Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that Baxter’s audited financial statements referred to above be included in Baxter’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 for filing with the Securities and Exchange Commission.

Audit and Non-audit Fees

      The table set forth below lists the fees billed to Baxter by PwC for audit services rendered in connection with the integrated audits of Baxter’s consolidated financial statements for the years ended December 31, 2006 and 2005, and fees billed for other services rendered by PwC during these periods.

      Audit Fees include fees for services performed by PwC relating to the integrated audit of the consolidated annual financial statements and internal control over financial reporting, the review of financial statements included in the company’s quarterly reports on Form 10-Q and statutory and regulatory filings or engagements. Excluding the impact of foreign exchange, the 2006 Audit Fees decreased by 4.1% versus 2005.

      Audit-Related Fees include fees for assurance and related services performed by PwC related to the performance of the audit or review of the financial statements, including employee benefit plan audits, accounting consultations, subsidiary audits and reviews, due diligence services and other assurance services. Audit-Related Fees in 2006 include multi-year carve-out audits of the Transfusion Therapies business.

      Tax Fees include fees for services performed by PwC for tax compliance, tax advice, and tax planning. Of these amounts, approximately $807 in 2006 and $1,370 in 2005 were related to tax compliance services, including transfer pricing support, income tax return preparation or review and VAT compliance. Fees for tax consulting services of approximately $136 in 2006 and $587 in 2005 were related to international, federal, state and local tax planning, assistance with tax audits and appeals and other tax consultations.

      All Other Fees include fees for all other services performed by PwC, including software license fees for certain accounting and audit-related software.

Pre-approval of Audit and Permissible Non-Audit Services

      The Audit Committee must separately pre-approve the engagement of the independent registered public accounting firm to audit the company’s consolidated financial statements. Prior to the engagement, the Audit Committee reviews and approves a list of services, including estimated fees, expected to be rendered during that year by the independent registered public accounting firm. Reports on projects and services are presented to the Audit Committee on a regular basis.

      The Audit Committee has established a pre-approval policy for engaging the independent registered public accounting firm for other audit and permissible non-audit services. Under the policy, the Audit Committee has identified specific audit, audit-related, tax and forensic services that may be performed by the independent registered public accounting firm. The engagement for these services specified in the policy requires the further, separate pre-approval of the chair of the Audit Committee or the entire Audit Committee if specific dollar thresholds set forth in the policy are exceeded. Any project approved by the chair under the policy must be reported to the Audit Committee at the next meeting. Services not specified in the policy as well as the provision of internal control-related services by the independent registered public accounting firm require separate pre-approval by the Audit Committee.

      All audit, audit-related, tax and other services provided by PwC in 2006 were pre-approved by the Audit Committee in accordance with its pre-approval policy.

Proposal 2 — Ratification of Independent Registered Public Accounting Firm

      In accordance with its charter, the Audit Committee of the Board of Directors has appointed PricewaterhouseCoopers LLP (PwC) as the independent registered public accounting firm for Baxter in 2007. The Audit Committee requests that the shareholders ratify the appointment. PwC served as the independent registered public accounting firm for Baxter in 2006. If the shareholders do not ratify the appointment of PwC, the Audit Committee will consider the selection of another independent registered public accounting firm for 2008 and future years.

      Before selecting PwC, the Audit Committee carefully considered PwC’s qualifications as an independent registered public accounting firm. This included a review of its performance in prior years as well as its reputation for integrity and competence in the fields of accounting and auditing. The Audit Committee’s review also included matters required to be considered under rules of the Securities and Exchange Commission on auditor independence, including the nature and extent of non-audit services, to ensure that the provision of such services will not impair the independence of the auditors. The Audit Committee expressed its satisfaction with PwC in all of these respects.

      One or more representatives of PwC will be present at the Annual Meeting to respond to appropriate questions and to make a statement if they so desire.

      The persons named as proxies intend to vote the shares represented by proxy in favor of the ratification of the appointment of PwC as the company’s independent registered public accounting firm, except to the extent a shareholder votes against or abstains from voting on this proposal.

      The Audit Committee of the Board of Directors recommends a vote FOR the ratification of the appointment of PwC as independent registered public accounting firm for Baxter in 2007.

Proposal 3 — Approval of the 2007 Incentive Plan

General

      The Board of Directors recommends that shareholders approve the Baxter International Inc. 2007 Incentive Plan (the “2007 Plan”). The Board of Directors approved the 2007 Plan on February 13, 2007. It is not anticipated that any awards will be made under the 2007 Plan unless and until shareholder approval is obtained. However, any awards that are made under the 2007 Plan prior to its approval by the shareholders will be conditioned upon shareholder approval of the 2007 Plan. Upon shareholder approval of the 2007 Plan, no further awards will be granted under our 1998 Incentive Compensation Program. The Board of Directors believes that it is in the best interest of Baxter and its shareholders to adopt a new incentive plan. The purposes of the 2007 Plan are to increase shareholder value and to advance the interests of Baxter and its subsidiaries by providing a variety of economic incentives designed to motivate, retain and attract employees, directors, consultants, independent contractors, agents and other persons providing services to Baxter. A summary of the material terms of the 2007 Plan is contained below. This summary should be read with and is subject to the specific provisions of the 2007 Plan, the full text of which is set forth as Appendix A to this Proxy Statement.

      Excluding shares available under Baxter’s employee stock purchase plans, approximately 17.2 million shares remained available for grant under Baxter’s current incentive compensation plans as of December 31, 2006 and approximately 8.1 million shares remained available for grant under Baxter’s incentive compensation plans as of March 16, 2007, following our annual equity grants which occur in March. For the years 2004 through 2006, the number of shares granted as a percentage of the total shares of common stock outstanding of Baxter averaged 1.86%, which percentage is often referred to as Baxter’s burn rate. For further information on our current equity compensation plans, please refer to Equity Compensation Plan Information on page 41 of this Proxy Statement.

      Shareholders are asked to approve the 2007 Plan to qualify stock options as incentive stock options for purposes of Section 422 of the Code, to qualify certain compensation under the 2007 Plan as performance-

based compensation for purposes of Section 162(m) of the Code, and to satisfy New York Stock Exchange guidelines relating to equity compensation.

