RESULTS OF OPERATIONS
NET SALES


                                Three months ended                                 Nine months ended
                                  September 30,                 Percent              September 30,                Percent
(in millions)                     2008            2007           change              2008           2007           change

BioScience                   $   1,354         $ 1,099              23%         $   3,949        $ 3,440              15%
Medication Delivery              1,157           1,047              11%             3,386          3,076              10%
Renal                              593             560               6%             1,749          1,638               7%
Transition services to
Fenwal Inc.                         47              44               7%               133            100              33%

Total net sales              $   3,151         $ 2,750              15%         $   9,217        $ 8,254              12%

                       Three months ended                        Nine months ended
                          September 30,            Percent         September 30,            Percent
   (in millions)           2008         2007        change           2008        2007        change

   International      $   1,879      $ 1,539           22%      $   5,525     $ 4,708           17%
   United States          1,272        1,211            5%          3,692       3,546            4%

   Total net sales    $   3,151      $ 2,750           15%      $   9,217     $ 8,254           12%

Foreign currency fluctuations benefited sales growth by 6 and 7 percentage points in the three- and nine-month periods ended September 30, 2008, respectively, principally due to the weakening of the U.S. Dollar relative to the Euro in both periods.

                                Three months ended                                 Nine months ended
                                  September 30,                 Percent              September 30,                Percent
(in millions)                     2008            2007           change              2008           2007           change

Total net sales              $   3,151         $ 2,750              15%         $   9,217        $ 8,254             12 %
Pre-divestiture sales
of Transfusion
Therapies products
(included in
BioScience segment
through the
February 28, 2007
divestiture date)                    -               -              N/A                 -             79           (100 %)
Transition services to
Fenwal Inc.
(subsequent to the
February 28, 2007
divestiture date)                   47              44               7%               133            100             33 %

Total net sales
excluding Transfusion
Therapies                    $   3,104         $ 2,706              15%         $   9,084        $ 8,075             12 %

Net sales excluding Transfusion Therapies (TT) increased 15% and 12% in the three- and nine-month periods ended September 30, 2008 (including a 6 percentage point favorable impact from foreign currency fluctuations for both the three- and nine-month periods ended September 30, 2008). Management believes that net sales and sales growth excluding TT facilitates a more meaningful analysis of the company's net sales growth due to the divestiture of this business in 2007. See Note 3 for further information regarding the divestiture of the TT business. BioScience
Net sales in the BioScience segment increased 23% and 15% for the three- and nine-month periods ended September 30, 2008 (including a 6 and 7 percentage point favorable impact from foreign currency fluctuations in the three- and nine-month periods ended September 30, 2008, respectively). The following is a summary of sales by significant product line.

                          Three months ended                        Nine months ended
                             September 30,            Percent         September 30,            Percent
(in millions)                 2008         2007        change           2008        2007        change

Recombinants             $     516      $   432           19%      $   1,460     $ 1,251          17 %
Plasma Proteins                338          246           37%            889         714          25 %
Antibody Therapy               307          245           25%            908         705          29 %
Regenerative Medicine          104           82           27%            307         251          22 %
Transfusion Therapies            -            -           N/A              -          79        (100 %)
Other                           89           94           (5% )          385         440         (13 %)

Total net sales          $   1,354      $ 1,099           23%      $   3,949     $ 3,440          15 %

