Eli Lilly and Company 2008 Annual Report and Proxy

On the Cover

Eli Lilly and Company makes medicines that help people Mark Wiley is a manager at Lilly who oversees live longer, healthier, and more active lives. the contract manufacturing for several device products, including an insulin pen called the Integrity—Excellence—Respect for People HumaPen® Luxura HD.™ Although the majority We promise to operate our business with absolute integrity of job roles that Mark has held in his 20-year and earn the trust of all, set the highest standards for our career at Lilly have, in some way, touched the performance and for the performance of our products, and diabetes therapeutic area, he never could have demonstrate caring and respect for all those who share in predicted the role that a Lilly insulin product our mission and are touched by our work. would one day play in his own life. Nor could Mark have predicted, as he Improved Outcomes for Individual Patients packed up his laptop and left the offi ce to We will make a signifi cant contribution to humanity by enjoy the 2008 holiday break with his family, improving global health in the 21st century. Starting with the that the job he would return to a week later work of our scientists, we will place improved outcomes for would have such new meaning. individual patients at the center of what we do. We will listen On December 26, one day before her carefully to understand patient needs and work with health 14th birthday, Mark’s daughter, Paige, was care partners to provide meaningful benefi ts for the people diagnosed with type 1 diabetes. Paige had who depend on us. not been feeling well for awhile. She was often thirsty and had little to no appetite. Mark and his wife realized it was serious when they weighed Paige on Christmas Eve Year in Review and discovered that she had lost 13 pounds 1 Financial Highlights since October. 2 Letter to Shareholders 7 Securing—Then Redefi ning—Lilly’s Future: A Tribute To Sidney Taurel Upon learning Paige’s diagnosis, Mark 8 Innovation at Lilly: The Portfolio and the Pipeline said they were shocked, but also relieved. “Finding out that Paige had diabetes—we Financials knew—was a big deal. But we also saw it 12 Review of Operations as a blessing because we knew it could be 16 Consolidated Statements of Operations 21 Consolidated Balance Sheets successfully treated.” 22 Consolidated Statements of Cash Flows Paige was admitted to a local children’s 23 Consolidated Statements of Comprehensive Income (Loss) hospital, where she and her parents received 33 Segment Information what Mark describes as a “crash course on 34 Selected Quarterly Data a completely new lifestyle.” But there was 35 Selected Financial Data 36 Notes to Consolidated Financial Statements one particular aspect of Paige’s insulin 65 Management’s Reports treatment that Mark did feel comfortable 66 Report of Independent Registered Public Accounting Firm about—and that was using the HumaPen Luxura HD to administer her injections. Given Proxy Statement that Mark oversees the manufacturing of this 68 Notice of 2009 Annual Meeting and Proxy Statement 69 General Information device, he was more than familiar with how 73 Board of Directors the pen worked. 77 Highlights of the Company’s Corporate Governance Guidelines “I guess you could say that my job just 82 Committees of the Board of Directors became very personal to me,” Mark said. 82 Membership and Meetings of the Board and Its Committees As for Paige, she has embraced her new 83 Directors’ Compensation 85 Directors and Corporate Governance Committee Matters diagnosis and treatment regimen with a 86 Audit Committee Matters maturity and courage beyond her years. And 88 Compensation Committee Matters she feels a lot better, too. 89 Executive Compensation She’s also determined not to let diabetes 111 Ownership of Company Stock stand in her way. Just two days after leaving 113 Items of Business To Be Acted Upon at the Meeting 122 Other Matters the hospital, Mark delivered on a promise 123 Appendix A he made before Paige’s diagnosis—he took her rock climbing for her birthday. And Corporate Information despite a fear of heights, Paige achieved her 124 Senior Management and Board of Directors goal that day—she successfully scaled her 126 Corporate Information 127 Annual Meeting Admission Ticket way to the top. 2008 Financial Highlights

ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Year Ended December 31 2008 2007 Change % Net sales ...... $20,378.0 $18,633.5 9

Research and development ...... 3,840.9 3,486.7 10

Research and development as a percent of net sales ...... 18.8% 18.7%

Net income (loss) ...... $(2,071.9) $ 2,953.0

Earnings (loss) per share—diluted ...... (1.89) 2.71 Reconciling items1: Net impact associated with ImClone acquisition2 ...... 4.46 — Acquired in-process research and development (IPR&D) ...... 10 .63 Asset impairments, restructuring, and other special charges . . . 1.54 .21 Beneﬁ t from resolution of IRS audit ...... (.19) — Pro forma adjustment as if the ICOS acquisition was completed on January 1, 2007 ...... — (.01) Adjusted earnings per share—diluted...... 4.02 3.54 14

Dividends paid per share...... 1.88 1.70 11

Capital expenditures ...... 947.2 1,082.4 (12)

Employees ...... 40,4503 40,600 —

1For more information on these reconciling items, see the Financial Results section of the Executive Overview on page 12.

2Includes $4.28 for acquired IPR&D related to this acquisition.

3Headcount ﬁ gures for 2008 include approximately 1,600 employees from businesses acquired in 2008.

Sales Grow Across Therapeutic Areas Net Sales Per Employee Continue to Increase

($ millions, percent growth) ($ thousands, percent growth) +10% +21% $504 Sales in Neurosciences, led by Zyprexa In 2008, we continued our focus on productivity. and Cymbalta, increased 7 percent as Net sales per employee increased 10 percent to $459 compared to 2007 and represent $504,000. Excluding the impact of the businesses +10% 41 percent of our 2008 net sales. we acquired in 2008, our net sales per employee +11% Endocrinology, led by Humalog, $5,890.7 +8% would be $525,000, reflecting a 14 percent $378 Evista, and Humulin, increased $8,371.5 increase from 2007. +11% +7% $344 8 percent and represents 29 percent of our 2008 net sales. Oncology $311

was our fastest growing therapeutic $2,874.4 area with growth of 17 percent. +17%

$1,882.7 Neuroscience +16% Endocrinology $1,093.3 Oncology $265.4 +10% Cardiovascular +12% Other Pharmaceutical Animal Health 04 05 06 07 08

1 To Our Shareholders

For Eli Lilly and Company, 2008 was a year of transition As a result of certain signifi cant charges, we reported and transformation. a net loss of $2.07 billion, or $1.89 per share, for 2008, Our solid fi nancial performance, driven by volume- compared with 2007 net income of $2.95 billion and based sales growth, improved gross margins, and better earnings per share of $2.71. The company recorded total productivity, allowed us to make important investments charges of $4.73 billion related to the acquisition of to advance our pipeline of promising molecules, to ImClone Systems, and $1.42 billion related to Zyprexa® resolve much of the uncertainty surrounding product liti- investigations by the United States Attorney for the East- gation, and to complete several strategic business develop- ern District of Pennsylvania (EDPA) and multiple states— ment transactions, including the acquisition of ImClone which I’ll discuss below. On a pro forma non-GAAP basis, LETTER SHAREHOLDERS TO Systems—the largest acquisition in Lilly history. excluding signifi cant items totaling $5.91 per share, earn- Transformation is not optional. The economic down- ings rose 14 percent to $4.02 per share. turn only added to the challenges facing the pharmaceuti- Strong volume sales, coupled with discipline on cal industry—including pressure on pricing and access, expenses and continued productivity gains, allowed us a drought in research, and regulatory uncertainty. At the to generate over $7 billion in operating cash fl ow. These same time, we have unprecedented opportunities to ad- results give us the benefi t of a strong fi nancial position dress unmet patient needs. Lilly enters 2009 with more just when we need it most—to make the necessary invest- molecules in clinical development than ever before—and ments in our pipeline and in the company’s broader trans- an unwavering commitment to deliver improved out- formation. We aim to sustain solid operating performance comes for individual patients. as we prepare for the full impact of patent expirations This has also been a year of transition. I succeeded beginning in late 2011, a period we call “Years YZ.” Sidney Taurel as CEO in April and as chairman on Janu- ary 1, 2009. In my new responsibilities, I retain a pro- Commercial and regulatory overview found sense of optimism about Lilly’s future—grounded In 2008, we experienced three quarters of double-digit, in a realistic assessment of the challenges we face and the volume-driven sales growth that was broad-based across diffi cult nature of the task ahead. many brands and regions. Unfortunately, in the fourth quarter we saw a slowdown in total sales growth and vol- REVIEW OF 2008 ume growth. In addition, as the dollar strengthened late in the year, exchange rates turned from a benefi t to a drag on Sales and fi nancial results our sales line. Throughout 2008, we advanced Lilly’s transformation For the full year, products launched this decade— by executing on our operational and strategic priorities. Alimta®, Byetta®, Cialis®, Cymbalta®, Forteo®, Strattera®, Reported sales grew 9 percent, driven primarily by a Symbyax®, Xigris®, and Yentreve™—collectively grew 5 percent increase in volume. For the fi rst time, we sur- 22 percent on a reported basis, to $7.31 billion, and passed $20 billion in revenue, with eight products—and accounted for 36 percent of total sales, compared with our Elanco animal health business—exceeding $1 billion 32 percent of total sales in 2007. (For individual product in annual sales. According to data from IMS Health, Lilly performance, please see page 15.) has moved into the top 10 companies in worldwide phar- In 2008, we set the stage for continued growth in our maceutical sales. marketed products with the approval and launch of new indications and line extensions. These included: Alimta for

$5,000 ﬁ rst-line treatment of non-squamous non-small cell lung Eight Products Exceed $1 Billion in Net Sales cancer in the U.S. and Europe; Cymbalta for ﬁ bromyalgia ($ millions)

$4,696 in the U.S. and for generalized anxiety disorder in Europe; $4,000 Eight products and one product Cialis for once-daily use in the U.S.; and the Humalog ™ line—Zyprexa, Cymbalta, Humalog, KwikPen in the U.S., Japan, and select international mar- Gemzar, Cialis, Alimta, Animal $3,000 kets. Zypadhera™—a long-acting formulation of Zyprexa— Health, Evista, and Humulin— $2,697 exceeded $1 billion in 2008. received ﬁ nal approval in Europe late last year, and we are At $1.15 billion in sales, Alimta $2,000 currently launching in the ﬁ rst several markets. $1,736 reached “blockbuster” status in $1,720

$1,445 In addition, we submitted, among others: Alimta for its fifth year on the market. $1,155 $1,093 $1,076 $1,063 the maintenance treatment of non-squamous non-small $1,000 $779

$580 cell lung cancer in the U.S. and Europe; Cialis for pulmonary arterial hypertension in the U.S., Europe, and Japan; 0 and Byetta for monotherapy in the U.S. Cialis Evista Forteo Alimta Zyprexa Gemzar As this report went to press, we received good Humulin Strattera Humalog Cymbalta news in Europe on prasugrel, the antiplatelet agent we Animal Health

2 LETTER TO SHAREHOLDERS 3 ce, ce, or patients like or patients like cer , a reusable insulin pen that doses insulin pen that , a reusable ™ er that matters f eedback to the device development team, eedback to the device Luxura HD ® John C. Lechleiter, Ph.D. Chairman, President, and Chief Executive Offi doses in small increments for children. Upon returning to the offi Upon returning for children. doses in small increments ® Paige who have diabetes. From left to right: Thomas Wallbank, Keith Johns, to right: Thomas Wallbank, left who havePaige diabetes. From Stuart Tim Kruse, Leeann Chris Mitchener, Garvin, Alison Dodd, Jim Mattler, Gorgol. Tom and Lehman, Aubrey Harper, Chambers, Jay During a hospital visit in the fall of 2005, a pediatric endocrinologist approached approached 2005, a pediatric endocrinologist During a hospital visit in the fall of administer a need for an insulin pen that could and expressed John Lechleiter Humalog who are and his daughter, Paige, Mark Wiley are Lechleiter Dr. with Pictured to the as well the cover, on as members of the team who responded featured an answ delivered and successfully challenge and on April 1, 2007, the HumaPen Dr. Lechleiter relayed this customer f relayed Lechleiter Dr. in half-unit increments from 1 to 30 units, wasin the United States. launched from in half-unit increments $20,000 trials in 2009—as well as its state-of-the-art manufactur- Products Launched This Decade Have Driven Our Sales Growth ing facility. ($ millions) As part of our ongoing transformation into a leaner, Combined net sales of our products launched this more fl exible organization, we entered a 10-year service decade—Alimta, Byetta, Cialis, Cymbalta, Forteo, $15,000 Symbyax, Xigris, and Yentreve— increased by agreement with Covance, a global drug development ser- 22 percent over 2007, representing $7.3 billion, or 36 percent of total net sales, compared with vices fi rm and longtime Lilly partner, to provide preclini- $6.0 billion, or 32 percent in 2007. Combined net cal toxicology work and perform additional clinical trials sales of Evista, Gemzar, Humalog, and Humulin $10,000 for Lilly. As part of this agreement, Covance purchased increased 9 percent to $5.6 billion and represented 27 percent of sales. Zyprexa sales decreased our Greenfi eld Laboratories site, where it serves Lilly and 1 percent in 2008. other clients.

$5,000 And throughout 2008, we continued to advance Lilly’s LETTER SHAREHOLDERS TO pipeline through external collaborations and in-licensing.

Products Launched This Decade All of these moves strengthen our business and our pipe- Alimta, Byetta, Cialis, Cymbalta, Forteo, Xigris, Strattera, Symbyax, and Yentreve Other Established Products Evista, Gemzar, Humalog, and Humulin line, and we intend to continue an aggressive pace. Zyprexa 0 Other 04 05 06 07 08 Resolution of Zyprexa investigations In January 2009, Lilly announced that we had resolved certain investigations of past Zyprexa marketing and pro- co-developed with Daiichi Sankyo Company, Limited. motional practices. As part of the resolution, Lilly pleaded The European Commission (EC) approved prasugrel guilty to one misdemeanor violation of federal law for the for the prevention of atherothrombotic events in off-label promotion of Zyprexa between September 1999 patients with acute coronary syndromes (ACS) under- and March 2001. In addition, we entered into federal and going percutaneous coronary intervention (PCI). EC state civil settlement agreements and committed to under- approval authorizes Lilly and Daiichi Sankyo to co- take a set of defi ned corporate integrity obligations. As I promote Efi ent®—the approved European trademark for noted earlier, we took a charge in 2008 in connection with prasugrel—in 30 countries, including the 27 members these investigations, and that charge was suffi cient to cover of the European Union. the payments under the agreements announced in January. In the U.S., on February 3, 2009, an advisory com- The company deeply regrets the past actions covered mittee of the Food and Drug Administration (FDA) voted by this misdemeanor plea. We realize that we have a unanimously that prasugrel should be approved for the tremendous responsibility to patients, and we strive to treatment of ACS patients undergoing PCI. The FDA live up to that responsibility every day in every interac- is not bound by the committee’s recommendation but tion. Doing the right thing is non-negotiable at Lilly, and I takes its advice into consideration when reviewing new remain personally committed to seeing that our company drug applications. We will continue to work closely with maintains the highest standards of conduct. the FDA as the agency moves toward fi nal action on Now let me turn to the future. prasugrel. In addition, we have initiated a Phase III clinical trial for prasugrel in the treatment of ACS patients OUTLOOK who are being medically managed. A challenging environment demands value Business development Today, Lilly is operating from a position of consider- After investing $3 billion in acquisitions and in-liable strength as we transform our business to succeed in censed molecules in 2007, we accelerated the pace of invest- a very diffi cult external environment. ment in 2008. This past year, we made three acquisitions: As we deal with the pressures on our industry and • Our Elanco animal health business acquired world- the broader upheaval in the global economy, we also face wide rights to the dairy cow supplement Posilac®, as our own particular challenges in the advent of Years YZ. well as supporting operations, from Monsanto. At the same time, we see tremendous opportunities • We also acquired SGX Pharmaceuticals, a biotech rooted in recent scientifi c advances that counter many of company based in San Diego that provides impor- the challenges we face. We’ve set our sights on delivering tant tools for our drug discovery efforts. more of the thing that is in the shortest supply in health • And of course, on November 24, we completed our care markets—and the thing that policymakers are often purchase of ImClone Systems. looking for as well. In a word, it’s value. With ImClone, we simultaneously accelerated our Our customers—patients, physicians, and payers emergence as both a biotech and cancer powerhouse. We alike—want to get the economic and therapeutic value gained ImClone’s pipeline of biotech molecules—includ- of medicines, without so much trial and error, and waste. ing three oncology candidates expected to be in Phase III They want to experience the value, in particular, of more

4 LETTER TO SHAREHOLDERS 5 - ght against against ght a particular medicine. t from . By the measure of sales of our . By the measure of biotechnology A third set of changes, in support of our strategy, has in support of our strategy, A third set of changes, really taking center stage is our transition But what’s successful examples of FIPNet can point to many We And the examples are multiplying, enabling us to We’re also changing how we interact with customers. interact with customers. how we also changing We’re and deliberate more aggressive A second focus is a history While Lilly has had a long and distinguished virtually unique among existing biopharma- We’re reshaping the way we work and operate. In addi- work we to do with reshaping the way also completed in 2008 a we tion to our Six Sigma efforts, of management effort to reduce the layers company-wide and to give oor, me and the person on the shop fl between our managers broader spans of control. from being a fully integrated pharmaceutical company, from being a fully integrated pharmaceutical company, fully calling FIPNet—a to the model that we’re or FIPCO, . FIPNet consists of an integrated pharmaceutical network increasing number of highly sophisticated partnerships Lilly provides high-level across all areas of our business. other orga- and assets to which coordination, investment, nizations can add value. are implementing today: our virtual platform for that we getting new molecules to proof of concept, called Cho- that extends the called Vanthys, rus; a new joint venture, our Chorus model in the emerging Indian marketplace; synthe- our chemistry systems biology hub in Singapore; in Shanghai; our risk-sharing deals with Indian sis work biopharmaceutical companies; and our shift of signifi to Covance. work cant, early-stage development access critical resources around the globe, and to expand essential component of personalized medicine. We’re We’re medicine. of personalized essential component the patients who will—or able to identify increasingly won’t—benefi into move already we’re our insulins, including current bio-products, Our ambi- in the world. company biotech fth-largest the fi more prominent products an even biotech tion is to make part of our total mix. our more recent strategic investments in biotechnology, our acquisition of ImClone—are in biotech—including half of our literally transforming our pipeline. Nearly of biologics. pipeline in Phase II or Phase III is comprised been able to combine ceutical companies in that we’ve in targeted disease areas therapeutic knowledge deep, biotech with the capability of generating potential solutions alongside more traditional, chemistry-based fi A good example is in the high-stakes work. both a disease. Lilly currently is developing Alzheimer’s antibody targeting this compound and a biotech chemical unmet medical need. Last summer, we launched an entirely new sales model in new sales model an entirely launched we Last summer, to expand soon to the hope we which Ohio and Wisconsin, sales representatives providing our We’re rest of the U.S. tools to respond to what doctors tell with new training and disease and product knowl- looking for—deeper us they’re dialogue, information, meaningful edge, access to relevant customer questions. c to specifi answers and quick

® of in- ow We aim to create aim to create We , as it always has, upon our ability has, , as it always 2013. medicines by ow of high-value . range of cancers, as well as for supportive care. as for supportive as well range of cancers, tunities in chronic infl ammation and autoimmune infl tunities in chronic diseases. endocrine and metabolic disorders, including diabe- including endocrine and metabolic disorders, as cardiovascu- as well and osteoporosis, obesity, tes, and including acute coronary syndrome lar diseases, atherosclerosis. multiple disease, schizophrenia, Alzheimer’s pain, and alcohol abuse. sclerosis, In oncology, we are pursuing therapies for a wide are pursuing therapies for we In oncology, The fi rst is a commitment to being more patient The fi • And we have a growing pipeline of emerging oppor- a growing have • And we Of course, attrition is an expected part of drug devel- The lifeblood of our business is our pipeline, and our The lifeblood of our potential new medicines for continue to develop • We in pursuing molecules • In neuroscience, we’re • Our pipeline focuses on a number of important unmet Our pipeline focuses on a number of important Lilly’s strategy follows from this: strategy follows Lilly’s and to the increased pro- Owing both to acquisitions Five key areas of focus will support and enable Lilly’s enable Lilly’s areas of focus will support and key Five In sum, we continue to build a pipeline that we be- continue to build a pipeline that we In sum, we centered and customer focused—a commitment that will Being patient centered no part of Lilly untouched. leave of transforming the work among other things, means, call “tailored therapies”—an our labs to produce what we opment, an inherently risky endeavor. While our attrition endeavor. opment, an inherently risky our AIR terminated we generally low, rates in 2008 were future success depends The pipeline is our top priority value for our stakeholders by accelerating the fl accelerating by for our stakeholders value outcomes for medicines that provide improved novative individual patients. predictable benefi This in side effects. t and less risk of benefi predictable the knowledge about more deliver that we turn requires to the right matched of the right medicine right dose the right time. patient at new medicines that innovative and develop to discover lives. and more active healthier, longer, help people live compounds the current list of ductivity of our own labs, is larger and more in some stage of human testing at Lilly time in the history of the company. exciting than at any 17 new mol- Laboratories moved In 2008, Lilly Research had 31, 2009, we ecules into clinical testing. As of January 60 molecules in the clinic—double the number at the end in Phase II of 2006—including a record 23 compounds and Phase III. medical needs: strategy Elements of our broader strategyElements our of Inhaled Insulin program, which was being conducted in was Inhaled Insulin program, which Inc. partnership with Alkermes, of the next decade, provid- will meet the challenges lieve ing a steady fl the range of opportunities to discover and develop new and Humulin. These safety measures help patients, physi- medicines. cians, pharmacists, and other health care professionals The fourth plank of our strategy deals with globaliza- accurately identify prescribed insulin and avoid mix-ups. tion, steadily increasing the share of Lilly’s sales derived in the world’s fastest-growing markets. Going forward, we Philanthropy: Lilly has consistently ranked among the aim to expand our presence in China and Russia, along nation’s most charitable companies. There’s no better with Brazil, India, Korea, Mexico, Turkey, and others. Japan example of our commitment than our program to fi ght and China, in particular, offer us the possibility of counter- multidrug-resistant tuberculosis—the Lilly MDR-TB cyclical growth to offset revenue losses in Years YZ. Partnership created in 2003. We’ve also launched efforts And the relationships and market familiarity that we to improve outcomes for people with diabetes. These gain through this sales expansion will further enhance include our donation of life-saving insulin for children in LETTER SHAREHOLDERS TO and support our FIPNet efforts—and vice versa. sub-Saharan Africa, through the International Diabetes The fi fth and fi nal component of Lilly’s strategy is Federation’s “Life for a Child” program, and our “FACE prudent diversifi cation. Diabetes” outreach to African-Americans to help them I want to be clear that we do not intend to stray from manage this potentially devastating disease. our core business of human pharmaceuticals. Within Our company and our employees continue to give that rubric, however, it’s in Lilly’s best interests to remain back to the communities in which we have a presence. open to new therapeutic areas as well as new or comple- In 2008, this commitment led us to start the record-setting mentary technology. Lilly Global Day of Service—and more than 20,000 em- We aim to make the most of our Elanco animal ployees participated in service projects around the world. health business, whose growing sales and expansion into Our next Global Day of Service is set for May 20, 2009, the companion animal market could not be coming at a and we intend to make it an annual event. better time. We’ll look to further strengthen our position I can offer only a cursory look at our efforts here, but in oncology, where Lilly has become a key player very a full accounting is provided in our 2008 Lilly Corporate quickly. And our tailoring efforts mean that we will re- Responsibility Report, available online at www.lilly.com. main alert to business development opportunities arising from the convergence among pharmaceuticals, medical In closing, I want to thank my predecessor, Sidney devices, and diagnostic medicine. Taurel, for his 37 years of service to our company, as well as his wisdom and counsel to me before and during our Earning trust through corporate citizenship seamless leadership transition. He leaves behind a very Ultimately, our future depends on the trust of the pa- strong business that is today transforming itself from a tients, physicians, and payers who use, prescribe, and pay position of strength. for our products. We have to earn that trust every day. So I also want to express my gratitude to my Lilly col- no discussion of our future would be complete without ad- leagues. My strength and spirits are sustained, time and dressing our commitment to strong corporate citizenship. again, by their dedication to this great enterprise and to those whom we serve. A poignant example of that dedica- Transparency: We’ve learned that the best way to build tion is featured in this report. I’m proud to be associated trust is by letting people see for themselves what we’re with the team whose photograph graces this letter—and doing. We’ve been leaders in transparency, going back to the Lilly team around the world. In a time of unprec- the industry’s fi rst voluntary registry of clinical trial data edented challenge and transformation, I have never been in 2004. This past September, in another industry fi rst, more excited about Lilly’s future. we announced plans to voluntarily disclose our payments to doctors for any speaking and consulting services they For the Board of Directors, provide, beginning later this year. Lilly was also actively involved in efforts by the Pharmaceutical Research and Manufacturers of America (PhRMA), which resulted in a revised code for company John C. Lechleiter interactions with health care professionals and strength- Chairman, President, and Chief Executive Offi cer ened PhRMA’s guiding principles for direct-to-consumer advertising about prescription medicines.

Patient Safety: We’re also working to build consumers’ trust in the safety of the medicines they take. An example: In October, we introduced a color differentiation system for insulin products marketed in the U.S. and Europe, including vials, pens, and individual packaging for Humalog

6 A LEADER’S LEGACY 7 Beyond numbers, Sidney’s legacy legacy Sidney’s numbers, Beyond stay to his ability springs from while even with the past connected ning the future. defi company’s He championed the of integrity, values long-held people for and respect excellence, brand, a corporate and established that a company Lilly make to working with answers customers provided that matter. beyond extended Those answers leader- medicine. Under Sidney’s in corporate was a leader ship, Lilly a pioneering created and philanthropy multidrug- combat to partnership that includes tuberculosis resistant the hardest-hit to transfer technology a leader also became Lilly countries. in the rst fi in transparency—the trial data publish clinical to industry its educational report online, publicly it will disclose and announce grants, U.S. physicians. The payments to accolades also earned company its management practices— for The leaders. including developing will leaders of Lilly generation next sharpen their skills in the Sidney Center, Leadership Executive Taurel himself which opens in 2009. Sidney the for advocate a leading became medicines—an of innovative power sought by major statesman industry and policymakers newspapers the world. around that a leader said once Sidney and supplies direction “provides change.” He to power the motive true ed that. By staying exemplifi while past Lilly’s from the best to to the company transforming made Sidney in the future, succeed millions of patients to a difference a Lilly and leaves the world around value greater deliver poised to in the future. ning—Lilly’s Future ning—Lilly’s rst rst , sales revenue during revenue , sales ® As new business challenges arose, arose, challenges business As new the transform sought to Sidney greater even deliver to company he envisioned The Lilly value. therapies tailored provide would individual patients, orchestrate for and be faster to network a global and be increasingly creative, more years, four the past Over productive. has made tangible the company this vision. realizing toward progress Sidney made sure that Lilly not only not only that Lilly made sure Sidney patients but the world’s touched He talents. the world’s also tapped and diverse built an international Lilly’s and expanded team leadership about half of Today, presence. global outside the from come sales Lilly’s States. United Sidney Taurel took charge of Lilly as of Lilly charge took Taurel Sidney the most anticipated the company in its history— serious challenge of Prozac, expiration the U.S. patent some 25 percent for which accounted that point, every Up to of sales. that had company pharmaceutical magnitude of similar a loss suffered Under its independence. had lost not only Lilly leadership, Sidney’s laid the groundwork but also survived with the loss Even growth. future for of Prozac Sidney’s tenure as CEO doubled, from from as CEO doubled, tenure Sidney’s $20 billion. nearly about $10 billion to when many pharmaceutical In an era or merge to chose companies Lilly focused Sidney diversify, breakthrough delivering on squarely that were innovation—medicines in their or the best, rst, either the fi During Sidney’s class. therapeutic launched 10 as CEO, Lilly tenure such medicines, including the fi treatment for severe sepsis, the fi severe for treatment build healthy bone in humans, and to malignant pleural treat to rst the fi mesothelioma. Securing—Then Redefi Securing—Then PORTFOLIO AND PIPELINE 2004 1999 [activated]) (drotrecogin alfa 8 1 (tadalafi 2004 (olanzapine/fl 2004 (cetuximab) 2004 (duloxetine) 2005 Major Marketed Products Innovation atLilly:ThePortfolio andthePipeline 2001 (teriparatide) 2002 (atomoxetine) (pemetrexed) 1998 (pioglitazone) (raloxifene) 2004 (exenatide) 2003 (duloxetine) 2003 For fullprescribinginformation, pleaserefertoindividualproduct websites, which canbeaccessed fromwww.lilly.com. Evista Actos Xigris Byetta Forteo Cymbalta Cialis Strattera Yentreve Symbyax Erbitux Alimta ® ® ® ®

® ® ®

® ® ® ®

for attention-deﬁ for major depressive disorder for treatment of osteoporosis in postmenopausal women (1999) for of postmenopausal treatment osteoporosis in for locally or regionally advanced squamous cell head and neck cancer (2006) cancer neck and head cell squamous advanced or regionally for locally for diabetic peripheral neuropathic pain (2004) pain neuropathic peripheral for diabetic uoxetine) for second-line treatment of non-squamous non-small cell lung cancer (NSCLC) (2004) cancer lung cell non-small of fortreatment non-squamous second-line

for maintenance treatment of ADHD in children and adolescents and (2008) children in of treatment ADHD for maintenance risk for a fracture for risk afracture 1

for of severepatients death risk at adult sepsis high in for erectile dysfunction for erectile cancer colorectal metastatic for EGFR-expressing later-stage outside of North America and in Japan) and of America North outside Merck KGaA and Japan, and America Co.in North Squibb withBristol-Myers (in collaboration (2006) cancer neck and head cell or squamous metastatic for recurrent later-stage world) in the elsewhere Ingelheim Boehringer with and in U.S., &Co.Ltd. in the Shionogi Japan, Corp. Transnational (in with Quintiles collaboration for of treatment majorfor depressive maintenance the (2007) disorder (2007) disorder anxiety for generalized fi o ramn fmnadpsmnpua oe ihotoooi h r thg at osteoporosis high who are women with for postmenopausal of treatment menand for the treatment of glucocorticoid-induced osteoporosis (2008; Europe) for of treatment osteoporosis glucocorticoid-induced (2008; the for mesothelioma pleural for malignant fi (in with Takeda collaboration U.S.) the outside 2diabetes for type for prevention women of postmenopausal osteoporosis in fi of year the indicate (Dates (in collaboration with Chugai Pharmaceutical Co., Ltd.in Japan) (in Pharmaceutical with Chugai collaboration (2007) cancer breast invasive for women risk at high postmenopausal in cancer breast of invasive for risk in reduction osteoporosis (2007) women with postmenopausal in cancer breast of invasive for risk in reduction for use in combination with a thiazolidinedione (2007) athiazolidinedione combinationfor in with use (in collaboration with Amylin Pharmaceuticals, Inc.) with(in Amylin Pharmaceuticals, collaboration 2diabetes for type for stress urinary incontinence (outside incontinence U.S.) the for urinary stress for bipolar depression for once daily use (2007) use for once daily bromyalgia (2008) bromyalgia rst-line treatment of non-squamous NSCLC (2008) NSCLC of treatment non-squamous rst-line cit hyperactivity disorder (ADHD) in children, adolescents, adults and children, (ADHD) in disorder cit hyperactivity rst global launch) global rst PORTFOLIO AND PIPELINE 9 ciently stabilized ciently ciency ciency (1995) ciency tablet (2000) tablet ® for maintenance for adult with treatment patients of schizophrenia suffi ™ Mix 75/25 (1999) Mix 75/25 Mix (1999) 50/50 ® ® Zydis granules (2004; launched only) in Japan ® ® rst-line treatment non-small of cell lung cancer rst-line recurrent metastatic or squamous cell head and neck cancer schizophrenia fi for treatment of type treatment of for 1 and type 2 diabetes for unstable angina associated with stent procedure (1997) unstable anginafor associated with procedure (1997) stent Japan) in except collaboration(in Centocor, with for prevention of cardiac of in undergoing ischemic patients coronary complications prevention for for growthfor failure caused by pediatric growth defi hormone for typefor 1 and type 2 diabetes Zyprexa for bladder cancer (1999; outside the U.S.) outside cancer bladder for (1999; metastatic breast cancerfor (2003) recurrentfor ovarian cancer (2004) biliaryfor tract cancer (2006; Japan) for monotherapy treatment of type treatment monotherapy of for 2 diabetes schizophrenia adolescent for and disorder bipolar long-acting injection delivery schizophrenia for atherothrombotic of prevention/reduction in with patients events for acute coronary syndromes undergo who percutaneous collaboration coronary Ltd.) (in Daiichi Sankyo with (PCI) intervention Company, pulmonaryfor arterial hypertension collaboration Therapeutics United with (in the in U.S.) Humalog treatment-resistant depression for maintenance non-squamous for of treatment NSCLC therapy adult growth replacement for for defi hormone pancreatic for cancer (1996)

syndrome stature short caused for by Turner (1997) ® mania acute bipolar for (2000) as such angioplasty intervention,

® for for for for ®

® ® ® Humalog

for ﬁ for

l Humulin Humatrope Gemzar ReoPro Humalog Zyprexa (lispro recombinant (lispro 1987

(abiciximab) (somatropin of (somatropin recombinant DNA origin) DNA stature short idiopathic (2003) for 1983 insulin) 1995 Zyprexa schizophrenia for maintenance (2001) therapy as with combination mania lithium acute bipolar for valproate (2002) or maintenance bipolar (2003) for Rapid-acting IntraMuscular (2004) formulation Cetuximab 1996 New Drug Applications Submitted For Review to the U.S. Food and Drug Administration during acute treatment with oral olanzapine (2009) 1996 (human insulin (human recombinant)