Key Features of the 2007 Plan

      The 2007 Plan contains features that the Board of Directors believes are consistent with the interests of shareholders and sound governance principles. These features include the following:

Eligibility

      All officers, directors, or other employees of Baxter or its subsidiaries, consultants, independent contractors or agents of Baxter or its subsidiaries, and persons who are expected to become officers, employees, directors, consultants, independent contractors or agents of Baxter or a subsidiary, including, in each case, directors who are not employees of Baxter or a subsidiary, are eligible to receive awards under the 2007 Plan. As of December 31, 2006, Baxter and its subsidiaries had approximately 48,000 employees.

New Plan Benefits

      The specific individuals who will be granted awards under the 2007 Plan and the type and amount of any such awards will be determined by the Committee (as defined below), subject to annual limits on the maximum amounts that may be awarded to any individual, as described below. Accordingly, future awards to be received by or allocated to particular individuals under the 2007 Plan are not presently determinable.

Administration

      A committee selected by Baxter’s Board of Directors (the “Committee”) will administer the 2007 Plan. The Committee must be comprised of at least two members of the Board of Directors (unless a larger number is required by applicable SEC or stock exchange listing rules). Performance-based awards under the 2007 Plan must be made by a committee that consists solely of outside directors determined under section 162(m) of the Code. Grants of awards to directors who are not employees of Baxter or a subsidiary must be made by the full Board and the full Board will be the Committee with respect to such awards. Otherwise, unless specified by the Board of Directors, the Committee will be the Compensation Committee. Except to the extent prohibited by applicable law or the rules of any stock exchange, the Committee may delegate its responsibilities under the 2007 Plan to one or more of its members or to other

persons selected by it. The Committee selects from eligible individuals those persons who will be granted awards under the 2007 Plan (“Participants”), the types of awards to be granted and the applicable terms, conditions, performance criteria, restrictions and other provisions of such awards.

      Subject to the terms and conditions of the 2007 Plan and the individual award agreements, the Committee will have the authority and discretion to: (i) select eligible individuals who will receive awards under the 2007 Plan; (ii) determine the time or times of receipt of awards; (iii) determine the types of awards and the number of shares covered by the awards; (iv) establish the terms, conditions, performance targets, restrictions, and other provisions of such awards; (v) modify the terms of, cancel, or suspend awards; (vi) reissue or repurchase awards; and (vii) accelerate the exercisability or vesting of any award. In making such award determinations, the Committee may take into account the nature of services rendered by the respective individual, the individual’s present and potential contributions to Baxter’s or a subsidiary’s success and such other factors as the Committee deems relevant. The Committee will have the authority and discretion to determine the extent to which awards under the 2007 Plan will be structured to conform to the requirements applicable to performance-based compensation (as discussed below), and to take such action, establish such procedures, and impose such restrictions at the time such awards are granted as the Committee determines to be necessary or appropriate to conform to those requirements. The Committee also has the authority and discretion to conclusively interpret the 2007 Plan, to establish, amend and rescind any rules and regulations relating to the 2007 Plan, to determine the terms and provisions of any agreements made pursuant to the 2007 Plan, to remedy any defect or omission and reconcile any inconsistency in the 2007 Plan or any award, and to make all other determinations that may be necessary or advisable for the administration of the 2007 Plan.

Shares Subject to the 2007 Plan and Limits on Awards

      The maximum number of shares that may be delivered to Participants and their beneficiaries under the 2007 Plan may not exceed 25,000,000 shares of Baxter’s common stock, subject to adjustment as described below. Any shares subject to an award that expires or is forfeited, cancelled, surrendered, or terminated without issuance of shares (including shares attributable to awards that are settled in cash) will again be available for awards under the 2007 Plan. The 2007 Plan will not permit adding shares back to the number available for issuance when a SAR is net settled, when shares are delivered or withheld by Baxter to pay the exercise price or the withholding taxes associated with an award, or when Baxter repurchases shares on the open market using the proceeds from payment of the exercise price in connection with the exercise of an outstanding stock option. In an acquisition, any awards made and any of the shares delivered upon the assumption of, or in substitution or exchange for, outstanding grants made by the acquired company will not be counted against the number of shares available under the 2007 Plan. Shares used for awards under the 2007 Plan may be shares currently authorized but unissued or currently held or subsequently acquired by Baxter as treasury shares, including shares purchased in the open market or in private transactions. To the extent provided by the Committee, an award under the 2007 Plan may be settled in cash rather than common stock.

      The following additional limits apply to awards under the 2007 Plan: (i) no more than 1,000,000 aggregate shares of common stock may be delivered to Participants and their beneficiaries with respect to incentive stock options; (ii) the maximum number of shares of common stock that may be covered by options and SARs granted to any one Participant in any one calendar year is 1,000,000; (iii) the maximum number of shares of common stock that may be delivered pursuant to full value awards intended to be “performance-based compensation” (as described below) that are granted to any one Participant during any one calendar-year period, regardless of whether settlement of the award is to occur prior to, at the time of, or after the time of vesting, is 500,000; (iv) the maximum aggregate amount of shares of common stock that may be delivered to Participants and their beneficiaries pursuant to full value awards under the 2007 Plan is 6,500,000; and (v) the maximum amount of cash incentive awards intended to be “performance-based compensation” payable to any one Participant for performance periods beginning in any one calendar year will be $5,000,000 (pro rated for performance periods of less than twelve months). If awards are denominated in cash but an equivalent amount of shares is delivered in lieu of cash, the applicable limits for performance-based compensation will be applied to the cash based on the

methodology used by the Committee to convert the cash into shares. Any adjustment in the amount delivered due to deferred delivery of shares or cash is disregarded for purposes of applying the foregoing limits for performance-based compensation.

      The closing price of a share of Baxter’s common stock on February 28, 2007 was $50.01 per share.

Adjustments

      In the event a stock dividend, stock split, reverse stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, distribution, split-up, spin-off, exchange of shares, or similar corporate transaction affects the shares such that the Committee determines, in its sole discretion, that an adjustment is warranted in order to preserve the benefits or prevent the enlargement of benefits of Awards under the Plan, then the Committee shall, in the manner it deems equitable: (i) adjust the number and kind of shares that may be delivered under the 2007 Plan (including adjustments to the individual limits); (ii) adjust the number and kind of shares subject to outstanding awards; (iii) adjust the number and exercise price of outstanding options and SARs; and (iv) make other adjustments, including without limitation, (A) replacement of awards with other awards that the Committee determines have comparable value and are based on stock of a company resulting from or involved in the transaction, and (B) cancellation of the award in return for cash payment of the current value of the award, determined as though the award is fully vested at the time of payment.

