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.

Cost of sales in 2006, compared to 2005, increased as a result of:

• the impact of higher implementation costs associated with our cost-reduction initiatives of $392 million in 2006, compared to $124 million in 2005;

• the timing of implementation of inventory-management initiatives;

• the unfavorable impact on expenses of foreign exchange; and

• charges related to certain inventory and manufacturing equipment write-downs,

partially offset by:

• changes in sales mix;

• savings related to our cost-reduction initiatives; and

• $73 million in write-offs of inventory and exit costs in 2005 related to suspension of sales and marketing of Bextra.

Selling, Informational and Administrative (SI&A) Expenses

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

offset by:

• the unfavorable impact on expenses of foreign exchange;

• 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 (See the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review).

 Animal Health

Revenues of our Animal Health business follow:

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

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

• for livestock products, the continued good performance of our premium anti-infectives for cattle and swine, and intramammaries 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 (a parasiticide for dogs and cats); Rimadyl (for treatment of pain and inflammation associated with canine osteoarthritis and soft-tissue orthopedic surgery); and new product launches, such as Convenia (first-in-class single-dose treatment antibiotic therapy for dogs and cats), Slentrol (weight management for dogs) and Cerenia (treatment and prevention of vomiting in dogs); and

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

The increase in Animal Health revenues in 2006, compared to 2005, was primarily attributable to:

• for livestock products, the continued good performance of Draxxin (for treatment of respiratory disease in cattle and swine) in Europe and in the U.S.; and

• for companion animal products, the continued good performance of Revolution;

partially offset by:

• a decline in U.S. Rimadyl revenues due to intense branded competition, as well as increased generic competition in the European companion animal market.

SI&A expenses increased 2% in 2006, compared to 2005, which reflects:

• higher promotional investments in new product launches and in-line product promotional programs;

• expenses related to share-based payments; and

• the