(olanzapine) Zypadhera (gemcitabine) 1995 Exenatide disodiumPemetrexed Prasugrel Tadalaﬁ Olanzapine Olanzapine LAI Olanzapine-Fluoxetine Ruboxistaurin mesylate diabetic for retinopathy PORTFOLIO AND PIPELINE 10 IMC-A12 IL-23 Antibody IL-17 Antibody IL-1 Antibody iGluR5 Antagonist Activator Glucokinase PEG GLP-1 Analog for solid tumors Fc GLP-1 Analog Prodrug Gemcitabine FGF-21 Variant eIF-4E ASO Inhibitor Eg5 CD20 Antibody for Analog Insulin Basal BAFF Antibody diabetes in Mid-Stage Investigation Candidates Drug Select Teplizumab Semagacestat Prasugrel IMC-1121B Exenatide Enzastaurin Duloxetine Dirucotide Cetuximab Arzoxifene Investigation in Late-Stage Candidates Drug Select

for secondary progressive multiple for sclerosis secondary (SPMS)

for lung, gastric, esophageal, and adjuvant colorectal cancers cancers adjuvant colorectal and esophageal, for gastric, lung, for chronic pain for chronic

for the prevention and treatment of osteoporosis and invasive breast cancer risk reduction risk cancer breast for prevention invasive of the treatment osteoporosis and and

for non-Hodgkins lymphoma for (NHL) non-Hodgkins for rheumatoid arthritis

for for pain for type 2diabetes for type for type 2diabetes for type for solid tumors for rheumatoid arthritis 2diabetes for type 1diabetes for type for dosing once weekly for multiple sclerosis multiple for Inc.) with OSI(in Pharmaceuticals, collaboration 2diabetes for type 2diabetes for type for solid tumors with Kyowa(in Co., collaboration Ltd) Kirin Hakko for solid tumors Inc.)(in with Macrogenics collaboration inhibitor) secretase (gamma for Alzheimer’s disease managed medically being who are syndromes coronary for acute patients with for cancer breast lymphoma B-cell large for diffuse with BioMS(in Medical Corp.) collaboration PORTFOLIO AND PIPELINE 11 c and c for solid tumors solid for for depression and ADHD depression for alcoholfor dependence disease Alzheimer’s for tumors solid for alcohol for dependence

for insomnia for type for 2 diabetes

tumors solid for tumors solid for tumors solid for TGF beta Inhibitor tumors solid for TGF beta Antibody chronic renal for disease and tumors solid regulatory hurdles may cause pipeline compounds to be delayed or even to fail to reach the market. to fail to reach or even to be delayed regulatory hurdles may cause pipeline compounds Information is current as of February 17, 2009. The search for new drugs is risky and uncertain, and there are no guarantees. Remaining scientifi and uncertain, and there are no guarantees. is risky for new drugs 17, 2009. The search Information is current as of February NK-1 Antagonist NK-1 IVNERI LY2599506schizophrenia LY2624803 mGlu2/3 Prodrug for IMC-18F1 OpRA II Solanezumab Survivin ASO Tasisulam IMC-3G3 IMC-11F8 FINANCIALS ibility of the Zyprexa investigation settlements. settlements. investigation Zyprexa ofthe ibility deduct- partial the and charge IPR&D ImClone of the non-deductibility the by caused $1.31 primarily billion, of taxes income before aloss despite million, $764.3 of expense tax We incurred of$1.48 billion. charge 12 We incurred• IPR&Dcharges associated withlicensing • (Note 3) Acquisitions 2008 fi dated nifi sig- following ofthe impact the by affected are 2007 and 2008 between comparisons $2.71 income in2007. Net of share per earnings or of$2.95 billion, income net Cymbalta with associated costs marketing prasugrel, with associated activities pre-launch by driven sales, as rate same the at grew expenses administrative and selling, Marketing, margin. ingross an improvement to contributed ofsales cost on rates exchange eign offor- impact favorable The keyproducts. several w of9percent, growth sales worldwide We achieved Financial Results industry. pharmaceutical the and company our affecting matters other and regulatory, signifi opments, devel- pipeline late-stage and product recent results, fi ofour overview an provides section This EXECUTIVE OVERVIEW Review ofOperations tional practices for Zyprexa for practices tional promo- and marketing U.S. past toour related gations investi- government on resolution (IPR&D) reached and development and research in-process acquired for lion inasignifi resulting (ImClone), Inc. Systems ofImClone acquisition our We completed 10 grew percent. development and inresearch ment invest- our while expenses; litigation-related increased to a loss of $1.89 per share, in 2008 as compared with with compared as in2008 of$1.89 share, per to aloss $4.60, decreased share per earnings and billion, $2.07 of loss toanet billion, $5.02 decreased ingly, earnings and Evista hich was primarily driven by volume increases in increases volume by driven primarily was hich Inc. (SGX), whichdecreased earningspershare by$.03. associated withtheacquisitionofSGX Pharmaceuticals, incurred IPR&Dcharges of$28.0 million(pretax) intangible asset associated with Erbitux incremental interest costs, andamortizationofthe operating results subsequentto theacquisition, The remaining netexpenses are related to ImClone’s include anIPR&Dcharge of$4.69billion(pretax). decreased earningspershare by$4.46.Theseamounts associated withtheacquisitionofImClone, which We recognized charges totaling $4.73billion(pretax) cant items (see Notes 3, 5, 12, 14 5, 3, and consoli- tothe Notes (see items cant nancial statements for additional information): additional for statements nancial ® , the impact of foreign exchange rates, and and rates, exchange offoreign impact , the cant business development, and legal, legal, and development, business cant ® , resulting in an additional additional inan , resulting cant charge of $4.69 bil- of$4.69 charge cant ® . We also nancial Accord-

• We recognized• asset impairments,restructuring, and 14) (Notes 5and Charges Special Other and Restructuring Related and Impairments Asset • We incurred• IPR&Dcharges associated withour We incurred• IPR&Dcharges associated withthe (Note 3) Acquisitions 2007 We recognized• adiscrete income tax benefi (NoteOther 12) We recorded• charges of $1.48billion(pretax) related to of theAIR the sale ofourGreenfield, Indianasite, thetermination sales. Thesecharges were primarily associated with earnings pershare by$.04,was includedincost of charge of$57.1million(pretax), which decreased which decreased earningsper share by$.30.Asimilar other specialcharges totaling $497.0million(pretax), (pretax), whichdecreased earnings pershare by$.07. TransPharma Medical Ltd.totaling $122.0million arrangements withBioMSMedical Corp.(BioMS)and licensing arrangements withGlenmark Pharma- share by$.57. $631.6 million(pretax), whichdecreased earningsper (Hypnion), andIvyAnimalHealth, Inc.(Ivy),totaling acquisitions ofICOSCorporation (ICOS),Hypnion,Inc. which increased earningspershare by$.19. income tax returns for theyears 2001through 2004, substantial portionofthe IRS auditofourfederal $210.3 millionasaresult oftheresolution ofa share by$1.20. the District ofColumbia,whichdecreased earningsper investigation regarding Zyprexa involving 32states and (EDPA), aswell astheresolution ofamulti-state U.S. Attorney for theEastern District ofPennsylvania the federal andstate Zyprexa investigations led bythe related to manufacturing operations. ÒÀÊ^g¨g^gSgÊÊ9Û¨ÀgÚ:® SÍÒg^ÊÍÊ^ØgÀÄsÛÊÒÀÊ¨ÀÍsÊ:^ÊgÄÄgÊ SÍÀJÒÍg^ÊdÇ®ÎÊJÊÍÊgÍÊÄ:gÄÊ:^Ê -ÛJÛ:Ú[Ê6zÀÄ[Ê:^Ê7gÍÀgØg®Ê.gÄgÊ¨À^ÒSÍÄÊ ÛgÍÍ:[Ê :Ä[Ê ÛJ:Í:[ÊÀÍg[Ê-ÍÀ:ÍÍgÀ:[Ê *À^ÒSÍÄÊ:ÒSg^ÊÍÄÊ^gS:^gÊSÒ^gÊÍ:[Ê eZgXZcid[cZihVaZh ,#(7âa^dc^cHVaZh9jg^c\'%%- EgdYjXihAVjcX]ZYI]^h9ZXVYZ8dcig^WjiZY 6aaDi]Zg OnegZmV EgdYjXihAVjcX]ZYI]^h9ZXVYZ ® Insulinprogram, andstrategic exit activities '%%, '%%- )& )' t of (+ (' '( '+ FINANCIALS 13 as a monotherapy as a monotherapy ® , in combination with , in combination ® for the same indication. the same indication. for ® for the treatment of osteoporosis of osteoporosis the treatment for . ® ™ or a total purchase price of approximately $6.5 billion. of approximately price purchase or a total associated with sustained, systemic glucocorticoid glucocorticoid systemic with sustained, associated risk for and men at increased in women therapy letter an approvable also received have We fracture. Forteo for the FDA from treatment for type 2 diabetes to the FDA. to type 2 diabetes for treatment Forsteo for The FDA approved Cymbalta for the management of for Cymbalta approved The FDA the In addition, pain disorder. a chronic bromyalgia, fi the for Cymbalta approved Commission European (GAD). anxiety disorder of generalized treatment cisplatin, as a fi rst-line treatment for locally advanced advanced locally for treatment rst-line cisplatin, as a fi (NSCLC) lung cancer non-small cell and metastatic The with nonsquamous histology. patients for in Alimta, also approved health authorities European for treatment rst-line cisplatin, as a fi with combination other than patients with cancer lung non-small cell histology. cell squamous predominantly authorities in regulatory to (PAH) hypertension arterial and Japan. the U.S., Europe, f program, which was being conducted in collaboration in collaboration which was being conducted program, in Phase III had been Inc. The program with Alkermes, type for treatment as a potential development clinical This decision was not a result 1 and type 2 diabetes. during AIR Insulin trials relating of any observations of was a result but rather of the product, the safety to environment in the regulatory uncertainties increasing commercial of the evolving evaluation and a thorough to compared of the product potential and clinical therapies. medical existing Inc. (Amylin), submitted Byetta Inc. (Amylin), submitted both targeted will offer combination This strategic with an oncology agents along and oncolytic therapies development. pipeline spanning all phases of clinical capabilities. our biotechnology It also expands the to related Corporation Therapeutics with United indication the PAH rights for U.S. commercialization a proposed Risk Evaluation and Mitigation Strategy, Strategy, and Mitigation Risk Evaluation a proposed In addition, in the near future. be submitted which will by was approved injection long-acting olanzapine name under the trade Commission the European Zypadhera Cymbalta for the management of chronic pain. We plan pain. We the management of chronic for Cymbalta half of 2009, rst in the fi the application resubmit to in chronic study completed a recently from adding data pain of the knee. osteoarthritis • The European Commission approved a new indication indication a new • approved Commission The European • We submitted tadalafi l as a treatment for pulmonary for l as a treatment • tadalafi submitted We • Business Development of ImClone shares all of the outstanding • acquired We • We terminated development of our AIR Insulin • development terminated We • We, along with our partner Amylin Pharmaceuticals, • Pharmaceuticals, with our partner Amylin along We, arrangement and a supply a license into • entered We • We withdrew our supplemental NDA from the FDA for for the FDA from NDA our supplemental • withdrew We Alimta • approved The FDA nal decision. nal Activity ed, are seeking from the U.S. Food and Drug and Drug the U.S. Food from seeking ed, are ceuticals Limited India, MacroGenics, Inc., and OSI MacroGenics, India, Limited ceuticals million (pretax), $114.0 totaling Pharmaceuticals, by $.06. per share earnings which decreased which million (pretax), of $190.6 other special charges These charges by $.12. earnings per share decreased announced previously with associated primarily were and manufacturing decisions affecting strategic facilities. research Zyprexa over carriers with one of our insurance of a reduction to led liability claims, which product recoveries, liability insurance product our expected This resulted liability charges. and other product which $111.9 million (pretax), totaling in a charge by $.09. earnings per share decreased Limit as a prasugrel for approval (FDA) Administration syndrome coronary patients with acute for treatment coronary being managed with percutaneous and Renal Drugs The Cardiovascular intervention. prasugrel reviewed of the FDA Advisory Committee it for recommended during a hearing and unanimously the recommendation will consider The FDA approval. its fi and makes its review as it continues a Medicines Agency issued (CHMP) of the European of prasugrel approval opinion recommending positive in events of atherothrombotic the prevention for undergoing syndromes coronary patients with acute The CHMP intervention. coronary percutaneous the nal action to fi for opinion has been referred positive Commission. European and acute injection (LAI) for olanzapine long-acting for in adults. of schizophrenia treatment maintenance with the agency on the new work to continuing are We any require does not The FDA (NDA). drug application of review the continued trials for additional clinical preparing are we request, the agency’s Per the NDA. Asset Impairments and Related Restructuring and Other Special Charges 5 and (Notes 14) and restructuring, impairments, asset • recognized We a settlement following a special charge • incurred We Late-Stage Pipeline Developments and Business Development • The Committee for Medicinal Products for Human Use • for Medicinal Products for Committee The the FDA from letter response a complete • received We Pipeline Company • Sankyo with our partner Daiichi along We, Our long-term success depends, to a great extent, on our ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on compounds currently in development by other biotechnology pharmaceutical or companies. There were num- a ber of late-stage pipeline developments and business development transactions within including: the past year, FINANCIALS • We entered• into anagreement withanaffiliate ofTPG- We entered• into alicensing anddevelopment agree- 14 Prozac Zyprexa, for practices promotional and marketing U.S. toour relating gation offi notifi were we 2004, In March Matters Other and Regulatory, Legal, We acquired• SGX for approximately $64millionincash. We soldourGreenfi• eld Laboratories site inGreenfi • the Zyprexa-related federal claims, as well as similar similar as well as claims, federal Zyprexa-related the settled we that and concluded, successfully been had discussions the that announced we 2009, In January of$1.42 billion. acharge recorded we and EDPA, the by led investigations ongoing the toresolve discussions inadvanced were we that announced we 2008, October trial funding. based milestones androyalties inexchange for clinical disease. Thisagreement provides TPGwithsuccess- two lead molecules for thetreatment ofAlzheimer’s Axon Capital (TPG)for thePhaseIIIdevelopment ofour Phase IIclinical testing. TransPharma’s proprietary technology, iscurrently in product, whichisadministered transdermally using delivery system for thetreatment ofosteoporosis. The to acquire rightsto itsproduct andrelated drug ment withTransPharma Medical Ltd. (TransPharma) compounds focused onanumber ofkinasetargets. technology, andto aportfolio of preclinical oncology ment-based, protein structure guideddrugdiscovery efforts. Italsogives usaccess to FAST guided drugdiscovery platform into ourdrugdiscovery The acquisitionallows usto integrate SGX’s structure- support activitiesatthesite. responsibility for ourtoxicology testing andotherR&D service agreement, underwhichCovance willassume Indiana, to Covance Inc.We alsosigneda10-year Phase IIIclinical trialsinsecondary progressive MS. compound iscurrently beingevaluated intwo pivotal wide rightsto amultiple sclerosis (MS) compound. The ment withBioMSwhereby we acquired exclusive world- We entered into a licensing anddevelopment agree- supplement Posilac We acquired theworldwide rightsto thedairycow review bytheFDA. tion inthecompany. Theindication iscurrently under arrangement, we acquired a$150.0millionequityposi- manufacturing andsupply arrangement. Aspartofthis ize tadalafil for PAH intheU.S.,aswell asfor aproduct million inexchange for exclusive rightsto commercial- of tadalafil. We received anupfront paymentof$150.0 complements thoseofouranimalhealthproduct line. acquisition ofPosilac provides uswithaproduct that gent consideration basedonfuture Posilac sales. The an upfront paymentof$300.0million,aswell ascontin- ing operations, from Monsanto Company(Monsanto) for ce for the EDPA that it had commenced an investi- an commenced had EDPA it the that ce for ® , aswell astheproduct’s support-

ed by the U.S. Attorney’s Attorney’s U.S. the by ed ® , and Prozac Weekly Prozac , and ™ , SGX’s frag- ™ eld, . In to extensive price and market regulations, and there there and regulations, market and price to extensive adverse effect on our consolidated results of operations. ofoperations. results consolidated our on effect adverse a material have could which severe, more to become levels state and federal the at pressures pricing expect We spending. inhealthcare offsets other or cuts sive aggres- toseek expected are and economy inthe turn diffi budget substantial down- tothe facing due culties are states many Inaddition, industry. pharmaceutical the on have will programs or decisions government any impact the and Congress and administration new the surrounding exists D. Uncertainty Part Medicare through medicines their receive who topatients sales on rebates additional impose or patients toMedicaid sales on pay we rebates the increase would that introduced been have proposals various Additionally, facturers. manu- pharmaceutical with Ddirectly Part Medicare within prices drug tonegotiate Services Human and ofHealth Secretary the require, or allow, either and drugs ofprescription importation the tolegalize als propos- including products, our on pressures pricing additional impose would that Senate U.S. and sentatives ofRepre- House U.S. the inboth passed and/or cussed dis- been have measures D). Various Part Medicare benefi drug prescription effective an toprovide continues (MMA) of2003 Act Modernization and Improvement, Drug, we could record signifi record could we decision, the on however, time; this at depending made fi No months. totwelve six last to expected is review altogether. The operations ceasing and facility, the tosell opportunities exploring mission, site arevised with operations continuing include site this for considered being Options Indiana. Lafayette, in facility manufacturing Tippecanoe ofour review gic remain. 120 claims Approximately cation. medi- tothe relating us against claims tosettle gation liti- liability product Zyprexa inU.S. involved attorneys of2009. beginning ofthe ket as mar- German the from withdrawn been has olanzapine generic ruling, ofthis aresult As Court. Patent Federal German the by in2007 invalid declared been had that patent Zyprexa our re-established (BGH) inGermany million. $62.0 paid we which under ofColumbia, District the and states 32 with asettlement reached we 2008, InOctober Zyprexa. to pertaining documents seeking laws protection sumer con- state various under ofstates ofanumber general attorneys the from subpoenas or demands tigative settlement. inthe ticipate topar- decide which ofstates claims Medicaid-related International operations also are generally subject subject generally are also operations International Prescription Medicare the States, United In the In the third quarter of 2008, we initiated astrate- initiated we of2008, quarter third In the claimants’ with agreements toreach We continue Court Supreme Federal the 2008, In December inves- civil received we 2006, inAugust Beginning t under the Medicare program (known as as (known program Medicare the t under cant charges. nal decisions have been been have decisions nal FINANCIALS 15 , all et of of et ects llion. llion. Total from 2007 569.4 569.4 2 709.3 10 995.8 10 985.2 8 854.0 35 1,143.8 1,143.8 26 1,474.6 1,474.6 18 2,102.9 2,102.9 28 1,592.4 8 Year Ended Percent 1,090.7 (1) 2,354.4 (1) December 2007 31, Change

579.5 579.5 Total Zyprexa, our top-selling product, is a treatment for Sales of Cymbalta, a product for the treatment Sales of Humalog, our injectable human insulin 141.7 141.7 bromyalgia, increased 23 percent in the U.S., driven marily by increased sales of Cymbalta, Humalog, Cialis, and Alimta. Sales outside the U.S. increased percent, 11 to $9.44 billion, driven primarily by the sales growth of Alimta, Cialis, Cymbalta, and Humalog. schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance. Zyprexa sales in the U.S. decreased 1 percent in 2008, driven by lower demand, partially offset by higher prices. Sales outside the U.S. decreased 1 percent, driven by decreased demand and to a lesser extent, lower prices, partially offset by the favorable impact of foreign exchange rates. Demand outside the U.S. was unfavorably impacted by generic competition in Germa- ny and Canada. As noted previously, generic olanzapine has been withdrawn from the German market as of the 2009. of beginning of major depressive diabetic disorder, peripheral neuropathic pain, generalized anxiety and disorder, ﬁ by increased demand and, to a lesser extent, higher prices. Sales outside the U.S. increased 66 percent, driven by increased demand and, to a lesser extent, the favorable impact of foreign exchange rates and higher prices. Higher demand outside the U.S. reﬂ increased demand in established markets as well as recent launches in new markets. analog for the treatment of diabetes, increased per- 14 cent in the U.S., driven by increased demand and higher Year Ended Outside U.S.

December 2008 31,

+10% $98 Animal Health Animal

+8% $127

Gemzar 1

Humalog +18% $261

+26% $301 Cialis

+35% $301 Alimta

+28% $594 Cymbalta . Worldwide sales 0 - ® 600 - 500 - 400 - 300 - 200 - 100 - , and Gemzar ® (Dollars in millions) ...... 437.8 ...... 380.9 682.3 1,063.2 ® ® , Alimta, Humalog ...... 539.0 905.5 1,444.5 2 ® les Key Contributors to 2008 Sales Growth ($ in millions represent growth in product sales; percentages represent changes from 2007) Five products and a product line— Cymbalta, Alimta, Cialis, Humalog, Gemzar, and Animal Health—generated $9.8 billion in net sales during 2008, an increase of $1.7 billion over 2007, and accounted for 96 percent of our sales growth. The growth of these products and product line was primarily driven by volume increases and the inclusion of U.S. Posilac sales. expenses and income taxes, is reported in other—net in our consolidated statements of operations.Cialis Subsequent product to the acquisition sales are reported in our net sales. Worldwide 2008 sales for Cialis grew percent 19 from 2007 sales of $1.22 bi ICOS LLC (North America, excluding Puerto Rico, and Europe). Our share of the joint-venture territory sales for January 2007, n Prior to the acquisition of ICOS in late January 2007, the Cialis sales shown do not include sales in the joint-venture territories of Lilly U.S. sales include sales in Puerto Rico. Forteo ...... Forteo Strattera 489.9 288.8 778.7

volume increased 5 percent, while foreign exchange rates contributed 3 percent, and selling prices contributed 2 percent. (Numbers do not add due to rounding.) Sales in the U.S. increased billion, 8 percent, to $10.93 driven pri- Our worldwide sales for 2008 increased 9 percent, to $20.38 billion, driven primarily by growth of Cymbalta, Cialis Sa OPERATING RESULTS—2008 OPERATING are many proposals for additional cost-containment measures, including proposals that would directly or indirectly impose additional price controls or reduce the value of our intellectual property protection. 1 2 Humalog ...... Humalog ...... Gemzar Cialis 1,008.4 734.8 727.4 985.0 1,735.8 1,719.8 Zyprexa ...... Zyprexa Cymbalta...... $ 2,202.5 2,253.8 $2,493.6 $ 4,696.1 443.3 $ 4,761.0 2,697.1 (1) The following table summarizes ournet sales activity in 2008 compared with 2007: Product U.S. Product Alimta ...... Alimta Animal health products...... Evista...... Humulin 561.9 537.3 700.5 592.8 556.0 375.1 1,154.7 1,093.3 1,075.6

Other pharmaceutical products . . Other pharmaceutical products net sales Total ...... 1,087.6 $10,934.4 1,252.1 $9,443.6 $20,378.0 2,339.7 $18,633.5 9 FINANCIALS anns(os e hr—ai n iue Nt 1...... (Note 11). . diluted and share—basic per (loss) Earnings . (loss) income Net See notes to consolidated ﬁ toconsolidated notes See noetxs(oe1) (Note 12) taxes Income . . noe(os eoeicm ae ...... taxes income before (loss) Income 16 2006 2007 2008 31 December Ended Year . sales Net data) per-share except millions, in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Consolidated StatementsofOperations (income) . expense Other—net, (Note 5) charges . special other and restructuring, impairments, Asset . (Note 3). development and research in-process Acquired administrative and . selling, Marketing, eerhaddvlpet . development and Research . ofsales Cost . nancial statements. ,685.6

$20,378.0 $ (2,071.9) 21 (1,307.6) 4,382.8 4,835.4 3,840.9 6,626.4 1,974.0 764.3 $(1.89) 26.1 (122.0) (122.0) (237.8) 3,486.7 3,486.7 3,129.3 302.5 302.5 945.2 $18,633.5 $18,633.5 $15,691.0 14,756.7 14,756.7 12,273.0 923.8 923.8 755.3 4,248.8 4,248.8 3,546.5 745.6 — 745.6 6,095.1 4,889.8 2930 $2,662.7 $2,953.0 3,876.8 3,418.0 $2.71 $2.45 FINANCIALS

78.5%

77.2%

77.4%

76.3% 76.7% 04 07 05 06 08 0 80 70 60 50 40 30 20 10 Marketing, selling, and administrative expenses Sales of Strattera, a treatment for attention- Worldwide sales of Byetta, an injectable product Animal health product sales in the U.S. increased alescompared with percent 77.2 for 2007. This cit hyperactivity disorder in children, adolescents, Gross Margin (percent of net sales) Gross margin as a percent of net sales increased by 1.3 percentage points to 78.5 percent in 2008, due primarily to the favorable impact of foreign exchange rates. increased 9 percent in 2008, to $6.63 billion. This increase was due to increased marketing and selling expenses, including prelaunch expenses for prasugrel and marketing costs associated with Cymbalta and Evista; the impact of foreign exchange rates; and increased litigation-related expenses. Investment in research and development increased percent, 10 to $3.84 billion, due to increased late-stage clinical trial and discovery research costs. increase was primarily due to the favorable impact of foreign exchange rates. decreased demand, partially offset by higher prices. Sales outside the U.S. increased 34 percent, driven by increased demandand, to a lesser extent, the favorable impact of foreign exchange rates. defi and adults, decreased 6 percent in the U.S., driven by decreased demand, partially offset by higher prices. Sales outside the U.S. increased 35 percent, driven primarily by increased demand. for the treatment of type 2 diabetes that we market with Amylin, increased percent million 16 to $751.4 during 2008. report We as revenue our 50 percent share of Byetta’s gross margin in the U.S., 100 percent of Byetta sales outside the U.S., and our sales of Byetta pen delivery devices to Amylin. Our revenues increased 20 percent million to $396.1 in 2008. percent,12 driven by the inclusion of U.S. Posilac sales since the date of acquisition. Sales outside the U.S. increased 8 percent, driven by increased demand and, to a lesser extent, the favorable impact of foreign rates.exchange Gross Margin, Costs, and Expenses The 2008 gross margin increased78.5 to percent of s ght vari- ght Sales a product of Gemzar, approved to fi Sales of Alimta, a treatment for various cancers, Sales of Evista, a product for the prevention and Sales of Humulin, an injectable human insulin for Sales of Forteo, an injectable treatment for osteo- Our sales of Cialis, a treatment for erectile dys- ous cancers, increasedpercent 10 in the U.S., driven by increased demand and higher prices. Sales outside the U.S. increased 7 percent, driven primarily by the favorable impact of foreign exchange rates and, to a lesser extent, increased demand, partially offset by lower prices. will We likely face increased generic competition in certain markets outside the U.S. in 2009. prices. Sales outside the U.S. increased 24 percent, driven by increased demand and, to a lesser extent, the favorable impact of foreign exchange rates. function, increased 27 percent in the U.S., driven by increased demand and higher prices. Sales outside the U.S. increased 26 percent, driven by increased demand and, to a lesser extent, the favorable impact of foreign exchange rates andhigher prices. worldwide Total sales of Cialis increased percent 19 to $1.44 billion in 2008 as compared billion to $1.22 in 2007. This includes $72.7 million of sales in the Lilly ICOS joint-venture territories for the 2007 period prior to the acquisition of ICOS. increased 25 percent in the U.S., driven by increased demand and, to a lesser extent, higher prices. Sales outside the U.S. increased 46 percent, driven by increased demand and, to a lesser extent, the favorable impact of foreign exchange rates. treatment of osteoporosis in postmenopausal women and for risk reduction of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal women at high risk for invasive breast cancer, decreased 1 percent in the U.S., driven by decreased demand, partially offset by higher prices. Sales outside the U.S. decreased 2 percent, driven by lower demand and lower prices, partially offset by the favorable impact of foreign exchange rates. As described in Legal and Regulatory Matters, Evista is the subject of a Hatch-Waxman patent challenge Pharma- by Teva ceuticals USA, Inc. which (Teva), has received tentative approval of its Abbreviated New Drug Application (ANDA) from the FDA. Unless the current stay on Teva’s approved ANDA remains in force is preliminarily or Teva enjoined from markets if the stay is lifted, it is possible could choosethat Teva to launch before the current action against is concluded. Teva Such a launch could have a material adverse impact on our future consolidated results of operations. the treatment of diabetes, increased 4 percent in the U.S., driven by higher prices. Sales outside the U.S. increased percent, 10 driven by the favorable impact of foreign exchange rates and increased demand. porosis in postmenopausal women and men at high risk for fracture, decreased 1 percent in the U.S., driven by FINANCIALS • Net othermiscellaneous items decreased $132.5mil- • The Lilly ICOSjointventure• income priorto the2007 Interest income• for 2008decreased $4.6million,to Interest expense• for 2008wasessentially fl items. expense and income miscellaneous other all and venture, joint ICOS Lilly ofthe results ing operat- after-tax the income, interest expense, interest of consists item line This of$26.1 million. expense 18 investigation settlements. The IPR&D charge was not tax tax not was charge IPR&D The settlements. investigation Zyprexa billion $1.48 the and ImClone for charge IPR&D acquired billion $4.69 the by driven was loss net Our lion. of$1.31 taxes bil- income before aloss having despite information. additional for ments fi 14 5and consolidated 3, tothe Notes See states. multiple EDPA and the for Attorney U.S. the with investigations ofZyprexa resolution the with associated primarily were charges 2008 The in2007. million $302.5 to compared as of$1.97 in2008, charges billion special other and restructuring, impairments, asset recognized We in2007. million to$745.6 compared as in2008 lion bil- $4.84 were TransPharma, and BioMS with ments arrange- in-licensing our as well as SGX, and of ImClone consisted ofunrealized losses). on investment securitiesin2008(themajorityof which lower outlicensing income and increased netlosses lion to aloss of$8.5million,primarily asaresult of our consolidated fi acquisition, allactivityrelated to ICOS isincludedin acquisition was$11.0million.Subsequentto the offset byhighercash balances. $210.7 million,aslower interest rates were partially financing oftheImClone acquisition. balances andincreased interest expense dueto the interest dueto lower construction-in-progress our debtwassubstantially offsetbylower capitalized $228.3 million.Theimpactoflower interest rates on provide answersthatmatterforourcustomers. best-in-class andfirst-in-classmedicinesto history, supportingourcommitmenttodevelop clinical trialsin2008,unprecedentedLilly’s us tomove17drugcandidatesintohuman investment inresearchanddevelopmentenabled discovery researchcosts.Thissustainedlevelof due toincreasesinlate-stageclinicaltrialand increased by10percent,to$3.8billion,in2008 Research anddevelopmentexpenditures ($ millions,percentofnetsales) Increasing Research andDevelopmentInvestment We incurred tax expense of $764.3 million in 2008, in 2008, million of$764.3 expense tax We incurred $148.1 toanet million, decreased Other—net acquisitions tothe related charges IPR&D Acquired nancial results. $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $500 nancial state- 0 04 05 06 07 08 06 05 07 04 at at $2,691 19.4% $3,026 20.7% $3,129 19.9% $3,487 18.7% $3,841 18.8% items that are refl are that items ofsignifi impact the by affected are 2006 and 2007 between comparisons income Net in2006. share, per $2.45 or billion, $2.66 with compared as in2007 share, $2.71 or per 11 billion, to$2.95 percent, increased share per earnings and income net aresult, As increased. rate tax effective the and decreased other—net sales, as rate same the approximately at grew aggregate the in expenses operating and ofsales cost in 2007. While 11 percent development and inresearch investment our toincrease us enabled and growth sales to this contributed products, care diabetes the and Cymbalta primarily ofkeyproducts, insupport expenses selling and inmarketing investments additional Our of ICOS. acquisition the from resulting involume increase this asignifi with ofkeyproducts, number gr This of19 percent. growth sales worldwide We achieved Financial Results OPERATING RESULTS—2007 of Zyprexa, Alimta, Gemzar, and Cymbalta. Gemzar, Cymbalta. and Alimta, of Zyprexa, growth sales and ofCialis, inclusion the by primarily driven billion, to$8.49 percent, 20 increased U.S. the outside Sales ofCialis. inclusion the and Byetta, and Alimta, Zyprexa, ofCymbalta, sales increased ily by to $10.15 18 primar- percent, increased driven billion, U.S. inthe Sales torounding.) due add not do (Numbers 3percent. by sales increased each rates exchange foreign and prices selling while 12 percent, increased volume sales Worldwide Humalog. Gemzar, and Alimta, Zyprexa, ofCymbalta, growth sales and ICOS of acquisition 29, 2007 January our since of Cialis inclusion the by primarily driven to $18.63 billion, 19 percent, increased 2007 for sales worldwide Our Sales • We recognized• asset impairments,restructuring, and information): additional for ments fi 14 5and consolidated tothe Notes (see follows as summarized are items 2006 The Overview. nifi fi 12 Note consolidated tothe See in2007. percent 23.8 was rate tax effective The audit. IRS ofthe resolution the for benefi tax income adiscrete as well as acquisition, ImClone the with associated expense tax recorded we Inaddition, deductible. was settlements tion investiga- Zyprexa ofthe aportion only and deductible, nancial statements for additional information. additional for statements nancial $.31 (Note 5). fourth quarter, whichdecreased earningspershare by other specialcharges of$450.3 million(pretax) inthe lion (pretax), or$.42pershare (Notes 5and14). Zyprexa product liabilitylitigationmatters of$494.9mil- In thefourth quarter, we incurred acharge related to owth was primarily driven by volume increases ina increases volume by driven primarily was owth cant items for 2007 are summarized in the Executive Executive inthe summarized are 2007 for items cant ected in our fi inour ected nancial results. The sig- The results. nancial t of $210.3 million million t of$210.3 cant portion of portion cant nancial state- cant FINANCIALS 19 consoli- rto Rico, we marketed marketed we 611.8 611.8 40 Total from 2006 219.0 219.0 51 415.6 415.6 6 215.8 215.8 NM 579.0 579.0 (2) 594.3 19 925.3 6 875.5 14 448.5 (17) 1,316.4 1,316.4 60 1,299.5 1,299.5 13 Year Ended Percent 1,373.3 (12) 1,045.3 4 1,408.1 1,408.1 13 December 2006 31, Change

569.4 569.4 Total ted from access to medical coverage through Sales of Evista increased 6 percent in the U.S., driv- Sales of Humulin decreased 1 percent in the U.S., Sales of Alimta increased 28 percent in the U.S., Sales of Forteo increased percent 19 in the U.S., Sales of Strattera decreased 9 percent in the U.S., 14.2 330.7 219.8 219.8 370.6 267.3 267.3 2,102.9 215.2 215.2 709.3 514.9 514.9 995.8 demand, the favorable impact of foreign exchange rates, and higher prices. en by higher prices. Sales outside the U.S. increased 1 percent, driven by the favorable impact of foreign exchange rates, partially offset by lower prices and lower demand. driven by lower demand, partially offset by higher prices. Sales outside the U.S. increased percent, 11 driven by increased demand and the favorable impact of foreign exchange rates, partially offset by lower prices. driven by increased demand and, to a lesser extent, higher prices. Sales outside the U.S. increased 55 percent, driven by increased demand and, to a lesser extent, the favorable impact of foreign exchange rates. driven by higher net selling prices. U.S. sales growth beneﬁ the Medicare Part D program and decreased utilization of our U.S. patient assistance program and, to a lesser extent, increased demand. Sales outside the U.S. increased 21 percent, driven by increased demand and the favorable impact of foreign exchange rates. as a result of decreased demand. Sales outside the U.S. Year Ended Outside U.S. December 2007 31,

(Dollars in millions) ...... 213.6 227.2 440.8 ® ...... 150.8 ...... 423.8 720.0 1,143.8 ® 2 Total worldwideTotal sales of Cialis were billion $1.22 Sales of Gemzar increased percent 10 in the U.S., Sales of Humalog increased 9 percent in the Sales of Cymbalta increased 58 percent in the U.S., Zyprexa sales in the U.S. increased 6 percent in dated statements of operations. Subsequent to the acquisition, all Cialis product sales are reported in our net sales. Cialis exclusively. The remaining sales relate to the joint-venture territories of Lilly ICOS LLC (Northand America, Europe). Our share excluding of the joint-venture Pue territory sales, net of expenses and income taxes, is reported in other—netin our Prior to the acquisition of ICOS, the Cialis sales shown in the table above represent results only in the territories in which U.S. sales include sales in Puerto Rico. Other pharmaceutical products . . pharmaceuticalOther products net sales Total ...... 452.3 $10,145.5 $8,488.0 760.0 $18,633.5 1,212.3 $15,691.0 19 Byetta ...... 316.5 driven by higher prices and increased demand. Sales outside the U.S. increased percent, 16 driven by increased demand and the favorable impact of foreign rates.exchange

