(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 21, 2006

Dear Shareholder:

You are cordially invited to attend our Annual Meeting of Shareholders on Tuesday, May 9, 2006 at 10:30 a.m. Central Time at the Palmer House Hilton Hotel, Grand Ballroom, 17 East Monroe Street, Chicago, Illinois.

The Notice of the Annual Meeting and Proxy Statement that accompany this letter describe the business requiring action at the meeting.

Your vote is very important. You can vote your shares by using the Internet or the telephone. Instructions for using these convenient services are set forth on the enclosed proxy card. Alternatively, you may vote your shares by marking your votes on the enclosed proxy card, signing and dating it, and mailing it in the enclosed envelope.

Whether or not you plan to attend the Annual Meeting in person, I urge you to vote your shares as soon as possible. If you attend the Annual Meeting, you may revoke your proxy and vote in person.

I look forward to seeing you at the Annual Meeting.

Very truly yours,

Robert L. Parkinson, Jr.

Chairman of the Board,

President and Chief

Executive Officer

Your Vote is Important

Please Vote by Using the Internet,

The Telephone, or by Signing, Dating, and Returning

The Enclosed Proxy Card

March 21, 2006

Notice of Annual Meeting of Shareholders

The 2006 Annual Meeting of Shareholders of Baxter International Inc. will be held at the Palmer House Hilton Hotel, Grand Ballroom, 17 East Monroe Street, Chicago, Illinois, on Tuesday, May 9, 2006 at 10:30 a.m. Central Time, for the following purposes:

Only shareholders of record at the close of business on March 13, 2006 will be entitled to vote at the meeting.

By order of the Board of Directors,

Susan R. Lichtenstein

Corporate Vice President,

General Counsel and

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 9, 2006 in accordance with the foregoing notice. This Proxy Statement and accompanying proxy card are being mailed to shareholders on or about March 21, 2006.

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 2006 Annual Meeting for re-election as directors. However, if the amendments to Baxter’s Restated Certificate of Incorporation eliminating the classified board structure are approved by the requisite vote of shareholders, directors, including those elected at the 2006 Annual Meeting, will be elected for one-year terms.

      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. The Board of Directors appointed Peter S. Hellman on March 30, 2005 to serve as a director until the 2006 Annual Meeting of Shareholders. Mr. Hellman was recommended to the Corporate Governance Committee by an independent search firm. No nominations for directors were received from shareholders, and no other candidates are eligible for election as directors at the 2006 Annual Meeting. The Proxyholders intend to vote the shares represented by proxy in favor of all of the Board’s nominees, except to the extent a shareholder withholds authority to vote for the 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 all of the nominees for director.

Nominees for Election as Directors (Term Expires 2009)

Directors Continuing in Office (Term Expires 2007)

Directors Continuing in Office (Term Expires 2008)

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 Shapazian, Thomas T. Stallkamp, K. J. Storm and Albert P.L. Stroucken. Please refer to the section entitled “Corporate Governance — Director Independence” on page 9 for a discussion of Baxter’s independence standards.

      During 2005, the Board held 13 meetings. All directors attended 91% or more of the aggregate meetings of the Board and Board committees on which they served. Each regularly scheduled Board meeting was attended by all directors. 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 3, 2005.

Committees of the Board

      The Audit Committee, Compensation Committee, Corporate Governance Committee, Finance Committee, and Public Policy Committee are the standing committees of the Board of Directors. Each committee consists solely of independent directors, as defined by the rules of the New York Stock Exchange as well as Baxter’s Corporate Governance Guidelines, 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 Thomas T. Stallkamp (Chair), Blake E. Devitt, Peter S. Hellman, K. J. Storm and Albert P.L. Stroucken. The Board has determined that Messrs. 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 12 times in 2005. The Audit Committee Report appears on page 23.

Compensation Committee

      The Compensation Committee is currently composed of John D. Forsyth (Chair), Walter E. Boomer, Carole Shapazian and Thomas T. Stallkamp. The Compensation Committee exercises the authority of the Board relating to employee benefit plans and the compensation of Baxter’s executives. 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; and (4) serving as the administration committee of the company’s equity plans. The Compensation Committee met 5 times in 2005. The Compensation Committee Report begins on page 11.

Corporate Governance Committee

      The Corporate Governance Committee is currently composed of Walter E. Boomer (Chair), Blake E. Devitt, John D. Forsyth and Joseph B. Martin, M.D., Ph.D. 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; (7) developing and

implementing an annual process for evaluating Board and committee performance; and (8) making recommendations to the Board concerning director compensation. The Corporate Governance Committee met 4 times in 2005.