Types of Awards

      The types of awards that may be granted by the Committee to Participants under the 2007 Plan are described below.

      The Committee may grant incentive stock options or non-qualified stock options under the 2007 Plan. A stock option gives the Participant the right to purchase shares of common stock at an exercise price determined under the option. Incentive stock options are options that are intended to satisfy the requirements of section 422 of the Code and may only be granted to employees of Baxter and its subsidiaries. The exercise price for an option cannot be less than the fair market value of a share of common stock on the date the option is granted. The Committee may grant options in tandem with SARs, in which case the exercise price of the option and SAR will be the same, and the exercise of the option or SAR with respect to a share will cancel the corresponding tandem SAR or option, as applicable, with respect to such share.

      Options granted under the 2007 Plan will be exercisable in accordance with the terms established by the Committee. The exercise price of an option will be payable in cash or cash equivalents, in shares of common stock valued at fair market value as of the day of exercise (such shares must be shares held by the holder thereof for at least six months prior to the date of exercise or purchased in the open market), or in a combination thereof. The exercise price must be paid in full at the time of exercise (except if the exercise price is paid using cash equivalents, payment may be made as soon as practicable after the exercise). The Committee, in its discretion, may impose such conditions, restrictions and contingencies on shares acquired pursuant to the exercise of an option as the Committee determines to be desirable.

      Except for adjustments to shares in connection with corporate transactions or as approved by Baxter’s shareholders, the exercise price of an option cannot be decreased after the date of grant and no option may be surrendered in consideration for the grant of a replacement option at a lower exercise price.

      In no event will an option expire more than ten years after the date of grant (or such shorter period required by law or the rules of any stock exchange).

      The Committee may grant SARs under the 2007 Plan. An SAR entitles the Participant to receive the amount (in cash or stock) by which the fair market value of a specified number of shares on the exercise

date exceeds an exercise price established by the Committee. The exercise price of an SAR cannot be less than the fair market value of a share of common stock on the date the SAR is granted. The Committee may grant SARs in tandem with options, in which case the exercise price of the SAR and option will be the same, and the exercise of the SAR or option with respect to a share will cancel the corresponding tandem option or SAR, as applicable, with respect to such share.

      SARs granted under the 2007 Plan will be exercisable in accordance with the terms established by the Committee; provided, however, that SARs may only be exercised with respect to whole shares. The Committee, in its discretion, may impose such conditions, restrictions and contingencies on shares acquired pursuant to the exercise of an SAR as the Committee determines to be desirable.

      The Committee may grant full value awards under the 2007 Plan. A “full value award” is the grant of one or more shares of common stock or a right to receive one or more shares of common stock in the future (including restricted shares, restricted share units, deferred shares, deferred share units, performance shares and performance share units), with such grant subject to one or more of the following, as determined by the Committee:

      The grant may also be subject to such other conditions, restrictions and contingencies, as determined by the Committee, including provisions relating to dividend or dividend equivalent rights and deferred payment or settlement. If the right to become vested in a full value award is conditioned on the completion of a specified period of service with Baxter or its subsidiaries, without achievement of performance targets or performance measures (as described below) being required as a condition of vesting, and without it being granted in lieu of other compensation, then the required period of service for full vesting will not be less than three years (subject to accelerated vesting, to the extent provided by the Committee, in the event of the Participant’s death, disability, involuntary termination or otherwise in connection with a change in control, or retirement).

      The Committee may grant “cash incentive awards” under the 2007 Plan which is the grant of a right to receive a payment of cash (or in the discretion of the Committee, shares of common stock having value equivalent to the cash otherwise payable) that is contingent on achievement of performance objectives over a specified period established by the Committee. The grant of cash incentive awards may also be subject to such other conditions, restrictions and contingencies, as determined by the Committee, including provisions relating to deferred payment.

Performance Measures

      An income tax deduction for Baxter will generally be unavailable for annual compensation in excess of $1 million paid to any of the five most highly compensated officers. However, amounts that constitute “performance-based compensation” are not counted toward the $1 million limit. It is expected that options and SARs granted under the 2007 Plan will satisfy the requirements for “performance-based compensation.” The Committee may designate whether any full value awards or cash incentive awards being granted to any Participant are intended to be “performance-based compensation” as that term is used in section 162(m) of the Code. Any such awards designated as intended to be “performance-based

compensation” will be conditioned on the achievement of one or more performance measures, to the extent required by Code section 162(m).

      The performance measures that may be used by the Committee for such awards will be based on any one or more of the following, as selected by the Committee: (i) sales or net sales; (ii) gross profit or margin; (iii) expenses, including cost of goods sold, operating expenses, marketing and administrative expense, research and development, restructuring or other special or unusual items, interest, tax expense, or other measures of savings; (iv) operating earnings, earnings before interest, taxes, depreciation, or amortization, net earnings, earnings per share (basic or diluted) or other measure of earnings; (v) cash flow, including cash flow from operations, investing, or financing activities, before or after dividends, investments, or capital expenditures; (vi) balance sheet performance, including debt, long or short term, inventory, accounts payable or receivable, working capital, or shareholders’ equity; (vii) return measures, including return on invested capital, sales, assets, or equity; (viii) stock price performance or shareholder return; (ix) economic value created or added; or (x) implementation or completion of critical projects, including acquisitions, divestitures, and other ventures, process improvements, product or production quality, attainment of other strategic objectives, including market penetration, geographic expansion, product development, regulatory or quality performance, innovation or research goals, or the like.

      In each case, performance may be measured (A) on an aggregate or net basis; (B) before or after tax or cumulative effect of accounting changes; (C) relative to other approved measures, on an aggregate or percentage basis, over time, or as compared to performance by other companies or groups of other companies; or (D) by product, product line, business unit or segment, or geographic unit. The performance targets may include a threshold level of performance below which no payment will be made (or no vesting will occur), levels of performance at which specified payments will be made (or specified vesting will occur), and a maximum level of performance above which no additional payment will be made (or at which full vesting will occur). Where applicable, each of the foregoing performance targets will be determined in accordance with generally accepted accounting principles and will be subject to certification by the Committee; provided that the Committee will have the authority to exclude the impact of charges for restructurings, discontinued operations, extraordinary items, and other unusual, special, or non-recurring events and the cumulative effects of tax or accounting principles as identified in financial results filed with or furnished to the Securities and Exchange Commission.