Recombinants
The primary driver of sales growth in the Recombinants product line during the third quarter and first nine months of 2008 was increased sales volume of recombinant factor VIII therapies. Factor VIII products are used in the treatment of hemophilia A, which is a bleeding disorder caused by a deficiency in blood clotting factor VIII. Sales growth was fueled by the continuing adoption by customers of the advanced recombinant therapy, ADVATE (Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method) rAHF-PFM, with strong patient conversion in both the United States and international markets, and increased demand for new dosage forms that reduce both the volume of drug and infusion time required for hemophilia patients needing high doses of factor VIII.
Plasma Proteins
Plasma Proteins include specialty therapeutics, such as FEIBA, an anti-inhibitor coagulant complex, and ARALAST (alpha 1-proteinase inhibitor (human)) for the treatment of hereditary emphysema, plasma-derived hemophilia treatments and albumin. Sales growth in the third quarter and first nine months of 2008 was driven by growth across all plasma protein products, including albumin, FEIBA, plasma-derived factor VIII and ARALAST, as a result of strong demand and pricing improvements, primarily for albumin, as well as the timing of international tenders.
Antibody Therapy
Higher sales of IGIV (immune globulin intravenous), which is used in the treatment of immune deficiencies, fueled sales growth during the third quarter and first nine months of 2008, with increased volume, continuing improvements in pricing in the United States, and continuing customer conversions to the liquid formulation of the product. Because it does not need to be reconstituted prior to infusion, the higher-yielding liquid formulation offers added convenience for clinicians and patients.
Regenerative Medicine
This product line principally includes plasma-based and non-plasma-based biosurgery products for hemostasis (the stoppage of bleeding) and wound-sealing. Growth in the third quarter and first nine months of 2008 was driven by increased sales volume of the company's portfolio of fibrin sealant products, FLOSEAL, COSEAL and TISSEEL.
Transfusion Therapies
The Transfusion Therapies product line included products and systems for use in the collection and preparation of blood and blood components. See Note 3 for information regarding the company's February 28, 2007 sale of substantially all of the assets and liabilities of this business. Other
Other BioScience products primarily consist of vaccines and sales of plasma to third parties. The decrease in sales in this product line in the third quarter of 2008 was primarily due to the impact of lower milestone revenue associated with the development of a candidate pandemic vaccine and a seasonal influenza vaccine for the U.S. government. The decrease in sales in this product line in the first nine months of 2008 was primarily due to the transfer of marketing and distribution rights for recombinant FIX (BeneFIX) back to Wyeth effective June 30, 2007. Sales of BeneFIX were approximately $110 million through the June 30, 2007 transition date. Also contributing to the decrease in sales in the year-to-date period were significant shipments of candidate H5N1 influenza vaccine to various governments worldwide in the first quarter of 2007. Partially offsetting these declines in the first nine months of 2008 were strong international sales of FSME Immun (for the prevention of tick-borne encephalitis), due to both volume and pricing improvements. Sales of vaccines may fluctuate from period to period based on the seasonal nature of demand, timing of government tenders and new supply agreements.

Medication Delivery
Net sales in the Medication Delivery segment increased 11% and 10% for the
three- and nine-month periods ended September 30, 2008 (including a 5 percentage
point favorable impact from foreign currency fluctuations for both the three-
and nine-month periods ended September 30, 2008).
The following is a summary of sales by significant product line.


                         Three months ended                        Nine months ended
                            September 30,            Percent         September 30,            Percent
  (in millions)              2008         2007        change           2008        2007        change

  IV Therapies          $     403      $   346           16%      $   1,182     $ 1,012          17 %
  Global Injectables          403          372            8%          1,164       1,114           4 %
  Infusion Systems            235          207           14%            684         624          10 %
  Anesthesia                  112          111            1%            333         296          13 %
  Other                         4           11          (64% )           23          30         (23 %)

  Total net sales       $   1,157      $ 1,047           11%      $   3,386     $ 3,076          10 %