Finance Committee

      The Finance Committee is currently composed of K. J. Storm (Chair), Gail D. Fosler, James R. Gavin, M.D., Ph.D., Peter S. Hellman and Albert P.L. 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 2005.

Public Policy Committee

      The Public Policy Committee is currently composed of Gail D. Fosler (Chair), James R. Gavin III, M.D., Ph.D., Joseph B. Martin M.D., Ph.D. and Carole 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 4 times in 2005.

Compensation of Directors

      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.

Cash Compensation

      Under the Director Compensation Plan, each non-employee director receives a $45,000 annual cash retainer. In addition, each non-employee director also receives a $1,000 fee for each Board and each committee meeting attended, 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. 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).

      Each non-employee director is eligible for life insurance benefits. Life insurance premiums of $1,080 in the aggregate were paid in 2005 for the benefit of non-employee directors.

Stock Options

      Each non-employee director is entitled to receive 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 death, disability, or a change in control of Baxter. Under the Director Compensation Plan, the Board or the Compensation Committee may substitute stock appreciation rights for any outstanding stock options granted on or after May 4, 2004.

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.

Director Stock Ownership Guidelines

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

      The following table provides information on 2005 compensation for non-employee directors who served during 2005.

Non-Employee Director Compensation for 2005

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. Pursuant to Baxter’s Corporate Governance Guidelines, a director will not be independent if, within the preceding three years:

      The Corporate Governance Guidelines also provide that the following commercial or charitable relationships will not be considered to be material relationships that would impair a director’s independence:

      The relationship described under the caption entitled “Certain Relationships and Related Transactions” on page 20 of this Proxy Statement was considered in assessing the independence of Ms. Fosler and her relationship was not deemed to impair her independence in light of the criteria set forth above. For relationships not covered above, the determination of whether the director is independent or not will be made by the directors who satisfy the independence guidelines.

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, amended as of February 22, 2005, 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 and Corporate Responsibility Office

      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.

      The Corporate Responsibility Office, which was established by the Board in 1993, is responsible for communicating the company’s Global Business Practice Standards, maintaining multiple channels for employees to report concerns, providing guidance and training to employees and directors (including, for directors, both one-on-one orientation to Baxter’s business practice processes as well as the same on-line Business Practice Standards Awareness Training course for employees), and monitoring compliance. Permanent members of the Corporate Responsibility Office include the company’s Vice President of Business Practices, who reports to the Public Policy Committee, and the Vice President of Corporate Audit, who reports to the Audit Committee.

Executive Sessions

      The non-employee directors of the Board met in executive session without management at every regularly scheduled meeting during 2005 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 Compensation Committee also meets in executive session as it deems appropriate.

Lead Director

      Baxter’s lead director is currently Thomas T. Stallkamp. Baxter’s Corporate Governance Guidelines provide that the lead director is responsible for presiding at all executive sessions of the Board and acting as the liaison between the non-management directors and the Chair 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. Communications will be forwarded by Baxter’s Corporate Secretary directly to the lead director, unless a different director is specified.

Nomination of Directors

      It is the policy of Baxter’s Corporate Governance Committee to consider shareholder recommendations for candidates for the Board. The Corporate Governance Committee also considers candidates recommended by members of the Board, management and the independent search firm retained by the Board of Directors 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. In evaluating individual director candidates, the Corporate Governance Committee applies the membership criteria set forth in Exhibit A to Baxter’s Corporate Governance Guidelines, a copy of which is attached as Appendix A. 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.

      Shareholder recommendations for candidates for the Board must be submitted in writing to the Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015 and include the following information: (1) the name and address of the shareholder making the recommendation and evidence of his or her ownership of Baxter Common Stock, including the number of shares and period of ownership; (2) the name and address of the director candidate, and his or her resume or listing of qualifications, taking into account the criteria described in Appendix A; and (3) the candidate’s signed consent to serve as a director if elected and to be named in the proxy statement. For a candidate to be considered by the Corporate Governance Committee as a nominee for election at the next annual meeting of shareholders, the shareholder’s recommendation must be received by the Corporate Secretary not less than 120 days before the anniversary date of the company’s most recent annual meeting of shareholders. In addition, the Bylaws provide that nominations for director may only be made by a shareholder entitled to vote at the relevant meeting who sends notice to the Corporate Secretary not fewer than 60 nor more than 90 days before the anniversary date of the previous year’s annual meeting. Any nomination by a shareholder also must comply with the procedures specified in Article I — Section 2 of Baxter’s Bylaws.

Compensation Committee Report

      The Compensation Committee of the Board of Directors (the “Committee”) makes recommendations to the independent directors of the Board concerning compensation for the Chief Executive Officer and determines compensation for other officers. The Committee also exercises the authority of the Board with respect to Baxter’s employee benefit plans. During 2005, the Compensation Committee held five meetings and met in executive session as it deemed appropriate.