      For awards intended to be “performance-based compensation,” the grant of the awards and the establishment of the performance measures will be made during the period required under Code section 162(m).

Dividends and Dividend Equivalents

      Awards may provide for the payment or crediting of dividends or dividend equivalents with respect to the underlying shares, subject to the same conditions, restrictions and contingencies that apply to the underlying shares unless the Committee determines otherwise.

No Repricing

      Except as approved by Baxter’s shareholders or as adjusted for corporate transactions described below, the exercise price of an option or SAR may not be decreased after the date of grant nor may an option or SAR be surrendered to Baxter as consideration for the grant of a replacement option or SAR with a lower exercise price.

Special Director Provisions

      Notwithstanding any other provision of the 2007 Plan to the contrary, unless otherwise provided by the Board, awards to non-employee directors shall be made in accordance with the terms of the Director Compensation Plan, and all such awards shall be deemed to be made under the 2007 Plan. As discussed above under the caption entitled “Director Compensation” on page 26 of this Proxy Statement, the Director Compensation Plan provides for formulaic equity grants to directors. Directors receive annual

grants of stock options and restricted stock units on the date of the annual shareholders meeting, in each case in an amount having a value equal to $60,000.

Amendment and Termination

      The 2007 Plan may be amended or terminated at any time by the Board of Directors provided that no amendment or termination may, in the absence of written consent to the change by the affected Participant (or, if the Participant is not then living and if applicable, the affected beneficiary), adversely affect the rights of any Participant or, if applicable, beneficiary under any award granted under the 2007 Plan prior to the date such amendment is adopted by the Board of Directors (or the Committee, if applicable). Adjustments relating to corporate transactions are not subject to the foregoing limitations. No amendment will be made to the provisions of the 2007 Plan relating to prohibitions on repricing without the approval of Baxter’s shareholders and no other amendment will be made to the 2007 Plan without the approval of Baxter’s shareholders if shareholder approval of such amendment is required by law or the rules of any stock exchange on which shares of common stock are listed.

      It is the intention of Baxter that, to the extent that any provisions of the 2007 Plan or any awards granted under the 2007 Plan are subject to section 409A of the Code (relating to nonqualified deferred compensation), the 2007 Plan and the awards comply with the requirements of section 409A of the Code and it is the intention of Baxter that 2007 Plan and awards will be administered in good faith in accordance with such requirements and that the Committee will have the authority to amend any outstanding Awards to conform to the requirements of section 409A. Baxter, however, does not guarantee that awards under the 2007 Plan will comply with section 409A and the Committee is under no obligation to make any changes to any awards to cause such compliance.

Transferability

      To the extent that the Participant who receives an Award under the Plan has the right to exercise such Award, the Award may be exercised during the lifetime of the Participant only by the Participant. The Committee may permit Awards under the Plan to be transferred to or for the benefit of the Participant’s family (including, without limitation, to a trust or partnership for the benefit of a Participant’s family), subject to such procedures as the Committee may establish. Incentive stock options may not be transferred to the extent that such transferability would violate the requirements applicable to such option under section 422 of the Code.

United States Federal Income Tax Consequences

      The following discussion is based on United States Federal tax laws and regulations presently in effect, which are subject to change, and it does not purport to be a complete description of the Federal income tax aspects of the 2007 Plan. A Participant may also be subject to state and local taxes in connection with the grant of awards under the 2007 Plan. Baxter recommends that Participants consult with their individual tax advisors to determine the applicability of the tax rules to the awards granted to them in their personal circumstances.

      Under present Federal income tax laws, awards granted under the 2007 Plan will have the following tax consequences:

Non-Qualified Options

      The grant of a non-qualified option (“NQO”) will not result in taxable income to the Participant. Except as described below, the Participant will realize ordinary income at the time of exercise in an amount equal to the excess of the fair market value of the shares acquired over the exercise price for those shares, and Baxter will be entitled to a corresponding deduction. Gains or losses realized by the Participant upon disposition of such shares will be treated as capital gains and losses, with the basis in such shares equal to the fair market value of the shares at the time of exercise.

      The exercise of an NQO through the delivery of previously acquired stock will generally be treated as a non-taxable, like-kind exchange as to the number of shares surrendered and the identical number of shares received under the option. That number of shares will take the same basis and, for capital gains purposes, the same holding period as the shares that are given up. The value of the shares received upon such an exchange that are in excess of the number given up will be includible as ordinary income to the Participant at the time of the exercise. The excess shares will have a new holding period for capital gain purposes and a basis equal to the value of such shares determined at the time of exercise.

Incentive Stock Options

      The grant of an incentive stock option (“ISO”) will not result in taxable income to the Participant. The exercise of an ISO will not result in taxable income to the Participant provided that the Participant was, without a break in service, an employee of Baxter or a subsidiary during the period beginning on the date of the grant of the option and ending on the date three months prior to the date of exercise (one year prior to the date of exercise if the Participant is disabled, as that term is defined in the Code).

      The excess of the fair market value of the shares at the time of the exercise of an ISO over the exercise price is an adjustment that is included in the calculation of the Participant’s alternative minimum taxable income for the tax year in which the ISO is exercised. For purposes of determining the Participant’s alternative minimum tax liability for the year of disposition of the shares acquired pursuant to the ISO exercise, the Participant will have a basis in those shares equal to the fair market value of the shares at the time of exercise.

      If the Participant does not sell or otherwise dispose of the stock within two years from the date of the grant of the ISO or within one year after receiving the transfer of such stock, then, upon disposition of such shares, any amount realized in excess of the exercise price will be taxed to the Participant as capital gain, and Baxter will not be entitled to any deduction for Federal income tax purposes. A capital loss will be recognized to the extent that the amount realized is less than the exercise price.

      If the foregoing holding period requirements are not met, the Participant will generally realize ordinary income, and a corresponding deduction will be allowed to Baxter, at the time of the disposition of the shares, in an amount equal to the lesser of (i) the excess of the fair market value of the shares on the date of exercise over the exercise price, or (ii) the excess, if any, of the amount realized upon disposition of the shares over the exercise price. If the amount realized exceeds the value of the shares on the date of exercise, any additional amount will be capital gain. If the amount realized is less than the exercise price, the Participant will recognize no income and a capital loss will be recognized equal to the excess of the exercise price over the amount realized upon the disposition of the shares.

