Our Animal Health business is one of the largest in the world.

The increase in Animal Health revenues in 2008, compared to 2007, was primarily attributable to:

• for livestock products, the continued good performance of our cattle biologicals and intramammaries franchises in 2008;

• for companion animal products, the good performances of Revolution (a parasiticide for dogs and cats), and new product launches, such as Convenia ( first-in-class single-dose treatment antibiotic therapy for dogs and cats), Cerenia (treatment and prevention of vomiting in dogs) and Improvac (boar taint vaccine for pigs); and

• the favorable impact of foreign exchange, which increased revenues by 3%.

The increase in Animal Health revenues in 2007, compared to 2006, was primarily attributable to:

• for livestock products, the continued good performance of our cattle biologicals and intramammaries franchises in 2007, as well as revenues from Embrex, which we acquired in the first quarter of 2007;

• for companion animal products, the good performances of Revolution; Rimadyl (for treatment of pain and inflammation associated with canine osteoarthritis and soft-tissue orthopedic surgery); and new product launches, such as Convenia, Slentrol (weight management for dogs) and Cerenia; and

• the favorable impact of foreign exchange, which increased revenues by 5%.

Costs and Expenses

Cost of Sales

Cost of sales decreased 28% in 2008, while revenues were essentially flat in 2008, and cost of sales increased 47% in 2007, while revenues were flat in 2007. Cost of sales as a percentage of revenues decreased in 2008 compared to 2007 and increased in 2007 compared to 2006.

Cost of sales in 2008, compared to 2007, decreased as a result of:

• asset impairment charges, write-offs and other exit costs associated with Exubera of $2.6 billion recorded in 2007 (see the “Our 2008 Performance: Certain Charges—Exubera” section of this Financial Review);

• savings related to our cost-reduction initiatives; and

• the favorable impact of foreign exchange on expenses,

partially offset by:

• the impact of higher implementation costs associated with our cost-reduction initiatives of $745 million in 2008, compared to $700 million in 2007.

Cost of sales in 2007, compared to 2006, increased as a result of:

• asset impairment charges, write-offs and other exit costs associated with Exubera of $2.6 billion recorded in 2007 (see the “Our 2008 Performance: Certain Charges—Exubera” section of this Financial Review);

• the unfavorable impact of foreign exchange on expenses;

• the impact of higher implementation costs associated with our cost-reduction initiatives of $700 million in 2007, compared to $392 million in 2006; and

• costs of $194 million for 2007, related to business transition activities associated with the sale of our Consumer Healthcare business, completed in December 2006,

partially offset by:

• savings related to our cost-reduction initiatives.

Selling, Informational 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