Overview of Compensation Philosophy and Practices

      The Committee’s compensation philosophy provides a framework for aligning compensation with business objectives. The Committee’s philosophy is to provide compensation opportunities that are structured to: (i) recognize performance by basing compensation on the achievement of pre-established performance goals for Baxter as well as individual performance and (ii) be competitive when compared to

healthcare and non-healthcare companies of similar size and scope. This philosophy is intended to assist Baxter in retaining, motivating, and attracting executives with superior leadership and management abilities. The Committee considers the total annual compensation received by the officers, including salary, cash bonuses, long-term incentives and perquisites, in establishing each element of compensation. The Committee also conducts a total compensation, or “Tally Sheet”, review of all elements of compensation for Mr. Parkinson.

      To promote a pay-for-performance philosophy, employee compensation is based on the performance of both Baxter and the individual. The Committee believes that management should be motivated and compensated based on both financial and non-financial measures. For this reason, the Committee emphasizes the financial measures of sales growth, earnings per share, return on invested capital, and total shareholder return when determining compensation for all officers. In terms of non-financial measures, the Committee focuses on such areas as integrity, quality, leadership, customer satisfaction, innovation, and talent management. The Committee believes that a combination of financial and non-financial measures were the appropriate focus for 2005.

      In order to appropriately reward individual performance in a manner that differentiates among the members of management, a performance differentiation framework is used to determine each officer’s compensation, including salary, cash bonus and long-term incentives. This approach is designed to strengthen the link between an individual’s compensation and his or her personal performance as measured by the officer’s performance compared to the goals and objectives set for 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.

      The Committee also considers compensation survey data from 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 (“comparable companies”). Based on the survey data from the comparable companies, the Committee determines the competitiveness of the total compensation structure for each officer, including Mr. Parkinson. The Committee engages independent compensation consultants to assist in obtaining survey data from the comparable companies and determining the competitiveness of Baxter’s total compensation structure. The consultants report to the Committee.

      Section 162(m) of the Internal Revenue Code of 1986, as amended, imposes a $1 million limit on the amount that a public company may deduct for compensation paid to the company’s chief executive officer or other named executive officers. This limitation does not apply to compensation that meets the requirements under Section 162(m) for “qualifying performance-based” compensation. Baxter’s philosophy with respect to the $1 million limit is to maximize the benefit of tax laws for Baxter’s shareholders.

Elements of Executive Compensation

      Baxter’s compensation structure for 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 in the comparable companies. The Committee approved increases in officer salaries at its meeting in February 2005, to reflect individual performance relative to the 50th percentile of salaries paid to their counterparts in the comparable companies.

      Cash bonuses are intended to provide officers with an opportunity to receive additional cash compensation, but only if it is earned through achievement of specified performance goals. Cash bonus targets for 2005 were intended to be competitive with the 60th percentile of cash bonuses paid to officers

in the comparable companies. The Committee establishes annual performance goals for the company under the officer cash bonus plan. The Committee also establishes annual bonus targets for each officer by utilizing the market data from the comparable companies. After year-end results are reported, the Committee determines each officer’s bonus based on the achievement of the specified annual performance goals and the officer’s individual performance. Individual performance is assessed using the performance differentiation framework discussed above.

      Baxter exceeded its earnings per share, sales, and return on invested capital goals established by the Committee as the performance measures under the officer cash bonus plan for 2005. Based on these financial results, the Committee approved officer cash bonus funding of 131% of each officer’s target bonus. Actual bonus amounts for 2005 were adjusted to reflect each officer’s individual performance and ranged from 40% to 140% of funded bonus targets.

      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 managers, including the Chief Executive Officer and the other officers. For 2005, the LTI Plan was structured to provide a mix of stock options (70%) and restricted stock units (30%). 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. Grants to senior management from the LTI Plan are made in March of each year.

      To motivate participants to achieve superior total shareholder return (TSR) compared to Baxter’s competitors, the LTI Plan contains a TSR Multiplier that increases or decreases a participant’s stock option and restricted stock unit targets, depending on Baxter’s relative TSR performance. 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 for 2005 could increase up to a maximum of 150% or decrease to a minimum of 75% of target. Actual awards are 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 2004 drove enhanced LTI grants for 2005. For the period of January to December 2004, Baxter’s TSR was 15.08% compared to a TSR of 1.68% 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 2005 were adjusted to the maximum of 150% of target. Actual stock option and restricted stock unit awards for executive officers who continued employment during 2005, ranged from 100% to 130% of adjusted targets due to individual performance.

