and Administrative (SI&A) Expenses

SI&A expenses decreased 7% in 2008, compared to 2007, which reflects:

• savings related to our cost-reduction initiatives; and

• charges associated with Exubera of $85 million recorded in 2007 (see the “Our 2008 Performance: Certain Charges—Exubera” section of this Financial Review),

partially offset by:

• the unfavorable impact of foreign exchange on expenses; and

• the impact of higher implementation costs associated with our cost-reduction initiatives of $413 million in 2008, compared to $334 million in 2007.

SI&A expenses in 2007 were comparable to 2006, which reflects: • savings related to our cost-reduction initiatives,

offset by:

• the unfavorable impact of foreign exchange on expenses;

• the impact of higher implementation costs associated with our cost-reduction initiatives of $334 million in 2007, compared to $243 million in 2006; and

• charges associated with Exubera of $85 million recorded in 2007 (see the “Our 2008 Performance: Certain Charges—Exubera” section of this Financial Review).

Research and Development (R&D) Expenses

R&D expenses decreased 2% in 2008, compared to 2007, which reflects:

• the up-front payment to Bristol-Myers Squibb Company (BMS) of $250 million and additional payments to BMS related to product development efforts, in connection with our collaboration to develop and commercialize apixaban, recorded in 2007;

• exit costs, such as contract termination costs, associated with Exubera of $100 million recorded in 2007 (see the “Our 2008 Performance: Certain Charges—Exubera” section of this Financial Review); and

• savings related to our cost-reduction initiatives,

partially offset by:

• the impact of higher implementation costs associated with our cost-reduction initiatives of $433 million in 2008, compared to $416 million in 2007;

• the up-front payment to Medivation of $225 million in connection with our collaboration to develop and commercialize Dimebon, recorded in 2008; and

• higher R&D spending in 2008 related to clinical trials for our expanded Phase 3 portfolio.

R&D expenses increased 6% in 2007, compared to 2006, which reflects:

• the impact of higher implementation costs associated with our cost-reduction initiatives of $416 million in 2007, compared to $176 million in 2006;

• the up-front payment to BMS of $250 million and additional payments to BMS related to product development efforts, in connection with our collaboration to develop and commercialize apixaban, recorded in 2007;

• the unfavorable impact of foreign exchange on expenses;

• a one-time R&D milestone due to us from sanofi-aventis (approximately $118 million) recorded in 2006; and

• exit costs, such as contract termination costs, associated with Exubera of $100 million recorded in 2007 (see the “Our 2008 Performance: Certain Charges—Exubera” section of this Financial Review),

partially offset by:

• savings related to our cost-reduction initiatives.

R&D expenses also include payments for intellectual property rights of $377 million in 2008, $603 million in 2007 and $292 million in 2006. (For further discussion, see the “Our Strategic Initiatives—Strategy and Recent