IV Therapies
This product line principally consists of intravenous (IV) solutions and nutritional products. Growth for the third quarter and first nine months of 2008 was principally driven by increased demand for IV therapy products in Europe, Latin America, and Asia, and strong international sales of nutritional products. Also impacting sales growth in the third quarter and first nine months of 2008 were pricing improvements for IV therapy products in the United States. Global Injectables
This product line primarily consists of the company's pharmaceutical company partnering business, enhanced packaging, premixed drugs and generic injectables. Sales growth in the third quarter and first nine months of 2008 was driven by strong international sales in the pharmacy-compounding business, partially offset by lower sales of generic injectables. In the year-to-date period, lower sales of generic injectables was principally driven by the transfer of marketing and distribution rights for generic propofol back to Teva Pharmaceutical Industries Ltd. effective July 1, 2007. Sales of propofol totaled approximately $35 million in the first nine months of 2007. Infusion Systems
Sales growth in the third quarter and first nine months of 2008 was driven by increased revenues relating to COLLEAGUE infusion pumps which remain in use as the remediation plan is executed and increased sales of disposable tubing sets used in the administration of IV solutions. Refer to Note 4 and the "Certain Regulatory Matters" section below for additional information related to the COLLEAGUE infusion pump.
Anesthesia
Sales in this product line in the third quarter of 2008 benefited from strong international sales of SUPRANE (desflurane, USP) and sevoflurane. However, sales growth of SUPRANE in the United States in the third quarter of 2008 was negatively impacted by wholesaler purchasing patterns. Sales growth in the first nine months of 2008 was driven by the launch of sevoflurane in additional geographic markets and strong global sales of SUPRANE. Renal
Net sales in the Renal segment increased 6% and 7% for the three- and nine-month periods ended September 30, 2008 (including a 7 and 8 percentage point favorable impact from foreign currency fluctuations in the three- and nine-month periods ended September 30, 2008, respectively).
The following is a summary of sales by significant product line.

                        Three months ended                         Nine months ended
                           September 30,             Percent         September 30,            Percent
   (in millions)          2008            2007        change           2008        2007        change

   PD Therapy         $    480        $    448            7%      $   1,404     $ 1,310           7 %
   HD Therapy              113             112            1%            345         328           5 %

   Total net sales    $    593        $    560            6%      $   1,749     $ 1,638           7 %

PD Therapy
Peritoneal dialysis, or PD Therapy, is a home dialysis treatment for end-stage renal disease. PD Therapy uses the peritoneal membrane, or abdominal lining, as a natural filter to remove waste from the bloodstream. Excluding the impact of foreign currency, sales were flat in the third quarter and declined slightly in the first nine months of 2008, as increased numbers of patients in Asia (particularly in China), the United States, and Central and Eastern Europe were more than offset by the loss of a government tender in Mexico in the first quarter of 2008. Increased penetration of PD Therapy products continues to be strong in emerging markets, where many people with end-stage renal disease are currently under-treated.
HD Therapy
Hemodialysis, or HD Therapy, is another form of end-stage renal disease dialysis therapy that is generally performed in a hospital or outpatient center. In HD Therapy, the patient's blood is pumped outside the body to be cleansed of wastes and fluid using a machine and an external filter, also known as a dialyzer. The favorable impact of foreign currency fluctuations in the third quarter and first nine months of 2008 were partially offset by lower saline sales. Transition Services to Fenwal Inc.
Net sales in this category represents revenues associated with manufacturing, distribution and other services provided by the company to Fenwal Inc. (Fenwal) subsequent to the divestiture of the TT business on February 28, 2007. See Note 3 for further information.

GROSS MARGIN AND EXPENSE RATIOS


                                Three months ended                                 Nine months ended
                                  September 30,                                      September 30,
                                  2008            2007           Change              2008           2007           Change

Gross margin                     48.3%           50.0%         (1.7 pts )           49.1%          48.9%          0.2 pts
Marketing and
administrative
expenses                         21.6%           24.1%         (2.5 pts )           22.0%          22.6%         (0.6 pts )

Gross Margin
The gross margin in both the third quarter and the first nine months of 2008 benefited from continued customer conversion to ADVATE and the liquid formulation of IGIV, manufacturing efficiencies and improved volumes and pricing for certain plasma protein and other products.
Included in the company's gross margin in 2008 were charges of $125 million related to COLLEAGUE infusion pumps (with $72 million recorded in the third quarter and $53 million recorded in the first quarter) and a $19 million charge in the first quarter related to the company's recall of its heparin products in the United States. These charges decreased the gross margin by 2.3 percentage points in the third quarter and 1.6 percentage points in the year-to-date period. Refer to Note 4 for further information on these charges. Also negatively impacting the gross margin in both periods were increased raw material costs.
Marketing and Administrative Expenses
The decline in the marketing and administrative expense ratios for the third quarter and first nine months of 2008 was principally due to leverage from higher sales, stronger cost controls and the impact of the third quarter 2007 charge of $56 million to establish reserves related to the average wholesale pricing (AWP) litigation, partially offset by an increase in stock compensation costs and spending related to certain marketing programs, particularly in the BioScience segment.