      Baxter also provides its officers with certain perquisites that Baxter believes are reasonable, competitive and consistent with Baxter’s overall compensation philosophy. These perquisites include: car and financial planning allowances, executive physical exams, airline club memberships and certain subscription dues. Officers may use the company aircraft for personal travel on a limited basis and only if such aircraft usage is pre-approved by the Chief Executive Officer. No named executive officer used the company aircraft for personal travel in 2005. In addition, if circumstances warrant, Baxter may provide home security systems for certain officers. In 2005, the value of these perquisites did not exceed $25,000 for any named executive officer.

Basis for Chief Executive Officer Compensation

      In 2005, Mr. Parkinson participated in the same compensation programs provided to Baxter’s other executive officers as described above. The Committee’s general approach to setting Mr. Parkinson’s compensation was to be competitive with the comparable companies, while ensuring that his compensation was dependent upon achievement of Baxter’s financial performance goals and personal performance

objectives, both of which are reviewed and approved by the Board. The Board has an established process through which 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.

      In February 2005, the Board increased Mr. Parkinson’s salary by 3.6% from $1,100,000 to $1,140,000, in recognition of his strong performance and leadership. In addition, this increase more closely aligned Mr. Parkinson’s base salary with the 50th percentile of salaries paid to chief executive officers at the comparable companies.

      In March 2005, pursuant to the terms of the LTI Plan described above, Mr. Parkinson was granted an option to purchase 750,750 shares of Baxter stock at an exercise price of $34.85. The option vests 100% after three years. On that same day, he was also granted 80,438 restricted stock units, which vest 1/3 per year for three years. These awards represented 165% of his target, or 110% of his target as adjusted for strong TSR performance.

      Baxter exceeded its earnings per share, sales, and return on invested capital goals established by the Committee as the performance measures under the officer cash bonus plan for 2005. In February 2006, the Board determined that for 2005 Mr. Parkinson earned a cash bonus of $1,941,420. This amount represented 131% of Mr. Parkinson’s target bonus, or 100% of the bonus funded based upon Baxter’s exceeding of its earnings per share, sales and return on invested capital performance measures.

Stock Ownership Guidelines

      In July 2005, the Committee adopted stock ownership guidelines to better align the interests of our executive officers with the interests of shareholders and to further promote our commitment to sound corporate governance. Under the guidelines, our Chief Executive Officer is required to achieve ownership of Baxter common stock valued at six times annual base salary, while Baxter’s other executive officers’ multiple is four times annual base salary. All executive officers are expected to comply with their respective guidelines within five years of becoming an executive officer. Mr. Parkinson is currently at approximately 95% of his stock ownership goal and will exceed his goal in 2006 with his anticipated 2006 LTI Plan restricted stock unit grant to be made later in March. All other executive officers are currently at or on track to meet their stock ownership requirement within the five-year period.

Executive Compensation

Summary Compensation Table

      The following table shows, for the years ended December 31, 2005, 2004, and 2003, the compensation provided by Baxter and its subsidiaries to its Chief Executive Officer and the four 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.

Summary Compensation Table

Stock Option Grants

Option Grants in Last Fiscal Year

Individual Grants

Stock Option Exercises

Aggregated Option Exercises in Last Fiscal Year

and Fiscal Year-End Option Values

Pension Plan, Excess Plans and Supplemental Plans

      The table on the following page shows estimated annual retirement benefits payable to participants in Baxter’s United States pension plan (“Pension Plan”) whose employment terminates at normal retirement (age 65). The normal retirement benefit equals (i) 1.75 percent of a participant’s Final Average Pay multiplied by the employee’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 employee’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 Incentive Compensation Plan. The figures shown include benefits payable under the Pension Plan, Baxter’s related defined benefit excess pension plan and supplemental plans for certain individuals. The estimates assume that benefit payments begin at age 65 under a single life annuity form. The figures are net of the Social Security offset specified by the Pension Plan’s benefit formula and therefore do not include Social Security benefits payable from the federal government. The estimated primary Social Security benefit used in the calculations is that payable for an individual attaining age 65 in 2005.

      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.

Pension Plan Table

      As of December 31, 2005, the named executive officers’ years of Pension Plan participation and Final Average Pay for purposes of calculating annual retirement benefits payable under the Pension Plan are as follows: Mr. Parkinson (1 year and $2,050,512); Ms. Amundson (0 years and $652,185); Mr. Arduini (0 years and $453,017); Mr. Greisch (3 years and $594,740); and Mr. Utts (30 years and $452,089). As described under the caption “Employment Agreements — Benefits and Perquisites”, Mr. Parkinson will earn a special supplemental pension benefit pursuant to his employment agreement. As of December 31, 2005, the present value of this supplemental benefit at age 65 is approximately $2,147,000, and Baxter has accrued $305,000 of this amount.