Gemzar ...... Gemzar ...... Humalog Cialis 670.0 888.0 922.4 586.6 1,592.4 1,474.6 2 NM—Not meaningful NM—Not 1 Zyprexa ...... Zyprexa Cymbalta...... $ 2,236.0 1,835.6 $2,525.0 $ 4,761.0 $ 4,363.6 9 The following table summarizes ournet sales activity in 2007 comparedwith 2006: Evista...... Animal healthproducts...... Humulin...... Alimta 706.1 ...... Forteo 480.9 ...... Strattera 365.2 Humatrope 448.0 494.1 384.6 464.6 620.0 406.0 1,090.7 104.8 985.2 854.0 and million $971.0 during 2007 and 2006, respectively. This includes $72.7 million of sales in the Lilly ICOS joint-venture territories for the 2007 period prior to the acquisition of ICOS. Worldwide sales grew 25 percent in 2007. U.S. sales increased 20 percent in 2007, driven by increased demand and higher prices. Sales outside the U.S. increased 28 percent driven in 2007, by increased U.S., driven by higher prices and increased demand. Sales outside the U.S. increased 20 percent, driven by increased demand and the favorable impact of foreign exchange rates, partially offset by declining prices. driven primarily by strong demand. Sales outside the U.S. increased 70 percent, driven by increased demand and the favorable impact of foreign exchange rates. 2007, driven2007, by higher net selling prices, partially offset by lower demand. Sales outside the U.S. increased percent,12 driven by the favorable impact of foreign exchange rates and increased demand. U.S. Product Actos FINANCIALS statements for additional information. statements fi 14 5and consolidated 3, tothe Notes See 2006. in million to$945.2 compared as in2007 million $302.5 of charges special other and restructuring, ments, impair- asset We incurred Glenmark. and MacroGenics, OSI, with arrangements licensing our as well as Ivy, and Hypnion, ofICOS, acquisitions tothe related and 2007 unfavorable impact of foreign exchange rates. rates. exchange offoreign impact unfavorable the and products, care diabetes the and ily Cymbalta primar- ofkeyproducts, insupport expenses selling and marketing increased as well as acquisition, ICOS of the impact tothe due largely was increase $6.10 This billion. to in2007, percent 25 increased expenses administrative and selling, Marketing, costs. trial clinical late-stage and research indiscovery toincreases due was increase this ofICOS, acquisition to the Inaddition billion. $3.49 11 to percent, increased development and in research 19 in2007.Investment percent increased expenses) tive administra- and selling, marketing, and development 20 operating after-tax the income, interest expense, ofinterest consists item line This of $122.0 million. sales. than rate aslower at growing expenses turing manufac- by partially offset sales, than rate aslower at growing volumes production and rates, exchange eign offor- impact unfavorable the acquisition, ICOS in the acquired assets intangible ofthe amortization the from resulting expense tothe due primarily was decrease of s to77.2 percent decreased margin gross 2007 The Expenses and Costs, Margin, Gross demand. increased and rates exchange offoreign impact favorable the by driven 10 percent, increased U.S. the outside Sales launches. product companion-animal new and Health, Animal ofIvy tion acquisi- the demand, increased by driven 18 percent, in2007. million to$330.7 51 percent increased revenues Our 2007. during million to $650.2 rates. exchange offoreign impact favorable the extent, toalesser and, demand increased by primarily driven percent, 30 increased U.S. the outside Sales U.S. the rates. exchange offoreign impact favorable the and demand increased by driven percent, 50 increased • Interest income• for 2007decreased $46.6million, to Interest expense• for 2007 decreased $9.8million, items. expense and income neous miscella- other all and venture, joint ICOS Lilly of the $215.3 million, dueto lower cash balances in2007 average debtbalances in2007compared to 2006. to $228.3 million.Thisdecrease isaresult oflower ales compared with 77.4 percent for 2006. This This 2006. for 77.4 percent with compared ales Other—net decreased $115.8 toincome decreased million, Other—net in million $745.6 were charges IPR&D Acquired and ofresearch aggregate (the expenses Operating Animal health product sales in the U.S. increased increased U.S. inthe sales product health Animal 51 percent increased ofByetta sales Worldwide in percent 46 decreased Actos from revenues Our nancial results diabetes care products. products. care diabetes ofour growth long-term inthe invest and systems, ity qual- and productivity toenhance facilities research and manufacturing our toupgrade continue bilities, capa- biotechnology $1.1 inour invest we as billion approximately tobe expenditures capital 2009 expect We in2007. than less $135.2 million were 2008 s and equivalents, cash cash, 31, 2008, ofDecember As FINANCIAL CONDITION fi 12 Note consolidated tothe See charge. the to deduct expect reasonably we inwhich countries inthe laws benefi tax the as rate, tax effective our than less was charge liability product ofthe effect tax The in2006. of $494.9 million charges liability product the and in2007, million $594.6 of charges IPR&D Hypnion and ICOS nondeductible the by primarily affected were 2006 and 2007 for rates tax effective The 2006. for 22.1 with percent compared percent, of23.8 rate tax effective inan resulting 2007, Net othermiscellaneous income items increased• The Lilly ICOSjoint-venture• income was$11.0million purchases of noncurrent investments of$815.1 million. investments ofnoncurrent purchases of$947.2 net and equipment and million, of property purchases billion, of$2.06 paid dividends billion, $6.08 of acquisitions corporate for paid cash net ofthe total the exceeded billion of$4.41 ofdebt issuance the from proceeds net and of$7.30 billion in2008 operations 31, fl Cash 2007. December at billion $4.83 with nancial statements for additional information. additional for statements nancial hort-term investments totaled $5.93 billion compared compared billion $5.93 totaled investments hort-term $6.3 millionto $124.0million. the acquisitionofICOSonJanuary29,2007. in 2007ascompared to $96.3millionin2006,dueto compared to 2006. diabetes careproducts. and investinthelong-termgrowthofour to enhanceproductivityandqualitysystems, our manufacturingandresearchfacilities biotechnology capabilities,continuetoupgrade approximately $1.1billionasweinvestinour We expect2009capitalexpenditurestobe 2008 were$135.2millionlessthanin2007. Capital expendituresof$947.2millionduring ($ millions) to CashFlow Capital ExpenditureManagementContributes Capital expenditures of$947.2 during expenditures million Capital We incurred tax expense of $923.8 million in million of$923.8 expense tax We incurred t was calculated based upon existing tax tax existing upon based calculated t was $1,000 $1,500 $2,000 $500 0 04 05 06 07 08 06 05 07 04 $1,898

$1,298 ow from $1,078 $1,082 $947 FINANCIALS 21 (95.2) 13.2 (2,635.0) 1,610.7 706.8 711.3 2,523.7 1,816.1 1,196.7 238.4 100.5 12,316.1 1,280.6 13,503.9 8,575.1 2,673.9 924.4 513.6 3,805.2 613.6 577.1 $26,874.8 7,934.1 $26,874.8 1,145.1 1,030.9 13,604.4 5,983.6 5,983.6 823.8 5,436.8 4,593.5 287.5 11,806.7 709.5 2,455.4 642.8 — 1,670.5 99.2 74.7 34.5 (86.3) 711.1 367.6 229.2 771.0 429.4 374.6 133.0 498.5 906.2 873.4 735.3 536.8 382.1 885.8 3,967.2 9, 4,615.7 8, 3,976.6 2,387.6 7,654.9 6, 2,778.8 8,626.3 1,383.4 2,493.2 1,544.6 6,8 4,054.1 2,534.3 (2,786.8) 13,109.7 (2,635.0) 12,453.3 $ 5,846.3 $ 413.7 $ 5,496.7 $ 3,220.5 $2 $2

9,212.6

December 31 31 December 2008 2007 (Note 7). (Note ...... nancial statements. nancial t (Note 13) ...... 13) t (Note (Notes 8 and 10) t trust ...... t trust ......

Employee beneﬁ Employee Deferred costs—ESOP ...... Retained earnings ...... Retained earnings Accumulated other comprehensive income (loss) 15). (Note ...... Additional paid-in...... capital ...... current Total assets AssetsOther Prepaid pension 13) (Note ...... Investments 6) (Note Goodwill and other intangibles—net 3) (Note ...... Sundry 9). (Note ...... See notes to consolidated ﬁ Commitments and contingencies 14) (Note Equity Shareholders’ Common stock—no par value 3,200,000,000 shares: Authorized (2008) (2007) Issued and 1,135,212,894 shares: 1,136,948,610 ...... Property and Equipment, net Shareholders’Liabilities Equity and Current Liabilities Accounts receivable, net of allowances (2008) (2007) of $97.4 and $103.1 . . . Short-term borrowings and current maturities of long-term debt Short-term investments...... Other receivables...... 9) (Note ...... Inventories ...... Deferred income taxes 12) (Note Assets Current Assets Cash and cash equivalents...... Consolidated Balance Sheets Balance Consolidated ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions) Prepaid expenses...... current Total liabilities ...... Deferred income taxes 12) (Note Other current liabilities ...... 9) (Note Long-term income ...... taxes payable 12) (Note Accounts payable ...... Employee compensation...... Sales rebates and discounts...... Income taxes payable 12) (Note Dividends...... payable

shares Less cost of common stock in treasury 2008—888,998 2007—899,445 shares ...... Other Liabilities ...... Long-term debt 7) (Note beneﬁ retirement Accrued Other noncurrent ...... liabilities 9) (Note FINANCIALS e hnei hr-embroig...... borrowings. inshort-term change Net paid . Dividends Flows FromCash Financing Activities Activities Investing for) by (Used Provided Net Cash Other, . . net acquired ofcash net . acquisitions, for paid Cash development and research . ofin-process Purchases investments . ofnoncurrent Purchases rcesfo ae n auiiso ocretivsmns . investments ofnoncurrent maturities and sales from Proceeds . investments inshort-term change Net . equipment and ofproperty Disposals equipment and . ofproperty Purchases From Flows Activities Cash Investing See notes to consolidated ﬁ toconsolidated notes See . Year of End at Equivalents Cash and Cash . ofyear beginning at equivalents cash and Cash . equivalents. cash and incash increase Net . equivalents cash and cash on changes rate ofexchange Effect — — Activities Financing for) (Used by Provided Cash Net Other, . net plans stock under stock ofcommon . Issuances . . stock ofcommon Purchases . debt oflong-term Repayments debt oflong-term . . issuance from Proceeds . (decrease) liabilities—increase other and payable Accounts decrease . assets—(increase) Other . decrease. Inventories—(increase) Net Cash Provided by Operating Activities by Provided Net Operating Cash . decrease Receivables—(increase) ofacquisitions net liabilities, and assets inoperating Changes Other, net . oftax net . development, and research in-process Acquired tc-ae opnainepne . expense compensation Stock-based . taxes indeferred Change . amortization and Depreciation From Activities Operating To Flows Income Net Cash To Reconcile Adjustments 22 2006 2007 2008 31 December Ended Year . (loss) income Net Flows FromCash Activities Operating millions) in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Consolidated StatementsofCashFlows . . . nancial statements......

47.8 947.8

$(2,071.9) ,2. $3,109.3 $3,220.5 $ 5,496.7 (2,056.7) (6,083.0) (7,268.8) (2,412.4) 2,346.0 3,220.5 5,060.5 1,648.6 4,792.7 2,276.2 7,295.6 2,3 1,597.3 1,122.6 4, (284.8) (184.7) (122.0) (649.8) (947.2) 442.6 406.5 255.3 799.1 957.6 (96.6) 84.8 25.7 (8.1) 0.1 2526 — 2,512.6 (842.7) 243.9 (842.7) 32.3 65.2 626 — 692.6 (844.9) (844.9) (4,578.8) (6.) (8.4) (468.5) 3,109.3 3,006.7 172.1600.6 (376.9) 1,247.5 5,154.5 3,975.9 (5.) (43.0) (355.8) 1079 801.8 1,047.9 60.7 346.8 143 (60.2) 154.3 (53.8) (53.8) (795.3) 4,771.2 5,208.3 800.1 800.1 1,507.7 282.0 359.3 282.0 111.2 102.6 111.2 (.) 9.9 (0.6) ,5. $2,662.7 $2,953.0 (1,853.6) (1,736.3) (1,853.6) 990.4(936.0) 197 97.1 129.7 (,7.) — (2,673.2) (1.) — (111.0) (,2.) 608.4 (4,328.1) (6.) 179.0 (166.3) (1,059.5) (2,781.5) (750.7) (750.7) (1,313.2) (,8.) (1,077.8) (1,082.4) 47 59.6 24.7 (122.1) — FINANCIALS 23 (18.8) — 943.8 — 1,401.9 1,401.9 620.6 (11.4) (3.2) 1,688.9 663.7 $2,953.0 $2,953.0 $2,662.7 $4,354.9 $4,354.9 $3,283.3 756.6 542.4 (0.1) 143.3 (0.1) (287.0) (287.0) (43.1) scal challenges due to the economic 23.2 (190.6) (766.1) 1,074.7 (2,941.2) (3,874.7) (2,800.0) $(4,871.9) $(2,071.9) In recent months, global economic conditionshave believeWe that cash generated from operations, cient to fund our normal operating needs, including

nancial institutions have tightened lines of credit,

deteriorated. Triggered by the liquidity crisis in the capital markets, the implications have become more widespread, resulting in higher unemployment and declines in real consumer spending. In addition, many fi reducing funding available for near-term economic growth. Pharmaceutical consumption has traditionally relativelybeen unaffected downturns; economic by how- an extendedever, downturn could lead to a decline in overall prescriptions corresponding with the growth of the uninsured and underinsured population in the U.S. In addition, both private and public health care payers are facing heightened fi slowdown and are taking aggressive steps to reduce the costs of care, including pressures for increased pharmaceutical discounts and rebates and efforts to drive greater use of generic drugs. continue We to monitor the potential near-term impact of prescription trends, the credit worthiness our of wholesalers and other customers and suppliers, the decline of health insurance coverage in the overall population, and the federal government’s involvement in the economic crisis. along with available cash and cash equivalents, will be suffi debt service, capital expenditures, costs associated with litigation and government investigations, and dividends in 2009. believe We that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowings. Our access to credit markets has not been adversely affected by the recent illiquidity in the market because of the high credit qual-

$1.88

t $1.70

$1.60

$1.52 $1.42 04 07 05 06 08 0.0 2.00 1.50 1.00 0.50 ecting the commer- rst-quarter dividend in ow hedges...... nancial statements. nancial t pension and retireehealth benefi ned benefi ned Dividends per of $1.88 share were paid in 2008, an Total debt as of DecemberTotal 2008 31, increased Dividends Paid Per Share Continue to Grow ($ dollars) Dividends paid during 2008 increased to $1.88 per share. This constitutes the 41st consecutive increase in annual dividends. Our strong 2008 cash flow enabled us to increase the first-quarter 2009 dividend by 4.3 percent, to $.49 per share. nance our acquisition of ImClone, offset by long-term Netincome (loss)...... Consolidated Statements of Comprehensive Income (Loss) of Comprehensive Statements Consolidated ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions) Year Ended December 31 2008 2007 2006 Other comprehensive income (loss) Foreign currency translation...... gains (losses) Net unrealized...... losses on securities increase of 11 percentincrease from In the of 11 2007. fourth quarter of 2008, effective for the fi 2009, the quarterly dividend was increased to $.49 per share 4.3 (a percent increase), resulting in an indicated annual rate per for share. 2009 The year of $1.96 2008 was consecutive the 124th year in which we made dividend payments consecutive and the 41st year in which dividends have been increased. $5.45 billion, to $10.46 billion, refl cial paper we issued in November 2008 primarily to fi debt repayments and paydown of commercial paper with cash and cashequivalents on hand. Our current debt ratings from Standard & Poor’s and Moody’s are at AA respectively. and A1, ...... plans 13) (Note Minimum pension liability adjustment 13) (Note Defi ...... Effective portion of cash fl — Other comprehensive income (loss) before ...... income taxes Provision for income taxes related to other comprehensive ...... income (loss) items Other ...... comprehensive income (loss) 15) (Note Comprehensive income ...... (loss) See notes to consolidated fi FINANCIALS November 2008, we obtained a one-year aone-year obtained we 2008, November in Additionally, program. paper commercial our backs ofwhich $1.20 billion facilities, credit bank committed ofunused $1.24 billion have We currently debt. term oflong- issuance the and operations, from generated cash hand, on equivalents cash and cash with paper cial commer- outstanding reduce tofurther and settlements, EDPA the with inconnection required payments to fund sensitive instruments over a one-year period. period. aone-year over instruments sensitive fl cash earnings, on impact material no have would respectively, 2007, and 31, 2008 ofDecember as instruments ofthe value fair tothe applied rates ininterest change 10 percent ahypothetical instruments, risk-sensitive rate interest other and derivatives 2007, including and 31,ber 2008 Decem- at exposure rate interest overall our on Based balance. that maintain tohelp derivatives rate interest fl and fi between balance acceptable an toachieve strive we exposures, rate interest tomanage effort In an rates. interest dollar U.S. inshort-term changes from trading. than other purposes for are activities derivative All rates. exchange currency and in interest offl earnings on impact the tolimit is risks fi ofderivative use the includes that management risk of program acontrolled through risks ofthese portion of fi fl These values. rency tofl exposed are fl 24 debt. long-term and short- ofour ity results and cash generated from operations. operations. from generated cash and results operating our affect may section, 2009 for Expectations Financial inthe discussed those including uncertainties, fi alternative back-up, as billion of$4.00 amount inthe facility credit revolving nancial instruments. The objective of controlling these these ofcontrolling objective The instruments. nancial uctuating currency exchange rates, primarily the U.S. U.S. the primarily rates, exchange currency uctuating and ROEfor2008. items. TheseitemsresultedinnegativeROA impairments, restructuring,andotherrelated Zyprexa ($1.48billion),aswellasset of federalandstateinvestigationsrelatedto technologies, asdescribedinNote3,settlement ($4.73 billion)andin-licensemolecules by strategicdecisionstoacquireImClone Net income,ROA,andROEwereaffected average shareholders’equity) ROE—based onnetincomedividedby quarterly averageassetbalance; (ROA—based onnetincomedividedby Return onAssetsandShareholders’Equity nancing, investing, and operating. We address a We address operating. and investing, nancing, Return onShareholders’Equity(ROE) Return onAssets(ROA) Our foreign currency risk exposure results from from results exposure risk currency foreign Our results exposure risk rate interest primary Our operations our ofbusiness, course normal In the oating rate debt positions and may enter into enter may and positions debt rate oating uctuations in interest rates and cur- and rates ininterest uctuations ows, or fair values of interest rate risk- rate ofinterest values fair or ows, uctuations can vary the costs costs the vary can uctuations nancing. Various risks and and risks Various nancing. -20 - -15 - -10 - In 2009, we intend intend we In 2009, 10 - 15 - 20 - 25 - -5 - 0 - 5 -

06 0708 05 04 7.8% short-term short-term 17.8% uctuations uctuations 8.2% 18.5%

11.1% 24.8%

xed xed 12.1% 24.3%

-7.5% -16.3% by the results of the derivative instruments. derivative ofthe results the by inpart, offset, be would that positions underlying the on refl not do calculations These period. aone-year over instruments risk-sensitive rate currency offoreign values fair or fl cash earnings, on impact material no have would respectively, 2007, and 31, 2008 ofDecember as dollar) U.S. the against (primarily rates inexchange change 10 percent 2007, ahypothetical and 31,December 2008 fi derivative our ing Consider- revenues. anticipated and commitments, fl currency of impact the inpart, offset, positions derivative these on losses and Gains exposures. ofsuch coverage hedge maximum and minimum the outlines policy Our sures. expo- currency foreign our tomanage options chased pur- and contracts forward use We may period. of the fl have that rates exchange at dollar U.S. tothe operations global ofour results the translating from arises that exposure currency face also We currency. local the than other incurrencies nated denomi- basis, intercompany an on generally actions, intotrans- enter we when arise that exposures currency transactional We face euro. the against pound British the and yen, Japanese the and euro the against dollar rial to the results of operations in any one period. These These period. one inany ofoperations results tothe rial mate- be could toexpense charge aggregate the period, reporting same inthe reached tobe happen would arrangements these by covered products multiple for However, milestones if period. reporting annual one any included in the table of contractual obligations. ofcontractual table inthe included not are they payments, ofthese nature contingent of the Because obtained. is marketing for approval regulatory that event in the product pharmaceutical ofthe sales ofthe apercentage upon based payments make royalty to have may we arrangement, the by required If levels). sales ofcertain achievement the upon or agency tory regula- appropriate the by marketing for product of the approval (e.g., product pharmaceutical ofthe cycle life development inthe point important ofan achievement ful success- the upon contingent required be may payments Milestone indevelopment. asset ofthe success to the linked events future ofcertain occurrence the upon gent contin- party third tothe payments royalty and milestone require often that parties third with arrangements ment develop- and intoresearch enter and indevelopment still assets on collaborate and We acquire resources. capital or expenditures, capital liquidity, ofoperations, results infi changes fi our on effect future amaterial have to likely reasonably are that or effect current a material have that arrangements sheet off-balance no We have Obligations Contractual and Arrangements Sheet Off-Balance Individually, these arrangements are not material in material not are arrangements these Individually, ect the impact of the exchange gains or losses losses or gains exchange ofthe impact the ect uctuations on the existing assets, liabilities, liabilities, assets, existing the on uctuations nancial condition, revenues or expenses, expenses, or revenues condition, nancial nancial instruments outstanding at at outstanding instruments nancial uctuated from the beginning nancial condition, nancial condition, ows, FINANCIALS 25 — d the le rate rate le 5.2 6.0 — 73.6 29.5 nancial position, nancial 185.0 587.1 388.5 834.7 — 17.0 17.0 316.7 316.7 cant operating locations as of December 31, ts of $906.2 million, as we cannot reasonably ed supplemental pension funding requirements and ount Accrualsount We regularlyWe review the supply levels of our sig- — 13.1 13.1 c 90.8 141.4 cant products sold to major wholesalers in the U.S. 157.1 157.1 judgment would cause a material adverse effect on our consolidated results of operations, fi or liquidity for the periods presented in this report. Our most critical accounting policies have been discussed with our audit committee and are described below. Revenue Recognition and Sales Return, Rebate, and Dis recognizeWe revenue from sales of products at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership. For more than 90 percent our of sales, this is at the time products are shipped typically to the customer, a wholesale distributor or a major retail chain. The remaining sales, which are outside the U.S., are recorded at the point of delivery. Provisions for returns, rebates, and discounts are established in the same period the related sales are recorded. nifi and in major markets outside the U.S., primarily by reviewing periodic inventory reports supplied by our major wholesalers and available prescription volume information for our products, or alternative approaches. attemptWe to maintain wholesaler inventory levels at an average of approximately one month or less on a consistent basis across our product portfolio. Causes Less Than Payments Due by Period 1–3 3–5 Than More . . 1,088.8 3 ...... 7,923.0 5,976.3 723.5 2 nancial statements in accordance ...... $ 8,205.5 $ 595.8 387.0 $ $ 881.2 $6,341.5 1 ed...... 157.1 ected on our balance sheet 4 eparing our fi 2008. Some of these purchase orders may be cancelable; however, forpurposes of this disclosure, we havebetween cancelable noncancelable not and purchase obligations. distinguished r • Purchase obligations, consisting primarily of all open purchase orders at our signifi • Contractual payment obligations withcant vendors, each of our signifi which are noncancelable and are not contingent. ows from sales of products. We have included the following: We have included long-term liabilities consisting primarily of our nonqualifi deferred compensation liabilities. We excluded liabilities for unrecognized tax benefi estimate the timing of futureows associated cash outfl with those liabilities. interest rate forward curve at December 2008 31, to compute the amount of the contractual obligation for interest on the variab debt instruments and swaps. This category comprises primarily minimum pension funding requirements. Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. We use ...... Total $17,751.0 $6,833.1 $1,585.6 $1,533.5 $7,798.8 with generally accepted accounting principles(GAAP), we must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Some of those judgments can be subjective and complex, and consequently actual results could differ from those estimates. For any given individual estimate or assumption we make, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. We believe that, given current facts and circumstances, it is unlikely that applying any such other reasonable APPLICATION OF CRITICAL OF ACCOUNTING POLICIES APPLICATION In p arrangements often give us the discretion to unilater- ally terminate development of the product, which would allow us to avoid making the contingent payments; how- we are unlikely to ceaseever, development if the compound successfully achieves clinical testing objectives. alsoWe note that, from a business perspective, we view these payments as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate cash fl 4 The contractual obligations table is current as of December 2008. 31, expect We the amount of these obligations to change materially over time as new contracts are initiated and existing contracts are completed, terminated, modifi or 3 2 1 Capital lease obligations...... Operating ...... leases Purchase obligations 41.3 335.3 Total 1 Year Years Years 5 Years Long-term debt, including interest payments Our current noncancelable contractual obligations that will require future cash payments are as follows millions): (in Other long-term liabilities refl Other FINANCIALS rebate and discount contracts. contracts. discount and rebate ofcurrent provisions the and groups segment customer toour made payments discount and rebate historical our upon primarily accruals these We base programs. government other various and programs, assistance patient hospital, long-term-care, chargebacks, care, Medi- care, managed Medicaid, include accrual of the establishment inthe ofjudgment use the require that discounts and rebates Sales sales. net our at arrive to adeduction as recorded are amounts discount and rebate The sales. related the as period same in the fl not have and years three past the over sales net of our percent one approximately been have returns product Actual dates. expiry product and conditions business 26 specifi as well as rates return historical on based primarily is estimate This sales. tothose related returns product future for occur sales the when areserve estimate we Exists, ofReturn Right When Recognition Revenue 48, SFAS with Consistent destroyed. is it returned, is product the Once sales. net our at toarrive deduction a as amounts return the We record returns. product returns. product ofactual rate inthe changes material any caused not has historically activity destocking and stocking Wholesaler destocking. or ofstocking amount the quantify toaccurately able ever, always not are we how- trend; sales product tothe material is amount the believe we if discussion sales product inour this disclose we demand, underlying with compared product ofamajor sales inthe decrease or increase unusual an caused have patterns purchasing wholesaler believe we When wholesalers. our at levels inventory on data improved us provides and buying wholesaler lative specu- for incentive the eliminates arrangements of our structure current the U.S., Inthe operations. business inwholesaler changes and stocking, holiday redundant network, transportation inthe changes anticipated patterns, weather issues, supply product anticipated or actual include patterns buying wholesaler of unusual months later. Because of this time lag, in any particular particular inany lag, time ofthis later.months Because uptosix paid typically is sale tothat related rebate icaid Med- the shipped), is product the (when sale the record we time the at rebates Medicaid for a liability accrue we Although contracts. discount and rebate current and ing pric- product our and recipients, toMedicaid sold are that products ofour percentage the interpretations, and laws rebate Medicaid current ofthe evaluation an signifi any as well as trends, sales insales changes cant historical ofour apercentage as product by payments rebate Medicaid historical our consider we amount, accrual appropriate the Indetermining Medicaid. by covered sales with associated rebates are amounts uctuated uctuated signifi We establish sales rebate and discount accruals accruals discount and rebate sales We establish The largest of our sales rebate and discount discount and rebate sales ofour largest The We establish sales return accruals for anticipated anticipated for accruals return sales We establish cally cally identifi cantly as a percent ofsales. apercent as cantly ed anticipated returns due to known toknown due returns anticipated ed liabilities, end of year ofyear end liabilities, . . rebates and discount and rebate, return, Sales ofdiscounts payments Cash cal budget defi budget cal refl not are estimates our If sale. related the as period same inthe recognized defi budgeted revise authorities governmental as updated rebates, ofthese estimate Abest country. in the defi budget pharmaceutical anticipated the on based are rebates government countries, European large Insome sales. related the as period same inthe nized recog- and estimated are and mandated legislatively or and Medicare rebate liability was $618.5 was million. liability rebate Medicare and Medicaid, returns, sales our 31, 2008, ofDecember As taxes. income before income our on effect million $52 approximate toan lead would in2008 recognized we amounts rebate Medicare and Medicaid, return, sales inthe change A5percent respectively. 2006, and 2007, in2008, million $704.8 and million, $738.8 $1.03 by billion, sales reduced rebates Medicare and (Medicaid) programs assistance pharmaceutical state and rebate Medicaid mandated federally returns, Sales circumstances. and facts current on based ate appropri- and reasonable are discounts and rebates, of accruals for several periods. periods. several for of accruals revisions incorporate may adjustments rebate our period developing our product litigation liability reserves and and reserves liability litigation product our developing in consider we factors The probabilities. and judgments complex upon based are and uncertain nature, their by are, contingencies other and liabilities litigation Product Litigation Liabilities andProduct Contingencies Other 1 and rebates sales to due sales ofnet Reduction returns, . ofyear. beginning liabilities, discounts, discount and rebate, return, Sales 2008 liability balances, including Medicaid (in millions): Medicaid including balances, liability signifi most our of aroll-forward represents following The respectively. 2007, and 31, 2008 ofDecember as U.S. inthe products ofour sales from resulted liability discount and rebate, return, sales global ofour percent 78 and percent 80 Approximately sheet. balance consolidated our on ities liabil- noncurrent other and liabilities current inother ed includ- is liability return sales global Our sheet. balance consolidated our on discounts and rebates insales ed Adjustments of the estimates for these returns, rebates, and dis- and rebates, returns, these for estimates the of Adjustments for each of the years presented. years the of each for sales net of 0.1 percent than less were results actual to counts We believe that our accruals for sales returns, returns, sales for accruals our that We believe contractual are U.S. the outside rebates ofour Most Our global rebate and discount liabilities are includ- are liabilities discount and rebate global Our cit, we adjust our rebate reserves. rebate our adjust we cit, cant U.S. returns, rebate, and discount discount and rebate, returns, U.S. cant 1 ...... ective of the actual pharmaceuti- actual ofthe ective (1,751.8) 5 . 3 9 6 $ $ 806.5 1,864.9 $ $ 693.5 614.5 1,404.0 (1,325.0) cits, is cits, 2007 cit FINANCIALS 27 ows, t pen- t c yield c ows to be t obligation obligation t ned benefi ned t plans (U.S. plans) were ts together withour expecta- nancial advisers and economists. We le tax returns based on our interpreta- ed, loss a is recorded equal to the excess We believeWe our pension and retiree medical plan Income Taxes Income prepareWe and fi tion of tax laws and regulations and record estimates based onthese judgments and interpretations. In the normal course of business, our tax returns are subject to examination by various taxing authorities, which may result in future tax, interest, and penalty assessments We reviewWe the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. determine We impairment by comparing the projected undiscounted cash fl generated by the asset to its carrying value. If an impairment is identifi of the asset’s net book value over its fair value, and the cost basis is adjusted. The estimated future cash fl based on reasonable and supportable assumptions and projections, require management’s judgment. Actual results could vary from these estimates. tions and asset allocations (approximately 88 percent to 92 percent of which are growth investments); and the views of leading fi use an actuarially determined, company-specifi curve to determine the discount rate. In evaluating our expected retirement age assumption, we consider the retirement ages of our past employees eligible for pension and medical benefi ages. retirement future of tions assumptions are appropriate based upon the above factors. If the health-care-cost trend rates were to be increased by one percentage point each future the year, aggregate of the service cost and interest cost components of the 2008 annual expense would increase by approximately $27 million. A one-percentage-point decrease would lower the aggregate of the 2008 service cost and interest cost by approximately $21 million. If the 2008 discount rate for the U.S. defi sion and retiree health benefi to be changed by a quarter percentage point, income before income taxes would change by approximately $26 million. If the 2008 expected return on plan assets for U.S. plans were to be changed by a quarter percentage point, income before income taxes would change by approximately million. If our $17 assumption regarding the 2008 expected age of future retirees for U.S. plans were adjusted our income by before one year, income taxes would be affected by approximately $28 million. The U.S. plans represent approximately 83 percent of the total accumulated postretirement benefi and approximately 84 percent of total plan assets at December 2008. 31, Impairment of Long-Lived Assets t ts. ned benefi ned led, to the extent we t plans. In evaluating cant effect on the amounts culties in obtaining product cant product liability contingen- nancial statements for additional t costs include assumptions for the dis-