RESEARCH AND DEVELOPMENT


                               Three months ended                                Nine months ended
                                  September 30,                Percent             September 30,                Percent
(in millions)                    2008            2007           change             2008           2007           change

Research and
development (R&D)
expenses                         $230            $203              13%             $642           $539              19%
As a percent of sales            7.3%            7.4%                              7.0%           6.5%

R&D expenses increased during the third quarter and first nine months of 2008 with strong growth in spending on R&D projects across all three of the company's businesses, particularly BioScience, reflecting the company's

commitment to accelerate R&D investments. Foreign currency fluctuations also contributed to the increase in R&D expenses in both periods. Included in R&D expenses in the third quarter of 2008 was a $12 million in-process R&D (IPR&D) charge related to an in-licensing agreement with Innocoll Pharmaceuticals Ltd. (Innocoll) to market and distribute Innocoll's gentamicin surgical implant in the United States upon receipt of regulatory approval. Included in R&D expenses in the third quarter of 2007 was a $25 million IPR&D charge related to a collaboration for the development of a next-generation home HD machine with HHD, LLC, and a $10 million IPR&D charge related to an in-licensing arrangement with Halozyme Therapeutics, Inc. (Halozyme). The nine months ended September 30, 2007 also included an $11 million IPR&D charge relating to the acquisition of certain assets of MAAS Medical, LLC (MAAS Medical). Refer to Note 2 for additional information regarding the company's in-licensing agreement with Innocoll and the 2007 Annual Report for a discussion of the company's R&D pipeline, arrangements with HHD, LLC and Halozyme and the acquisition of MAAS Medical.
2007 RESTRUCTURING CHARGE
During 2007, the company recorded a restructuring charge of $70 million principally associated with the consolidation of certain commercial and manufacturing operations outside of the United States. Based upon a review of current and future capacity needs, the company decided to integrate several facilities in order to reduce the company's cost structure and optimize the company's operations.
Included in the charge was $17 million related to asset impairments and $53 million for cash costs, principally pertaining to severance and other employee-related costs. The reserve for cash costs is expected to be substantially utilized by the end of 2009. Refer to Note 4 for further information, including reserve utilization through September 30, 2008. The company believes that the reserves are adequate. However, adjustments may be recorded in the future as the programs are completed. Cash expenditures are being funded with cash generated from operations.
NET INTEREST EXPENSE
Net interest expense was $20 million and $6 million in the third quarters of 2008 and 2007, respectively, and $62 million and $10 million for the nine months ended September 30, 2008 and 2007, respectively. The increased expense was driven by lower interest rates and higher average debt levels, principally due to the December 2007 issuance of $500 million of senior unsecured notes and the May 2008 issuance of $500 million of senior unsecured notes. The increase in net interest expense for the nine months ended September 30, 2008 was also driven by lower average cash balances.
OTHER EXPENSE, NET
Other expense, net was $32 million and $21 million in the third quarters of 2008 and 2007, respectively, and $36 million and $28 million for the nine-month periods ended September 30, 2008 and 2007, respectively. Other expense, net in both periods included amounts relating to foreign exchange, minority interests and equity method investments. Included in other expense, net for the three and nine months ended September 30, 2008 was a third quarter 2008 charge of $31 million associated with the discontinuation of the company's CLEARSHOT pre-filled syringe program. Also included in other expense, net for the nine months ended September 30, 2008 and 2007 was income recognized in the first quarter of 2007 related to the divestiture of the TT business, which included a gain on the sale of the TT business of $58 million less related charges of $35 million, and $16 million of income in the first quarter of 2008 related to the finalization of the net assets transferred in the TT divestiture. See Note 3 for further information on the TT business divestiture and Note 4 for further information on the CLEARSHOT charge.
PRE-TAX INCOME
Refer to Note 8 for a summary of financial results by segment. The following is a summary of significant factors impacting the segments' financial results. BioScience
Pre-tax income increased 18% and 21% for the three- and nine-month periods ended September 30, 2008, respectively. The primary drivers of the increase in both periods were the continued customer conversion to ADVATE and the liquid formulation of IGIV, improved pricing of certain plasma protein products, manufacturing