Employment Agreements

      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 after April 19, 2006, such that at any time after April 19, 2006, 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 of Directors. On February 22, 2005, the independent directors of the Board set Mr. Parkinson’s 2005 base salary at $1,140,000. Mr. Parkinson is also eligible to participate in the annual officer bonus program, which provides for payment of a cash bonus amount equal to up to 200% of Mr. Parkinson’s annual salary

if maximum performance levels are achieved for the performance period, 125% of Mr. Parkinson’s annual salary if target performance levels are achieved for the performance period and such lesser amounts as provided in the program document. For performance periods in 2004 and 2005, Mr. Parkinson earned a bonus of not less than the target level for each performance period. On February 14, 2006, the independent directors of the Board of Directors approved Mr. Parkinson’s 2005 annual bonus of $1,941,420. On the same date, the independent directors of the Board of Directors set Mr. Parkinson’s 2006 target bonus at 135% of his 2006 annual salary for the 2006 performance period.

      Options and Restricted Stock. Under the agreement, Mr. Parkinson is eligible for equity awards under the Long-Term Incentive (LTI) Plan, including for calendar year 2005, an option for a minimum of 455,000 shares of company stock and a restricted stock award for a minimum of 48,750 shares. After 2005, 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 of Directors.

      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.

      Termination of Employment. Upon written notice, the agreement may be terminated by either Baxter or Mr. Parkinson. The agreement with Mr. Parkinson 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.

      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.

      In the event of termination of employment without Cause, or due to Constructive Discharge, Change in Control or non-renewal of the employment agreement, in addition to the base benefits, Mr. Parkinson would be eligible for an annual bonus payment for the performance period in which such termination of employment occurs. In addition, Mr. Parkinson would 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 would lapse and become fully vested and fully exercisable as of the date of the termination of employment, and all restricted stock awards would fully vest immediately and all restrictions would lapse. The stock options would 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 would the exercise period be greater than the original expiration date of the grant. Mr. Parkinson and his family members would be entitled to 18 months of paid COBRA coverage.

      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 organization are, or would be, in actual competition when such rendering of services might potentially involve the disclosure or use of confidential information or trade secrets. 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.

      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.

Certain Relationships and Related Transactions

      Carlos Arturo del Salto, Jr., son of Carlos del Salto, Baxter’s former Corporate Vice President, President, Intercontinental/ Asia, is employed by Baxter in a non-officer position as a sales representative. For his services, Mr. del Salto, Jr. earned $82,548 in total compensation in 2005, which was comparable to other employees at a similar level. In addition, Magdalena Nemer, sister-in-law of Mr. del Salto (spouse of his brother), formerly served as Baxter’s General Manager for Mexico. During 2005, Ms. Nemer was on expatriate assignment from the United States to Mexico. For her services, Ms. Nemer was paid $226,926 in total compensation in 2005. Ms. Nemer’s compensation included a base salary of $176,039, a cost of living allowance of $14,498, a hardship allowance of $26,405 and a bonus of $9,984. Ms. Nemer also received normal expatriate benefits related to her assignment in the amount of $341,501, which primarily included tax equalization, housing assistance, a company car and educational assistance for her children. The compensation paid to Ms. Nemer was consistent with the compensation paid to other Baxter expatriate employees in similar positions.

      Baxter also has been a party to the following transactions with entities of which a member of the Board serves or has served in an executive or similar capacity. Baxter has agreed to make the $1.5 million donation described in the previous section of this Proxy Statement under the caption “Employment Agreements — Donation to Loyola University Chicago”. The pledge was made in connection with Mr. Parkinson’s employment with Baxter and while Mr. Parkinson was Dean of Loyola University Chicago’s School of Business Administration and Graduate School of Business. Mr. Parkinson currently serves on Loyola University Chicago’s Board of Trustees. In 2005, Baxter paid $87,300 in membership dues and program attendance fees to The Conference Board, a tax-exempt organization. Ms. Fosler, a member of Baxter’s Board, serves as Executive Vice President and Chief Economist of The Conference Board.

Security Ownership by Directors and Executive Officers

      The following table sets forth information as of January 31, 2006 regarding beneficial ownership of Baxter Common Stock by executive officers, directors and director nominees.

Security Ownership by Certain Beneficial Owners

      As of February 14, 2006, the following entity was the beneficial owner of more than five percent of Baxter Common Stock:

Performance Graph

      The following graph compares the performance of Baxter’s Common Stock with the Standard & Poor’s 500 Composite Index and the Standard & Poor’s 500 Health Care Index. The comparison of total return for each of the years shown in the table below assumes that $100 was invested on December 31, 2000 in each of Baxter, the Standard & Poor’s 500 Composite Index and the Standard & Poor’s 500 Health Care Index. Total return is based on the change in year-end stock price plus reinvested dividends.

