2007

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Business

We are a global, research-based company applying innovative science to improve world health. Our efforts in support of that purpose include the discovery, development, manufacture and marketing of safe and effective medicines; the exploration of ideas that advance the frontiers of science and medicine; and the support of programs dedicated to illness prevention, health and wellness, and increased access to quality healthcare. Our value proposition is to demonstrate that our medicines can effectively prevent and treat disease, including the associated symptoms and suffering, and can form the basis for an overall improvement in healthcare systems and their related costs. Our revenues are derived from the sale of our products, as well as through alliance agreements, under which we co-promote products discovered by other companies.

Our Pharmaceutical segment represented approximately 92% of our total revenues in 2007 and, therefore, developments relating to the pharmaceutical industry can have a significant impact on our operations.

Our 2007 Performance

We delivered a solid performance in 2007, reflecting the favorable impact of foreign exchange, the important contributions of many of our products launched since 2005 and our in-line products in the aggregate performing well in a tough operating environment, largely offset by revenue declines from the loss of U.S. exclusivity of Zoloft in August 2006 and Norvasc in March 2007, and other factors.

Specifically, in 2007:

• Revenues of $48.4 billion were flat compared to 2006, due primarily to the favorable impact of foreign exchange, an aggregate year-over-year increase in revenues from products launched since 2005 and the solid aggregate performance of the balance of our broad portfolio of patent-protected medicines, offset by the impact of loss of U.S. exclusivity on Zoloft in August 2006 and Norvasc in March 2007. Zoloft and Norvasc collectively experienced a decline in revenues of about $3.5 billion in 2007 compared to 2006. These declines were offset by an aggregate revenue increase in new products and the balance of our portfolio of patent-protected products and alliance revenues, such as:

• Decision to Exit Exubera:

Exubera was the first inhaled insulin therapy for the treatment of diabetes, and since May 2006, had been launched in Germany, Ireland, the U.K. and the U.S. In the third quarter of 2007, after an assessment of the financial performance of Exubera, as well as its lack of acceptance by patients, physicians and payers, we decided to exit the product.

Our Exubera-related exit plans included working with physicians over a three-month period to transition patients to other treatment options, evaluating redeployment options for colleagues, working with our partners and vendors with respect to transition and exit activities, working with regulators on concluding outstanding clinical trials, implementing an extended transition program for those patients unable to

transition to other medications within the three-month period, and exploring asset disposal or redeployment