efficiencies and the favorable impact of foreign currency fluctuations. Partially offsetting this growth was higher spending on new marketing programs and increased R&D spending related to product development and milestone payments to partners.
Medication Delivery
Pre-tax income decreased 48% and 22% for the three- and nine-month periods ended September 30, 2008, respectively. The improvements in product mix, with increased sales of certain higher-margin products such as SUPRANE, sevoflurane and nutritional products, as well as the favorable impact of foreign currency fluctuations, were more than offset by the impact of special charges and increased spending on R&D. The nine months ended September 30, 2008 included $125 million of charges related to the COLLEAGUE infusion pump (with $72 million recorded in the third quarter and $53 million recorded in the first quarter), a third quarter 2008 charge of $31 million related to the discontinuation of the CLEARSHOT pre-filled syringe program and a first quarter 2008 charge of $19 million related to the company's recall of its heparin products in the United States. See Note 4 for further information about these charges. Renal
Pre-tax income decreased 5% and 12% for the three- and nine-month periods ended September 30, 2008, respectively. The decrease in both periods was principally due to the loss of a PD tender in Mexico, and increased spending on new product development, including a next-generation home HD machine, partially offset by the favorable impact of foreign currency fluctuations. Other
Certain items are maintained at the company's corporate level and are not allocated to the segments. These items primarily include net interest expense, certain foreign currency fluctuations and the majority of the foreign currency and interest rate hedging activities, stock compensation expense, income and expense related to certain non-strategic investments, corporate headquarters costs, certain employee benefit plan costs, certain nonrecurring gains and losses, IPR&D charges and income related to the manufacturing, distribution and other transition agreements with Fenwal. Refer to Note 8 for a reconciliation of segment pre-tax income to income before income taxes per the consolidated income statements. The significant factors impacting these other items are described below.
Refer to the discussion above regarding net interest expense, the 2007 restructuring charge, the AWP charge and IPR&D charges.
The increase in stock compensation expense in the quarter and year-to-date period was principally due to changes in the company's stock compensation programs, including the granting of performance share units beginning in 2007 and an amendment to the company's employee stock purchase plan effective January 1, 2008. Refer to the 2007 Annual Report for further information regarding these changes.
The increase in other corporate expenses, net in the first nine months of 2008 was primarily driven by increased legal and other costs held at corporate and the impact of the income in the first quarter of 2007 related to the divestiture of the TT business, partially offset by income in the first quarter of 2008 related to the finalization of the net assets transferred in the divestiture of the TT business. Refer to Note 3 for further information regarding the divestiture of the TT business.
INCOME TAXES
The company's effective income tax rates were 15.4% and 18.2% in the third quarters of 2008 and 2007, respectively, and were 18.1% and 19.1% in the nine-month periods ended September 30, 2008 and 2007, respectively. The effective tax rates in the third quarters and first nine months of 2008 and 2007 were impacted by reductions of $29 million and $57 million, respectively, of valuation allowances on net operating loss carryforwards in foreign jurisdictions due to profitability improvements, and $14 million and $84 million, respectively, of additional U.S. income tax expense related to foreign earnings which are no longer considered indefinitely reinvested outside of the United States because management planned to remit these earnings to the United States in the foreseeable future. Also impacting the tax rate in the 2007 year-to-date period was the extension of tax incentives and the settlement of tax audits in jurisdictions outside of the United States.

INCOME AND EARNINGS PER DILUTED SHARE
Net income was $472 million and $395 million for the three months ended September 30, 2008 and 2007, respectively, and $1,445 million and $1,229 million for the nine months ended September 30, 2008 and 2007, respectively. Net income per diluted share was $0.74 and $0.61 for the three months ended September 30, 2008 and 2007, respectively, and $2.26 and $1.87 for the nine months ended September 30, 2008 and 2007, respectively. The significant factors and events contributing to the changes are discussed above.
CRITICAL ACCOUNTING POLICIES . . .