Stock Appreciation Rights

      The grant of an SAR will not result in taxable income to the Participant. Upon exercise of an SAR, the amount of cash or the fair market value of shares received will be taxable to the Participant as ordinary income, and a corresponding deduction will be allowed to Baxter. Gains or losses realized by the Participant upon disposition of such shares will be treated as capital gains and losses, with the basis in such shares equal to the fair market value of the shares at the time of exercise.

Full Value Awards

      A Participant who has been granted a full value award will not realize taxable income at the time of grant, and Baxter will not be entitled to a deduction at that time, if (i) the award is subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the participant or achievement of other objectives, and (ii) the restrictions constitute a “substantial risk of forfeiture” for Federal income tax purposes. Upon the vesting of shares subject to an award, the holder will realize ordinary income in an amount equal to the then fair market value of those shares, and Baxter will be entitled to a corresponding deduction. Gains or losses realized by the Participant upon disposition of such shares will be treated as capital gains and losses, with the basis in

such shares equal to the fair market value of the shares at the time of vesting. Dividends paid to the holder during the restriction period will also be compensation income to the Participant and deductible as such by Baxter.

Cash Incentive Awards

      A Participant will realize taxable income at the time the cash incentive award is distributed, and Baxter will be entitled to a corresponding deduction.

Change of Control

      Any acceleration of the vesting or payment of awards under the 2007 Plan in the event of a Change of Control (as defined under Section 280G of the Code) in Baxter may cause part or all of the consideration involved to be treated as an “excess parachute payment” under the Code, which may subject the Participant to a 20% excise tax and which may not be deductible by Baxter.

Required Vote

      Approval of this proposal requires the affirmative vote of a majority of the shares of Baxter common stock present in person or by proxy and entitled to vote at the Annual Meeting. Abstentions will have the effect of a vote against the approval of this proposal. Nominees such as banks and brokers holding shares on behalf of beneficial owners who do not provide voting instructions may not vote such shares with respect to this proposal.

      The Board of Directors recommends that shareholders vote FOR the approval of the 2007 Incentive Plan.

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, 2006.

      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.

2001 Global Stock Option Plan

      The 2001 Global Stock Option Plan is a broad-based plan that was 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.

Other Stock Option Grants Not Approved by Shareholders

      Baxter has made several stock option grants outside of the Programs approved by shareholders. However, the terms and conditions of each of these grants provide that the provisions of either the 1994 Incentive Compensation Program or the 1998 Incentive Compensation Program, as the case may be, govern these stock option grants (except for the limit on shares available under these Programs). Accordingly, the terms and conditions of these grants are consistent with the terms of the Programs, which were previously approved by shareholders.

      The Compensation Committee approved the following grants of non-qualified stock options: options to purchase 1,685,538 shares granted in February 1997 to Baxter employees; options to purchase 13,588 shares granted in November 1997 to members of Baxter’s scientific advisory board; options to purchase 2,621,855 shares granted in November 1997 to Baxter employees; options to purchase 4,305,501 shares granted in February 1998 to Baxter employees; and options to purchase 5,625,114 shares granted in February 2000 to Baxter employees. 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 sale price of the common stock as reported on the New York Stock Exchange composite reporting tape 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 as of the date hereof.

Other Information

Attending the Annual Meeting

      The 2007 Annual Meeting of Shareholders will take place at the Chicago Cultural Center, 78 East Washington Street, Chicago, Illinois on Tuesday, May 1, 2007 at 10:30 a.m., Central Time.

      Admittance to the meeting will be limited to shareholders eligible to vote or their authorized representatives. If you plan to attend the Annual Meeting, simply indicate your intention by marking the designated box on the proxy card or by following the instructions provided when you vote by Internet or telephone. Shareholders who wish to attend the Annual Meeting, but do not wish to vote by proxy prior to the meeting, may register at the door. If you hold shares through a broker, bank or other nominee, your name will not appear on the list of registered shareholders and you will be admitted only after showing proof of ownership, such as your most recent account statement or a letter from your broker or bank.

Reducing Mailing Expenses

      Duplicates: If you receive more than one copy of the 2007 Annual Report to Shareholders at the same address and you wish to reduce the number you receive, we will discontinue the mailing of the annual report on accounts you select if you mark the designated box on the appropriate proxy card(s) or follow the instructions provided when you vote by Internet or telephone. At least one account at your address must continue to receive an annual report, unless you elect to view future documents by Internet.

      Electronic Delivery: If you wish to view future proxy materials and annual reports over the Internet instead of receiving copies in the mail, follow the instructions provided when you vote through the Internet. If you vote by telephone, you will not have the option to elect electronic delivery while voting. A registered shareholder may choose electronic delivery at any time during the year by accessing the site directly at http://www.econsent.com/bax and enrolling. If you elect electronic delivery, we will discontinue mailing the proxy materials and annual reports to you beginning next year and will send you an e-mail message notifying you of the Internet address or addresses where you may access next year’s proxy materials and annual report.

Shareholder Proposals for the 2008 Annual Meeting

      Any shareholder who intends to present a proposal at Baxter’s annual meeting to be held in 2008, and who wishes to have a proposal included in Baxter’s proxy statement for that meeting, must deliver the proposal to the Corporate Secretary. All proposals must be received by the Corporate Secretary no later than November 20, 2007 and must satisfy the rules and regulations of the Securities and Exchange Commission to be eligible for inclusion in the proxy statement for that meeting.

      Shareholders may present proposals that are proper subjects for consideration at an annual meeting, even if the proposal is not submitted by the deadline for inclusion in the proxy statement. To do so, the shareholder must comply with the procedures specified by Baxter’s Bylaws. The Bylaws require all shareholders who intend to make proposals at an annual meeting of shareholders to submit their proposal to the Corporate Secretary not fewer than 60 and not more than 90 days before the anniversary date of the previous year’s annual meeting.

      To be eligible for consideration at the 2008 annual meeting, proposals that have not been submitted by the deadline for inclusion in the proxy statement and any nominations for director must be received by the Corporate Secretary between February 8 and March 10, 2008. This advance notice period is intended to allow all shareholders an opportunity to consider all business and nominees expected to be considered at the meeting.