ected on a gross basis as liabilities and assets, Periodically, we evaluate the discount rate and the The litigation accruals and environmental liabilities believeWe that the accruals and related insurance We alsoWe consider the insurance coverage we have nancial condition of the insurers, and the possibility of reported. In addition to the analysis below, see Note 13 to the consolidated fi expected return on plan assets in our defi count rate, retirement age, and expected return on plan assets. Retiree medical plan costs include assumptions for the discount rate, retirement age, expected return on plan assets, and health-care-cost trend rates. These assumptions have a signifi information regarding our retirement benefi can formulate a reasonable estimate of their costs. We estimate these expenses based primarily on historical claims experience and data regarding product usage. accrueWe legal defense costs expected to be incurred in connection with signifi cieswhen probable reasonably and estimable. other contingent liability amounts include the merits and jurisdictionof the litigation, the nature and the number of other similar current and past litigation cases, the nature of the product and the current assessment of the science subject the to litigation, and the likelihood of settlement and current state of settlementdiscus- sions, In addition, ifany. we accrue for certain product liability claims incurred, but not fi Pension and Retiree Medical Plan Assumptions benefiPension and the related estimated insurance recoverables have refl been respectively, on our consolidated balance sheets. recoveries we have established for product litigation liabilities and other contingencies are appropriate based on current facts and circumstances. to diminishthe exposure for periods covered by insurance. In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for denial of coverage by the insurance company, the fi and length of time for collection. In the past few years, we have experienced diffi liability insurance due to a very restrictive insurance market. Therefore, for substantially all of our currently marketed products, we have been and expect that we will continue to be completely self-insured for future product liability losses. In addition, there is no assurance that we will be able to fully collect from our insurance carriers in the future. pension and retiree health benefi these assumptions, we consider many factors, including an evaluation of the discount rates, expected return on plan assets, and health-care-cost trend rates of other companies; our historical assumptionscompared with actual results; an analysis of current market condi- FINANCIALS FINANCIAL EXPECTATIONS FOR 2009 respectively. million, $42.3 and million $43.2 ofapproximately income innet inachange result would allowance valuation the and positions tax uncertain the of amount inthe change A5percent circumstances. and facts current on based appropriate are assets tax deferred the against allowances valuation and positions and a reduction of income tax expense. tax ofincome areduction and allowances valuation ofthese reversal tothe lead could jurisdictions inthese generation income future or assets tax deferred these torecover strategies planning of tax Implementation assumption. an such support not does history where carryforwards these with associated tions jurisdic- inthe strategies planning tax or income taxable future any assumed not have we assets, tax deferred these recover not than likely more would we whether ing Inevaluat- jurisdictions. taxing incertain carryforwards credit tax and losses operating net from generated been have that those primarily assets, tax deferred ofour tain 28 We growth. sales digit mid-single expect we aresult, As impacts. positive these offset topartially anticipated are Gemzar for markets incertain competition of generic impact the and pressures, pricing worldwide currencies, foreign ofweaker impact However, negative the sion. divi- health animal Elanco the by as well as prasugrel, of launches anticipated the and Humalog, Cialis, Alimta, Cymbalta, by driven in2009, again insales growth volume We expect to$4.25. of$4.00 range inthe to be share per earnings expect we of2009, year full the For benefi tax tounrecognized related penalties and interest accrued both We recognize returns. tax ofour examinations from suffi and priate appro- are positions tax uncertain for estimates our that We believe examination. ofan resolution or examination, atax during obtained information new authorities, taxing the by interpretations or ofregulations issuance the and result from signifi could adjustments example, For circumstances. and benefi tax unrecognized of amount The resolution. ultimate upon realized being benefi largest the on based measured are aposition such from benefi tax The position. ofthe merits technical the on based authorities, taxing the by examination on sustained be will position tax the that not than likely more is it if only position tax benefi tax the We recognize uncertain systems. an t from court tax jurisdictions’ various the through concluded as and/or regulation, legislation, from resulting law intax tochanges due positions tax ofmany estimates in exist uncertainties Inherent authorities. these by We believe that our estimates for the uncertain tax tax uncertain the for estimates our that We believe cer- against allowances valuation recorded We have t that has a greater than 50 percent likelihood of likelihood percent 50 than agreater has t that ts in income tax expense. tax inincome ts ts recognized in the fi inthe recognized ts cient to pay assessments that may result result may that assessments topay cient cant amendments to existing tax law law tax toexisting amendments cant ts is adjusted for changes in facts infacts changes for adjusted is ts nancial statements to update these forward-looking statements. forward-looking these to update duty no We undertake pharmaceuticals. for bursement reim- and importation, pricing, regarding actions mental ofgovern- impact the and investigations; government and litigation, developments, regulatory other changes; inventory wholesaler rates; tax ineffective changes conditions; macroeconomic global and rates exchange foreign charges; development and research in-process inacquired resulting development under compounds of acquisitions and restructurings, impairments, asset launches; product new ofour success the and approvals ofregulatory scope and timing the products; competitive with developments products; marketed currently of our growth continuing the things, other among on, depend • of1984): Act Term Restoration Patent and Competition Price Drug (the Act Hatch-Waxman te mat- litigation patent following inthe engaged We are Litigation Patent period. accounting one inany operations of results consolidated toour material be possibly fi consolidated our on effect adverse amaterial have not will matters as specifi except that, believe we matters, ofthese outcome the todetermine possible not is it While below. described m govern- and actions legal tovarious aparty We are MATTERS REGULATORY AND LEGAL continued strong operating cash fl cash operating strong continued $1.1 expect we and approximately tobe billion, expected are expenditures Capital million. $250 and million $200 ofbetween loss anet tobe expected is Other—net digits. low-double inthe togrow projected are expenses ment fl toshow expected are expenses administrative and ing, fi inthe pronounced more be could increase dollar. This strengthening the by driven toincrease, sales ofnet apercent as margin gross expect at to low-single digit growth. Research and develop- and Research growth. digit tolow-single at ingredient isunenforceable. Lawsuits have beenfi alleges thepatent havingclaimsdirected to theactive the useofCymbalta for treating fibromyalgia, andone one furtheralleges invalidity oftheclaimsdirected to the eightchallengers to thecompound patent claims, claims directed to theactive ingredient duloxetine. Of formulation, andeightallege invalidity ofthepatent of thepatent claimsdirected to thecommercial 2013). Ofthesechallengers, allallege non-infringement relevant U.S. patents (theearliest ofwhichexpires in versions ofCymbalta prior to theexpiration ofour submitted ANDAs seeking permission to market generic Cymbalta: Sixteen genericdrugmanufacturers have rs brought pursuant to procedures set out in the inthe out set toprocedures pursuant brought rs ent investigations. The most signifi most The investigations. ent Actual results could differ materially and will will and materially differ could results Actual cally noted below, the resolution of all such such ofall resolution the below, noted cally nancial position or liquidity, but could could but liquidity, or position nancial rst half of 2009. Marketing, sell- Marketing, of2009. half rst ow. cant of these are are ofthese cant led in FINANCIALS 29 ed and ed nancial position. nancial We believe each of these challenges of Hatch-Waxman each believe We We have received challenges to Zyprexa patents in a In Canada, several generic pharmaceutical generic pharmaceutical In Canada, several of our the validity challenged have manufacturers (expiring and method-of-use patent compound Zyprexa Court in 2011). In April 2007, the Canadian Federal Inc. (Apotex), Apotex challenger, rst the fi against ruled in February rmed on appeal and that ruling was affi Court held 2008. In June 2007, the Canadian Federal challenger, of a second allegation that an invalidity justifi was Ltd. (Novopharm), Novopharm denied our request that Novopharm be prohibited from from be prohibited that Novopharm denied our request generic olanzapine in for approval marketing receiving generic olanzapine began selling Canada. Novopharm sued of 2007. We quarter in Canada in the third infringement, and the trial began patent for Novopharm run through the trial to expect 2008. We in November with a decision in the second of 2009, quarter rst the fi an action led fi 2007, Apotex half of 2009. In November of our Zyprexa of the invalidity seeking a declaration and no trial and method-of-use patents, compound similar actions brought have has been set. We date 2007), Sandoz (July (August Pharmascience against 2007), Nu-Pharm (June 2008), Genpharm (June 2008) and Cobalt (January 2009); none of these suits has to has agreed trial. Pharmascience for been scheduled suit, and, of the Novopharm be bound by the outcome agreed have of the lawsuit, we pending the outcome company the prevent to any further steps take not to with generic olanzapine tablets, market to coming from damages obligation should we a contingent subject to Novopharm. against be successful Egis-Gyogyszergyar and Neolab Ltd. challenged the and Neolab Ltd. challenged Egis-Gyogyszergyar and method-of-use compound of our Zyprexa validity in 2011). In June 2007, the German (expiring patent scheduled for trial beginning March 9, 2009, while no 9, 2009, while beginning March trial for scheduled In Barr. in the lawsuit against has been set trial date of approval tentative Teva granted the FDA April 2008, a generic product market to ability but Teva’s its ANDA, which has been extended stay, a statutory to is subject the has appealed 9, 2009. Teva on March expire to and expires If the stay stay. of the statutory extension the from relief preliminary obtain cannot the company regardless launch its generic product, can Teva court, our litigation, but subject to of the current of the status at trial. prevail we damages, should recover right to • In Germany, generic pharmaceutical manufacturers • manufacturers generic pharmaceutical In Germany, is without merit and expectprevail to in this litigation. it isHowever, not possible to determine the outcome of this litigation, and accordingly, we can provide no assurance that we will prevail. An unfavorable outcome in any of these cases could have a material adverse impact on our future consolidated results of operations, liquidity, and fi number of countries outside the U.S.: • Evista: Barr Laboratories, Inc. (Barr) submitted an Inc. (Barr) submitted Barr Laboratories, Evista: a generic market to in 2002 seeking permission ANDA of our relevant the expiration prior to of Evista version in 2012-2017) and alleging (expiring U.S. patents or not not enforceable, invalid, are that these patents a lawsuit against led fi 2002, we infringed. In November the Southern District Court for Barr in the U.S. District are of Indiana, seeking a ruling that these patents Teva and being infringed by Barr. enforceable, valid, an has also submitted Inc. (Teva) USA, Pharmaceuticals a generic version market to seeking permission ANDA a similar lawsuit led fi In June 2006, we of Evista. the Southern Court for in the U.S. District Teva against currently is Teva of Indiana. The lawsuit against District U.S. District Court for the Southern District of Indiana the Southern District Court for U.S. District Pharma Ltd.; Aurobindo Elizabeth LLC; Activis against Inc.; Inc.; Impax Laboratories, Cobalt Laboratories, Inc.; Global, Inc.; Sun Pharma Sandoz Lupin Limited; the patents seeking rulings that Limited, and Wockhardt the to Answers infringed, and enforceable. valid, are pending. are complaints Pharma (USA) Inc. (Mayne), and Sun Pharmaceutical (Mayne), and Sun Pharmaceutical Pharma (USA) Inc. seeking an ANDA each submitted Inc. (Sun) Industries of Gemzar versions generic market to permission U.S. patents relevant of our expiration the prior to in 2010 and method-of- expiring patent (compound these that alleging in 2013), and expiring use patent lawsuits in the U.S. District led fi We invalid. are patents Sicor of Indiana against the Southern District Court for 2006 and January (October 2006) and Mayne (February valid are 2008), seeking rulings that these patents has Sicor infringed. The suit against being and are ANDAs 2009. Sicor’s trial in July for been scheduled must Sicor however, by the FDA; been approved have generic marketing to prior 90 days notice provide seek a preliminary us to time for allow Gemzar to been Mayne have injunction. Both suits against to agreed and the parties have closed, administratively suit. In November of the Sicor be bound by the results action in the judgment a declaratory led 2007, Sun fi District the Eastern Court for District States United method-of-use of Michigan, seeking rulings that our or unenforceable, invalid are patents and compound generic of Sun’s not be infringed by the sale or would 2009. December for trial is scheduled This product. ANDAs (APP) each submitted LLC Pharmaceuticals, of Alimta versions generic market to seeking approval U.S. patent of the relevant the expiration prior to and University of Princeton the Trustees from (licensed We, is invalid. the patent in 2016), and alleging expiring lawsuits in the U.S. District led fi with Princeton, along and Teva against of Delaware the District Court for is valid patent APP, seeking rulings that the compound 2010. 8, November for is scheduled and infringed. Trial • Mayne Inc. (Sicor), Pharmaceuticals, Gemzar: Sicor and APP (Teva) Medicines, Inc. Parenteral • Teva Alimta: • FINANCIALS 30 consolidated results ofoperations. results consolidated our on impact adverse amaterial have could markets inadditional olanzapine ofgeneric availability The tion. litiga- ofthis outcome the determine We cannot basis. acountry-by-country on patents Zyprexa toour lenges We have received• challenges inanumberofother ties on past andfutureon past ties sales ofthese products. On royal- seeking and body, human inthe phenomenon ing signal- cell ofanatural discovery tothe related patent ofa infringement the inducing were Evista, and Xigris products, ofour oftwo sales that alleging us, sued ofMassachusetts District the for Court District U.S. inthe College ofHarvard Fellows and President the and Research, Biomedical for Institute Whitehead the ofTechnology, Institute Massachusetts the Inc., ticals, unpatentable, a position that Ariad continues to contest. tocontest. continues Ariad that a position unpatentable, are issue at claims Ariad the that position the took 2007 inAugust and patent, ofthe areexamination menced Offi Trademark and Patent States United the 2005, InJune processes. natural covers impermissibly and unenforceable is patent the that tion conten- our on 2006, inAugust held was Massachusetts of Court District U.S. the with trial bench a separate Inaddition, oftrial. date the through patent ofthe ance ofissu- date the from Evista and ofXigris sales U.S. all to royalty percent a2.3 applying by calculated damages, in million $65 approximately plaintiffs the awarded jury The patent. the infringe sales Evista and Xigris that case inthe decision initial an issued inBoston ajury 2006, and ahearingdate for theappealhasnotbeenset. patent wasvalid. Dr. Reddy’s appealed thisdecision, Patents CourtintheHighCourt,Londonruled thatour of-use patent (expiring in2011).InOctober 2008,the the validity ofourZyprexa compound andmethod- Dr. Reddy’s Laboratories (UK)Limited haschallenged In theU.K.,genericpharmaceutical manufacturer is now pendingbefore theCommercial CourtinMadrid. manufacturers’ challenges, butfurtherlegal challenge and appellate court levels indefeating thegeneric In Spain,we have beensuccessful atboththetrial France, andseveral smaller European countries. countries, includingSpain,theUnited Kingdom(U.K.), companies for damagesarisingfrom infringement. to preliminary injunction.We are pursuing these agreed to withdraw from themarket orwere subject of theSupreme Court,thegenericcompanies either found thepatent to bevalid. Following the decision Supreme Courtreversed theFederal Patent Courtand and following ahearinginDecember 2008,the the decisionto theGermanFederal Supreme Court Germany inthefourth quarter of2007.We appealed Generic olanzapinewaslaunchedbycompetitors in Federal Patent Courtheldthatourpatent isinvalid. Xigris chal- legal various the contesting vigorously We are ® and Evista: In June 2002, Ariad Pharmaceu- Ariad 2002, InJune Evista: and ce (USPTO) com- ce (USPTO) M ay 4, ments relating to sales of Zyprexa and our marketing marketing our and ofZyprexa tosales relating ments ofdocu- production seeking of Florida, State ofthe Unit, Offi Government Investigations and Related Litigation and Related Investigations Government remote. is damages monetary ofany likelihood the that therefore and issues, these on prevail ultimately will we that merit, legal without are allegations these that We believe 2009. 6, February on appeal the on arguments oral heard Circuit Federal the for of Appeals Court The judgment. this appealed We have exhausted. been have toappeal rights all untilafter damages any topay requirement the deferred However, Court the decision. jury ofthe time the since Evista and of Xigris sales U.S. net on royalty percent a2.3 plus million $65 fi and enforceable, and valid, patentable, are claims Ariad’s that indicating afi entered Court the 2007, In September tems, processes, policies, procedures and practices. practices. and procedures policies, processes, tems, sys- company’s the on report and toassess organization review third-party independent an for provides also ment fi for obligations integrity corporate of defi aset toundertake and program compliance our tomaintain us require will agreement (HHS). This Services Human and ofHealth Department U.S. of the Offi the with agreement integrity intoacorporate entered have we settlement, suffi be will of$1.42 billion quarter third inthe matter this for recorded we charge The tosettle. agree that states those to payment for million $362.0 ofapproximately amount amaximum available make will and investigation, in its EDPA the with coordinated have that states ofthe Units Control Fraud Medicaid State the by brought tigations inves- civil the tosettle agreed also We have allegations. tothe admit not do we although million, $438.0 mately approxi- pay will we which under claims, civil federal the resolving agreement intoasettlement entered also We have 2001. March and 1999 September between tia, demen- Alzheimer’s including dementia, for treatment as populations inelderly ofZyprexa promotion off-label the for is plea misdemeanor The $615.0to pay million. agreed and Act Cosmetic and Drug, Food, ofthe violation misdemeanor toone guilty pled we resolution, ofthe part matter. ofthis As resolution reached we that announced we 2009, InJanuary ofZyprexa. promotion and marketing toour relating claims Medicaid-related ofany tigation inves- EDPA the inits with coordinated states 30 than ofmore Units Control Fraud Medicaid State the addition, Weekly. In Prozac and Prozac, toZyprexa, respect with advisors, and consultants ofphysician remuneration and physicians with communications our including tices, prac- promotional and marketing U.S. toour related investigation an commenced had it that us EDPA advised Offi the the for 2004, Attorney In March U.S. ce ofthe ce of the Attorney General, Medicaid Fraud Control Control Fraud Medicaid General, Attorney ce ofthe cient to cover these payments. Also, as part of the ofthe part as Also, payments. these tocover cient In June 2005, we received a subpoena from the the from asubpoena received we 2005, In June nding damages in the amount of amount inthe damages nding ce of Inspector General (OIG) General ce ofInspector ve years. Theagree- ve years. nal judgment ned FINANCIALS 31 led by the states of Alaska, t programs, as well as the costs ed for residents of Quebec, and a second ed in Ontario and includes all Canadian The 2005 settlement totaling $700.0 million was areWe prepared to continue our vigorous defense In early 2005, we were served with four lawsuits Since the beginning of 2005, we have recorded In December 2004, we were served with two more than 8,000 claims for $690.0 million plus $690.0 for than 8,000 claims more of the settlement. administration cover to $10.0 million date; and date; liability product Zyprexa the known regarding costs we the extent claims to future claims and expected of the probable estimate a reasonable formulate could of the claims. number and cost number of plaintiffs’ attorneys to settle more than more settle to attorneys plaintiffs’ number of $500 million. approximately for 18,000 claims paid during 2005. TheJanuary 2007 settlements were paid during 2007. of Zyprexa in all remaining claims. The U.S. Zyprexa product liability claims not subject to these agreements include approximately lawsuits 105 in the U.S. covering approximately plaintiffs, 120 of which about 80 cases covering about 90 plaintiffs are part of the MDL. No trials have been scheduled related to these claims. seeking class action status in Canada on behalf of patients whotook Zyprexa. One of these four lawsuits has been certifi has been certifi residents except for residents of Quebec and British Columbia. The allegations in the Canadian actions are similar to those in the litigation pending in the U.S. aggregate net billion pretax for charges of $1.61 Zyprexa product liability matters. The net charges, which take into account our actual insurance recoveries, covered the following: to liability settlements product • of the Zyprexa The cost and defense liability exposures • product for Reserves • In January 2007, we reached agreements with a • agreements reached we In January 2007, lawsuits brought in state court in Louisiana on behalf of the Louisiana Department of Health and Hospitals, alleging thatZyprexa caused or contributed to diabetes or high blood-glucose levels, and that we improperly promoted the drug. These cases have been removed to federal court and are now part of the MDL proceedings in the Eastern District of New (EDNY). York In these actions, the Department of Health and Hospitals seeks to recover the costs it paid for Zyprexa through Medicaid and other drug-benefi the department alleges it has incurred and will incur to treat Zyprexa-related illnesses. have We been served with similar lawsuits fi Arkansas, Connecticut, Minnesota, Idaho, Mississippi, Montana, New Mexico, Pennsylvania, South Carolina, Utah, and West Virginia in the courts of the respective states. The Connecticut, Louisiana, Minnesota, Missis- sippi, Montana, New Mexico, and West Virginia cases are led led led claims led ce seeking production of nding that we have violated led lawsuits and other asserted ed of many other claims of individuals led suit. The lawsuits and unfi prexa product liability lawsuits in the U.S. and Since June 2005, we have entered into agree- Beginning in August 2006, we received civil investi- In June 2005, we reached an agreement in principle in principle an agreement reached In June 2005, we settle to nal agreement) 2005 a fi (and in September gative demands or subpoenas from the attorneys general of a number of states under various state consumer protection laws. Most of these requests became part of a multistate investigative effort coordinated by an executive committee of attorneys general. In October 2008, we reached a settlement with 32 states and the District of Columbia. While there is no fi any provision of the state laws under which the investigations were conducted, we paid $62.0 million and agreed to undertake certain commitments regarding Zyprexa for a period of six years, through consent decrees fi in the settling states. The 32 states participating in the settlement are: Alabama, Arizona, California, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Missouri, Nebras- ka, Nevada, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, Texas, Washington, and Wisconsin. have been notifi who have not fi (together the allege “claims”) a variety of injuries from the use of Zyprexa, with the majority alleging that the product caused or contributed to diabetes or high blood-glucose levels. The claims seek substantial compensatory and punitive damages and typically accuse us of inadequately testing for and warning about side effects of Zyprexa. Many of the claims also allege that we improperly promoted the drug. Almost all of the federal lawsuits are part of a Multi-District Litigation (MDL) proceeding before The Honorable Jack Weinstein in the Federal District Court for the Eastern District of New No.(MDL York 1596). ments with various claimants’ attorneys involved in U.S. Zyprexa product liability litigation to settle a substantial majority of the claims. The agreements cover a total of approximately 32,670 claimants, including a large number of previously fi claims. The two primary settlements were as follows: • Product Liability and Related Litigation haveWe been named as a defendant in a large number of Zy and promotional practices with respect to Zyprexa. In September 2006, we receiveda subpoena from the Cali- fornia Attorney General’s Offi documents related to our effortsto obtain and maintain statusZyprexa’s on California’s formulary, marketing and promotional practices with respect to Zyprexa, and remuneration of health care providers. expect We these matters to be resolved ifFlorida and California participate in the state component resolution. of the EDPA FINANCIALS related litigation could have a material adverse impact impact adverse amaterial have could litigation related and liability product ofZyprexa resolution ultimate The asserted. be may that claims and oflawsuits number 32 2009. inOctober trial for set is case sylvania Penn- The drug. the promoted improperly and Zyprexa of effects side about warned and for tested inadequately we that allege lawsuits these suits, liability product the with As York cases. New inthe described as grounds lar simi- on Zyprexa prescribed were who employees, state ofPennsylvania insurer as inPennsylvania court state in claims brought Trust Fund Employees Pennsylvania The In2007, 2008. inSeptember judgment, summary for motion our denying Weinstein’sorder, Judge order and certifi the We appealed consumers. individual and entities governmental excluding payors, third-party certifi Weinstein Judge 2008, InSeptember grounds. similar on in2006 EDNY in the fi were lawsuits Two additional fees. attorneys’ and damages, punitive damages, treble ofZyprexa, cost the of arefund seeking theories, law common and statute, RICO civil federal the statutes, protection consumer state certain under brought is which lawsuit, a single into consolidated been now have actions These Zyprexa. prescribed being patients insured or members their for make payments will or made have which entities, mental govern- excluding payors, third-party and consumers ofall behalf on actions class nationwide tobe porting states. respective intheir in August, Carolina South inNovember, and Pennsylvania in June, EDNY inthe Connecticut in2009: trial for set been have cases following The claims. similar over future in the us with settle may that states other certain as favorably as treated is Alaska that conditions, and limitations tain to cer- subject toensure, designed terms plus million, of$15.0 apayment for 2008 inMarch settled was case Alaska EDNY. The inthe proceedings MDL ofthe part We cannot determine with certainty the additional additional the certainty with determine We cannot In 2005, two lawsuits were fi were lawsuits two In 2005, ed a class consisting of consisting aclass ed led in the EDNY pur- EDNY inthe led cation led 1 PRIVATE LITIGATION SECURITIES OF ACT REFORM future. inthe carriers insurance our from collect tofully able be will we that assurance no is there Inaddition, losses. liability product future for self-insured completely tobe continue will we that expect and been have we products, marketed currently ofour all substantially for Therefore, market. insurance restrictive toavery due insurance liability diffi experienced have we years, few past Inthe future. inthe products other for claims related and liability ofproduct numbers tolarge subject become could we that possible is it limits. coverage and todeductibles ject sub- insurance, by covered are claims ofthese majority The thimerosal. and (DES) diethylstilbestrol primarily involving lawsuits liability product other in numerous fi and liquidity, ofoperations, results consolidated our on STATEMENTS forward-looking statements. forward-looking toupdate duty no We undertake Commission. Exchange fi 10-K and 10-Q Forms on report recent most our and section inthis earlier discussed are prospects and operations our affect may that factors other and legal, technological, mental, Economic, govern- competitive, those projected. from materially todiffer results actual cause may that ties uncertain- and torisks subject are they but made, are they time the at expectations management’s on based are document, inthis made those including us, by made projections or statements forward-looking any that investors caution we of1995, Act Reform Litigation ties Securi- Private ofthe provisions harbor safe the Under nancial nancial position. 995—A CAUTION CONCERNING FORWARD-LOOKING FORWARD-LOOKING CONCERNING CAUTION 995—A Because of the nature of pharmaceutical products, products, ofpharmaceutical nature ofthe Because adefendant as named been have we In addition, led with the Securities and and Securities the with led culties in obtaining product product inobtaining culties FINANCIALS 33 , and other prod- ® cant accounting poli- , Coban ® $10,145.5 $ 8,599.2 $10,145.5 $ 995.8 875.5 236.6 321.9 1,768.6 1,718.4 2,446.4 2,020.2 2,057.7 1,733.8 2,057.7 $18,633.5 $15,691.0 $18,633.5 $15,691.0 5,479.6 5,014.5 5,479.6 1,624.1 730.4 3,756.2 3,287.8 3,756.2 4,731.8 3,804.0 4,731.8 uctuations in foreign currency , Rumensin 265.3 ® 2,119.0 4,108.7 1,753.0 1,093.3 2,874.5 1,882.7 5,890.7 5,334.9 $10,934.4 $20,378.0 $2 $ 9 $ 8,371.5 $ 7,851.0 $ 6,728.5 $ 5,750.0 $ 5,905.4 $ 6,207.4 , and other miscellaneous pharmaceutical ®

0,378.0 ,622.0 $ 9,731.7 $ 9,659.6

and Vancocin ® Year Ended December 31 31 December Ended Year 2008 2007 2006 and other products for companion animals. The other pharmaceuti- ®

1 t or loss from operations before income taxes. The accounting policies of the nancial statements. Income before income taxes for the animal health business cant business segment—human pharmaceutical products. Operations of the animal liated customers liated liated customers liated , and Xigris. Animal health products include Posilac, Tylan ® ...... We areWe exposed to the risk of changes in social, political, and economic conditions inherent in foreign operations, Most of our pharmaceutical products are distributed through wholesalers that serve pharmacies, physicians Our business segments are distinguished by the ultimate end user of the product: humans or animals. Per- The assetsof the animal health business are intermixed with those of the pharmaceutical products business...... Net sales are attributed to the countries based on the location of the customer.

Other foreign...... countries and our results of operations and the value of our foreign assets are affected by fl exchange rates.exchange ucts for livestock and poultry, and Comfortis Oncology...... Cardiovascular ...... Animal health ...... The largest category of products is the neurosciences group, which includes Zyprexa, Cymbalta, Strattera, and Prozac. Endocrinology products consist primarily of Humalog, Humulin, Byetta, Actos, Evista, Forteo, and Humatrope. Oncology products consist primarily of Gemzar and Alimta. Cardiovascular products consist primarily of Cialis, ReoPro 1 Net sales—to unaffi Neurosciences...... Endocrinology Other pharmaceuticals...... We operateWe in one signifi Segment Information Segment ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions) health business segment are not material and share many of the same economic and operating characteristics as human pharmaceutical products. Therefore, they are included with pharmaceutical products for purposes of reporting. segment Geographic Information Net sales—to unaffi United States ...... Europe Other foreign...... countries Long-lived assets Long-lived United States ...... Europe products and services. and other health care professionals, and hospitals. In 2008, our three largest wholesalers each accounted for between percent percent and 12 of consolidated 16 net sales. they Further, each accounted for between per- 10 percentcent and of accounts 15 receivable as of December 2008. 31, Animal health products are sold primarily to wholesale distributors. formance is evaluated based on profi individual segments are substantially the same as those described in the summary of signifi cies in Note 1 to the consolidated fi was approximately million, million, $192 $173 and million $184 in 2008, 2007, and 2006, respectively. Long-lived assets disclosed above consist of property and equipment and certain sundry assets. cals category includes anti-infectives, primarily Ceclor Net sales ...... FINANCIALS o 2.1 39 4.1 47.81 57.18 .47 45.61 53.06 .97 .47 43.92 49.25 .88 29.91 .47 43.69 . (.43) Low .47 . . High. prices closing stock Common (3.31) . share. per paid Dividends . diluted. and share—basic per (loss) Earnings 34 51.63 54.99 54.39 .425 .47 60.56 54.09 .425 58.44 .61 49.09 1 .425 123.0 59.47 508.7 exchanges. stock Swiss and London, York, New the on listed is stock common Our .85 (38.3) 719.4 . Low 663.6 .425 — . High. 328.5 (1.8) 926.7 .78 prices closing stock Common 926.3 328.1 81.3 . . share. per paid Dividends (49.8) 1,178.4 922.5 2,171.0 854.4 . diluted. and –basic share per Earnings — 1,052.3 98.2 (32.1) 2,379.1 998.9 income Net . . taxes. income before Income $4,22 2,322.3 89.0 (income) . expense . Other—net, charges special 1,054.6 $4,631.0 other and 2,709.4 restructuring, impairments, Asset $4,586.8 . development. and 1,272.8 research in-process Acquired First . expenses. Operating $5,189.6 . ofsales Cost . sales Net Second (20.3) 145.7 (32.3) Third 1,056.3 87.0 88.9 1,206.3 (2.5) 35.0 1,659.4 Fourth (232.8) 2,427.6 1,111.3 81.2 80.0 2008 2,651.6 (3,337.4) 28.0 1,200.9 (loss) income Net . taxes income before (loss) Income $4,80 2,602.2 1,155.2 (income) . expense . Other—net, charges special $5,150.4 4,685.4 other and 2,785.9 restructuring, impairments, Asset 915.4 $5,209.5 . development. and research in-process Acquired . expenses. Operating $5,210.5 . ofsales Cost . sales Net data) per-share except millions, in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Selected QuarterlyData(unaudited) We incurred tax expense of $764.3 million in 2008, despite having a loss before income taxes of $1.31 billion. Our net loss was loss net Our $1.31 of billion. taxes income before aloss having despite 2008, in million $764.3 of expense tax We incurred crete income tax benefi t of $210.3 million in the fi rst quarter for the resolution of the IRS audit. IRS the of a dis- resolution as fi the the in well for benefi as tax quarter, million quarter income $210.3 t of crete rst fourth the in acquisition ImClone the with associated expense tax recorded we addition, In settlem deductible. was investigation Zyprexa the of aportion only and deductible, tax not was charge IPR&D The quarter. third settle the in recorded investigation Zyprexa billion $1.48 the and quarter fourth the in ImClone for charge IPR&D acquired billion $4.69 the by 1 ...... 3694 (6.) 5. 1,064.3 958.8 (465.6) (3,629.4) . . 07Fut Tid eod First Second Third Fourth 2007 ments driven driven ents ents 6.1 7.6 FINANCIALS 35 500 S&P S&P 1.8 mil- driven by 1,810.1 Peer Peer 1 Group Date Lilly 12/07 $ 84.76 $111.60 $141.99 12/05 $ 84.62 $ 96.99 $116.28 12/06 $ 80.20 $109.85 $134.61 12/08 $ 66.63 $ 93.90 $ 89.54 12/03 $100.00 $100.00 $100.0012/04 $ 82.53 $ 96.91 $110.85 2006 2005 2004 2005 2006 2 24.3% 24.8% 24.3%18.5% 17.8% 12.1%11.1% 8.2% 7.8% 23.8% 22.1% 26.3% 38.5% 26.3% 22.1% 23.8% 926.1 707.4 707.4 926.1 931.1 716.8 3 $ 459,000 $378,000 $344,000 $378,000 $311,000 459,000 $ 40,600 41,500 42,600 44,500 42,600 41,500 40,600 $18,633.5$15,691.0 $14,645.3 $13,857.9 3,546.5 4,248.8 3,223.93,474.2 3,486.7 3,129.3 3,025.5 3,486.7 3,129.3 2,691.1 4,284.2 4,889.8 4,497.0 6,095.1 41,700 44,800 50,800 52,400 50,800 44,800 41,700 15.8% 17.0% 13.5% 13.1% 13.5% 17.0% 15.8% 3,876.8 3,418.0 3,418.0 2,941.9 3,876.8 2,717.5 2.71 2.45 1.81 1.66 2.45 1.81 2.71 923.8 755.3 715.9 1,131.8 755.3 923.8 715.9 1.75 1.631.451.54 1.75 1,090,7501,087,490 1,092,1501,088,936 2,953.0 2,662.7 2,662.7 1,979.6 2,953.0 $12,316.1 $ 9,753.6$10,855.0$12,895.0 $12,316.1$ 5,254.0 5,436.85,884.8 7,762.2 7,550.9 8,152.3 7,912.5 8,575.1 26,874.8 22,042.4 24,667.8 24,954.0 22,042.4 24,667.8 26,874.8 3,494.4 4,593.5 5,763.5 4,491.9 10,820.2 13,503.9 10,631.410,759.4 1,047.9 1,047.9 801.8 726.4 597.5 4 NM NM 1.90 (7.5)% 764.3 (1.89) (16.3)% 39,800 40,450 1,122.6 4,615.7 6,735.3 3,840.9 8,626.3 6,626.4 4,382.8 6,835.5 13,109.7 29,212.6 (1,307.6) (2,071.9) 1,094,499 $ 947.2 $ 1,082.4 $ 1,077.8 $ 1,298.1 $ 1,898.1 $12,453.3 $ 504,000 $ $20,378.0 12/03 12/04 12/05 12/06 12/07 12/08