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, 2005 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, 2005 and 2004, 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.

      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. The amount in 2004 includes fees billed for work performed by PwC in connection with the amendment of the company’s previously issued financial statements.

      Tax Fees include fees for services performed by PwC for tax compliance, tax advice, and tax planning. Of these amounts, approximately $1,370 in 2005 and $2,243 in 2004 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 $587 in 2005 and $1,700 in 2004 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 2005 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 2006. The Audit Committee requests that the shareholders ratify the appointment. PwC served as the independent registered public accounting firm for Baxter in 2005. 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 2007 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 Proxyholders 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 2006.

Management Proposals

Proposal 3 — Proposed Amendments to Article SIXTH of the

Restated Certificate of Incorporation Eliminating the Classified Structure

of the Board of Directors

      At Baxter’s Annual Meeting of Shareholders held on May 3, 2005, shareholders approved a proposal requesting that the Board of Directors adopt and implement a bylaw requiring each director to be elected annually. In the proxy statement related to the 2005 Annual Meeting, the Board undertook that if this shareholder proposal was approved at the 2005 Annual Meeting, the Board would present for a vote at the 2006 Annual Meeting an amendment to Baxter’s Restated Certificate of Incorporation that, if approved, would eliminate the classified board. Accordingly, the Board of Directors has adopted resolutions approving amendments to Article SIXTH to eliminate the classified board structure and is now recommending such amendments to Baxter’s shareholders.

      If the proposed amendments are approved by our shareholders, the classified Board structure will be eliminated, and all directors will thereafter be elected for one-year terms at each annual meeting of shareholders. Furthermore, any director chosen as a result of a newly created directorship or to fill a vacancy on the Board of Directors will hold office until the next annual meeting of shareholders.

      If the proposed amendments are not approved by shareholders, the Board of Directors will remain classified, and the four directors elected at the 2006 Annual Meeting will be elected for a three-year term expiring in 2009. All other directors will continue in office for the remainder of their full three-year terms, subject to their earlier retirement, resignation, removal or death.

      The amendments to the Restated Certificate of Incorporation to implement this proposal are set forth in Appendix B, which shows the changes to Article SIXTH resulting from the amendments with deletions indicated by strike-outs and additions indicated by underlining. If approved, this proposal will become effective upon the filing of an Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware containing these amendments, which the company would cause to occur promptly after it is determined that the proposed amendments have been approved by the requisite vote of shareholders at the 2006 Annual Meeting.

Required Vote

      This proposal requires the affirmative vote of at least two-thirds of the holders of Baxter Common Stock. If this amendment is approved, all of the Board members, including those voted on at the 2006 Annual Meeting, will serve until the 2007 Annual Meeting of Shareholders. Abstentions will have the effect of a vote against this proposal. Nominees such as banks and brokers holding shares on behalf of beneficial owners who do not provide voting instructions may vote such shares with respect to this proposal.

      The Board of Directors recommends that the shareholders vote FOR the amendments to Article SIXTH to eliminate the classified structure of the Board of Directors and provide for the annual election of directors.

Proposal 4 — Proposed Amendments to Article FIFTH of the

Restated Certificate of Incorporation Reducing the

Minimum and Maximum Number of Directors

      Baxter’s Restated Certificate of Incorporation currently provides that the number of directors that shall constitute the Board of Directors will not be less than twelve or more than twenty. The Board of Directors proposes to amend Article FIFTH to reduce the minimum number of directors from twelve to nine. The Board also proposes to amend Article FIFTH to reduce the maximum number of directors from twenty to seventeen in order to maintain the same relative range of directors as contained in the existing Restated Certificate of Incorporation. The Board of Directors has unanimously adopted resolutions

approving such amendments, declaring their advisability and recommending such amendments to our shareholders.

      The Board believes these amendments are in the best interest of Baxter and its shareholders because they will provide the Board with the flexibility to act in a timely manner in the event of unexpected resignations or other vacancies in the Board. The Board of Directors currently is, and historically has been, composed of twelve directors. If one director were to become unable to serve for reasons outside of Baxter’s control, Baxter would not be operating in accordance with the terms of its certificate of incorporation until a new director was appointed. Reducing the minimum number of directors to nine would be consistent with Section 141 of the Delaware General Corporation Law, which only requires a minimum number of one director. A vacancy may be created by many factors outside of Baxter’s control such as the unexpected death or prolonged illness of a director. In addition, a vacancy may be created by the unexpected resignation of a director. For example, if a director were to accept employment with an organization that would cause the director to no longer be independent from Baxter, best practices would require the director to offer to resign at the effective time of his or her employment rather than waiting until the next annual meeting. Reducing the minimum number of directors protects Baxter in the event of such unexpected vacancies on the Board.