      All submissions to, or requests from, the Corporate Secretary should be made to Baxter’s principal executive offices at One Baxter Parkway, Deerfield, Illinois 60015.

Cost of Proxy Solicitation

      Baxter will bear the costs of soliciting proxies. Copies of proxy solicitation materials will be mailed to shareholders, and employees of Baxter may communicate with shareholders to solicit their proxies. Banks, brokers and others holding stock in their names, or in the names of nominees, may request and forward copies of the proxy solicitation material to beneficial owners and seek authority for execution of proxies, and Baxter will reimburse them for their expenses in doing so at the rates approved by the New York Stock Exchange.

      In addition, Baxter has retained Georgeson Shareholder Communications Inc. to assist in the distribution and solicitation of proxies. Baxter has agreed to pay Georgeson a fee of $10,000 plus expenses for these services.

Appendix A

BAXTER INTERNATIONAL INC.

2007 INCENTIVE PLAN

SECTION 1

General

      1.1 Purpose. Baxter International Inc., a Delaware corporation (“Baxter”), has established the Plan to increase shareholder value and to advance the interests of Baxter and the Subsidiaries (collectively, the “Company”) by providing a variety of economic incentives designed to motivate, retain and attract employees, directors, consultants, independent contractors, agents, and other persons providing services to the Company.

      1.2 Effect on Prior Plan. After the Approval Date, no further awards will be made under the Baxter International Inc. 1998 Incentive Compensation Program (the “1998 Program”) and Shares reserved for issuance thereunder shall not be available for future awards thereunder after the Approval Date.

SECTION 2

Defined Terms

      The meaning of capitalized terms used in the Plan are set forth below if not otherwise defined in the text of the Plan.

SECTION 3

Administration

      3.1 Administration By Committee. The authority to control and manage the operation and administration of the Plan shall be vested in the committee described in subsection 3.2 (the “Committee”) in accordance with this Section 3. If the Committee does not exist, or for any other reason determined by the Board, the Board may take any action under the Plan that would otherwise be the responsibility of the Committee.

      3.2 Selection of Committee. So long as Baxter is subject to Section 16 of the Exchange Act, the Committee shall be selected by the Board and shall consist of not fewer than two members of the Board or such greater number as may be required for compliance with Rule 16b-3 issued under the Exchange Act and shall be comprised of persons who are independent for purposes of applicable stock exchange listing requirements. Any Award granted under the Plan that is intended to constitute Performance-Based Compensation (including Options and SARs) shall be granted by a Committee consisting solely of two or more “outside directors” within the meaning of section 162(m) of the Code and applicable regulations; provided, however, that as of the Effective Date and continuing thereafter unless and until otherwise specified by the Board, the Committee shall be the Compensation Committee of the Board.

Notwithstanding any other provision of the Plan to the contrary, with respect to any Awards to Outside Directors, the Committee shall be the Board.

      3.3 Powers of Committee. The authority to manage and control the operation and administration of the Plan shall be vested in the Committee, subject to the following:

      3.4 Delegation by Committee. Except to the extent prohibited by applicable law or the rules of any stock exchange, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Committee at any time.

      3.5 Information to be Furnished to Committee. The Company shall furnish the Committee such data and information as may be required for it to discharge its duties. The records of the Company as to an individual’s employment or provision of services, termination of employment or cessation of the provision of services, leave of absence, reemployment and compensation shall be conclusive on all persons unless determined to be incorrect. Participants and other persons entitled to benefits under the Plan must furnish the Committee such evidence, data or information as the Committee consider desirable to carry out the terms of the Plan.

      3.6 Liability and Indemnification of Committee. No member or authorized delegate of the Committee shall be liable to any person for any action taken or omitted in connection with the administration of the Plan unless attributable to his own fraud or willful misconduct; nor shall Baxter or any Subsidiary be liable to any person for any such action unless attributable to fraud or willful misconduct on the part of a director or employee of Baxter or a Subsidiary. The Committee, the individual members thereof, and persons acting as the authorized delegates of the Committee under the Plan, shall

be indemnified by Baxter against any and all liabilities, losses, costs and expenses (including legal fees and expenses) of whatsoever kind and nature which may be imposed on, incurred by or asserted against the Committee or its members or authorized delegates by reason of the performance of a Committee function if the Committee or its members or authorized delegates did not act dishonestly or in willful violation of the law or regulation under which such liability, loss, cost or expense arises. This indemnification shall not duplicate but may supplement any coverage available under any applicable insurance.

SECTION 4

Participation

      Subject to the terms and conditions of the Plan, a “Participant” in the Plan is any Eligible Individual to whom an Award is granted under the Plan. Subject to the terms and conditions of the Plan, the Committee shall determine and designate, from time to time, from among the Eligible Individuals those persons who will be granted one or more Awards under the Plan and, subject to the terms and conditions of the Plan, a Participant may be granted any Award permitted under the provisions of the Plan and more than one Award may be granted to a Participant. Except as otherwise agreed by Baxter and the Participant, or except as otherwise provided in the Plan, an Award under the Plan shall not affect any previous Award under the Plan or an award under any other plan maintained by Baxter or any Subsidiary.

SECTION 5

Shares Reserved and Limitations

      5.1 Shares and Other Amounts Subject to the Plan. The Shares for which Awards may be granted under the Plan shall be subject to the following:

      5.2 Adjustments to Shares. In the event a stock dividend, stock split, reverse stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, distribution, split-up, spin-off, exchange of shares, or similar corporate transaction affects the Shares such that the Committee determines, in its sole discretion, that an adjustment is warranted in order to preserve the benefits or prevent the enlargement of benefits of Awards under the Plan, then the Committee shall, in the manner it deems equitable, (a) adjust the number and kind of shares that may be delivered under the Plan (including adjustments to the number and kind of shares that may be granted to an individual during any specified time as described in subsection 5.1); (b) adjust the number and kind of shares subject to outstanding Awards; (c) adjust the number and Exercise Price of outstanding Options and SARs; and (d) make other adjustments, including, without limitation, (i) replacement of Awards with other Awards that the Committee determines have comparable value and are based on stock of a company resulting from or involved in the transaction, and (ii) cancellation of the Award in return for cash payment of the current value of the Award, determined as though the Award is fully vested at the time of payment.