$90 $80 $70 $60 $150 $140 $130 $120 $110 $100 Peer Group Peer S&P 500 Lilly Lilly ects the ICOS acquisition, effective January 2007. 29, See Note 3 for additional information. ects the impact of a cumulative effect of a change in accounting principle in 2005 of $22.0 million, net of income taxes of $1 Value of $100 Invested on Last Business Day of 2003 Comparison of Five-Year Cumulative Total Return Among Lilly, S&P 500 Stock Index, and Peer Group* This graph compares the return on Lilly stock with that of the This graph compares the return on Lilly stock Index and our peer group* for the years 500 Stock Standard & Poor’s 2004 through 2008. The graph assumes that, on December 31, 2003, Index, the S&P 500 Stock in Lilly stock, $100 each a person invested The graph measures total common stock. and the peer group’s price and into account both stock takes shareholder return, which are a company It assumes that dividends paid by dividends. stock. in that company’s reinvested constructed the peer group as the industry index for this graph. *We It comprises the nine companies in the pharmaceutical industry that officers: 2008 compensation of executive used to benchmark we Squibb Company; Abbott Laboratories; Amgen Inc.; Bristol-Myers Inc.; Pfizer & Co., Merck & Johnson; GlaxoSmithKline Plc; Johnson Corporation; and Wyeth. Inc.; Schering-Plough We incurred tax expense of $764.3 million in 2008, despite having a loss before income taxes billion. of $1.31 Our net loss was $1.48 billion associated with the Zyprexa investigation settlements. the $4.69 billion acquired IPR&D charge for ImClone and the $1.48 billion Zyprexa investigation settlements.tax deductible, The and IPR&D only a portion charge was of not the Zyprexa investigation settlements was deductible.ated with In addition, the ImClone acquisition, we recorded tax as well expense as a discrete associ-t of $210.3 income million tax benefi for the resolution of the IRS audit. lion. The diluted earnings per share impact of this cumulative effect of a change in accounting principlediluted share was before $.02. the cumulative The net income per effect of a change in accounting principle was $1.83. Refl The increase refl ectsThe increase the in-process refl research and development expense of $4.69 billion associated with the ImClone acquisition and Refl Net sales per employee...... Number of employees ...... Number of shareholders ...... of record Net income as a percent of sales ...... 4 2 3 NM—Not Meaningful NM—Not 1 Income (loss) beforeincome taxes and cumulative Operations Net sales...... Selected Financial Data (unaudited) Data Financial Selected ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except net sales per employee and per-share data) 2008 2007 Cost of sales ...... Research and development ...... Marketing, selling,...... and administrative ...... Other ...... effect a change of in accounting principle Net income (loss) per share—diluted ...... Income taxes...... Dividends declared pershare...... Net income (loss) ...... Weighted-average shares of number outstanding—diluted (thousands) ...... Position Financial ...... Current assets Current liabilities...... Property and equipment—net ...... assets.Total ...... Long-term ...... debt Shareholders’ equity ...... Supplementary Data Return ...... on shareholders’ equity Return ...... on assets Capital expenditures ...... Capital expenditures Depreciation and amortization...... Effective ...... tax rate FINANCIALS replacement cost. Inventories at December 31 consisted of the following: ofthe 31 consisted December at Inventories cost. replacement fi the by valued are inventories Other inventories. total ofour percent 45 approximately or States, United continental inthe located inventories ofour majority the Inventories: Inventories: fi inthe paid tobe expected is which acquisition, ImClone the with assumed debt tothe related million of$339.0 cash restricted is 31, 2008, December at alents equiv- incash Included value. fair approximates investments ofthese cost The equivalents. cash tobe of purchase date the from less or months ofthree amaturity Cash with equivalents: investments liquid highly all We consider shares. incremental other and options stock ofdilutive effect the plus shares common ofoutstanding number weighted-average the on based Investments: Investments: . cost toLIFO Reduction 36 basis. aquarterly on derivatives ofour effectiveness and correlation the reviews fl acash or hedge value afair either as individually instruments the designate we initiated, are contracts derivative As hedged. being transactions and liabilities, assets, the on gains and losses offset tracts con- derivative on losses and gains because risk additional create not do and policies risk-management porate Risk-management instruments: . supplies and materials Raw . inprocess Work . products Finished eliminated. been have transactions and balances intercompany All liabilities. rent refl are interests shareholders’ outside the percent, 100 than less is subsidiaries solidated fi consolidated inthe included are subsidiaries majority-owned and owned wholly ofall accounts The (GAAP). States United inthe accepted generally practices accounting with T presentation: of Basis Signifi of 1:Note Summary data) per-share except millions, in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Notes toConsolidatedFinancial Statements losses reported in other—net. We own no investments that are considered to be trading securities. trading tobe considered are that investments no We own inother—net. reported losses nifi sig- have we which over incompanies Investments value. infair declines other-than-temporary any for adjusted cost specifi upon based computed are securities ofavailable-for-sale sales on losses and gains Realized basis. aregular on ofimpairment indicators for investments these We review ofimpairment. indicator an is fi the and depressed, been has value the oftime issuer, ofthe length the prospects near-term indevelopment, ofprojects status company-specifi include evaluation this inmaking consider we Factors earnings. in recognized are other-than-temporary tobe considered losses Unrealized income. comprehensive inother reported oftax, net losses, and gains unrealized the with value fair at carried are securities Available-for-sale able-for-sale. to market with gains and losses recognized currently in income to offset the respective losses and gains recognized recognized gains and losses respective the tooffset inincome currently recognized losses and gains with to market estimates. those from differ could results Actual period. fi ofthe date the reporting the during and statements nancial at disclosures related and expenses, revenues, liabilities, ofassets, amounts reported the affect that assumptions cant infl For derivative contracts that are designated and qualify as fair value hedges, the derivative instrument is marked marked is instrument derivative the hedges, value fair as qualify and designated are that contracts derivative For is, that basis, adiluted on presented are footnotes, inthe noted otherwise unless amounts, per-share All offi preparation The . . . . nancial condition of the industry. We do not evaluate cost-method investments for impairment unless there there unless impairment for investments cost-method evaluate We not do industry. ofthe condition nancial uence but not a controlling interest are accounted for using the equity method with our share of earnings or or ofearnings share our with method equity the using for accounted are interest acontrolling not but uence We state all inventories at the lower of cost or market. We use the last-in, fi last-in, the We use market. or ofcost lower the at inventories all We state Substantially all of our investments in debt and marketable equity securities are classifi are securities equity marketable and indebt investments ofour all Substantially nancial statements in conformity with GAAP requires management to make estimates and and estimates tomake management requires GAAP with inconformity statements nancial he accompanying consolidated fi consolidated accompanying he cant Accounting Policies Policies Accounting cant Our derivative activities are initiated within the guidelines of documented cor- ofdocumented guidelines the within initiated are activities derivative Our rst quarter of2009. quarter rst rst-in, fi rst-in, nancial statements have been prepared in accordance have prepared been nancial statements rst-out (FIFO) method. FIFO cost approximates current current approximates cost FIFO method. (FIFO) rst-out nancial statements. Where our ownership ofcon- ownership our Where statements. nancial

,493.2 664.4 2007 2008 $653.4 $ 771.0 $2 2, 1,657.1 (171.2) 236.3 c drivers of the decrease in fair value, value, infair decrease ofthe c drivers 1,803.0 202.7 $2,523.7 2,659.1 (135.4) c identifi rst-out (LIFO) method for for method (LIFO) rst-out ow hedge. Management Management hedge. ow ected in other noncur- inother ected cation of the initial oftheinitial cation ed as avail- FINANCIALS 37 xed- rm rm ow hedg- ow uctuations uctuating currency uctuating ow hedges, the years succeeding ve (38.0) (162.6) 1,767.5 142.8 104.8 1,604.9 $2,455.4 (45.4) 197.8 243.2 (346.6) 3,035.4 2,688.8 $4,054.1 $ 1,167.5 $ 745.7 xed rate are designated as cash fl uctuations in interest rates. These fl 2008 2008 2007 nancial instruments. The objective of controlling oating rate debt and investment positions and may enter xed and fl cant impairments occurred with respect to the carrying value of our uctuations in interest rates on earnings. Our primary interest rate risk exposure oating rate debt or investments to a fi Goodwill is not amortized. All other intangibles arising from acquisitions and oating rate are designated as fair value hedges of the underlying instruments. Interest Property and equipment is stated on the basis of cost. Provisions for depreciation of nite lives and are amortized over their estimated useful lives, ranging from 5 to 20 years, ow hedges of those future transactions and the impact on earnings is included in cost nancing, investing, and operating. address We a portion of these risks through a controlled ed earnings into in the same period the hedged transaction affects earnings. Hedge ineffectiveness Goodwill and other intangible assets at December were 31 as follows: Goodwill and net other intangibles are reviewed to assess recoverability at least annually and when certain In the normal course of business, our operations are exposed to fl We mayWe enterinto foreign currency forward and option contracts to reduce the effect of fl rate swaps or collars that convert fl can vary the costs fi of program of risk management that includes the use of derivative fi these risks is to limit the impact of fl results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fi into interest rate swaps or collars to help maintain that balance. Interest rate swaps or collars that convert our fi rate debt or investments to a fl es. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements. Goodwill...... approximates $280 million before tax, Substantially per year. all of the amortization expense is included in cost of sales. See Note 3 for further discussion of goodwill and other intangibles acquiredin 2008 and 2007. Developed product technology—gross ...... Less accumulated amortization...... Goodwill and other intangibles: using the straight-line method. The weighted-average amortization period for developed product technology is approximately years. 12 Amortization expense for 2008, 2007, and 2006 was million, $193.4 million, $172.8 and million before$7.6 tax, respectively. The estimated amortization expense for each of the fi research alliances have fi is immediately recognized in earnings. Derivative contracts that are not designated as hedging instruments are recorded at fair value with the gain or lossrecognized in current earnings during the period of change. effective portion gains of and losses on these contracts is reported as a component of other comprehensive income and reclassifi Less accumulated amortization...... Other intangibles—net ...... on the underlying exposure. For derivative contracts that are designated and qualify as cash fl buildings and equipment are computed generally by the straight-line method at rates based on their estimated useful to 50 lives years for (12 buildings years and 3 to 18 for equipment). review We the carrying value of long-lived assets for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the Property equipment: and ...... intangibles—netTotal impairment indicators are present. No signifi goodwill or other intangible assets in 2008, 2007, or 2006. exchange rates (principally the euro, the British pound, and the Japanese yen). Foreign currency derivatives usedfor hedging are put in place using the same or like currencies and duration as the underlying exposures. Forward contracts are principally used to manage exposures arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. These contracts are recorded at fair value with the gain or loss recognized in other—net. The purchased option contracts are used to hedge anticipated foreign currency transactions, primarily intercompany inventory activities expected to occur within the These next year. contracts are designated as cash fl of sales. may We enter into foreign currency forward contracts and currency swapsas fair value hedges of fi commitments. Forward and option contracts generally have maturities months. not exceeding 12 Developed product ...... technology—net Other intangibles—gross ...... FINANCIALS the research and development process that have not yet received regulatory approval for marketing and for which which for and marketing for approval regulatory received yet not have that process development and research the andAcquired development: research sales. innet included is revenue royalty This assured. reasonably is funds ofthe collection and measured reasonably be can sales third-party when terms contract the with in accordance earned as recorded inother—net. recorded generally are us by earned payments Milestone product. pharmaceutical ofthe cycle life development inthe point important an represents and determinable, objectively substantive, is event the if event milestone ofthe achievement the upon tous due payments milestone of amount full the recognize We immediately agreement. supply ofthe term the over sales net as recognized ally gener- are products the tosupply commitment arelated and products commercialized toour rights of marketing sale the both include that agreements out-licensing from received fees Initial date. approval product expected the through amortized are development under compounds ofour partnering the from receive we fees Initial perform. we calls ofsales number the applicable, if and, partners co-promotion our by reported sales net upon based recorded. are sales related the period same inthe established are rebates and discounts, returns, for Provisions ofdelivery. point the at recorded are sales ing remain- The chain. retail amajor or distributor awholesale customer, tothe typically shipped are products time the at is this sales, ofour percent 90 than more For ofownership. rewards and risks the assumes buyer the and buyer tothe passes ofgoods title time the at ofproducts sales from revenue We recognize recognition: Revenue losses. liability product future for self-insured completely are we products, marketed currently ofour all substantially However, for carriers. insurance the among ofinsolvencies level future projected and existing the and carriers, the by raised be might that tocoverage defenses ofany assessment our limits, age cover- deductibles, existing on based recoverables insurance We estimate ofincome. statement the on charges classifi are receivables These realized. be will they probable is it when recoveries insurance-related for receivables We record insurance. by covered is suits ofthese disposing and defending with associated costs ofthe Aportion estimable. reasonably and probable when accrued are contingencies loss liability signifi with inconnection incurred tobe expected costs defense Legal usage. product regarding data and experience claims historical on primarily based expenses these We estimate costs. oftheir estimate able fi not but incurred claims liability product certain for We accrue us. to available information the on based estimable and probable both are they extent tothe exposures estimated our for accrued have we us, against asserted currently claims liability product to the respect With sheets. balance refl are recoverables insurance Litigation andliabilities: environmental material. not are commitments rental minimum future and into, entered obligations lease capital sheets, balance consolidated inthe equipment and inproperty included leases capital under Assets respectively. 2006, 2007, and 2008, for million $293.6 and million, $294.2 million, $327.4 toapproximately amounted material), (not rentals gent contin- including leases, all for expense Total rental respectively. 2006, 2007, and in2008, equipment and property of part as capitalized were costs $106.7 ofinterest and million million, $95.3 million, $48.2 Approximately tively. . depreciation for allowances Less 38 . inprogress Construction . Equipment. . Buildings Land . . cash fl undiscounted projected comparing by determined is Impairment recoverable. be not may asset ofan value carrying to the excess of the asset’s net book value over its fair value, and the cost basis is adjusted. is basis cost the and value, fair its over value book net asset’s ofthe excess to the . Royalty revenue from licensees, which are based on third-party sales of licensed products and technology, are are technology, and products oflicensed sales third-party on based are which licensees, from revenue Royalty is services co-promotion from Revenue agreements. ofcollaboration aresult as income generate We also respec- million, $627.4 and million, $682.3 $731.7 was million, 2006 and 2007, 2008, for expense Depreciation At December 31, property and equipment consisted of the following: ofthe consisted equipment and 31, property December At . ows to be generated by the asset to its carrying value. If an impairment is identifi is impairment an If value. carrying toits asset the by generated tobe ows ected on a gross basis as liabilities and assets, respectively, on our consolidated consolidated our on respectively, assets, and liabilities as basis agross on ected We recognize as incurred the cost of directly acquiring assets to be used in used tobe assets acquiring of directly cost the incurred as We recognize Litigation accruals and environmental liabilities and the related estimated estimated related the and liabilities environmental and accruals Litigation led to the extent we can formulate areason- formulate can we extent tothe led

8,626.3 ,315.9 20 2007 2008

$ $180.0 $ 219.0 15 (6,689.6) 8,045.2 1,098.3 5,953.4 ed as a reduction of the litigation litigation ofthe areduction as ed 14,841.3 $ 8,575.1 1,662.7 7,454.9 5,543.7 (6,266.2) ed, a loss is recorded equal equal recorded is aloss ed, cant product cant product FINANCIALS t 39 nancial nancial ows. This This ows. (11.0) (11.0) (96.3) (215.3) (215.3) (261.9) $ 228.3 $ 238.1 (124.0)(117.7) $(122.0) $(237.8) $(122.0)6.1 8.5 (210.7) $228.3 $ 2 2008 2008 2007 2006

ted. Milestones paid prior to regulatory approval of the nancial position, results of operations, and cash fl ed. Once the product has obtained regulatory approval, we capitalize the cations have been made to the December 2007 31, and 2006 consolidated t from an uncertain tax position only if it is more likely than not that the tax posi- nancial statements from such a position are measured based on the largest benefi We recognizeWe the fair value of stock-based compensation as expense over the requi- Certain reclassifi Deferred taxes are recognized for the future tax effects of temporary differences between fi Other—net consisted of the following: cations: cations: ts recognized in the fi ...... The joint venture income represents our share of the Lilly ICOS LLC joint venture results of operations, net of We adoptedWe the provisions of Emerging Issues Force (EITF) Task Issue No. 07-3 (EITF Accounting 07-3), for We recognizeWe the tax benefi erivative Instruments and Hedging Activities, an amendment SFAS of FASB 161 Statement No. 133 (SFAS 161). nancial statements and accompanying notes to conform with the December 2008 31, presentation. applies all to derivative instruments and related hedged items accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement requires entities to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s fi Other—net: Other—net: milestones paid and amortize them over the period benefi product are generally expensed when theevent requiring payment of the milestone occurs. Interest expense...... no alternative future use has been identifi Joint venture income ...... Other — Interest ...... income Income taxes: income taxes. acquired We the outstanding ownership of the joint venture in January 2007 as a result of our acquisition ICOS. of See Note 3 for further discussion. Statement is effective for us January 2009. 1, Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities, on January 2008. 1, Pursuant to EITF 07-3, nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense when the related goods are delivered or services are performed, or when the goods or services are no longer expected to be received. This Issue is to be applied prospectively for In March 2008, the Financial AccountingStandards Board Disclosures (FASB) issued about Statement No. 161, D Note 2: Implementation of New Financial Accounting Pronouncements Accounting Financial New Implementation of 2: Note fi Stock-based compensation: compensation: Stock-based Earnings per share: calculate We basic earnings per share based on the weighted-average number of outstanding common shares and incremental shares. calculate We diluted earnings per share based on the weighted-average number of outstanding common shares plus the effect of dilutive stock options and other incremental shares. See for furtherNote 11 discussion. Reclassifi that has a greater than 50 percent likelihood of being realized upon ultimate resolution. site service period of the individual grantees, which generally equals the vesting period. Under our policy all stock- based awards are approved prior to the date of grant. The Compensation Committee of the Board Directors of approves the value of the award and date of grant. Stock-based compensation that is awarded as part of our annual c grantequity date scheduled grant in advance. is made on a specifi and income tax reporting based on enacted tax laws and rates. Federal income taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable. tion will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefi FINANCIALS n combi- business as for accounted were acquisitions These businesses. several acquired we 2007, and 2008 During Note 3: Acquisitions Interpretation. this ofadopting impact ofthe discussion further 12 Note for See return. inatax taken tobe expected or taken position ofatax measurement and recognition ment fi the for attribute measurement and threshold arecognition prescribes 1, 48 2007. FIN January on fi consolidated toour material be not will Issue ofthis implementation The date. effective ofthe as existing arrangements collaborative all for presented periods prior toall retrospectively applied be will and 1, 2009 January beginning us for effective is Issue This parties. third and arrangement the in participants between and arrangement inacollaborative participants between transactions for requirements 07-1 EITF defi Arrangements. Collaborative for ing fi consolidated toour material be will implementation the anticipate not do 1, we and 2009, January us for effective is Statement This deconsolidated. is asubsidiary when parent the by recognized be will loss or again while actions, trans- equity as treated be will indeconsolidation result not do that inasubsidiary interest ownership in aparent’s clarifi also Statement This required. be will interest noncontrolling the fi solidated con- inits equity as inasubsidiary interest anoncontrolling toreport companies 51), requiring (ARB by Statements Financial 51, No. Bulletin Consolidated Research Accounting amends Statement This Interests. Noncontrolling 1, 2009. January after or on is date acquisition the which for combinations business for us for effective is Statement This circumstances. the on depending capital, incontributed directly or combination of the period inthe operations continuing from inincome either combination ofabusiness because recognizable are that benefi tax deferred ofits amount inthe changes torecognize acquirer the torequire Statement this by amended also Taxes, 109, No. was Income for SFAS Accounting goodwill. from separately values, fair acquisition-date their at combination inabusiness acquired assets development and ofresearch capitalization the requires now and Method, Purchase the by for Accounted Combinations 2toBusiness No. Statement ofFASB Applicability 4, No. Statement signifi This defi the meet they that not than likely more is it if only value, fair acquisition-date their at measured tobe are date acquisition the of as contingencies other all from arising liabilities or assets and values, fair acquisition-date their at measured tobe are date acquisition ofthe as contingencies contractual from arising assumed liabilities and acquired Assets Statement). the with inaccordance determined amounts (or other values fair oftheir amounts full the at acquiree, identifi the torecognize instages achieved limited exceptions specifi with date, ofthat as values fair their at date, acquisition the at acquiree inthe interest noncontrolling any and assumed, liabilities acquired, assets tomeasure combination inabusiness acquirer an require Statement to this revisions 141. SFAS with primary inaccordance The applied is method 141(R)SFAS acquisition the how changes 40 approval regulatory achieved yet not had that development under extensions line or indications, new compounds, fi consolidated in our included are acquisitions ofthese ofoperations results The goodwill. as recorded been has applicable, where assets, net acquired of the value fair the over price purchase ofthe excess The assumptions. and mates fi consolidated inour date acquisition ofthe as values fair respective their at recorded were assumed liabilities and fi consolidated toour material not was Statement ofthis implementation The measurements. value fair about sures 157 defi SFAS 2008. date. effective the after or intoon entered contracts nancial position or results of operations. ofoperations. results or position nancial nancial statements. The determination of estimated fair value required management to make signifi tomake management required value fair of estimated determination The statements. nancial ofoperations. results or position nancial ations under the purchase method of accounting. Under the purchase method of accounting, the assets acquired acquired assets the ofaccounting, method purchase the Under ofaccounting. method purchase the under ations In December 2007, the FASB ratifi FASB 2007, the In December We adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, inIncome Uncertainty for Accounting 48, (FIN) No. Interpretation ofFASB provisions the We adopted for 160, No. 141(R),Accounting Statement SFAS with issued FASB the 2007, inconjunction In December 141(R)). (SFAS 141, No. Statement Combinations issued and Business revised FASB 2007, the In December Most of these acquisitions included in-process research and development (IPR&D), which represented represented (IPR&D), which development and research in-process included acquisitions ofthese Most 1, January on Measurements, 157), Fair Value 157 No. (SFAS Statement ofFASB provisions the We adopted nancial statements. Disclosure of the amounts of consolidated net income attributable to the parent and and parent tothe attributable income net ofconsolidated amounts ofthe Disclosure statements. nancial nition of an asset or a liability in FASB Concepts Statement No. 6, Elements of Financial Statements. Statements. ofFinancial Elements 6, No. Statement Concepts inFASB aliability or asset ofan nition nancial statements from the date of acquisition. ofacquisition. date the from statements nancial nes fair value, establishes a framework for measuring fair value in GAAP, and expands disclo- expands and inGAAP, value fair measuring for aframework establishes value, fair nes cantly amends other Statements and authoritative guidance, including FASB Interpretation Interpretation FASB including guidance, authoritative and Statements other amends cantly ed in the Statement. This Statement also requires the acquirer in a business combination combination inabusiness acquirer the requires also Statement This Statement. inthe ed ed the consensus reached by the EITF on Issue No. 07-1 No. 07-1), Issue on (EITF EITF the by reached Account- consensus the ed able assets and liabilities, as well as the noncontrolling interest in the inthe interest noncontrolling the as well as liabilities, and assets able nes collaborative arrangements and establishes reporting reporting establishes and arrangements collaborative nes es that transactions that result in a change inachange result that transactions that es nancial position or results of operations. of operations. results or position nancial nancial state- cant esti- ts FINANCIALS 41 xpands our bio- cant portion percent) (81 of the remaining value ows are then discounted to the present value using nal determination may result in asset and liability fair cant portion of these net assets. The purchase price has nancial results. nancial ...... 1,057.9 1 Estimated Fair Value at November 24, 2008 nancial information presents the combined results of our operations with ows that are derived from projected sales revenues and estimated costs. These projec- In addition to the acquisitions of businesses, we also acquired several products in development. The acquired All of the estimated fair value of the acquired IPR&D is attributable to oncology-related products in develop- The acquisition has been accounted foras a business combination under the purchase method of accounting, tical company focused on advancing oncology care, for a total purchase price of approximately $6.5 billion, u This intangible asset will be amortized on a straight-line basis through 2023 in the U.S. and 2018 in the rest of the world. 1 Cash and short-term investments...... Inventories ...... Developed product technology (Erbitux) $ 982.9 136.2 which was fi nanced through borrowings.which was This strategic fi combination will offer both targeted therapies and oncolytic agents along with a pipeline spanning all phases of clinical development. The combinationalso e ImClone Acquisition On November 24, 2008, we acquired all of the outstanding shares of ImClone Systems Inc. (ImClone), a biopharma- ce an appropriate discount rate. This analysis is performed for each project independently.In accordance with FIN 4, Applicability of FASB Statement No. to Business 2 Combinations Accounted for by the Purchase Method, these acquired IPR&D intangible assets totaling $4.71 billion and $340.5 million in 2008 and 2007, respectively, were expensed immediately subsequent to the acquisition because the products had no alternative future use. The ongoing activities with respect to each of these products in development are not material to our research and development expenses. IPR&D related to these products million of $122.0 and $405.1 million in 2008and 2007,respectively, was also written off by a charge to income immediately upon acquisition because the products had no alternative future use. for marketing. There areseveral methods that can be used to determine the estimated fair value of the IPR&D acquireda business in combination. utilized We the “income which method,” appliesprobability a weighting the to estimated future net cash fl tions are based on factors such as relevant market size, patent protection, historical pricing of similar products, and expected industry trends. The estimated future net cash fl ment, including billion $1.33 to line extensions for Erbitux. A signifi Pro Forma Financial Information The following unaudited pro forma fi of acquired IPR&D is attributable to two compounds in Phase III clinical testing and one compound in Phase II clinical testing, all targeted to treat various forms of cancers. The discount rate we used in valuing the acquired IPR&D projects was percent, 13.5 and the charge for acquired IPR&D of $4.69 billion recorded in the fourth quarter of 2008, was not deductible for tax purposes. Goodwill ...... Property and equipment ...... Debt assumed...... Deferred taxes 419.5 Deferred ...... income 339.8 Other assets (600.0) and liabilities—net ...... (315.0) Acquired in-process research and development...... (127.7) purchase Total price ...... (72.1) 4,685.4 $6,506.9 Allocation of Purchase Price areWe currently determining the fair values of a signifi technology capabilities. resulting million. in goodwill No portion of $419.5 of this goodwill is expected to be deductible for tax purposes. been preliminarily allocated based on an estimate of the fair value of assets acquired and liabilities assumed as nal determination of theseof the date fair of acquisition. values The will fi be completed as soon as possible but no later than one year from the acquisition date. Although the fi values that are different than the preliminary estimates of these amounts included herein, it is not expected that those differences will be material to our fi FINANCIALS ai n iue...... diluted. and Basic share: per Earnings aggregate purchase price, including transaction costs, of $66.8 million. million. of$66.8 costs, transaction including price, purchase aggregate an for redeemed were stock common ofSGX shares outstanding the agreement, ofthe terms the Under targets. ofkinase anumber on focused compounds oncology ofpreclinical toaportfolio and technology, discovery drug s product’s the as well as Posilac, supplement cow dairy tothe rights worldwide the acquired we 1, 2008, October On Posilac • certain reclassifi the reduction ofImClone’s• income tax expense to provide for income taxes atthestatutory tax rate andthe the adjustment to increase interest• expense related to thedebtincurred to finance theacquisition andthe the increase ofamortizationexpense of$78.8millionin2008and2007related• to the estimated fair value of a reduction oftheamortizationImClone’s• deferred income of$86.2 million(2008)and$98.4(2007); 42 toFAST access us gives also It efforts. discovery drug into our o acollab- (SGX), Inc. Pharmaceuticals, ofSGX stock common outstanding ofthe all acquired we 2008, 20, August On Inc. Pharmaceuticals, SGX purposes. tax for deductible is acquired assets intangible ofthe toeach allocated amount The years. 20 identifi ofthe all stantially Sub- $67.5 ofliabilities. million assumed We also equipment. and toproperty price purchase ofthe $99.5 million toidentifi million $204.3 We allocated doubt. areasonable beyond likely considered is payment which for sales Posilac future estimated on based toMonsanto consideration contingent for accrual an and costs, transaction payment, upfront million a$300.0 includes which million, of$403.9 price chase pur- aggregate an for facility, manufacturing and force sales U.S. product’s the as well as brand, Posilac to the rights the acquired we agreement, ofthe terms the Under business. health animal ofour those complements that 1 company. combined ofour ofoperations results future the toproject attempt fi forma pro unaudited the year. ofeach Inaddition, beginning the at acquisition the completed we had been have would actually ofoperations results consolidated our ofwhat indicative necessarily fi forma pro unaudited The acquisition. tothe attributable directly are that events fi consolidated historical the adjusted We have presented. years fi the and acquisition the if as ImClone Net income e ae . sales Net IPR&D charge of $28.0 million was recorded in the third quarter of 2008 and was not deductible for tax purposes. purposes. tax for deductible not was and of2008 quarter third inthe recorded was million of$28.0 charge IPR&D acquired The IPR&D. to acquired million $28.0 and assets tax todeferred price purchase ofthe $29.6 million allocated The unaudited pro forma fi nancial information above excludes the non-recurring charge incurred for acquired IPR&D of $4.69 billion billion $4.69 of IPR&D acquired for incurred charge non-recurring the excludes above fi forma pro information nancial unaudited The and other merger-related costs. costs. merger-related other and upporting operations, from Monsanto Company (Monsanto). The acquisition of Posilac provides us with a product aproduct with us provides ofPosilac acquisition The (Monsanto). Company Monsanto from operations, upporting ration partner since 2003. The acquisition allows us to integrate SGX’s structure-guided drug discovery platform platform discovery drug structure-guided SGX’s tointegrate us allows acquisition The 2003. since partner ration (e.g., ImClone’s license fees andmilestones were classified asother—net,rather thannetsales). $189.5 million(2007).Thisexcludes theacquired IPR&Dcharge of$4.69billion,whichwasnottax deductible; adjustment to income taxes for pro forma adjustments atthestatutory tax rate, totaling $139.3million(2008)and by atotal of$301.0millionin2008and2007; adjustment to decrease interest income related to thelost interest income onthecash usedto purchase ImClone acquisition wasnotmaterial; related to thechangeinestimated fair value ofproperty andequipmentfrom thebookvalue atthetimeof useful lives through 2023intheU.S.andthrough 2018 intherest oftheworld. Thechangeindepreciation expense identifiable intangible assets from thepurchase price allocation whichare beingamortizedover theirestimated The acquisition has been accounted for as a business combination under the purchase method of accounting. We ofaccounting. method purchase the under combination abusiness as for accounted been has acquisition The fi forma pro unaudited The This acquisition has been accounted for as a business combination under the purchase method of accounting. ofaccounting. method purchase the under combination abusiness as for accounted been has acquisition This 1 ...... cations to conform to accounting policiesandclassifications thatare consistent withourpractices able intangible assets are being amortized over their estimated remaining useful lives of lives useful remaining estimated their over amortized being are assets intangible able nancial information above refl above information nancial able intangible assets related to Posilac, $167.6 million to inventories, and $167.6 and toPosilac, toinventories, related million assets intangible able nancing for the acquisition had occurred as of the beginning of each of the ofthe ofeach beginning ofthe as occurred had acquisition the for nancing ects the following: the ects ™ nancial information to give effect to pro forma forma topro effect togive information nancial , SGX’s fragment-based, protein structure guided guided structure protein fragment-based, , SGX’s 20 2007 2008 $20,801.8 2,356.2 2.15 nancial information is not not is information nancial nancial information does not not does information nancial $19,051.4 2,704.1 2.48

FINANCIALS 43 cant por- cant ciencies in the further able intangible assets are cant asset. For this acquisi-

able intangible assets, primarily related to marketed rst quarter of 2007 was not deductible for tax purposes. Estimated Fair Value at January 29, 2007 ...... 1,659.9 1 t of net operating...... losses 404.1 nanced through borrowings. The acquisition of Hypnion provided us with a broader and more substantive presence in the area of sleep We determinedWe the following estimated fair values for the assets acquired and liabilities assumed as of the The acquisition has been accounted for as a business combination under the purchase method of accounting, The acquisition of Ivy provides us with products that complement those of our animal health business. This New indications for and formulations of the Cialis compound in clinical testing at the time of the acquisition e Lilly ICOS LLC jointventure for the manufacture and saleCialis of for the treatment of erectile dysfunction. harma) to acquire rights to its product and related drug delivery system for the treatment of osteoporosis. The rivately held neuroscience drug discovery company focused on sleep disorders, and Ivy Animal Health, Inc. (Ivy), This intangible asset will be amortized over the remaining expected patent lives of Cialis in each country; patent expiry dates range from 2015 to 2017. to 2015 from product, which is administered transdermally using proprietary TransPharma’s technology, was in Phase II clinical testing, and had no alternative future use. Under the arrangement, we also gained non-exclusive access to Trans- Pharma’s ViaDerm drug delivery system for the product. As with many development-phase products, launch of the Product Acquisitions In June 2008, we entered into a licensing and development agreement with TransPharma Medical Ltd. (Trans- P disorder research and ownership of HY10275, a novel Phase II compound with a dualmechanism of action aimed at promoting better sleep onset and sleep maintenance. This was Hypnion’s only signiﬁ tion, we recorded an acquired million, IPR&D charge which $291.1 of was not deductible for tax purposes. Because Hypnion was a development-stage company, the transaction was accounted for as an acquisition of assets rather than as a business combination and, therefore, goodwill was not recorded. Other Acquisitions Other During the second quarter of 2007, we acquired all of the outstanding stock of both Hypnion, Inc. (Hypnion), a p a privately held applied research and pharmaceutical product development company focused on the animal health industry, for $445.0 million in cash. date of acquisition. 1 resulting in goodwill $646.7 of million. No portion of this goodwill was deductible fortax purposes.