      The amendments to the Restated Certificate of Incorporation to implement this proposal are set forth in Appendix C, which shows the changes to Article FIFTH resulting from the amendments with deletions indicated by strike-outs and additions indicated by underlining. If approved, this proposal will become effective upon the filing of an Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware containing these amendments, which the company would cause to occur promptly after it is determined that the proposed amendments have been approved by the requisite vote of shareholders at the 2006 Annual Meeting.

Required Vote

      Approval of this proposal requires the affirmative vote of a majority of the outstanding shares of Baxter Common Stock. 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 vote such shares with respect to this proposal.

      The Board of Directors recommends that the shareholders vote FOR the amendments to Article FIFTH to reduce the minimum and maximum number of directors to nine and seventeen, respectively.

Shareholder Proposal

Proposal 5 — Shareholder Proposal Relating to the Redemption of the Shareholder Rights Plan

      Baxter has been advised that John Chevedden, as representative for Charles Miller, 23 Park Circle, Great Neck, NY 10024, owner of 1000 shares of Baxter Common Stock, intends to present the following resolution at the Annual Meeting. The following shareholder proposal contains assertions about Baxter that we believe are incorrect. Rather than refuting these inaccuracies, however, the Board has recommended a vote against this proposal for broader policy reasons as set forth below.

Shareholder Proposal

5 - Redeem or Vote Poison Pill

      RESOLVED, Shareholders request that our Board redeem any current or future poison pill, unless such poison pill is subject to a shareholder vote as a separate ballot item, to be held as soon as may be practicable. Charter or bylaw inclusion if practicable.

Shareholder’s Statement Supporting the Proposed Resolution

      Thus there would be no loophole to allow exceptions to override the a shareholder vote as soon as practicable. Since a vote would be as soon as practicable, it accordingly could take place within 4-months of the adoption of a new poison pill. To give our board valuable insight on our views of their poison pill, a vote would occur even if our board had promptly terminated a new poison pill because our board could turnaround and readopt their poison pill.

      Twenty (20) shareholder proposals on this topic won an impressive 58% average yes-vote in 2005 through late-September. The Council of Institutional Investors www.cii.org formally recommends adoption of this proposal topic. Yet in 2005 our management was still protected by a poison pill with a 15% trigger.

      It is important to take one forward step in our corporate governance and adopt the above RESOLVED statement since there are questions on whether our 2005 governance was focused in the right direction. For example are the most qualified candidates being selected as new directors.

      We could not locate any previous public corporate board experience for our new director Mr. Devitt — Qualification concern.

      Another new director Mr. Hellman had public board experience yet it was on boards rated “D” or “F” by The Corporate Library (TCL) http://www.thecorporatelibrary.com/ a pro-investor research firm:

Nordson (NDSN) = “D”

Also there is a question on why Ms. Fosler, who has a non-director link to our company, was on our key Audit Committee where impeccable independence is a priority. Especially when our company’s accounting was rated “F” by The Corporate Library.

      “Poison pills . . . prevent shareholders, and the overall market, from exercising their right to discipline management by turning it out. They entrench the current management, even when it’s doing a poor job. They water down shareholders’ votes.”

      “Take on the Street” by Arthur Levitt, SEC Chairman, 1993-2001.

Redeem or Vote Poison Pill

Yes on 5

Board of Directors’ Statement Regarding Shareholder Resolution

      The Board has continued to maintain a shareholder rights plan because it believes, based on its collective experience and the advice of outside experts, that the plan protects shareholders’ interests. A shareholder rights plan is integral to the Board’s ability to fulfill its duties to shareholders and decisions concerning shareholder rights plans properly belong to the Board. Accordingly, the Board recommends a vote AGAINST the proposal for the reasons discussed below.

      The purpose of Baxter’s shareholder rights plan is to provide protection from abusive and coercive tactics that frequently occur in takeover attempts. The shareholder rights plan is designed to ensure that Baxter’s shareholders receive fair and equal treatment in the event of an unsolicited attempt to take over Baxter and to guard against partial tender offers and other abusive takeover tactics designed to gain control of Baxter without paying all of the shareholders the fair value of their shares. The shareholder rights plan does not prevent potential purchasers from making offers, nor is it a deterrent to a shareholder’s initiation of a proxy contest. Instead, it encourages any potential purchaser to negotiate directly with the Board and thus strengthens the Board’s bargaining position vis-a-vis such bidder. In addition, the shareholder rights plan gives the Board a greater period of time within which it can review a takeover proposal in a careful

and rational manner. The Board gains the opportunity and additional time to determine if an offer reflects the full value of Baxter and is fair to all shareholders, and if the offer is not fair, to reject the offer or to seek an alternative that is fair.