SECTION 6

Options and SARS

      6.1 Definitions.

      (a) The grant of an “Option” under the Plan entitles the Participant to purchase Shares at an Exercise Price established by the Committee at the time the Option is granted. Options granted under this Section 6 may be either Incentive Stock Options or Non-Qualified Stock Options, as determined in the discretion of the Committee; provided, however, that Incentive Stock Options may only be granted to employees of Baxter or a Subsidiary. An Option will be deemed to be a Non-Qualified Stock Option unless it is specifically designated by the Committee as an Incentive Stock Option.

      (b) A grant of a “stock appreciation right” or “SAR” entitles the Participant to receive, in cash or Shares (as determined in accordance with the terms of the Plan), value equal to the excess of: (i) the Fair Market Value of a specified number of Shares at the time of exercise; over (ii) an Exercise Price established by the Committee at the time of grant.

      (c) An Option may but need not be in tandem with an SAR, and an SAR may but need not be in tandem with an Option (in either case, regardless of whether the original award was granted under this Plan or another plan or arrangement). If an Option is in tandem with an SAR, the Exercise Price of both the Option and SAR shall be the same, and the exercise of the Option or SAR with respect to a Share shall cancel the corresponding tandem SAR or Option right with respect to such share.

      6.2 Eligibility. The Committee shall designate the Participants to whom Options or SARs are to be granted under this Section 6 and shall determine the number of Shares subject to each such Option or SAR and the other terms and conditions thereof, not inconsistent with the Plan. Without limiting the generality of the foregoing, the Committee may grant dividend equivalents (current or deferred) with respect to any Option or SAR granted under the Plan.

      6.3 Limits on Incentive Stock Options. If the Committee grants Incentive Stock Options, then to the extent that the aggregate fair market value of Shares with respect to which Incentive Stock Options are exercisable for the first time by any individual during any calendar year (under all plans of the Company) exceeds $100,000, such Options shall be treated as Non-Qualified Stock Options to the extent required by section 422 of the Code.

      6.4 Exercise Price. The “Exercise Price” of an Option or SAR shall be established by the Committee at the time the Option or SAR is granted; provided, however, that in no event shall such price be less than 100% of the Fair Market Value of a Share on such date (or, if greater, the par value of a Share on such date).

      6.5 Exercise/ Vesting. Except as otherwise expressly provided in the Plan, an Option or SAR granted under the Plan shall be exercisable in accordance with the following:

      6.6 Payment of Exercise Price. The payment of the Exercise Price of an Option granted under this Section 6 shall be subject to the following:

      6.7 Post-Exercise Limitations. The Committee, in its discretion, may provide in an Award such restrictions on Shares acquired pursuant to the exercise of an Option as it determines to be desirable, including, without limitation, restrictions relating to disposition of the shares and forfeiture restrictions based on service, performance, Share ownership by the Participant and such other factors as the Committee determines to be appropriate.

      6.8 No Repricing. Except for adjustments pursuant to subsection 5.2 (relating to the adjustment of Shares) or reductions of the Exercise Price approved by Baxter’s shareholders, the Exercise Price for any outstanding Option or SAR may not be decreased after the date of grant nor may an outstanding Option or SAR granted under the Plan be surrendered to Baxter as consideration for the grant of a replacement Option or SAR with a lower exercise price. In addition, no repricing of an Option or SAR shall be permitted without the approval of Baxter’s shareholders if such approval is required under the rules of any stock exchange on which Shares are listed.

      6.9 Expiration Date. The “Expiration Date” with respect to an Option or SAR means the date established as the Expiration Date by the Committee at the time of the grant; provided, however, that in no event shall the Expiration Date of an Option or SAR be later than the date that is ten years after the date on which the Option or SAR is granted (or such shorter period required by law or the rules of any stock exchange).

SECTION 7

Full Value Awards and Cash Incentive Awards

      7.1 Definitions.

      (a) A “Full Value Award” is a grant of one or more Shares or a right to receive one or more Shares in the future (including restricted shares, restricted share units, deferred shares, deferred share units, performance shares and performance share units), with such grant subject to one or more of the following, as determined by the Committee:

      (b) A “Cash Incentive Award” is the grant of a right to receive a payment of cash (or in the discretion of the Committee, Shares having value equivalent to the cash otherwise payable) that is contingent on achievement of performance objectives over a specified period established by the Committee. The grant of Cash Incentive Awards may also be subject to such other conditions, restrictions and contingencies, as determined by the Committee, including provisions relating to deferred payment.

      7.2 Special Vesting Rules. If an employee’s right to become vested in a Full Value Award is conditioned on the completion of a specified period of service with Baxter or one or more Subsidiaries, without achievement of performance targets or other performance objectives (whether or not related to performance measures) being required as a condition of vesting, and without it being granted in lieu of other compensation, then the required period of service for full vesting shall be not less than three years (subject, to the extent provided by, and subject to such terms and conditions determined by, the Committee, to pro rated vesting over the course of such three year period and to acceleration of vesting in the event of the Participant’s death, disability, involuntary termination or otherwise in connection with a change in control, or retirement). The foregoing requirements shall not apply to (a) grants made to newly eligible Participants to replace awards from a prior employer and (b) grants that are a form of payment of earned performance awards or other incentive compensation.

      7.3 Performance-Based Compensation. Any Full Value Award or Cash Incentive Award granted to any Participant may constitute “Performance-Based Compensation” within the meaning of section 162(m) of the Code and regulations thereunder. If any such award is intended to satisfy the requirements for Performance-Based Compensation under section 162(m) of the Code, then to the extent required by section 162(m), any Full Value Award or Cash Incentive Award so designated shall be conditioned on the achievement of one or more performance targets as determined by the Committee and the following additional requirements shall apply:

Nothing in this Section 7 shall preclude the Committee from granting Full Value Awards or Cash Incentive Awards under the Plan or the Committee, Baxter or any Subsidiary from granting any Cash Incentive Awards outside of the Plan that are not intended to be Performance-Based Compensation; provided, however, that to the extent that the provisions of this Section 7 reflect the requirements

applicable to Performance-Based Compensation, such provisions shall not apply to the portion of the Award, if any, that is not intended to constitute Performance-Based Compensation.