development, marketing, and selling of this product. The aggregate cash purchase price of approximately $2.3 billion was fi ICOS Corporation On January 2007, we acquired 29, all of the outstanding commonstock of ICOS Corporation (ICOS), our partner in th The acquisition brought the full value of Cialis us to and enabled us to realize operational effi being amortized over their estimated remaining useful lives to 20 years. of 10 The million $37.0 allocated to acquired IPR&D was charged to expense in the second quarter of 2007. Goodwill resulting from this acquisition was fully allocated to the animal health business segment. The amount allocated to each of the intangible assets acquired, including goodwill of $25.0 million and the acquired million, IPR&D of $37.0 was deductible for tax purposes. products, million $37.0 to acquired IPR&D, and $25.0 million to goodwill. The other identifi acquisition has been accounted for as a business combination under the purchase method of accounting. We allocated $88.7 million of the purchase price to other identifi tion of this value. The discount rate we used in valuing the acquired IPR&D projects was 20 percent, and the charge for acquired IPR&D of $303.5 million recorded in the fi represented approximately 48 percent of the estimated fair value of the acquired IPR&D. The remaining value of acquired IPR&D represented several other products in development, with no one asset comprising a signifi Tax benefi Tax Goodwill...... Long-term debt assumed ...... Deferred taxes Other assets and liabilities—net ...... 646.7 Acquired in-process research and development. (275.6) ...... (583.5) purchase Total price ...... (32.1) 303.5 $2,320.7 Cash and short-term investments...... Developed product technology (Cialis) $ 197.7 FINANCIALS a Collaborative candidates. drug commercialize and to develop arrangements intocollaborative enter We often Note 4: Collaborations commercialization. for approved be products these should sales on based of2007. quarter fourth inthe expense as included was and purposes tax for deductible was IPR&D acquired for million of$44.0 charge The term. near inthe expected not was approved, if product, ofthe launch compounds, development-phase many with As use. future alternative no had and 1diabetes) type recent-onset with individuals for trial clinical II/III (Phase stage development inthe was which molecule, tothe rights exclusive the acquired we arrangement, ofthe part As diseases. ofautoimmune treatment inthe use for molecules anti-CD3 generation next- potential other as well as antibody, monoclonal anti-CD3 ahumanized teplizumab, commercialize and suspended. been has compound ofthis of2007. Development quarter fourth inthe expense as included was and purposes tax for deductible was IPR&D acquired for million of$45.0 charge The term. near inthe expected not was approved, if product, ofthe launch compounds, development-phase many with As use. future alternative no had and pain, osteoarthritic including conditions, pain various for treatment next-generation apotential as development phase clinical inearly was compound The compound. a clinical-phase including molecules, antagonist 1(TRPV1) sub-family vanilloid potential receptor oftransient toaportfolio rights 44 ratio. toapredetermined according companies both by shared thresholds ofthe inexcess costs with ofBMS, bility responsi- sole the are amounts, uptothreshold costs, other and development and research Erbitux arrangement, this Under types. tumor inadditional use its explore tofurther Erbitux for plan development clinical ongoing the in investment the toexpand agreed jointly had companies The BMS. with inJapan Erbitux co-promoting and oping co-devel- is and BMS, with America inNorth Erbitux co-promoting and co-developing is ImClone toErbitux, relating BMS), (collectively, Squibb E.R. and Company Squibb Bristol-Myers with agreement toacommercial Pursuant Bristol-Myers Squibb Company tous. return Canada and U.S. inthe toErbitux respect with rights ofthe all which in2018, upon toexpire expected are agreements The KGaA). (Merck Canada and U.S. the except worldwide and Squibb); (Bristol-Myers Canada and Japan, U.S., the territories: fi to approved aproduct toErbitux, respect with collaborations intoseveral entered ImClone acquisition, toour Prior Erbitux signifi more our and nature in unique is collaboration Each party. third tothe payments or reimbursements expense as well as in development, profi or royalty and milestone require often collaborations These distribution. and manufacturing, detailing), physician purposes. tax for deductible is and of2008 quarter second inthe expense as included was arrangement this to related IPR&D acquired for million of$35.0 charge The term. near inthe expected not was approved, if product, research and development, for a portion of royalty expenses, and for a portion of marketing, selling, and adminis- and selling, ofmarketing, aportion for and expenses, ofroyalty aportion for development, and research for ofproduct supply for ImClone by received reimbursements Collaborative agreement. tothe pursuant determined fi inthe expense as included was arrangement to this related IPR&D acquired for million of$25.0 charge The term. near inthe expected not was approved, if product, of the launch compounds, development-phase many with As use. future alternative no had and trials) Iclinical (Phase stage development inthe was compound this agreement, ofthis inception the At 2diabetes. oftype treatment the for pound fi inthe expense as included was arrangement tothis related IPR&D acquired for of$87.0 million charge The term. near inthe expected not was approved, if product, ofthe launch compounds, development-phase many with As use. future alternative no had and trials) IIIclinical (Phase stage ment develop- inthe was compound this agreement, ofthis inception the At effective. became sclerosis ofmultiple ment

ctivities might include research and development, marketing and selling (including promotional activities and and activities promotional (including selling and marketing development, and research include might ctivities ght cancer, while still in its development phase. The most signifi most The phase. development inits still ght cancer, while t share payments, contingent upon the occurrence of certain future events linked to the success of the asset asset ofthe success tothe linked events future ofcertain occurrence the upon contingent payments, t share Responsibilities associated with clinical and other ongoing studies are apportioned between the parties as as parties the between apportioned are studies ongoing other and clinical with associated Responsibilities royalties and milestones tofuture entitled generally are partners our arrangements, these with In connection com- toits rights the toacquire Inc. Pharmaceuticals, OSI with agreement intoan entered we 2007, In January todevelop (MacroGenics) Inc. MacroGenics, with alliance strategic intoaglobal entered we 2007, In October the toacquire India Limited Pharmaceuticals Glenmark with agreement intoan entered we 2007, In October treat- the for compound toits rights the toacquire Corp. Medical BioMS with agreement our 2008, In January cant arrangements are discussed below. below. discussed are arrangements cant rst quarter of 2007 and was deductible for tax purposes. purposes. tax for deductible was and of2007 quarter rst rst quarter of 2008 and is deductible for tax purposes. purposes. tax for deductible is and of2008 quarter rst cant collaborations operate in these geographic geographic inthese operate collaborations cant FINANCIALS 45 ingredient (API) for clinical and commercial use in the territory, and BMS will purchase all of its require- bromyalgia, outside the U.S. Pursuant to the terms of the agreement, we generally share equally in develop- Collaborative reimbursements or payments for the cost sharing of marketing, selling, and administrative Under the terms of our collaboration with Amylin, we report as revenue our 50 percent share of gross margin Exenatide once weekly is presently in Phase III clinical trials and has not received regulatory approval. Amylin We areWe responsible for the manufacture and supply of all requirements of Erbitux in bulk-form active pharma- e aree a collaborative in arrangement with Boehringer Ingelheim to market (BI) and promote Cymbalta, a product g, and selling of Byetta and other forms of exenatide such as exenatide once weekly. Byetta (exenatide injection) ments of API for commercial use from us, subject to certain stipulations per the agreement. Sales of Erbituxto BMS for commercial use are reported in net sales. for the treatment of major depressive diabetic disorder, peripheral neuropathic pain, generalized anxiety disorder, and fi ment, marketing, and selling expenses, and pay BI a commission on sales in the co-promotional territories. We manufacture the product for all territories. expenses are recorded in the respective expense line items in the consolidated statement of operations. The commission paid to BI is recognized in marketing, selling, and administrative expenses. Cymbalta Boehringer Ingelheim W is presently approved as an adjunctive therapy to improve glycemic control in patients with type 2 diabetes who have not achieved adequate glycemic control using metformin, a sulfonylureaand/or a thiazolidinediene (U.S. only), three common oral therapies for type 2 diabetes. Lilly and Amylin are co-promoting exenatide in the U.S. Amylin is responsible for manufacturing and primarily utilizes third-party contract manufacturing organizations to supply Byetta. Lilly However, is manufacturing Byetta pen delivery devices for Amylin. Lilly is responsible for development and commercialization costs outside the U.S. on sales in the U.S., 100 percent of sales outside the U.S., and our sales of Byetta pen delivery devices to Amylin. recordedWe revenues million, of $396.1 $330.7 million million, in 2008, and $219.0 2007, and 2006, respectively, for Byetta. pay We Amylin a percentage the of gross margin of exenatide sales outside of the U.S., and these costs are recorded in cost of sales.t-sharing arrangement Under the 50/50 for the U.S., in addition profi to recording as revenue our 50 percent share gross of exenatide’s margin, we also report 50 percent of U.S. research and development costs, and marketing and selling coststhe in research and development and marketing, selling, and administrative line items, respectively, on the consolidated statements of income. is constructing and will operate a manufacturing facility for exenatide once weekly, and we have entered into a supply agreement in which Amylin will supply exenatide once weekly product to us for sales outside the U.S. The estimated total cost of the facility is approximately $550 million. In 2008, we million paid $125.0 to Amylin, which we will amortize to cost of sales over the estimated life of the supply agreement beginning with product launch. wouldWe be required to reimburse Amylin for a portion of any future impairment of this facility, recognized in accordance with GAAP. A portion million of the $125.0 payment we made to Amylin would be creditable against any amount we would owe as a result of impairment. have We also agreed to loan million up to $165.0 to Amylin at an indexed rate beginning December 2009, and any 1, borrowings have to be repaid by June 30, 2014. Exenatide areWe in a collaborative arrangement with Amylin Pharmaceuticals (Amylin) for the joint development, market- in Merck KGaA Merck A development and license agreement between ImClone and Merck KGaA (Merck) with respect to Erbitux granted Merck exclusive rights to market Erbitux outside of North America and co-exclusive rights with BMS in Japan. Merck alsohas rights manufacture to Erbitux for supply in its territory. manufacture We and provide a portion of Merck’s requirements for API; we also receive a royalty on the sales of Erbitux outsideof the U.S. and Canada, both of which are included in net sales as earned. Collaborative reimbursements received for supply of product for research and development, reimbursement of a portion of royalty expense, and marketing, selling, and administrative expenses are recorded as a reduction to the respective expense line items on the consolidated statement of operations. Royalty expense paid to third parties is included in cost of sales. trative expenses, are recorded as a reduction to the respective expense line items on the consolidated statement of operations. Royalty expense paid to third parties is included in costs sales. of receive We a distribution fee in the form of a royalty from BMS, based on a percentage of net sales the in U.S. andCanada, which is recorded in net sales. ceutical FINANCIALS Covance, a global drug development services fi services development drug aglobal Covance, Greenfi our We sold of$182.4 million. charges special other and restructuring, impairments, fl intoamore totransform efforts ofour part as and (i3), Statprobe i3 as business doing Inc., Services, Pharmaceutical Ingenix and (Quintiles), Corp. Transnational Quintiles (Covance), ofColumbia. District the and states 32 involving Zyprexa regarding investigation ofamulti-state tion resolu- the as well as ofPennsylvania, District Eastern the for Attorney U.S. the by led investigations Zyprexa the 46 fi the during paid be will costs ofthese all substantially that We anticipate periods. inprior made decisions strategic announced previously with inconnection charges cleanup environmental and toseverance related primarily million, of $44.9 charges other and use, future no have ofwhich all assets, ofimpaired down write the for of$35.1 million ments impair- asset non-cash include charge ofthis components primary The decisions. strategic announced previously of 2 quarter fourth inthe million of$80.0 charges special other and restructuring, impairment, asset We incurred Charges Other and Restructuring Related and Impairments Asset profi inthe share and territories co-promotion inthe marketing and development ofthe costs inthe share parties Both milestones. success future topay agreed and fee license upfront an D-S paid we agreement, ofthe terms tothe Pursuant territories. in other fi U.S., (the territories in certain trademark same the under toco-promote agreed have we arrangement, this Within decisions. their awaiting rently cur- are and (EMEA) Agency Medicines European and FDA tothe applications drug new submitted We have (PCI). intervention coronary percutaneous as known procedure artery-opening an with managed being are who (ACS) m pro- and market, (D-S) todevelop, Limited Company, Sankyo Daiichi with arrangement inacollaborative We are Prasugrel expenses. administrative and selling, inmarketing, recorded are toQuintiles paid royalties The efforts. promotion their post years three for sales net on rate alower pay will we and in2009, expires Cymbalta topromote obligation Quintiles’ agreement, current tothe According sales. net upon based apayment receives Quintiles In exchange, us. with Cymbalta toco-promote costs inthe shares Quintiles agreement, ofthe terms tothe Pursuant U.S. in the Cymbalta promote and tomarket (Quintiles) Corp. Transnational Quintiles with arrangement inacollaborative We are Quintiles In 2008, we entered into an agreement with an affi an with agreement intoan entered we In 2008, Capital TPG-Axon ofsales. incost recorded be will toD-S paid royalties All expenses. administrative and selling, marketing, specifi aroyalty D-S pay will we ries, territo- exclusive Inthe agreement. tothe according shared be will territories co-promotion other and U.S. in the Profi territories. fi the co-promotion and produce exclusive our will we for but product product, nished bulk plying co inour charges special other and restructuring, impairments, inasset included charges ofthe components The Charges Special Other and Restructuring, Impairments, Asset 5: Note period. inany material tobe expected not is TPG from reimbursement The ofoperations. statement consolidated the on item line expense development and research the to areduction as recorded are treatments Alzheimer’s tothe related incurred costs development and of research portion their for TPG from received Reimbursements ofaproduct. launch after years eight approximately for paid be will royalties The treatments. Alzheimer’s ofthe development successful the upon contingent are that royalties digit tohigh-single mid- and million $330 totaling milestones success-based receive may TPG funding, their for Inexchange into2014. extend could and million $325 exceed not will TPG from Funding trials. clinical Alzheimer’s the for funding provide will TPG and we both agreement, ofthe terms tothe Pursuant disease. Alzheimer’s erate tomod- ofmild treatment the for molecules lead two our antibody, A-beta our and inhibitor gamma-secretase our ote prasugrel, an investigational antiplatelet agent for the treatment of patients with acute coronary syndromes syndromes coronary acute with ofpatients treatment the for agent antiplatelet investigational an prasugrel, ote nsolidated statements of income are described below. below. described are ofincome statements nsolidated 008. These charges were the result of decisions approved by management in the fourth quarter as well as as well as quarter fourth inthe management by approved ofdecisions result the were charges These 008. Further, in the third quarter of 2008, as a result of our previously announced agreements with Covance Inc. Inc. Covance with agreements announced previously ofour aresult as of2008, quarter third Further, inthe to related of$1.48 billion acharge recorded we of2008, quarter third 14, inthe inNote further discussed As rst quarter of 2009. of2009. quarter rst ve major European markets, and Brazil), while we have exclusive marketing rights rights marketing exclusive have we while Brazil), and markets, European major ve ts according to the terms specifi terms tothe according ts c to those territories. Profi territories. c tothose rm, and entered into a 10-year service agreement under which which under agreement service intoa10-year entered and rm, liate of TPG-Axon Capital (TPG) for the Phase III development of IIIdevelopment Phase the for (TPG) Capital ofTPG-Axon liate t share payments made to D-S will be recorded as as recorded be will toD-S made payments t share ed in the agreement. D-S is responsible for sup- for responsible is D-S agreement. inthe ed exible organization, we recognized asset asset werecognized organization, exible eld, Indiana site to site Indiana eld, ts FINANCIALS 47 rstquarter nancial support to fund rst quarter of 2008 in connection with previously rst quarter of 2007. These charges primarily related to a vol- In the fourth quarter of 2006, management approved plans to close two research and development facilities We incurredWe asset impairment, restructuring, and other special million charges in the fourth of $67.6 quarter In connection with previously announced strategic decisions, we recorded asset impairment, restructuring, In the second quarter of 2008, we recognized restructuring and other special charges of $88.9 million. In addi- In March 2008, we terminated development of our AIR Insulin program, which was being conducted in col- recognizedWe asset impairment, restructuring, and other special charges million in the fi of $145.7 untary severance program at one of our U.S. plants and other costs related to this action as well as management actions taken in the fourth quarter of 2006 as described below. The component of these charges related to the non-cash asset impairment million, was and $67.6 were necessary to adjust the carrying value of the assets to fair value. These restructuring activities were substantially complete 2007. at December 31, and one production facility outside the U.S. Management also made the decision to stop construction of a planned insulin manufacturing plant in the U.S. in an effort to increase productivity in research and development operations and to reduce excess manufacturing capacity. These decisions, as well as other strategic changes, resulted in non-cash charges of $308.8 million for the write down of certain impaired assets, substantiallyall of which have no future million, use, and primarily other charges related of $141.5 to severance and contract termination payments. The impairment charges were necessary to adjust the carrying value of the assets to fair value. These restructuring activities were substantially complete 2007. at December 31, of 2008. These charges were primarily related to the decision to terminate development of AIR Insulin. Compo- nents of these charges included non-cash charges of $40.9 million for the write down of impaired manufacturing assets that had no use beyond the AIR Insulin program, as well as million charges for estimated of $91.7 contractual obligations and wind-down costs associated with the termination of clinical trials and certain development activities, and costs associated with the patient program to transition participants from AIR Insulin. This amount includes an estimate of Alkermes’ wind-down costs for which we were contractually obligated. The wind-down activities and patient programs were substantially complete by the end of 2008. The remaining component of these million,charges, is related $13.1 to exit costs incurred in the fi announced strategic decisions made in prior periods. of 2007. These charges were a result of decisions approved by management in the fourth quarter as well as previously announced strategic decisions. Components of this charge include non-cash charges of $42.5 million for the write down of impaired assets, all of which have no future use, and other charges million, of $25.1 primarily related to additional severance and environmental cleanup charges related to previously announced strategic decisions. The impairment charges were necessary to adjust the carrying value of the assets to fair value. These restructuring activities were substantially complete at 2007. December 31, and other special charges million $123.0 of in the fi tion, we recognized non-cash million for charges the write of $57.1 down of impaired manufacturing assets that had nofuture use, which were included in cost of sales. In April 2008,we announced a voluntary exit program that was offered to employees primarily in manufacturing. Components of the second-quarter restructuring charge include total severance costs of $53.5 million related to these programs and $35.4 million related to exit costs incurred during the second quarter in connection with previously announced strategic decisions made in prior periods. Substantially all of these costs were paid by the end July of 2008. laboration with Alkermes, Inc. The program had been in Phase III clinical development as potential a treatment for type 1 and type 2 diabetes.This decision was not a result of any observations during AIR Insulin trials relating to the safety of the product, but rather was a result of increasing uncertainties in the regulatory environment, and a thorough evaluation of the evolving commercial and clinical potential of the product compared to existing medical therapies. As a result of this decision, we halted our ongoing clinical studies and transitioned the AIR Insulin patients in these studies to other appropriate therapies. implemented We a patient program in the U.S., and other regions of the world where allowed, to provide clinical trial participants with appropriate fi their medications and diagnostic supplies through the end of 2008. Covance will provide preclinical toxicology work and perform additional clinical trials for us as well as operate the site to meet our needs and those of otherpharmaceutical industry clients. In addition, we signed agreements with Quintiles for clinical trial monitoring services and with i3 for clinical data management services. Components of the third-quarter restructuring charge include non-cash charges of $148.3 million primarily related to the loss on sale assets of sold to Covance, severance costs million, of $27.8 and exit costs of $6.3 million. Substantially all of these costs were paid in 2008. FINANCIALS L isrmnsast 450 450 450 36 23.6 23.6 455.0 — 455.0 $(5,056.9) $(4,988.6) — $(5,180.1) — 455.0 $(5,180.1) . — instruments—asset Risk-management $(5,036.1) portion . . current investments in debt securities mature within fi within mature securities indebt investments $1.1 ofour Approximately billion available. readily not is investments other and method ofequity value fair The debt. fl cash discounted or liabilities, or assets comparable or identical for inputs 48 Value 70.0 NA 70.0 Amount 221.9 Value NA—Not available — 3) (Level 2) (Level — $408.3 1) (Level 408.3 $ 127.8 221.9 $1,610.7 1,194.9 Amount $ $1,610.7 $11.1 221.9 . investments $1,004.6 $429.4 $179.2 other and method Equity $1,194.9 . $– equity Marketable . securities Debt 217.1 $ $212.3 investments Long-term $429.4 . securities Debt investments Short-term Description investments: other ofcertain amount carrying the as well as basis, arecurring on value fair at measured liabilities and assets 31 for December at information value fair certain summarizes table following The Carrying Instruments Financial of Value Fair ratings. credit high their given obligations their tomeet tofail counterparties any expect not do but instruments tofi counterparties by ofnonperformance event inthe losses tocredit-related issuer. exposed We are fi one toany exposure ofcredit amount the limit we policies, corporate documented with Inaccordance securities. government U.S. percent 25 and securities, asset-backed percent 34 securities, rate of41 corpo- percent comprised were securities indebt investments our 31, December 2008, At issuers. corporate fi major with investments interest-bearing our of all Identical substantially We place insurance. and procedures review credit ongoing our by mitigated is concentration this with associated risk The required. not Markets Active generally is collateral Assets receivables; oftrade portion asubstantial for Prices b Quoted interest- and receivables of trade principally consist risk tocredit us subject potentially that instruments Financial Investments and Instruments 6:Financial Note discussion. 14 further Note for See claims. the of cost and number probable ofthe estimate areasonable formulate could we extent tothe claims future expected and claims, liability product known regarding Observable costs defense and exposures liability product Inputs for reserves costs, Signifi defense related and settlements liability ofproduct costs the include recoveries, insurance ofanticipated net are for e record- we toZyprexa, in related were ofwhich majority substantial the exposures, liability product ofour aresult As Charges Special Other and Liability Product Inputs Unobservable Other Fair Signifi Carrying Fair d net pretax charges of $111.9 million and $494.9 million in 2007 and 2006, respectively. These charges, which which charges, These respectively. of$111.9 charges 2006, and pretax d net in2007 $494.9 and million million earing investments. Wholesale distributors of life-sciences products and managed care organizations account account organizations care managed and products oflife-sciences distributors Wholesale investments. earing ong-term debt, including including debt, ong-term We determine fair values based on a market approach using quoted market values, signifi values, market quoted using approach amarket on based values fair We determine . ,4. $577.1 $1,544.6 ve years. nancial institutions, in U.S. government securities, or with top-rated top-rated with or securities, government inU.S. institutions, nancial 20 2007 Using Measurements Value Fair 2008 cn cant cn cant ow analyses, principally for long-term long-term for principally analyses, ow nancial institution or corporate corporate or institution nancial cant other observable observable other cant 88 NA 98.8 nancial FINANCIALS 49 300.0 hedges, excluded ow ow hedges of the variability in (395.1) $1,212.1 $2,848.4 $1,212.1 $3,987.4 222.0 921.7 400.0 22.0 21.4 63.5 21.4 6.1 9.0 $4,593.5 79.2 964.6 4,988.6 8.7 45.7 767.5 116.8 531.9 239.0 400.0 (420.4) 1,046.1 5,0 $1,876.4 $3,987.4 $4, $ 69.9 $ 43.5

36.1 615.7 2008 2008 2007 2006 2008 2007 2008 2008 2007 xed-rate debt securities of varying maturities. ed as long-term investments when they are likely to be rst moved into an unrealized loss position during 2008. At xed-rate notes billion ($1.00 at 5.20 $700.0 percent due in 2017; mil- ows have been received. oating rate debt from accumulated other comprehensive loss to earnings oating rate bonds outstanding at December 2008 31, are due in 2037 and have variable xed income securities is sensitive to changes to the yield curve and other market conditions which ows have been received and we have concluded that no other-than-temporary loss exists at December 31, ...... During the years ended December 2008,31, 2007, and 2006, net losses related to ineffectiveness and net loss- expectWe to reclassify an estimated million $10.2 of pretax net losses on cash fl Available-for-sale investment securities are classifi The securities in an unrealized loss position are comprisedof fi The net adjustment to unrealized gains and losses of tax) (net on available-for-sale securities increased In March 2007, we issued $2.50 billion of fi The $400.0 million of fl A summary of the fair value available-for-sale of securities in an unrealized gain or lossposition and the

Realized gross losses on sales ...... 2.90 percent notes (due 2008)...... includingOther, capitalized ...... leases — percent notes (due 2012–2037).4.50 to 7.13 ...... Long-term debt at December consisted 31 of the following: Realized gross gains on sales ...... es related to theportion of our risk-management hedging instruments, fair value and cash fl from the assessment of effectiveness were not material. expected future interest payments on fl during 2009. held for more than one year because of our intent to hold securities in an unrealized loss position until the market values recover or all of the underlying cash fl Note Borrowings 7: Floating rate bonds (due 2037)...... SFAS 133 fair value adjustment ...... Proceeds from sales ...... Unrealized...... gross losses valueFair of securities in an unrealized gain position ...... Unrealized gross gains ...... Unrealized gross gains

Fair valueFair of securities in an unrealized loss position...... The value fi of this time, there is no indication of default on interest or principal payments for asset-backed securities. have We the intent and ability to hold the securities in a loss position until the market values recover or allof the underlying fl cash 2008. The fair values of all of our auction rate securities and collateralized debt obligations held at December 31, 2008 were determined using Level 3 inputs. do not We hold securities issued by structured investment vehicles at December 2008. 31, (decreased) other comprehensive income million, by $(125.8) $(5.4) million, and $0.3 million in 2008, 2007, and 2006, respectively. Activityrelated to our available-for-sale investment portfolio was as follows: led to the decline in value during 2008. Approximately 90 percent of the securities in a loss position are investment- grade debt securities. The majority of these securities fi Less...... current portion lion at 5.50 percent due in 2027; and $800.0 million at 5.55 percent due in 2037). amount of unrealized gains and losses (pretax) in other comprehensive income at December follows: 31 FINANCIALS Performance Award Program Award Performance shares. million 88.0 than more not for Plan Stock Lilly 2002 the afi as options stock exercised benefi tax We classify shares. ofPA SVA and issuance the for and exercises option stock tosatisfy stock treasury and shares issued newly vide pro- We period. the equals vesting generally which grantees, ofthe individual period service the over requisite expense compensation stock-based the We recognize options. stock and (SVAs), awards value shareholder (PAs), awards ofperformance primarily consists expense compensation $115.9 stock-based Our respectively. million, lines may be withdrawn. be may lines the which under ofoccurring probable are that conditions no are there and material, not are fees commitment and fi alternative back-up, as billion of$4.00 amount in the facility credit revolving short-term aone-year obtained we 2008, inNovember Additionally, program. paper commercial our backs which of $1.20 billion facilities, credit bank committed ofunused $1.24 have billion we 31, 2008, December At ImClone. of acquisition the for 2008 inlate issued was paper paper. Commercial commercial and tobanks payable of notes lion; 2010, $19.7 2010, lion; 2011, million; $13.1 $11.1 2013, and 2012, $510.8 million; million; million. 50 S program. option stock our replaced which program, (SVA) award value ashareholder implemented we In 2007, Shareholder Value Program Award in2009. issued tobe expected are shares million 2.8 Approximately respectively. 2006, and 2007, in2008, issued were 1.7 and shares million shares, million 2.3 shares, million 2.5 approximately plan, to this Pursuant period. ing vest- the during achieved earnings the upon dependent is program award performance the for issued ultimately ofshares number The $56.18, and respectively. $54.23, $51.22, were 2006 and 2007, in2008, granted awards mance fi ofperfor- ofthe end the at values vest fair fully The and grant. ofgrant ofthe date the on year price scal stock upon the closing based value fair at for accounted are PA shares period. aone-year over targets earnings-per-share pre-established ofcertain achievement the on depending any, if varies issued, actually ofPA shares number The tooffi granted are (PAs) awards Performance above. table inthe Other in included is and respectively, 2007, and 31, 2008 December at million $90.6 and $81.9 was million balance The quarter. each payments principal and interest both receive will bondholders debt, ESOP ofthe feature amortizing ofthe ESOP. the by Because held shares certain on received dividends by and us from contributions by funded are debt the on interest and principal The them. guarantee we because sheet balance consolidated the on shown sifi torefi clas- and We expect have in2009 program. bonds the nance borrowing this on monthly interest We pay 2008). at interest rates LIBOR plus our six-month spread,credit adjusted semiannually4.10of (total percent at December 31, o rec- was million $359.3 and million, $282.0 million, of$255.3 amount inthe expense compensation Stock-based Plans Stock 8: Note hedge. ofthe inception tothe subsequent rates interest inmarket to movements attributable debt hedged ofthe value infair changes representing adjustment value fair is refl interest. ofcapitalized net respectively, million, $305.7 respectively. percent, 5.47 and percent 4.77 were obligations, debt hedged for swaps rate ofinterest effects the including 2007, and 31, 2008 December at rates interest and obligations debt on based rates borrowing effective weighted-average The swaps. rate est gnized in 2008, 2007, and 2006, respectively, as well as related tax benefi tax related as well as respectively, 2006, and 2007, in2008, gnized VAs are granted tooffi granted are VAs ed them as current at December 31, 2008. December at current as them ed At December 31, 2008, additional stock options, PAs, SVAs, or restricted stock grants may be granted under under granted be may grants stock restricted or SVAs, PAs, options, stock additional 31, 2008, December At We have converted approximately 50 percent of all fi ofall percent 50 approximately converted We have respectively, $18.6 and million, billion $5.43 included borrowings short-term 2007, and 31, 2008 December At fi next the for debt long-term on ofmaturities amounts aggregate The The 6.55 percent Employee Stock Ownership Plan (ESOP) debentures are obligations of the ESOP but are are but ESOP ofthe obligations are debentures (ESOP) Plan Ownership Stock Employee percent 6.55 The In accordance with the requirements of SFAS 133, the portion of our fi ofour portion the 133, ofSFAS requirements the with In accordance $159.2 and million, $203.1 totaled million, borrowings on ofinterest payments cash 2006, and 2007, In 2008, ected in the consolidated balance sheets as an amount equal to the sum of the debt’s carrying value plus the the plus value debt’s ofthe carrying sum tothe equal amount an as sheets balance consolidated inthe ected cers and management and are payable in shares of common stock at the end of a three- end the at stock ofcommon inshares payable are and management and cers ts resulting from tax deductions in excess of the compensation cost recognized for for recognized cost compensation ofthe inexcess deductions tax from resulting ts nancing cash fl cash nancing ow in the consolidated statements of cash fl ofcash statements consolidated inthe ow cers and management and are payable in shares of our common stock. stock. common ofour inshares payable are and management and cers xed-rate debt tofl debt xed-rate ve years are as follows: 2009, $420.4 mil- $420.4 2009, follows: as are years ve xed-rate debt obligations that is hedged hedged is that obligations debt xed-rate ts of $88.6 million, $96.4 million, and and million, $96.4 million, of$88.6 ts oating rates through the use ofinter- use the through rates oating nancing. Compensating balances balances nancing. Compensating ows. ows. FINANCIALS 51 rates rates 90% 2.75% 3.00% 2.0% 2006 2006 2008 2008 2007 thousands) (in SVAs Attributable to Units cers and management at exercise prices equal to the fair market value of

The maximum number of shares that could ultimately be issued upon vesting of the SVA units outstanding at A summary of the SVA activity is presented below: Weighted-average volatility...... Range of volatilities ...... Risk-free interest rate...... 24.8%–27.0% Weighted-average expected life...... 25.0% 4.6%–4.8% 7 years Dividend yield ...... Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk- free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The model incorpo our stock price at the date of grant. No stock options were granted in 2008 or 2007. Options fully vest three years from the grant date and have a term years. of 10 utilized We a lattice-based option valuation model for estimating the fair value of the stock options. The lattice model allows the use of a range of assumptions related to volatility, risk-free interest rate, and employee exercise Expected behavior. volatilities utilized in the lattice model are based on implied volatilities from traded options on our stock, historical volatility of our stock price, and other factors. Stock Option Program Stock options were granted in 2006 to offi December 31, 2008,December 31, million.is 2.7 As 2008, of December 31, the total remaining unrecognized compensation cost related to nonvested SVAs amounted to $46.7 million, which will be amortized over the weighted-average remaining requisite service period months. of 21.6 Outstanding at...... January 2007 1, ...... Granted Issued ...... Forfeited or expired...... — Outstanding ...... at December 2007 969 31, ...... Granted — Issued ...... (47) Forfeited or expired...... 922 1,282 Outstanding...... at December 2008 31, — (301) 1,903 Expected dividend yield...... year period. The number of shares actually issued varies depending on our stock price at the end of the three-year vesting period compared to pre-established target stock prices. measure We the fair value of the SVA unit on the grant date using a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input vari- ables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value the of award. Expected volatilities utilized in the model are based on implied volatilitiesfrom traded options on our stock, historical volatility our of stock price, and other factors. Similarly, the dividend yieldis based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time grant. of The weighted-average fair values of the SVA units granted during 2008 and 2007 were $43.46 and $49.85, respectively, determined using the following assumptions: Risk-free interest rate...... Range volatilities of ...... 2.05%–2.29% 20.48%–21.48% 22.54%–23. 4.81%–5.16% exercise and post-vesting forfeiture assumptions based on an analysis of historical data. The expected life of the 2006 grants is derived from theoutput of the lattice model. The weighted-average fair values of the individual options granted determined during 2006 using the following were $15.61, assumptions: FINANCIALS d The items. ofother avariety and partners collaboration our from receivables include receivables other Our Liabilities Other and Assets 9:Other Note vested stock options. tax benefi tax related recognized and respectively, 2006, and 2007, 2008, during options ofstock exercises from million $66.2 and $15.2 million, of$2.9 million, cash We received $249.1 and respectively. million, $381.8 million, million, to $84.1 amounted 2006 and 2007, 3,992 2008, during vested ofoptions value fair date grant total The respectively. million, $40.8 . 31, 2008. December at Nonvested Vested ...... (5,045) (5,045) Forfeited . Vested . lion related to the EDPA settlements discussed in Note 14, and an increase in current deferred taxes. deferred incurrent increase an 14, and in Note discussed EDPA settlements tothe related lion specifi liabilities, litigation inproduct increase an by primarily caused is liabilities current other 52 arrangements. development business other and acquisitions 2008 toour attributable income indeferred increase toan due primarily is liabilities noncurrent inother increase The items. ofother a variety and litigation, product liabilities, return product estimated ofour portion long-term the swaps. rate interest of our value fair inthe increase an and assets tax deferred in increase toan attributable primarily is assets insundry increase The swaps. rate interest ofour value fair the recoverables. Value Intrinsic Aggregate years) (in Term Contractual Remaining Options of Price Exercise thousands) (in 9,049 Options to Attributable Granted . . . 1, 2008. January at Nonvested 68,033 below: ended, is presented 72,025 (8,979) (145) . 31, 2008. December at Exercisable 31, 2008 December at . Outstanding . 81,149 expired. or Forfeited . Exercised Granted . 1, 2008 January at . Outstanding ecrease in other receivables is primarily attributable to a decrease in income tax receivable, and lower insurance insurance lower and receivable, tax inincome toadecrease attributable primarily is receivables inother ecrease As of December 31, 2008, there was no signifi no was there 31, 2008, ofDecember As The intrinsic value of options exercised during 2008, 2007, and 2006 amounted to $4.8 million, $1.5 million, and $1.5 and million, million, to$4.8 amounted 2006 and 2007, 2008, during exercised ofoptions value intrinsic The Our other noncurrent liabilities include deferred income from our collaboration and out-licensing arrangements, arrangements, out-licensing and collaboration our from income deferred include liabilities noncurrent other Our in increase The items. ofother avariety and liabilities, tax litigation, product include liabilities current other Our below: summarized is 2008 during activity option Stock Our sundry assets primarily include our deferred tax assets (Note 12), capitalized computer software, and and software, computer (Note 12), capitalized assets tax deferred our include primarily assets sundry Our then year the during changes and 31, 2008, ofDecember as options ofnonvested status ofthe A summary ts of $0.5 million, $0.4 million, and $11.3 million during those same years. same $11.3 those and during million, million $0.4 million, of$0.5 ts hrso omnSok egtdAeae Weighted-Average Weighted-Average Shares of Common Stock cant remaining unrecognized co unrecognized remaining cant (in thousands) Fair Value Fair thousands) (in Shares Grant Date — — (12) Weighted-Average $69.57 $16.47 72.31 72.31 70.04 70.04 15.76 15.26 69.35 19.69 17.51 — — mpensation cost related tonon- related cost mpensation 3.6 3.6 3.4 3.4

cally, the $1.42 the cally, bil- $1.9 1.9 FINANCIALS 53

t plans t Amount

65 3.0 (76) (76) (3.9) 128 128 5.8 160 160 9.8 Shares Shares thousands) thousands) Common Stock in Treasury in Stock Common (in (in

2,145 122.1

(2,297) (130.6) (170) (11.1)

Costs— Costs— 5.6 5.5 8.9 8.9 ESOP Deferred Deferred t plans. The funding had no net impact

(8.6) Retained Retained Earnings Earnings t trust. The cost basis of the shares held in the trust 2,662.7 (1,763.2) (2,079.9) 2,953.0 (1,903.9)

(2,071.9) Capital Capital Paid-in Paid-in Additional Additional t trust with 40 million shares of Lilly common stock to provide a source of

rst quarter of 2009, we contributed an additional million 10.0 shares to the trust. As of December 2008, 31, we have purchased $2.58 billion of our announced $3.0 billion share repurchase haveWe 5 million authorized shares of preferred stock. As of December 2008 31, and 2007, no preferred stock haveWe funded an employee beneﬁ We haveWe an ESOP as a funding vehicle for the existing employee savings plan. The ESOP used the proceeds of

Balance at January 2006. 1, ...... Net income $3,323.8 $ 9,866.7 $ (106.3) 934 $104.1 Changes in certain components of shareholders’ equity were as follows: Note 10: Shareholders’ Equity Shareholders’ 10: Note

Balance at December 2008. 31, ...... $3,976.6 program. acquired We approximately million shares 2.1 in 2006 under this program. No shares were repurchased 2007. or 2008 in $ 7,654.9 issued. been has $ (86.3) funds to assist us in meeting our obligations under various employee benefi on shareholders’ equity as we consolidate the employee benefi 889was $2.64 billion and is shown as a reduction in shareholders’ equity, which offsets the resulting increases of billion$2.61 in additional paid-in capital and $25.0 million in common stock. Any dividend transactions between us and the trust are $ 99.2 eliminated. Stock held by the trust is not considered outstanding in the computation of earnings per share. The assets of the trust were not used to fund any of our obligations under these employee benefi in 2008, 2007, or 2006. In the fi a loan from us to purchase shares of common stock from the treasury. The ESOP issued $200.0 million of third- party debt, repayment of which was guaranteed by us (see Note 7). The proceeds were used to purchase shares of ESOP transactions...... 11.9 Cash dividends declared per share: $1.63 ...... Retirement of treasury shares ...... Purchase for treasury...... (129.1) Balance at December 2007. 31, ...... Net loss ...... Cash dividends declared per 3,805.2 ...... share: $1.90 11,806.7 Stock-based compensation ...... (95.2) 255.3 899 100.5 Issuance of stock under employee ...... stock plans—net Stock-based compensation ...... ESOP transactions...... Balance at December 2006. 31, ...... 359.3 6.2 ...... Net income 11.7 3,571.9 10,766.2 (100.7) 910 101.4 Retirement of treasury shares ...... Issuance of stock under employee ...... stock plans—net (10.9) (84.9) ESOP transactions...... FIN 48 implementation ...... 12) (Note 10.4 Stock-based compensation ...... 282.0 Issuance of stock under employee ...... stock plans—net (55.2) Cash dividends declared per ...... share: $1.75 Retirement of treasury shares ...... (3.9) FINANCIALS

noetxs . taxes. Income State . . . . Foreign . Federal Deferred 54 State . . Foreign . Federal Current expense: tax ofincome composition the is Following Taxes 12:Note Income share per (loss) . earnings Diluted . outstanding—diluted shares ofcommon number Weighted-average . shares. incremental other and options Stock outstanding shares ofcommon number . Weighted-average share per (loss) earnings Diluted . share. per (loss) . earnings Basic shares. incremental including outstanding, shares ofcommon number Weighted-average share per (loss) earnings Basic . shareholders tocommon available (loss) Income share: per (loss) earnings incomputing used denominators ofthe areconciliation is Following Share Per (Loss) 11:Note Earnings period is recognized as compensation expense. each allocated ofshares value fair The contribution. plan savings ofour 2017 part as through annually employees toparticipating allocated be will ESOP the by held stock ofcommon Shares market. open the on stock common our . . . Sae ntosns 20 20 2006 2007 2008 (Shares in thousands)

