As a result of actions we took during the past year, Merck entered 2004 a stronger, more focused company, better equipped to meet the challenge of developing the competitively priced, novel medicines that are core to our success. We completed the spin-off of Medco Health Solutions, Inc., which returns Merck to its roots as a pure pharmaceutical research company and allows investors to evaluate both companies as pure plays in their respective industries. We also brought Merck's ownership of Tokyo-based Banyu Pharmaceutical Co., Ltd., from 51 percent to 99.4 percent, significantly strengthening our position in Japan, the world's second-largest pharmaceutical market. And we took steps to improve operating efficiency throughout our business.

In the fourth quarter of 2003, we implemented a new strategy for U.S. pharmaceutical wholesalers to make the distribution of our medicines more efficient and to moderate fluctuations in sales caused by their purchase patterns. The program lowers limits on average monthly purchases of Merck pharmaceutical products by our U.S. customers. We expect the long-term benefits in both cost savings and more effective distribution of our products will be considerable.

Our new integrated inventory management strategy, together with the new wholesaler distribution program, is expected to produce a cumulative cash flow benefit of more than $300 million through 2006.

We also announced reductions in our workforce of approximately 3,200 full-time positions and 1,200 contract or temporary employees that will be completed in 2004. Beginning in 2005, this action is expected to lower our annual payroll and benefit costs by approximately $250 to $300 million. We took this difficult step not only to improve our cost structure, but to make Merck a leaner, more responsive organization that is better positioned to prosper in the face of the competitive challenges ahead.

By streamlining our capital plan, we expect to free up approximately $340 million in additional cash flow through 2006. We anticipate that the Company's capital efficiency initiative will improve our capital spending profile through 2006, with average annual capital spending between 2003 and 2006 estimated to be less than $2 billion, compared to $2.3 billion per year in prior years. We also expect additional savings through other activities, such as changing the way we manage our supply chain and using our manufacturing capacity most efficiently.

Other changes already under way will continue this drive toward efficiency and effectiveness, including:

• Redesigning the way clinical data is gathered from doctors, patients and laboratories to make it faster and more accurate, reducing the time needed to collect valid clinical data by as much as 80 percent.
• Reducing the amount of time it takes us to process routine but widely used transactions such as accounts payable, and travel and expense reporting.
• Shortening our manufacturing cycle while safeguarding quality to get products to customers more quickly, improve service, boost productivity and cut inventory costs.

Operating efficiency is imperative as we focus our resources on the essential challenge of discovery, and continue to offer the novel and competitively priced medicines that drive our business.