SECTION 8

Operation and Administration

      8.1 Effective Date and Approval Date. The Plan will be effective as of the date it is adopted by the Board (the “Effective Date”); provided, however, that Awards granted under the Plan prior to the Approval Date will be contingent on approval of the Plan by Baxter’s shareholders. The Plan shall be unlimited in duration and, in the event of Plan termination, shall remain in effect as long as any Shares awarded under it are outstanding and not fully vested; provided, however, that no new Awards shall be made under the Plan on or after the tenth anniversary of the date on which the Plan is adopted by the Board

      8.2 Special Director Provisions. Notwithstanding any other provision of the Plan to the contrary, unless otherwise provided by the Board, awards to non-employee directors shall be made in accordance with the terms of the Baxter International Inc. Non-Employee Director Compensation Plan, as amended, and all such awards shall be deemed to be made under the Plan.

      8.3 Limit on Distribution. Distribution of Shares or other amounts under the Plan shall be subject to the following:

      8.4 Withholding. All Awards and other payments under the Plan are subject to withholding of all applicable taxes, which withholding obligations may be satisfied, with the consent of the Committee, through the surrender of Shares which the Participant already owns or to which a Participant is otherwise entitled under the Plan; provided, however, with the consent of the Committee, previously-owned Shares that have been held by the Participant or Shares to which the Participant is entitled under the Plan may only be used to satisfy the minimum tax withholding required by applicable law (or other rates that will not have a negative accounting impact).

      8.5 Transferability. Awards under the Plan are not transferable except as designated by the Participant by will or by the laws of descent and distribution or, to the extent provided by the Committee, pursuant to a qualified domestic relations order (within the meaning of the Code and applicable rules thereunder). To the extent that the Participant who receives an Award under the Plan has the right to exercise such Award, the Award may be exercised during the lifetime of the Participant only by the Participant. Notwithstanding the foregoing provisions of this subsection 8.5, the Committee may permit Awards under the Plan to be transferred to or for the benefit of the Participant’s family (including, without limitation, to a trust or partnership for the benefit of a Participant’s family), subject to such procedures as the Committee may establish. In no event shall an Incentive Stock Option be transferable to the extent that such transferability would violate the requirements applicable to such option under section 422 of the Code.

      8.6 Notices. Any notice or document required to be filed with the Committee under the Plan will be properly filed if delivered or mailed by registered mail, postage prepaid, to the Committee, in care of Baxter at its principal executive offices. The Committee may, by advance written notice to affected persons, revise such notice procedure from time to time. Any notice required under the Plan (other than a notice of election) may be waived by the person entitled to notice.

      8.7 Form and Time of Elections. Unless otherwise specified herein, each election required or permitted to be made by any Participant or other person entitled to benefits under the Plan, and any permitted modification or revocation thereof, shall be in writing filed with the applicable Committee at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the Plan, as the Committee shall require.

      8.8 Agreement With Baxter or Subsidiary. At the time of an Award to a Participant under the Plan, the Committee may require a Participant to enter into an agreement with Baxter or the Subsidiary, as applicable (the “Agreement”), in a form specified by the Committee, agreeing to the terms and conditions of the Plan and to such additional terms and conditions, not inconsistent with the Plan, as the Committee may, in its sole discretion, prescribe.

      8.9 Limitation of Implied Rights.

      (a) Neither a Participant nor any other person shall, by reason of the Plan, acquire any right in or title to any assets, funds or property of the Company whatsoever, including without limitation, any specific funds, assets, or other property which the Company, in its sole discretion, may set aside in anticipation of a liability under the Plan. A Participant shall have only a contractual right to the amounts, if any, payable under the Plan, unsecured by any assets of the Company. Nothing contained in the Plan shall constitute a guarantee by the Company any Subsidiary that the assets of such companies shall be sufficient to pay any benefits to any person.

      (b) The Plan does not constitute a contract of employment or continued service, and selection as a Participant will not give any employee the right to be retained in the employ or service of the Company, 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. Except as otherwise provided in the Plan, no Award under the Plan shall confer upon the holder thereof any right as a shareholder of Baxter prior to the date on which he fulfills all service requirements and other conditions for receipt of such rights and Shares are registered in his name.

      8.10 Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties.

      8.11 Action by Baxter or Subsidiary. Any action required or permitted to be taken by Baxter or any Subsidiary shall be by resolution of its board of directors or by action of one or more members of the board (including a committee of the board) who are duly authorized to act for the board or (except to the extent prohibited by applicable law or the rules of any stock exchange) by a duly authorized officer of Baxter.

      8.12 Gender and Number. Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular and the term “or” also means “and/or” and the term “including” means “including but not limited to”.

      8.13 Applicable Law. The provisions of the Plan shall be construed in accordance with the laws of the State of Delaware, without giving effect to choice of law principles.

      8.14 Foreign Employees. Notwithstanding any other provision of the Plan to the contrary, the Committee may grant Awards to eligible persons who are foreign nationals on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to foster and promote achievement of the purposes of the Plan. In furtherance of such purposes, the Committee may make such modifications, amendments, procedures and subplans as may be necessary

or advisable to comply with provisions of laws in other countries or jurisdictions in which Baxter or a Subsidiary operates or has employees.

SECTION 9

Amendment and Termination

      The Board may, at any time, amend or terminate the Plan, and the Board or the Committee may amend any Agreement, provided that no amendment or termination may, in the absence of written consent to the change by the affected Participant (or, if the Participant is not then living and if applicable, the affected Beneficiary), adversely affect the rights of any Participant or, if applicable, Beneficiary under any Award granted under the Plan prior to the date such amendment is adopted by the Board (or the Committee, if applicable); and further provided that adjustments pursuant to subsection 5.2 shall not be subject to the foregoing limitations of this Section 9; and further provided no amendment shall be made to the provisions of subsection 6.8 (relating to Option and SAR repricing) without the approval of Baxter’s shareholders; and provided further, that no other amendment shall be made to the Plan without the approval of Baxter’s shareholders if the approval of Baxter’s shareholders of such amendment is required by law or the rules of any stock exchange on which Shares are listed. It is the intention of Baxter that, to the extent that any provisions of this Plan or any Awards granted hereunder are subject to section 409A of the Code, the Plan and the Awards comply with the requirements of section 409A of the Code and that the Plan and Awards be administered in good faith in accordance with such requirements and the Committee shall have the authority to amend any outstanding Awards to conform to the requirements of section 409A. Notwithstanding the foregoing, the Company does not guarantee that Awards under the Plan will comply with section 409A and the Committee is under no obligation to make any changes to any Awards to cause such compliance.