20 20 2006 2007 2008 $ (2,071.9) 1,094,499 1,094,499 1,092,041 $(207.6) $923.8 $755.3 $923.8 $ 764.3 363.0 392 623.6 $(1.89) $(1.89) 37 (44.6) 23.7 2,458 6.2 1.4 .9 (5.5) (5.5) 192.2 (27.9) 113.5 53.078.3 412.1 390.6 (06 0.4 (30.6) 929.3 929.3 563.1 27.7 (25.2) $8. $ $489.5 197.7 1,090,750 1,087,490 1,090,750 1,086,239 1,090,430 1,821 2,153 1,821 $2.71 $2.45 1,085,337 1,088,929 $2.71 $2.45 $2,953.0$2,662.7 FINANCIALS 55 (532.5) (354.2) (65.3) (133.0) (662.2) (432.4) (2,501.3) 49.3 712.2 110.0 27.7 $ 654.8 302.1 174.6 810.5 3,271.8 361.5 69.1 2,917.6 117.9 211.6 251.5 313.6 100.8 755.0 562.3 585.0 345.2 (467.3) (287.8) (620.7) (860.2) (845.4) (542.7) 4, 3,552.1 (2,778.7) $1,154.6 $ 773.4 $ 416.3

2008 2008 2007 397.5 ts ...... ts — (675.9) ...... t in inventories cant components our of deferred tax assets and liabilities as of December are 31 as follows: ...... At December 2008, 31, we had net operating losses and other carryforwards for international and U.S. income Domestic and Puerto Rican companies generated the entire consolidated loss before income taxes in 2008 and At December 2008, 31, we had an aggregate billion of $13.31 of unremitted earnings of foreign subsidiaries that Cash payments (refunds) of income taxes totaled $(52.0) billion, million, and $1.01 $864.0 million in 2008, 2007, Signifi loss carryforwards Tax and carrybacks ...... Contingencies ...... Asset purchases Sale of intangibles...... Debt...... Product return reserves ...... Other...... Property and equipment ...... Inventories ...... Unremitted earnings...... Prepaid benefi employee Other...... deferred Total tax ...... liabilities Deferred tax assets—net ...... tax purposes billion: of $1.24 $84.3 million will expire within years; billion 10 $1.09 will expire between and 10 20 years; and $63.1 million of the carryforwards will never expire. The primary component of the remaining portion of the deferred tax asset for tax loss carryforwards and carrybacks is related to net operating losses for state income tax purposes that are fully reserved. also We have taxcredit carryforwards and carrybacks of $755.0 million available to reduce future income taxes; million $295.1 will be carried back; $84.1 million of the tax credit carryforwards will expire after 5 years; million and $13.0 of the tax credit carryforwards will never expire. The remaining portion of the tax credit carryforwards is related to federal tax credits million of $97.4 and state tax credits of $265.4 million, both of which are fully reserved. contributed approximately 7 percent percent and 18 in 2007 and 2006, respectively, to consolidated income before income taxes. have We a subsidiary operating in Puerto Rico under a tax incentive grant. The current tax incentive grant will not expire prior to 2017. have been or are intended to be permanently reinvested for continued use in foreign operations and that, if distributed, would result in additional income tax expense at approximately the U.S. statutory rate. and 2006, respectively. profi credit Tax carryforwards Intercompany and carrybacks ...... Deferred tax assets Compensation and benefi

Valuation...... allowances deferred Total tax assets...... Deferred tax liabilities Intangibles ...... FINANCIALS income (loss) before income taxes to reported income tax expense: tax income toreported taxes income before (loss) income 56 benefi tax unrecognized gross conclusion, audit IRS ofthe aresult As process. appeals administrative IRS the through resolution seek will we which for matter one for except 2001-2004 years oftax audit (IRS) Service Revenue Internal fi the During 2002. before years for jurisdictions taxing inmajor examinations tax income non-U.S. or local, and state federal, toU.S. subject longer no We are 31, 2008. December at million $863.8 . . 31 December at Balance . . Settlements oflimitation ofstatutes . Lapses . years. ofprior positions tax for Reductions years . ofprior positions tax for Additions . year current tothe related positions tax on based Additions . . 1 January at balance Beginning (benefi tax Income onciliation of the beginning and ending amount of gross unrecognized tax benefi tax unrecognized ofgross amount ending and beginning ofthe onciliation benefi tax unrecognized for liability inthe million of$8.6 increase an recognized we 48, ofFIN implementation ofthe aresult As return. fi the for eerhaddvlpet...... development and research in-process acquired and non-deductible Acquisitions Add (deduct) cantly increase or decrease within the next twelve months. twelve next the within decrease or increase cantly benefi tax ofunrecognized amount total the that possible reasonably is it believe We not do of 2008. quarter third the during 2005-2007 years oftax examination its began IRS The million. $50 ofapproximately refund ina resulted carryovers oftax utilization and prepayment ofthe Application in2005. made was oftax prepayment benefi tax unrecognized ingross reduction ofthe majority The expense. tax inincome areduction through $210.3 million noetxepne...... expense tax Income . Sundry . . credits business General . conclusion audit IRS . charges investigation Government . Rico Puerto including operations, International accrual refl accrual (benefi expense ofthe all Substantially respectively. lion, mil- $177.6 totaled $364.2 and penalties and million ofinterest payment the for accruals our 2007, and 31, 2008 December At penalties. and tointerest related respectively, $51.2 and million, million, $(118.0) $66.6 million, (benefi expense tax income recognized we 2006, 2007, and 31, 2008, December ended years the During The total amount of unrecognized tax benefi tax ofunrecognized amount total The Following is a reconciliation of the income tax expense (benefi expense tax income ofthe areconciliation is Following We fi We We adopted FIN 48 on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute attribute measurement and threshold arecognition prescribes 1, 48 2007. FIN January on 48 FIN We adopted We recognize both accrued interest and penalties related to unrecognized tax benefi tax tounrecognized related penalties and interest accrued both We recognize ts were reduced by approximately $618 million, and the consolidated results of operations were benefi were ofoperations results consolidated $618 the and approximately million, by reduced were ts ts related to intercompany pricing positions that were agreed with the IRS in a prior audit cycle for which a which for cycle audit inaprior IRS the with agreed were that positions pricing tointercompany related ts nancial statement recognition and measurement of a tax position taken or expected to be taken in a tax inatax taken tobe expected or taken position ofatax measurement and recognition statement nancial le income tax returns in the U.S. federal jurisdiction and various state, local, and non-U.S. jurisdictions. jurisdictions. non-U.S. and local, state, various and jurisdiction federal U.S. inthe returns tax income le ects the impact of the effective settlement of the IRS audit discussed above. discussed audit IRS ofthe settlement effective ofthe impact the ects t tteUS eea tttr a ae rate tax . statutory federal U.S. the t) at ts, and an offsetting reduction to the January 1, 2007 balance of retained earnings. Arec- earnings. ofretained balance 1, 2007 January tothe reduction offsetting an and ts, rst quarter of 2008, we completed and effectively settled our our settled effectively and completed we of2008, quarter rst ts that, if recognized, would affect our effective tax rate was was rate tax effective our affect would recognized, if that, ts t) and accruals relate to interest. The change in the 2008 2008 inthe change The tointerest. relate accruals t) and t) applying the U.S. federal statutory rate to rate statutory federal U.S. the t) applying 20 2007 2008 2006 2007 2008 $1,012.3 $1,657.4 $(457.7) 2. $755.3 $923.8 $ 764.3 1,819.4 (234.9) (598.4) (210.3) (216.2) (641.3) 288.8 359.3 115.6 (58.0) (47.1) ts is as follows: follows: as is ts 206.4 35.6 $1,657.4 — — — $1,470.8 281 — 208.1 (130.2) (163.5) (130.2) (53.1) $,5. $1,196.3 $1,356.9 (03 (47.6) (60.3) (5.) (229.9) (450.7) — — — (2.3) — ts in income tax expense. expense. tax inincome ts ts will signifi t) of ted ted by - FINANCIALS 57 t .6) t Plans t ned benefi ned (81.6) (81.6) (8 147.4 (297.7) 3.2 (274.3) (265.7) 1,622.8 $1,740.7 16.4 522.6 1,157.3 1,348.5 820.3 101.4 125.4 70.4 (7.8) (3.7) 87.9 62.1 (92.2) (92.2) 101.6 105.7 905.6 (261.6) (890.7) (882.9) (438.6) 1,148.0 1,796.3 1,409.6 1,348.5 $ 257.3 $ 248.3 $ 257.3 $ 248.3 $1,622.8 $ — $ – t) have not yet been recognized t obligation, change in plan assets,

t plans. do We not expect any plan assets t Pension Plans Retiree Health Benefi (311.0) (311.0) (373.1) (373.1) 32.7 — (227.7) 833.8 833.8 82.6 82.6 743.2 (879.4) (879.4) 49.9 49.9 — — (47.9) (47.9) (301.4) 6,519.0 6,519.0 362.4 362.4 1,231.7 1,143.3 $6,480.3 $6,480.3 6,561.0 6,561.0 202.9 202.9 88.4 88.4 $ 1,974.9 1,974.9 $ $ 1,974.9 1,974.9 $ 287.1 287.1 7,304.2 ned Benefi ned (2.4) 72.7 2008 2008 2007 2008 2007 (52.9) 409.8 260.1 223.7 Defi (217.9) (257.4) (279.0) (326.1) (338.4) 3,547.5 3,474.8 4,796.1 7,304.2 6,353.7 (2,187.8) (1,557.6) (1,504.7) $1,989.9 $6,561.0 $ — $ 1,670.5 $ 1,989.9 $ t) . . . . . t) t related to our retiree health benefi t plans, which were as follows: t ...... t t pension plans, million and $69.4 of unrecognized net actuarial loss and $35.9 million ts ts ned benefi ned t obligation t t obligation at beginning of year ...... ts paid ...... tspaid t obligation at end of year ...... t obligation at end year of ts paid ...... ts paid milliont cost, of unrecognized $97.5 net actuarial loss and $8.7 million of unrecognized prior service cost The unrecognized net actuarial loss and unrecognized prior service cost (benefi In 2009, we expect to recognize from accumulated other comprehensive loss as components of net periodic

related to our defi Net amount recognized ...... in net periodic pension costs and are included in accumulated other comprehensive loss at December 2008. 31, benefi of unrecognized prior service benefi Accumulated other comprehensive loss before income taxes...... funded status, and amounts recognized in the consolidated balance sheets at December for 31 our defi Change benefi in Benefi

Note Retirement 13: Benefi useWe a measurement date of December to develop 31 the change in benefi pension and retiree health benefi to be returned to us in 2009. benefi retirement Accrued Interest cost...... Actuarial (gain) loss Benefi ...... Service cost...... Plan amendments...... Foreign currency exchange rate changes Benefi and other adjustments...... plan in assetsChange value Fair of plan assets at beginning of year . . Actual return on plan assets ...... Employer ...... contribution Benefi Foreign currency exchange rate changes and other adjustments...... value Fair of plan assets at end of year ...... Funded status Unrecognized...... net actuarial loss Unrecognized prior service cost (benefi Net amount recognized ...... Amounts recognized in the consolidated balance sheet consisted of Prepaid pension...... Other current ...... liabilities FINANCIALS respectively, as of December 31, 2008, and $825.8 million and $46.9 million, respectively, as of December 31, 2007. ofDecember as respectively, million, $46.9 and million $825.8 and 31, 2008, ofDecember as respectively, benefi accumulated with plans pension benefi 31, accumulated The 2007. December of as $160.9 and respectively, $1.04 and billion million, 31, 2008, ofDecember as respectively, billion, $4.80 and for the defi the for benefi projected The respectively. 2007, and 31, 2008 December at lion 2014. by percent of5.5 rate ultimate toan year per cent per- 0.6 approximately by decreasing in2009, percent of8.5 rate annual an at toincrease assumed are rates trend benefi health retiree and plans defi U.S. our on ofreturn rate annualized 20-year our 2008, and 2002, in2001, ket conditions benefi worldwide ofour percent 84 approximately defi U.S. inour assets plan Our economists. and advisers fi ofleading views the and allocations, asset conditions, market ofcurrent analysis an results, actual with as follows: Amortization of prior service cost (benefi service ofprior Amortization . assets plan on return Expected cost Interest . . Expected return on plan assets for net benefi net for assets plan on return Expected benefi net for increase ofcompensation Rate eiaerbts...... (16 (.) 87 (00 (06 (69.0) (10.6) (10.0) (8.7) (7.9) (11.6) benefi health Retiree . rebates Medicare benefi health Retiree benefi for increase ofcompensation Rate benefi net for rate Discount Recognized actuarial loss ...... loss actuarial Recognized . cost Service service cost and interest cost by $20.7 million (12.3 million $20.7 percent). by cost interest and cost service benefi postretirement accumulated 2008, 31, December the decrease would rates inthese decrease (16.0 Aone-percentage-point $26.9 million percent). by increase would expense annual 2008 ofthe components cost interest and cost service ofthe aggregate the benefi postretirement accumulated 31,ber 2008, Net periodic benefi 58 benefi periodic ofnet Components Defi benefi for rate Discount 31 ofDecember as assumptions Weighted-average (Percents) ned benefi Net pension and retiree health benefi health retiree and pension Net The following benefi refl following which The t payments, compared assumptions historical our considered have we assets, plan on return expected the In evaluating The total accumulated benefi accumulated total The If the health-care-cost trend rates were to be increased by one percentage point each future year, Decem- future the each point percentage one by increased tobe were rates trend health-care-cost the If The following represents our weighted-average assumptions as of December 31: ofDecember as assumptions weighted-average our represents following The ned benefi t) ...... t) . tpninpas 305 386 348 324 433 $2,234.0 $403.3 $392.4 $384.8 $378.6 $360.5 plans . t pension tpasnt 17 81 0. $103 0. $530.0 $104.1 599.0 $ $100.3 $114.7 $101.1 $110.3 $98.1 $109.8 $91.7 $106.0 . t plans—net $103.3 . t plans—gross t pension plans with projected benefi projected with plans t pension t cost t cost . t obligation ...... t obligation t costs t costs . t plan was approximately 8.2 percent as of December 31, 2008. Health-care-cost Health-care-cost 31, 2008. ofDecember as percent 8.2 approximately was t plan t obligation for our defi our for t obligation t cost t obligations in excess of plan assets were $4.98 billion and $4.06 billion, billion, $4.06 and billion $4.98 were assets ofplan inexcess t obligations t obligation t obligation . t obligation by $192.0 million (10.8 percent) and the aggregate of the 2008 2008 ofthe aggregate the (10.8 and $192.0 by million percent) t obligation t expense included the following components: following the included t expense 08 07 2006 2007 2008 t obligation and fair value of the plan assets for the defi the for assets plan ofthe value fair and t obligation t costs ...... t costs t costs ...... t costs $260.1 Defi $151.7 ect expected future service, as appropriate, are expected to be paid paid tobe expected are appropriate, as service, future expected ect (603.0) 409.8 0921 21 21 2013 2012 2011 2014-2018 2009 2010 t obligation would increase by $247.8 (13.9 by million and increase percent) would t obligation 76.6 t plan assets. Including the investment losses due to overall mar- tooverall due losses investment the Including assets. t plan 8.2 $287.1 $280.0 $239.0 $286.6 $239.0$286.6 100 149.6 130.0 362.4 343.5 343.5 362.4 7.7 8.3 7.78.3 ned Benefi (4.) (494.8) (548.2) ned benefi ned benefi t obligations in excess of plan assets were $6.35 billion billion $6.35 were assets ofplan inexcess t obligations t Pension Plans Plans t Pension Defi 0820 20 2007 2008 2008 2007 t pension plans was $5.64 billion and $5.69 bil- $5.69 and billion $5.64 was plans t pension 4.6 4.1 6.7 6.4 9.0 t pension and retiree health plans comprise comprise plans health retiree and t pension ned Benefi 46 — — 4.6 6.4 6.4 9.0 9.0 46 — — 4.6 5.7 t obligation and fair value of the plan assets assets plan ofthe value fair and t obligation t Pension Plans Retiree Health Benefi Health Retiree Plans t Pension

(118.4) $62.1 $76.1 105.7 (36.0) 62.7 08 07 2006 2007 2008 04 $72.2 $70.4 $149.0 $172.5 $149.0 114 97.9 101.4 95.0 107.9 (57 (15.6) (15.7) (0.) (89.9) (102.1) Retiree Health Benefi Health Retiree ned benefi 6.7 6.9 9.0 6.7 6.0 9.0 ned benefi t pension t pension t Plans nancial t Plans t FINANCIALS 59 xed-income 100 11 78 11 12 74 14 t Plans t 100 ts and accrue for the t plans in 2008, 2007, and t pension plans to satisfy mini- t RetireeHealth ned Benefi ned ned benefi ned Pension Plans Benefi Defi Pension 100 75 75 10 14 nancial security during retirement by provid- 1 1 — — 12 17 70 100 t plan investment allocation strategy currently 2008 Pension Plan 2007 Percentage Assets of 2008 Retiree Health Plan Assets 2007 Percentage of income . .income (8.2) 36.0 ts primarily related to disability benefi t plans. do We not expect to make any contributions to our post- t) included in net ned benefi ned ed and invested in U.S. and international small-to-large companies.The remaining cally noted below, the resolution of all such matters will not have a material adverse nancial position or liquidity, but could possibly be material to our consolidated results t pension and retiree health benefi t plans during 2009. t pension plan and retiree health plan asset allocations as of December are 31 as follows: cant. ned benefi ned nedcontribution savingsplans that cover our eligible employees worldwide. The purpose of ned benefi ned nedcontribution plans is generally to provide additional fi cant of these are described below. While it is not possible to determine the outcome of these matters, we fi In 2009, we expect to contribute approximately $55 million to our defi The following represents theamounts recognized in other comprehensive income (loss) in 2008: We haveWe defi We provideWe certain other postemployment benefi Our defi Our U.S. defi axman Act (the Drug Price Competition and Patent Restoration Term Act of 1984): seeking permission to market generic versions of Cymbalta prior to the expiration of our relevant U.S. patents (the U.S. patents of our relevant the expiration prior to of Cymbalta generic versions market to seeking permission Patent Litigation areWe engaged in the following patent litigation matters brought pursuant to procedures set out in the Hatch- W effect on our consolidated fi of operations in any one accounting period. (ANDAs) Drug Applications New Abbreviated submitted have • generic drug manufacturers Sixteen Cymbalta: believe that, except as specifi (Percents) ...... Total mum funding requirements In addition, for the year. we expect to contribute approximately million of additional $15 discretionary funding in 2009 to our defi Asset Category Equity securities and equity-like instruments ......

Actuarial loss arising during ...... period Plan amendments during period ...... Amortization of prior service cost $2,533.4 (beneﬁ (2.4) $658.6 —

Amortization of net actuarial loss included net in income ...... Foreign currency exchange rate changes...... other comprehensiveTotal loss during period...... (76.6) (130.4) $2,315.8 (62.7) $625.4 (6.5) these defi ing employees with an incentive to save. Our contributions to the plan are based on employee contributions and the levelof our match. Expenses million, million, and million, $106.5 under $112.3 the plans for the years totaled $114.1 2008, 2007, and 2006, respectively. related cost over the service lives of employees. Expenses associated with these benefi 2006 were not signifi We areWe a party to various legal actions, government investigations, and environmental proceedings. The most signi Debt securities ...... Real estate ...... Other retirement health benefi Note Contingencies 14: comprises approximately 88 percent to 92 percent growth investments and 8 percent percent to 12 fi investments. Within the growth investment allocation, the plan asset strategy encompasses equity and equity-like instruments that are expected to represent approximately 75 percent of our plan asset portfolio of both public and private market investments. The largest component of these equity and equity-like instruments is public equity securities that are well diversifi portion of the growth investment allocation includes alternative investments. FINANCIALS • our future consolidated results of operations, liquidity, and fi and liquidity, ofoperations, results consolidated future our on impact adverse amaterial have could cases ofthese inany outcome unfavorable An prevail. will we that ance assur- no provide can we accordingly, and litigation, ofthis outcome the todetermine possible However, not is it 60 • Alimta: Teva• Parenteral Medicines,Inc.(Teva) andAPPPharmaceuticals, LLC (APP)eachsubmitted ANDAs seeking Gemzar: Sicor Pharmaceuticals, Inc.(Sicor), MaynePharma(USA)Inc.(Mayne),andSunPharmaceutical• take any furthersteps to prevent thecompany from coming to market withgenericolanzapine tablets, subjectto a be boundbytheoutcome oftheNovopharm suit,and,pendingtheoutcome ofthelawsuit,we have agreed notto 2008) andCobalt(January2009); noneofthesesuitshasbeenscheduled for trial.Pharmascience hasagreed to similar actionsagainst Pharmascience (August 2007),Sandoz(July 2007),Nu-Pharm(June2008),Genpharm the invalidity ofourZyprexa compound andmethod-of-usepatents, andnotrialdate hasbeenset.We have brought of 2009,withadecisioninthe second halfof2009.InNovember 2007,Apotex filed anaction seekingadeclaration of for patent infringement,andthetrialbegan inNovember 2008.We expect thetrialto runthrough thefi Canada. Novopharm begansellinggenericolanzapine inCanadathethird quarter of2007.We suedNovopharm denied ourrequest thatNovopharm beprohibited from receiving marketing approval for genericolanzapinein Court heldthataninvalidity allegation ofasecond challenger, Novopharm Ltd.(Novopharm), wasjustifi Apotex Inc.(Apotex), andthatrulingwasaffirmed onappealinFebruary 2008. InJune2007,theCanadianFederal method-of-use patent (expiring in2011).InApril2007,theCanadianFederal Courtruled against the fi In Canada,several genericpharmaceutical manufacturers have challenged thevalidity ofourZyprexa compound and litigation, butsubjectto ourrightto recover damages,shouldwe prevail attrial. obtain preliminary relief from thecourt, Teva can launchitsgenericproduct, regardless ofthestatus ofthecurrent March 9,2009.Teva hasappealed theextension ofthestatutory stay. Ifthestay expires andthecompany cannot but Teva’s abilityto market agenericproduct issubjectto astatutory stay, whichhasbeenextended to expire on date hasbeensetinthelawsuitagainst Barr. InApril2008,theFDA granted Teva tentative approval ofitsANDA, District ofIndiana.Thelawsuitagainst Teva iscurrently scheduled for trialbeginningMarch 9,2009,while notrial version ofEvista. InJune2006,we filed asimilarlawsuitagainst Teva intheU.S.District Courtfor theSouthern by Barr. Teva Pharmaceuticals USA,Inc. (Teva) hasalsosubmitted anANDA seekingpermission to market ageneric for theSouthernDistrict ofIndiana,seekingarulingthatthesepatents are valid, enforceable, andbeinginfringed invalid, notenforceable, ornotinfringed.InNovember 2002,we filed alawsuitagainst BarrintheU.S.District Court Evista priorto theexpiration ofourrelevant U.S.patents (expiring in2012-2017)andalleging thatthesepatents are Evista: BarrLaboratories, Inc.(Barr)submitted anANDA in2002seekingpermission to market agenericversion of compound patent isvalid andinfringed.Trial isscheduled for November 8,2010. filed lawsuitsintheU.S.District Courtfor theDistrict ofDelaware against Teva andAPP,seekingrulingsthatthe Trustees ofPrinceton University andexpiring in2016),andalleging thepatent isinvalid. We, along withPrinceton, approval to market genericversions ofAlimta priorto theexpiration oftherelevant U.S.patent (licensed from the infringed bythesale ofSun’s genericproduct. This trialisscheduled for December 2009. seeking rulingsthatourmethod-of-useandcompound patents are invalid orunenforceable, orwould notbe Sun filed adeclaratory judgmentactionintheUnited States District Courtfor theEastern District ofMichigan, administratively closed, andthepartieshave agreed to beboundbytheresults oftheSicor suit.InNovember 2007, generic Gemzarto allow timefor usto seekapreliminary injunction.Bothsuitsagainst Maynehave been Sicor’s ANDAs have beenapproved bytheFDA; however, Sicor must provide 90daysnotice priorto marketing these patents are valid andare beinginfringed.Thesuitagainst Sicor has beenscheduled for trial inJuly 2009. District ofIndianaagainst Sicor (February 2006)andMayne(October 2006andJanuary2008),seekingrulingsthat in 2013),andalleging thatthesepatents are invalid. We filed lawsuitsintheU.S.District Courtfor theSouthern the expiration ofourrelevant U.S.patents (compound patent expiring in2010andmethod-of-usepatent expiring Industries Inc.(Sun)eachsubmitted anANDA seekingpermission to market genericversions ofGemzarpriorto valid, infringed,andenforceable. Answers to thecomplaints are pending. Lupin Limited; SandozInc.;SunPharmaGlobal, Inc.;andWockhardt Limited, seekingrulingsthatthepatents are Indiana against ActivisElizabethLLC; Aurobindo PharmaLtd.;CobaltLaboratories, Inc.;ImpaxLaboratories, Inc.; the active ingredient isunenforceable. Lawsuitshave beenfiled inU.S.District Courtfor theSouthernDistrict of directed to theuseofCymbalta for treating fibromyalgia, andonealleges thepatent havingclaimsdirected to duloxetine. Oftheeightchallengers to thecompound patent claims,onefurtheralleges invalidity oftheclaims to thecommercial formulation, andeightallege invalidity ofthepatent claimsdirected to theactive ingredient earliest ofwhichexpires in2013).Ofthesechallengers, allallege non-infringementofthepatent claimsdirected We have received challenges to Zyprexa patents in a number of countries outside the U.S.: the outside ofcountries inanumber patents toZyprexa challenges received We have We believe each of these Hatch-Waxman challenges is without merit and expect to prevail in this litigation. litigation. inthis toprevail expect and merit without is challenges Hatch-Waxman ofthese each We believe nancial position. nancial position. rst challenger, rst quarter ed and FINANCIALS 61 ned ned mil-

ce (USPTO) ce nal judgment judgment nal nding damages in the amount$65 of mil- ce of Inspector General of the U.S. (OIG) Department of Health and Human ve years. The agreement also provides for an independent third-party review cient to cover these payments. Also, as part of the settlement, we have entered into a ce of the U.S. Attorney for the Eastern District of Pennsylvania (EDPA) advised us that it had Xigris and Evista: In June 2002, Ariad Pharmaceuticals, Inc., the Massachusetts Institute the of Technology, We areWe vigorously contesting the various legal challenges to our Zyprexa patents on a country-by-country contingent damages obligation should we be successful against Novopharm. Novopharm. against successful be should we damages obligation contingent of our Zyprexa compound and method-of-use patent (expiring in 2011). In June 2007, the German Federal Patent Patent the German Federal In June 2007, in 2011). (expiring patent and method-of-use compound of our Zyprexa in the fourth in Germany competitors was launched by Generic olanzapine is invalid. that our patent Court held hearing in a Court and following Supreme Federal the German the decision to appealed of 2007. We quarter Following be valid. to the patent Court and found Patent the Federal Court reversed 2008, the Supreme December or were the market from withdraw to either agreed Court, the generic companies Supreme the decision of the infringement. damages arising from for these companies pursuing are injunction. We preliminary subject to court trial and appellate at both the been successful have In Spain, we countries. European smaller and several the pending before is now challenge legal but further challenges, manufacturers’ the generic in defeating levels Laboratories Reddy’s Dr. manufacturer In the U.K., the generic pharmaceutical Court in Madrid. Commercial in 2011). (expiring method-of-use patent and compound of our Zyprexa the validity has challenged (UK) Limited appealed Reddy’s Dr. was valid. that our patent the High Court, London ruled Court in 2008, the Patents In October has not been set. the appeal for hearing date this decision, and a lion for payment to those states that agree to settle. The charge we recorded for this matter in the third quarter billionof $1.42 will be suffi corporate integrity agreement with the Offi Services This (HHS). agreement will require us to maintain our compliance program and to undertake a set of defi corporate integrity obligations for fi In March 2004, the Offi commenced an investigation related to our U.S. marketing and promotional practices, including our communications with physicians and remuneration of physician consultants and advisors, with respect to Zyprexa, Prozac, and Prozac In addition, Weekly. the State Medicaid Fraud Control Units of more than 30 states coordinated with the EDPA in its investigation of any Medicaid-related claims relating to our marketing and promotion of Zyprexa. In January 2009, we announced that we reached resolution As of this matter. part of the resolution, we pled guilty to one misdemeanor violation of the Food, Drug, and Cosmetic Act and agreed million. to pay The $615.0 misdemeanor plea is for the off-label promotion of Zyprexa in elderly populations as treatment for dementia, including Alzheimer’s dementia, between September 1999 and March 2001. have We also entered into a settlement agreement resolving the federal civil claims, under which we will pay approximately $438.0 million, although we do not admit to the allegations. We have also agreed to settle the civil investigations brought by the State Medicaid Fraud Control Units of the states that have coordinated with theits in EDPA investigation, and will make available a maximum of approximately $362.0 Government Investigations Related and Litigation Whitehead Institute for Biomedical Research, and the President and Fellows of Harvard College in the U.S. Dis- trict Court for the District of Massachusetts sued us, alleging that sales of two of our products, Xigris and Evista, were inducing the infringement of a patent related to the discovery of a natural cell signaling phenomenon in the human body, and seeking royalties on past and future sales of these products. On May 4, 2006, a jury in Boston issued an initial decision in the case that Xigris and Evista sales infringe the patent. The jury awarded the plaintiffs approximately $65 million in damages, calculated by applying a 2.3 percent royalty to all U.S. sales of Xigris and Evista from the date of issuance of thepatent through the date of trial. In addition, a separate bench trial with the U.S. District Court of Massachusettswas held in August 2006, on our contention that the patent is unenforceable and impermissibly covers natural processes. In June 2005, the United States Patent and Trademark Offi commencedreexamination a of the patent, and in August 2007 took the position that the Ariad claims at issue are unpatentable,a position that Ariad continues to contest. September In the 2007, Court entered a fi indicating that Ariad’s claims are patentable, valid, and enforceable, and fi lion plus a 2.3 percent royalty on net U.S. sales of Xigris and Evista since the time of the jury decision. However, the Court deferred the requirement to pay any damages until after all rights to appeal have been exhausted. We have appealed this judgment. The Court of Appeals for the Federal Circuit heard oral arguments on the appeal on February 6, 2009. believe We that these allegations are without legal merit, that we will ultimately prevail on these issues, and therefore that the likelihood of any monetary damages is remote. • In Germany, generic pharmaceutical manufacturers Egis-Gyogyszergyar and Neolab Ltd. challenged the validity the validity Ltd. challenged and Neolab Egis-Gyogyszergyar • manufacturers pharmaceutical In Germany, generic France, Kingdom (U.K.), Spain, the United including in a number of other countries, challenges • received have We basis. cannot We determine the outcome of this litigation. The availabilityof generic olanzapine in additional markets could have a material adverse impact on our consolidated results of operations. FINANCIALS allegations in the Canadian actions are similar to those in the litigation pending in the U.S. U.S. inthe pending litigation inthe tothose similar are actions Canadian inthe allegations certifi certifi been has lawsuits four ofthese One Zyprexa. took who claims. tothese related scheduled been have trials No MDL. ofthe part are plaintiffs 90 about covering cases 80 about ofwhich 120 plaintiffs, mately approxi- covering U.S. inthe 105 lawsuits approximately include agreements tothese subject not claims liability 2007.during In January2007,we reached agreements• withanumberofplaintiffs’ attorneys to settle more than18,000 claims In June2005,we reached anagreement• inprinciple (andin September 2005afinal agreement) to settle more than follows: as were settlements primary fi ofpreviously number alarge including claimants, 32,670 mately ofapproxi- atotal cover agreements The claims. ofthe majority asubstantial tosettle litigation liability product 1596). York (MDL No. ofNew District Eastern the for Court District Federal inthe Weinstein Jack Honorable The before proceeding (MDL) Litigation District ofaMulti- part are lawsuits federal ofthe all Almost drug. the promoted improperly we that allege also claims ofthe Many ofZyprexa. effects side about warning and for testing ofinadequately us accuse typically and damages punitive and compensatory substantial seek claims The levels. blood-glucose high or todiabetes contributed or caused product the that alleging majority the with ofZyprexa, use the from ofinjuries avariety “claims”)the allege of the EDPAof the resolution. component state inthe participate California and Florida if resolved tobe matters these We expect providers. care ofhealth remuneration and toZyprexa, respect with practices promotional and marketing formulary, California’s Offi General’s Attorney California the from asubpoena received we 2006, InSeptember toZyprexa. respect with practices tional promo- and marketing our and ofZyprexa tosales relating ofdocuments production seeking ofFlorida, State the liability matters. The net charges, which take into account our actual insurance recoveries, covered the following: the covered recoveries, insurance actual our into account take which charges, net The matters. liability Wisconsin. and Washington, Texas, Vermont, see, Tennes- Dakota, South Island, Rhode Pennsylvania, Oregon, Oklahoma, Ohio, Dakota, North Carolina, North York, New Jersey, New Nevada, Nebraska, Missouri, Michigan, Massachusetts, Maryland, Maine, Kansas, Iowa, Indiana, Illinois, Hawaii, Florida, Delaware, California, Arizona, Alabama, are: settlement inthe participating states 32 The fi decrees consent through years, ofsix aperiod for Zyprexa regarding commitments tain cer- toundertake agreed and million $62.0 paid we conducted, were investigations the which under laws state of the fi no is there provision While any ofColumbia. violated have we that nding District the and states 32 with settlement a reached we 2008, InOctober general. ofattorneys committee executive an by coordinated effort investigative state ofamulti- part became requests ofthese Most laws. protection consumer state various under ofstates a number 62 blood- high or todiabetes contributed or caused Zyprexa that alleging Hospitals, and ofHealth Department siana Reserves for product• liabilityexposures anddefense costs regarding theknown Zyprexa product liabilityclaimsand The cost oftheZyprexa• product liability settlements to date; and bee have and U.S. inthe lawsuits liability product ofZyprexa number inalarge adefendant as named been We have Litigation Related and Liability Product practices. and procedures policies, processes, systems, company’s the on report and toassess organization for approximately $500million. 8,000 claimsfor $690.0millionplus$10.0to cover administration ofthesettlement. the claims. expected future claimsto theextent we could formulate areasonable estimate oftheprobable numberand cost of n notifi In early 2005, we were served with four lawsuits seeking class action status in Canada on behalf of patients ofpatients behalf on inCanada status action class seeking lawsuits four with served were we 2005, In early product Zyprexa U.S. The claims. remaining inall ofZyprexa defense vigorous our tocontinue prepared We are paid were settlements 2007 January The 2005. during paid was million $700.0 totaling settlement 2005 The Zyprexa inU.S. involved attorneys claimants’ various with intoagreements entered have we 2005, June Since Since the beginning of 2005, we have recorded aggregate net pretax charges of $1.61 billion for Zyprexa product of$1.61 product charges Zyprexa for pretax billion net aggregate recorded have we of2005, beginning the Since of general attorneys the from subpoenas or demands investigative civil received we 2006, inAugust Beginning of Unit, Control Fraud Medicaid Offi the from General, asubpoena Attorney ce ofthe received we 2005, In June In December 2004, we were served with two lawsuits brought in state court in Louisiana on behalf of the Loui- ofthe behalf on inLouisiana court instate brought lawsuits two with served were we 2004, In December ed in Ontario and includes all Canadian residents except for residents of Quebec and British Columbia. The The Columbia. British and ofQuebec residents for except residents Canadian all includes and inOntario ed ed of many other claims of individuals who have not fi not have who ofindividuals claims other ofmany ed ce seeking production of documents related to our efforts to obtain and maintain Zyprexa’s status on on status Zyprexa’s maintain and toobtain efforts toour related ofdocuments production ce seeking ed for residents of Quebec, and a second has been been has asecond and ofQuebec, residents for ed led suit. The lawsuits and unfi and lawsuits The suit. led led lawsuits and other asserted claims. The two two The claims. asserted other and lawsuits led led in the settling states. states. settling inthe led led claims (together (together claims led FINANCIALS 63 t led by the states of Alaska, Arkansas, Connecticut, Idaho, nancial position. nancial led in the EDNY purporting to be nationwide class actions on behalf of all consum- cation and order Judge order, Weinstein’s denying our motion for summary judgment, in ed a class consisting of third-party payors, excluding governmental entities and individual consumers. culties in obtaining product liability insurance due to a very restrictive insurance market.Therefore, for In 2005, two lawsuits were fi cannotWe determine with certainty the additional number of lawsuits and claims that may be asserted. The In addition, we have been named as a defendant in numerous other product liability lawsuits involving pri- Because of the nature of pharmaceutical products, it is possible that we could become subject to large num- und, we have been designated as one of several potentially responsible parties with respect to fewer sites. than 10 Under Superfund, each responsible party may be jointly and severally liable for the entire amount of the cleanup. alsoWe continue remediation of certainour of own sites. have We accrued for estimated Superfund cleanup costs, remediation, and certain other environmental matters. This takes into account, as applicable, available information regarding site conditions, potential cleanup methods, estimated costs, and the extent to which other parties can be expected to contribute to payment of those costs. have We limited liability insurance coverage for certain environmental liabilities. glucose levels, andthat we improperly promoted the drug. These cases have been removed to federal court and are now part of the MDL proceedings in the Eastern District of New (EDNY). York In these actions, the Department of Health and Hospitals seeks to recover the costs it paid for Zyprexa through Medicaid and other drug-benefi We appealed the certifi the appealed We Minnesota, Mississippi, Montana, New Mexico, Pennsylvania, South Carolina, Utah, and West Virginia in the courts of the respective states. The Connecticut, Louisiana, Minnesota, Mississippi, Montana, New Mexico, and West Vir- ginia cases are part the of MDL proceedings in the The EDNY. Alaska case was settled in March 2008 for a payment million,of $15.0 plus terms designed to ensure, subject to certain limitations and conditions, that Alaska is treated as favorably as certain other states that may settle with us in the future over similar claims. The following cases have been set for trial in 2009: Connecticut in the EDNY in June, Pennsylvania and South in November, Carolina in August, in their respective states. ers and third-party payors, excluding governmental entities, which have made or will payments make for their members or insured patientsbeing prescribed Zyprexa. These actions have now been consolidated into a single lawsuit, which is brought under certain state consumer protection statutes, the federal civil RICO statute, and common law theories, seeking a refund of the cost of Zyprexa, treble damages, punitive damages, and attorneys’ ledfees. in the EDNY additional Two in 2006lawsuits on similar grounds. were fi In September 2008, Judge Wein- certifi stein September 2008. In 2007, The Pennsylvania Employees Fund Trust brought claims in state court in Pennsylvania as insurer of Pennsylvania state employees, who were prescribed Zyprexa on similar grounds as described in the New cases. York As with the product liability suits, these lawsuits allege that we inadequately tested for and warned about side effects of Zyprexa and improperly promoted the drug. The Pennsylvania case is set for trial in October 2009. ultimate resolution of Zyprexa product liability and related litigation could have a material adverse impact on our consolidated results of operations, liquidity, and fi marily diethylstilbestrol (DES) and thimerosal. The majority of these claims are covered by insurance, subject to deductibles and coverage limits. bers of product liability and related claims for other products in the future. In the past few years, we have experienced diffi Environmental Matters Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Super- f substantially all of our currently marketed products, we have been and expect that we will continue to be completely self-insured for future product liability losses. In addition, there is no assurance that we will be able to fully collect from our insurance carriers in the future. programs, as well asthe costs the department alleges ithas incurred and will incur to treat Zyprexa-related illnesses. have We been served with similar lawsuits fi FINANCIALS 64 (2,800.0) 16.7 fl ofcash portion effective The income. innet $(2,786.8) included ofsecurities sales on gains realized net for respectively, 2006, and 2007, in2008, $16.9and oftax, net million, $(150.1) 13.2 $ (1,924.8) $(3,076.4) signifi $(166.8) efi $(111.2) (125.8) $(1,151.6) defi our on costs service prior and losses $550.9 (766.1) $14.6 . 31, 2008. December at Balance $1,317.0 . (loss) income comprehensive Other . 1, 2008. January at balance Beginning follows: as were (loss) income comprehensive ofother component toeach related balances accumulated The (Loss) Income Comprehensive 15: Other Note