      The Board has a fiduciary duty to act in the best interest of the shareholders. The current Board is composed entirely of independent directors, except for the Chairman and Chief Executive Officer. In the event of a takeover attempt triggering the shareholder rights plan, the Board is in the best possible position to be free from self-interest in discharging its fiduciary duty to determine whether the proposed offer is in the best interests of shareholders.

      The economic benefits of a shareholder rights plan have been validated in several studies. A February 2004 Corporate Governance Study commissioned by Institutional Shareholder Services (ISS) revealed that companies with strong takeover defenses — including shareholder rights plans — achieved: higher shareholder returns over three-, five- and ten-year periods; higher return on equity; higher return on sales; higher net profit margins; higher dividend payouts; higher dividend yields; and higher interest coverage and operating cash flow to liability ratios.

      These recent findings are consistent with what studies about shareholder rights plans have historically revealed. Georgeson & Company Inc. — a nationally recognized proxy solicitor and investor relations firm retained to aid in our proxy solicitation — analyzed takeover data between 1992 and 1996 to determine whether rights plans had any measurable impact on stockholder value. Their findings were as follows:

      Georgeson’s two pioneering “Poison Pill” Impact Studies in 1998 and a 1995 report from JP Morgan reached the same conclusions. For these reasons, plans similar to our shareholder rights plan have been adopted by a majority of the companies in the S&P 500 index.

      Redeeming the rights would remove an important tool that the Board now has for the protection of shareholders. The decision to redeem the rights should be made only by the Board in the context of a specific takeover proposal. To do so in the absence of such a proposal at this time would be to deny Baxter’s shareholders protection in the event of an unsolicited offer and potentially reduce the long-term value for all shareholders.

      This proposal requires the approval of holders of a majority of the shares voting at the Annual Meeting. Because the proposal is only a recommendation, however, its approval would not effectuate the changes it references. Redemption of the existing rights under the shareholder rights plan would require Board action. Implementation of a requirement for shareholder approval of future shareholder rights plans would require either Board action or a shareholder amendment of either Baxter’s Restated Certificate of Incorporation or Bylaws, which in turn requires the affirmative vote of the holders of a majority of the issued and outstanding shares of Baxter Common Stock.

      The Board recommends a vote AGAINST redemption of the shareholder rights plan.

Other Information

Attending the Annual Meeting

      The 2006 Annual Meeting of Shareholders will take place at the Palmer House Hilton Hotel, Grand Ballroom, 17 East Monroe Street, Chicago, Illinois, on Tuesday, May 9, 2006 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 through the Internet or by 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 received more than one copy of the 2005 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 through the Internet or by telephone. At least one account at your address must continue to receive the annual report, unless you elect to view future documents through the 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 2007 Annual Meeting

      Any shareholder who intends to present a proposal at Baxter’s annual meeting to be held in 2007, 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, 2006 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 proposals 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 2007 annual meeting, proposals which 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, 2007. 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., 17 State Street, New York, New York 10004 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

CORPORATE GOVERNANCE GUIDELINES

MEMBERSHIP CRITERIA FOR NON-EMPLOYEE DIRECTORS

      It is the desire of Baxter International Inc. (the “Company”) to select individuals for nomination to the Board of Directors, who, if elected, will best serve the interests of the Company and its shareholders. To accomplish this goal, each director nominee should:

      Directors will be selected on the basis of talent and experience. The Company seeks a Board with diversity of background among its members, including diversity of gender, race, ethnic or national origin, age, and experience in business, government and education and in health care, science, technology and other areas relevant to the company’s activities. At least a majority of the Board will consist of individuals who are independent, as defined by these Guidelines and applicable New York Stock Exchange rules.

Appendix B

Proposed Amendments to

Article SIXTH of Baxter’s Restated Certificate of Incorporation

      The text of the proposed amendments is marked to reflect the proposed changes.

      Article SIXTH of Baxter’s Restated Certificate of Incorporation is amended to read as follows:

Appendix C

Proposed Amendments to

Article FIFTH of Baxter’s Restated Certificate of Incorporation

      The text of the proposed amendments is marked to reflect the proposed changes.

      The first sentence in Article FIFTH of Baxter’s Restated Certificate of Incorporation is amended to read as follows:

      The number of directors which shall constitute the whole board of directors of the corporation shall be the number from time to time fixed by the board of directors but in no event shall be less than twelvenine or more than twentyseventeen.