Corp. (Rinat);

 higher interest income compared to 2006, due primarily to higher net financial assets during 2007 compared to 2006, reflecting proceeds of $16.6 billion from the sale of our Consumer Healthcare business, and higher interest rates; and

 alowereffectiveincometaxrate.In2007,oureffectivetaxrate on continuing operations of 11.0% was lower than the 15.3% rate in 2006, which largely reflects the tax impact of our decision to exit Exubera in 2007, the tax impact of higher cost-reduction expenditures in 2007 compared to 2006 and the volume and geographic mix of product sales in 2007 compared to 2006.

• Discontinued operations—net of tax were losses of $69 million in 2007, compared with income of $8.3 billion in 2006. The results in 2006 relate primarily to our former Consumer Healthcare business, which was sold on December 20, 2006. The 2006 amount includes the gain on the sale of this business of approximately $7.9 billion, after tax. (See further discussion in the “Our Strategic Initiatives—Strategy and Recent Transactions: Dispositions” and “Analysis of the Consolidated Statement of Income” sections of this Financial Review.)

• Acquisitions—We completed a number of strategic acquisitions that we believe will strengthen and broaden our existing pharmaceutical capabilities. In 2007, we acquired BioRexis, a privately held biopharmaceutical company with a number of diabetes candidates and a novel technology platform for developing new protein drug candidates, and Embrex, an animal health company that possesses a unique vaccine delivery system known as Inovoject that improves consistency and reliability by inoculating chicks while they are still inside the egg. (See further discussion in the “Our Strategic Initiatives—Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations” section of this Financial Review.)

• Cost-reduction initiatives—We made significant progress with our cost-reduction initiatives, which are a broad-based, company-wide effort to improve performance and efficiency. We incurred related costs of approximately $3.9 billion in 2007, $2.1 billion in 2006 and $763 million in 2005. Building on what had already been accomplished, in January 2007, we announced additional plans to change the way we run our business to meet the challenges of a changing business environment and to take advantage of the diverse opportunities in the marketplace. We are generating cost reductions through site rationalizations in Research and Development (R&D) and manufacturing, streamlining organizational structures, sales force and staff function reductions, and increased outsourcing and procurement savings. (See further discussion in the “Cost- Reduction Initiatives” section of this Financial Review.)

On January 23, 2008, we filed a Current Report on Form 8-K, which included a press release announcing our fourth-quarter and full- year 2007 financial results. In completing our final analysis, we determined that our accruals related to U.S. rebate liabilities were understated by $195 million, pre-tax, and $154 million, after-tax. While not material to understanding fourth quarter and full year 2007 financial results