resulting translation adjustments are made in shareholders’ equity rather than in income. inincome. than rather equity inshareholders’ made are adjustments translation resulting fl cash affect not do generally rates inexchange changes operations, those For rate. exchange for interest expense on interest rate swaps designated as cash fl cash as designated swaps rate interest on expense interest for respectively, $7.9 and $11.6 options 2006, and 2007, $17.1 million, and currency million, in2008, oftax, net million, foreign on losses realized for respectively, 2006, and 2007, in2008, oftax, net million, $2.3 and million, $8.8 lion, t of $1.02 billion for 2008. The income taxes related to the other components of comprehensive income were not not were income ofcomprehensive components other tothe related taxes income The 2008. for t of$1.02 billion The unrealized gains (losses) on securities is net of reclassifi cation adjustments of $1.7 million, $5.8 million, ofreclassifi of$1.7 million, net is $5.8 adjustments million, securities on cation (losses) gains unrealized The actuarial net unrecognized the with associated taxes income The taxes. ofincome net are above amounts The Generally, the assets and liabilities of foreign operations are translated into U.S. dollars using the current current the using dollars intoU.S. translated are operations offoreign liabilities and assets the Generally, cant, as income taxes were not provided for foreign currency translation. currency foreign for provided not were taxes income as cant, ned benefi Gains (Losses) on Securities Benefi t Plans Hedges Income (Loss) Income Hedges Benefit Plans Securities on (Losses) Gains rnlto (oss RtreHat Cs lw Comprehensive Flow Cash Health Retiree (Losses) Translation Currency Currency t pension and retiree health benefi health retiree and t pension Foreign ow hedges is net ofreclassifi net is hedges ow Unrealized ow hedges. Gains Gains

Defi Pension and Portion of of Portion and Pension ned Benefi cation adjustments of$9.6 mil- adjustments cation t fetv Accumulated Effective t t plans (Noteaben- 13) were t plans ows; therefore, Other FINANCIALS 65 Act icts The Red control sys- nancial accounting accounting nancial is reviewed on a nancial results. The inter- cer rm subject to shareholder nancial position, results of nancial reporting based on the The Red Book rm to discuss audit activities, internal nancial statements in accordance with nancial accounting and reporting that nancial codeethics, of which further reinforces rm have full and free access to the committee. nancial reporting, our underlying system of internal nancial information that is transparent, complete, timely, issued by the Committee of Sponsoring Organizations of the nancial information. A staff of internal auditors regularly moni- rm. The audit committee meets several times during the year with dence in our fi ned in Rules 13a-15(f) and 15d-15(f) under the Securities and 15d-15(f) ned in Rules Exchange 13a-15(f) nancial statements present fairly our fi dentiality of proprietary information. nancial reporting was designed and operating effectively. to enable employees to report suspected violations anonymously. Employees cer Senior Vice President and Chief Financial Offi ve nonemployee members of the board of directors, all of whom are indepen- nancial management must signfi a nancial reporting has been assessed by Ernst Their responsibility LLP. & Young is to nancial policies that govern critical areas, including internal controls, fi The Red Book nancial statements have been audited by Ernst an independent LLP, & Young registered ows. nancial reporting as defi nancial statements and other fi rm. Their responsibility is to examine our consolidated fi duciary accountability, and safeguardingcorporate of assets. Our internal accounting nancial reporting matters, including reviews of our externally published fi Internal Control—Integrated Framework Control—Integrated Internal nancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of nancial statements. The statements have been prepared in accordance with generally accepted ac- duciaryresponsibilities. ) that applies to all employees worldwide, requiring proper overall business conduct, avoidance of confl We areWe dedicated to ensuring that we maintain the high standards of fi Our audit committee includes fi The consolidated fi The internal control over fi We conductedWe an evaluation of the effectiveness of our internal control over fi In addition to the system of internal accounting controls, we maintain a code of conduct (known as cation, approve both audit and nonaudit services performed by the independent registered public accounting rnal control over fi ation of the fi rm, and review the reports submitted by the fi nancial reporting was effective as of December 2008. 31, because However, of its inherent limitations, internal management, the internal auditors, and the independent public accounting fi dent from our company. The committee charter, which is published in the proxy statement, outlines the members’ roles and responsibilities and is consistent with enacted corporate reform laws and regulations. It is the audit committee’s responsibility to appoint an independent registered public accounting fi ratifi fi controls, and fi Management’s Report on Internal Control Over Financial Reporting—Eli Lilly and Company and Subsidiaries Management of Eli Lilly and Company and subsidiaries is responsible for establishing and maintaining adequatein- te nal auditors and the independent registered public accounting fi we have established. are We committed to providing fi relevant, and accurate. Our culture demands integrity and an unyielding commitment to strong internal practices and policies. Finally, we have the highest confi controls, and our people, who are objective in their responsibilities and operate under a code of conduct and the highest level of ethical standards. generally accepted auditing standards of the Public Company Accounting Oversight Board (United States). Ernst opinion with respect& Young’s to the fairness of the presentation of the statements (see opinion on page 66) is included in our annual report. Ernst reports & Young directly to the audit committee of the board of directors. public accounting fi their fi who report suspected violations are protected from discrimination or retaliation by the company.addition In to The Red Book, the CEO, and all fi effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Treadway Commission. Based on our evaluation under this framework, we concluded that our internal control over fi control over fi evaluate whether internal control over fi John Ph.D. Lechleiter, C. Derica Rice W. Book periodic basis with employees worldwide, and all employees are required report to suspected violations. A hotline number is published in tems are designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management’s authorization and are properly recorded, and that accounting records are adequate for preparation of fi tors, on worldwide a basis, the adequacy and effectiveness of internal accounting controls. The general auditor reports directly to the audit committee of the board of directors. framework in February 2009 16, Chairman, President, and Chief Executive Offi counting principles in the United States and include amounts based on judgments and estimates by management. In management’s opinion, the consolidated fi operations, and cash fl Management’s Reports Management’s Management’s Report for Financial Statements—Eli Lilly and Company and Subsidiaries Management of Eli Lilly and Company and subsidiaries is responsible for the accuracy, integrity, and fair presen- t of interest, compliance with laws, and confi of 1934. have We global fi and reporting, fi FINANCIALS cial statement presentation. We believe that our audits provide a reasonable basis for our opinion. our for basis areasonable provide audits our that We believe presentation. statement cial 2008, based on criteria established in established criteria on based 2008, fi over control internal subsidiaries’ and Company and Lilly Eli States), (United conformity with U.S. generally accepted accounting principles. accounting accepted generally U.S. with conformity fl cash their and operations oftheir results ed fi 66 signifi and used principles accounting fi inthe disclosures and amounts the supporting evidence fi the whether about assurance reasonable toobtain audit the perform and plan we that require standards Those States). (United fi these on opinion an toexpress is responsibility Our fi These 31, 2008. December ended period inthe years three ofthe each for 64) through 36 pages and 33, 23, 21through 16, pages (page (loss) income sive fl cash ofoperations, statements consolidated related the and 2007, and 31, 2008 December of as subsidiaries and Company and Lilly ofEli sheets balance consolidated accompanying the audited We have Company and Lilly Eli and Shareholders ofBoard Directors Report ofIndependentRegisteredPublicAccountingFirm 16, 2009 February Indiana Indianapolis, taxes. income for pronouncement accounting new opinion thereon. unqualifi an expressed 16, 2009 February dated report our and Commission Treadway ofthe Organizations ing nancial position of Eli Lilly and Company and subsidiaries at December 31, 2008 and 2007, and the consolidated consolidated the and 2007, and 31, 2008 December at subsidiaries and Company and Lilly ofEli position nancial We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board Board Oversight Accounting Company Public ofthe standards the with inaccordance audited, have We also fi the opinion, In our We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board Board Oversight Accounting Company Public ofthe standards the with inaccordance audits our We conducted As discussed in Note 12 inNote fi tothe discussed As nancial statements are free of material misstatement. An audit includes examining, on a test basis, basis, atest on examining, includes audit An misstatement. ofmaterial free are statements nancial nancial statements referred to above present fairly, in all material respects, the consolidat- the respects, material inall fairly, present toabove referred statements nancial nancial statements, in 2007 Eli Lilly and Company and subsidiaries adopted a adopted subsidiaries and Company and Lilly Eli in2007 statements, nancial cant estimates made by management, as well as evaluating the overall fi overall the evaluating as well as management, by made estimates cant Internal Control—Integrated Framework nancial statements are the responsibility of the company’s management. management. company’s ofthe responsibility the are statements nancial ows for each of the three years in the period ended December 31, 2008, in 31, 2008, December ended period inthe years three of the each for ows nancial statements based on our audits. our on based statements nancial nancial statements. An audit also includes assessing the the assessing includes also audit An statements. nancial issued by the Committee ofSponsor- Committee the by issued nancial reporting as of December 31, ofDecember as reporting nancial ows, and comprehen- and ows, ed nan- FINANCIALS 67 nancialreport- issued by the Committee of nancial statements in accordance nancial reporting as of Decem- nancial reporting and for its assess- nancial statements for external purposes nancial reporting, assessing the risk that a mate- nancial reporting may not prevent or detect misstate- ed opinion thereon. opinion ed nancial reporting included in the accompanying Management’s nancial statements. nancial Internal Control—Integrated Framework Control—Integrated Internal nancial reporting was maintained in all material respects. Our audit nancial statements of Eli Lilly and Company and subsidiaries and our nancial reporting is a process designed to provide reasonable assurance nancial reporting and the preparation of fi ect the transactions and dispositions of the assets of the company; (2) provide reasonable nancial reporting based on our audit. nancial reporting as of December 2008, 31, based on the COSO criteria. We conductedWe our audit in accordance with the standardsof the Public Company Accounting Oversight Board We alsoWe have audited, in accordance with the standards of the Public Company Accounting Oversight Board In our opinion, Eli Lilly and Company and subsidiaries maintained, in all material respects, effective internal A company’s internal control over fi Because of its inherent limitations, internal control over fi in accordance with generally accepted accounting principles. A company’s internal control over fi ing includes those policies and pertain procedures that to the (1) maintenance of records that, in reasonable detail, accurately and fairly refl assurance that transactions are recorded as necessary to permit preparation of fi with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide (3) reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could havea material effect on the fi ber 31, 2008,ber 31, based on criteria established in rial weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. We haveWe audited Eli Lilly and Company and subsidiaries’ internal control over fi Report of Independent Registered Public Accounting Firm Firm Public Accounting Registered of Independent Report Board of Directors and Shareholders Eli Lilly and Company Report on Internal Control Over Financial Reporting. Our responsibility isto express an opinion on the company’s internal control overfi (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over fi included obtaining an understanding of internal control over fi Sponsoring Organizations the of Treadway Commission (the COSO criteria). Eli Lilly and Company and subsidiaries’ management is responsible for maintaining effective internal control overfi ment the of effectiveness of internal control over fi ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. regarding the reliability of fi report dated February 2009, expressed 16, an unqualifi (United States), the 2008 consolidated fi control over fi Indianapolis, Indiana February 2009 16, PROXY STATEMENT 6868 purposes: 11:00 following at the 2009, for EDT 20, a.m. April Monday, on Indiana, Center, Indianapolis, Corporate Lilly Auditorium, Center Lilly the at held be will Company and Lilly ofEli ofshareholders meeting annual The 2009 20, April Notice ofAnnualMeetingShareholders http://www.lilly.com/pdf/lillyar2008.pdf at available are statement proxy and report annual The 2009: 20, April held be to meeting shareholder the for materials proxy of availability the regarding notice Important Offi Executive Chief and President, Chairman, C.Lechleiter, Ph.D. John toattend. plan you if even meeting, the at represented are shares your certain tobe inorder Internet the on or telephone, by mail, by tovote you Iurge important. Your very is vote 11:00 at EDT. Indiana, a.m. Center, Indianapolis, Corporate Lilly Auditorium, Center Lilly the at 2009, 20, April Monday, on ofshareholders meeting annual our toattend invited You cordially are Shareholder:Dear 9,March 2009 Notice of2009AnnualMeetingandProxy Statement Indianapolis, Indiana Indianapolis, 9,March 2009 Secretary B.Lootens James ofdirectors, board ofthe order By 9,March 2009. you. ticket with this bring please meeting, the toattend plan you If ticket. admission fi and media the from guests invited meeting. ofthe adjournment any at and • to consider andvote onashareholder• proposal requesting thattheboard ofdirectors adoptapolicyofasking to consider andvote onashareholder• proposal requesting thatthecompany amenditsarticles ofincorporation to consider andvote onashareholder• proposal requesting thattheboard eliminate allsupermajorityvoting to reapprove• thematerial terms ofperformance goalsfor theEliLilly andCompanyBonusPlan to approve• amendmentsto thearticles ofincorporation to provide for annualelection ofalldirectors to ratify theappointmentbyauditcommittee ofErnst &Young• LLPasprincipalindependentauditor for the to elect four directors• ofthecompany to serve three-year terms I look forward to seeing you at the meeting. meeting. the at you toseeing forward I look 71. page on described meeting tothe admission for procedures our note Please meeting. the at consider will we business the describe follow that statement proxy and ofmeeting notice The This combined proxy statement and annual report to shareholders and the proxy are being mailed on or about about or on mailed being are proxy the and toshareholders report annual and statement proxy combined This and shareholders, from proxies holding those toshareholders, limited be will meeting the at Attendance meeting the at tovote entitled be 13, will 2009, February on ofbusiness close the at ofrecord Shareholders shareholders to ratify thecompensation ofnamedexecutive officers attheannualmeetingofshareholders. to allow shareholders to amendthecompany’s bylawsbymajorityvote provisions from thecompany’s articles ofincorporation andbylaws year 2009 nancial community. A page at the back of this proxy statement contains an an contains statement proxy ofthis back the at Apage community. nancial cer PROXY STATEMENT 6969 cation and of the auditor, If your shares are the held broker by will a broker, ask you how you want your shares to be voted. law. by ed of principal independent auditor of the appointment cation —the appointment of principal independent auditor —the management proposal to reapprove performance goals for the company’s bonus plan shareholder proposals.—the Abstentions will not be counted either for or against these proposals. have nonvotes and broker abstentions this item, For shares. of the outstanding of 80 percent the vote requires the proposal. against as a vote the same effect The four nominees for director will be elected if they receive a majority of the votes cast. Abstentions will not Abstentions cast. a majority of the votes receive if they will be elected director nominees for The four a nominee. or against either for cast as votes count proposal: election of directors of directors election and bylaws incorporation The board of directors of Eli Lilly and Company is soliciting proxies to be voted at the annual meeting of share- • • The management proposal to amend the articles of incorporation to provide for annual election of all directors of all directors annual election for provide to of incorporation • amend the articles to management proposal The • the against those cast exceed the proposal for cast if the votes will be approved • of business items following The • held directly in your name as the shareholder of record of record name as the shareholder • in your held directly bank, or other nominee • a broker, with in an account you held for 401(k) Plan (the 401(k) plan). Employee • in the Lilly account your to attributed • ratifi of all directors annual election for provide to of incorporation articles • amending the company’s plan bonus cash the company’s goals for performance • reapproving of articles the company’s from provisions voting on eliminating supermajority • proposal a shareholder bylaws amend the company’s to shareholders on allowing • proposal a shareholder compensation. of executive cation ratifi on shareholder • proposal a shareholder g. As of the record date, 1,149,015,882 shares of companyg. As common of the stock record were date, issued 1,149,015,882 and outstanding. olders (the annual meeting) to be held on Monday, April 20, 2009, and at any adjournment of the annual meeting. as already passed. Nonetheless, in case there is an unforeseen need, the accompanying proxy gives discretion- ou have one vote for each share of common stock you held on the record date, including shares: What will the shareholders vote on at the annual meeting? items: Seven When the company asks for your proxy, we must provide you with a proxy statement that contains certain information specifi If you give the broker instructions, your shares will be voted as you direct. If you do not give instructions, one of two thingscan happen, depending on the type of proposal. For the election of directors, the ratifi the management proposals on reapproving performance goals for the company’s bonus plan and amending the articles of incorporation to provide for annual election of all directors,the broker may vote your shares in its discretion. For all other proposals,the broker may not vote your shares at all. When that happens, it is called a “broker nonvote.” Broker nonvotes. What constitutes quorum? a A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the annual meet- in How many votes are required for the approval of each item? There are differing vote requirements for the various proposals. Who is entitled to vote? Shareholders as of the close of business on February 2009 13, (the record date) may vote at the annual meeting. Y ary authority to the persons named on the proxy with respect to any other matters that might be brought before the meeting. Those persons intend to vote that proxy in accordance with their best judgment. Will there be any other items of business on the agenda? doWe not expect any other items of business because the deadline for shareholder proposals and nominations h h General Information General Why did I receive this proxy statement? PROXY STATEMENT s your tovote nominee other or broker your instruct may you nominee, other or abroker by held shares have you If broker? my by held are that shares Ivote do How meeting. the at inperson voting by proxy your revoke also may you record, of ashareholder are you If mail. by or Internet, the on telephone, by proxy alater-dated delivering (2) or in writing until11:59 19, available EDT, be p.m. will April voting 2009. Internet card. proxy your return not do Internet, the on vote you If mail. by voting as effect same the has Internet the Voting on availability. of their notifi that message e-mail inthe instructions the follow electronically, materials these or, received you if 7070 include: shares undirected These received. w vote your decline, you unless Inaddition, date. record the on account toyour allocated shares the You all vote may Ivote? can plan 401(k) the in shares many How card. aproxy than rather Inte the on or telephone, by mail, by 401(k) plan inthe shares your tovote how on trustee plan the You instruct may plan? 401(k) the in shares my Ivote do How to v you However, encourage we meeting. the at inperson shares your vote may you ofrecord, ashareholder are you If person? in Ivote do How Internet. the on and telephone, at online You vote may Internet. the On 19,EDT, April 2009. until11:59 available be p.m. will Telephone voting card. proxy your return not do telephone, by vote you If mail. by notifi that message e-mail inthe tions instruc- the following by electronically, materials these or, received card you if proxy enclosed the on instructions the following by telephone by vote may Canada and Rico, By telephone. Puerto States, United inthe Shareholders address. mailing and name your with along materials, ofthese availability electronic ofthe you notifying received you that message e-mail the from number control the us give you 317-433-5112. sure make calling by Please card, aproxy including materials, ofthese copies paper request may you below, discussed as Internet the on or telephone by than rather mail, by tovote wish you If proposals. shareholder the against and plan, bonus company’s the for goals performance ing reapprov- and ofincorporation articles the amending on proposals auditor, management the for independent of the ratifi the for below, listed director for nominees ofthe election the for behalf your on vote will we preferences, voting your indicate not do but proxy signed your return you If owners. ofall behalf on sign may owner one ownership, injoint held minor. is the not stock sign, the If should custodian the Act), toMinors fers Trans- Uniform the under example, (for aminor for incustody held is stock the If capacity. or title your and name offi the or trustee, tor, guardian, administrator, execu- attorney-in-fact, an as example, (for capacity inarepresentative signing are you If proxy. the on appears it B methods. following ofthe one any by proxy your vote may you ofrecord, ashareholder are you If proxy? by Ivote do How hares by following instructions that the broker or nominee provides for you. Most brokers offer voting by mail, by by mail, by voting offer brokers Most you. for provides nominee or broker the that instructions following by hares Sign and date each proxy card you receive and return it in the prepaid envelope. Sign your name exactly as as exactly name your Sign envelope. prepaid inthe it return and receive you card proxy each date and Sign y mail. ill also apply to a proportionate number of other shares held in the 401(k) plan for which voting directions are not not are directions voting which for 401(k) plan inthe held shares ofother number toaproportionate apply also ill • shares heldinthe planthatare• notyet credited to individualparticipants’ accounts. shares credited• to theaccounts ofparticipants whodonotreturn theirvoting instructions (except for a ote by mail, by telephone, or on the Internet even if you plan to attend the meeting. the toattend plan you if even Internet the on or telephone, by mail, by ote rnet as described above, except that, if you vote by mail, the card that you use will be a voting instruction card card instruction avoting be will use you that card the mail, by vote you if that, except above, described as rnet You have the right to revoke your proxy at any time before the meeting by (1) notifying the company’s secretary secretary company’s the (1) by meeting the before time notifying any at proxy your torevoke You right the have Note that if you previously elected to receive these materials electronically, you did not receive a proxy card. card. aproxy receive not did you electronically, materials these toreceive elected previously you if that Note participants to whoseaccounts theshares are credited) small numberofshares from a priorstock ownership plan,whichcan bevoted only onthedirections ofthe ed you of their availability. Voting by telephone has the same effect as voting voting as effect same the has telephone Voting by availability. oftheir you ed www.proxyvote.com cer or agent of a corporation or partnership), please indicate your your indicate please partnership), or ofacorporation agent or cer . Follow the instructions on the enclosed proxy card card proxy enclosed the on instructions the . Follow cation of the appointment oftheappointment cation ed ed you PROXY STATEMENT 7171 cationsfor duciaries are required to act prudently in making vot- rst-served basisin the garage indicated on the map on page 127. rst-come,fi ll it out and bring it with you to the meeting. The meeting will be held at the Lilly Center residing Director, Board of Directors Eli Lilly and Company c/o Corporate Secretary Lilly Corporate Center Indianapolis, Indiana 46285 P All such communications will be forwarded to the relevant director(s), except for solicitations or other matters If you do not want to have your vote applied the to undirected shares, you should check the box marked “I All participants are named fi duciariesAll participants under the terms plan of the 401(k) and are under named the Employee fi Retirement Parking will be available on a fi http://investor.lilly.com/governance.cfm or in paper form upon request to the company’s corporate secretary. nsideredfor inclusion in next proxy year’s statement, he or she must submit the proposal in writing so that we ortionally to all shares for which voting instructions are not otherwise received. roxy statement. Please fi ach card. Alternatively, if you vote by telephone or on the Internet, you will need to vote once for each proxy card tatements and annual reports online. If you elect this feature, you will receive an e-mail message notifying you How do I submit a shareholder proposal for the annual 2010 meeting? The company’s annual 2010 meeting is scheduled If 2010. a shareholder for April wishes 19, to have a proposal co unrelated to the company. What happens if I do not vote my 401(k) plan shares? sharesYour will be voted by other plan participants who have elected have to their voting preferences applied pro- p decline.” Otherwise, the trustee will automatically apply your voting preferences to the undirected shares propor- tionally with all other participants who elected to have their votes applied in this manner. ing decisions. Income Security Act (ERISA) for the limited purpose of voting shares credited to their accounts and the portion of undirected shares to which their vote applies. Under ERISA, fi each account. when the materials are available, along with a web address for viewing the materials and instructions for voting by telephone or on the Internet. If you have more than one account, you may receive separate e-mail notifi Does the company offer an opportunity to receive future proxy materials electronically? IfYes. you are a shareholder of record or a member of the plan, 401(k) you if you may, wish, receive future proxy s receive it by 2009. November Proposals 9, should be addressed to the company’s corporate secretary, Lilly Corpo- Indianapolis,rate Center, Indiana 46285. In addition, the company’s bylaws provide that anyshareholder wishing to propose any other business at the annual meeting must give the company written notice by 2009. November That 9, notice must provide certain other information as described in the bylaws. Copies of the bylaws are available online at What should I do if I want to attend the annual meeting? All shareholders as of the record datemay attend by presenting the admission that ticket appears at the end of this p Auditorium. Please use the Lilly Center entrance to the south of the fountain at the intersection of Delaware and McCarty streets. will You need to pass through security, including a metal Present detector. your to the ticket usher theat meeting. Who tabulates the votes? The votes are tabulated by an independent inspector of election, IVS Associates, Inc. and voting instruction card you receive. What does it mean if I receive more than one proxy card? It means that you hold shares in more ensure than one account. that all To your shares are voted, sign and return e How do I contact the board of directors? may sendYou written communications to one or more members of the board, addressed to: If you have questions about admittance or parking, you may call 317-433-5112. PROXY STATEMENT s proxy 2009 and report annual 2008 ofthe copy aseparate toreceive wish and inhouseholding participate you If statement? proxy and report annual the of copy aseparate receive to Iwant if What ofrecord. ers 7272 request. your upon promptly toyou documents requested the deliver York11717. New Way, Edgewood, 51 Mercedes We will Department, to: Householding write 1-800-542-1061 or a address same the have who ofrecord shareholders which under aprocedure “householding,” adopted We have isWhat “householding”? 317-433-5112. call information, more For time. any at delivery electronic Yes. You discontinue may later? mind my Ichange Can Inte with associated expenses usual the incur You may, ofcourse, delivery. electronic for nothing charges company The delivery? electronic of costs the are What materials. of proxy copies duplicate receiving toavoid way easy an y toreceive you for way aconvenient also is It costs. mailing and printing company’s the reduces delivery Electronic What are the benefi the are What broker. ofyour instructions the follow Please electronically. future. inthe electronically will not affect dividend check mailings. check dividend affect not will mailings. duplicative reducing by costs postage and printing saves procedure This copies. al notifi shareholders ofthese more or one unless statement proxy our proxy materials and makes it easy to vote your shares online. If you have shares in more than one account, it is is it account, one than inmore shares have you If online. shares your tovote easy it makes and materials proxy our tatement, or if you wish to receive separate copies of future annual reports and proxy statements, please call call please statements, proxy and reports annual offuture copies separate toreceive wish you if or tatement, nd last name and do not receive proxy materials electronically will receive only one copy of our annual report and and report annual ofour copy one only receive will electronically materials proxy receive not do and name last nd • You• maysignupatanytimebyvisitinghttp://investor.lilly.com/services.cfm. If you vote onlineasdescribedabove, you maysignupfor• electronic delivery atthattime. rnet access, such as telephone charges or charges from your Internet service provider. service Internet your from charges or charges telephone as such access, rnet If you hold your shares in a brokerage account, you may also have the opportunity to receive proxy materials materials proxy toreceive opportunity the have also may you account, inabrokerage shares your hold you If materials receiving tocontinue anything todo need not do you electronically, materials these received you If ways: intwo delivery electronic You upfor sign may Benefi Householding cards. proxy separate toreceive continue will inhouseholding participate who Shareholders cial shareholders can request information about householding from their banks, brokers, or other hold- other or brokers, banks, their from householding about information request can shareholders cial ts of electronic delivery? delivery? electronic of ts es us that they wish to continue receiving individu- receiving tocontinue wish they that us es PROXY STATEMENT 7373 cer in February cer and of Tropicana rm that provides business cer, Nalco Holdingcer, Company rm. Prior to joining North Castle, she served as Age 62 Director since 2002 Age 49 Director since 2005 Age 69 Director since 2002

cer of a start-up B2B exchange for the food and beverage industry.

cer of the Nabisco Biscuit Company, the largest operating unit of Nabisco, Inc.; from eorge F. Bakereorge Professor F. of Economics, Harvard University resident, The Barnegat Group LLC hairman, President, and Chief Executive Offi P 2008. From 2003 to 2008, Fyrwald Mr. served as group vice president the of agriculture and nutrition division at E.I. du Pont de Nemours and Company. From 20002003, until he was vice president and general manager Nutrition of DuPont’s and Health business. Mr. In 1999, Fyrwald was vice president for corporate strategic planning and business development. At FyrwaldDuPont, Mr. held a broad variety of assignments in a number of divisions covering many industries. He has worked in several locations throughout North America and Asia. Ellen R. Marram Mr. FyrwaldMr. joined Nalco Holding Company leading (a integrated water treatment and process improvement company) as chairman, president, and chief executive offi From 1993 to 1998, Ms. Marram was president and chief executive offi the Tropicana Beverage Group. From 1988 to 1993, she was president and chief executive offi 1987 to 1988, she was president Grocery of Nabisco’s Division; and from to 1986, 1970 she held a series of marketing positions at Nabisco/Standard Brands, Johnson & Johnson, and Lever Brothers. Ms. Marram is a member of the board of directors of Ford Motor Company and The New Times York Company, as well as several private companies. She serves on the boards of Institute for the Future, The New York-Presbyterian Hospital, Lincoln Center FamiliesTheater, and Work Institute, and Citymeals-on-Wheels. the chief executive offi Ms. Marram is the president of The Barnegat Group LLC, a fi advisory services. She was a managing director at North Castle Partners, LLC from 2000 to 2005 and is currently an advisor to the fi C Dr. Feldstein is presidentDr. emeritus of the National Bureau of Economic Research and the Baker George Professor F. of Economics at Harvard University. He became an assistant professor an associate at Harvard professor From in 1967, 1982 and in 1968, a professor in 1969. through 1984, he served as chairman the of Council of Economic Advisers and President Ronald chief economic Reagan’s adviser. President Obama has appointed him as a member of the Economic Recovery Advisory Board. He is a member of the American Philosophical Society, a corresponding fellow of the British Academy, a fellow of the Econometric Society, and a fellow of the National Association for Business Economics. Feldstein is a member Dr. of the executive committee of theTrilateral Commission and a director American of Inter- national Group, Inc. and Economic Studies, Inc. He is a member of the American Academy of Arts and Sciences and past president of the American Economic Association. J. Erik Fyrwald G Martin Feldstein, S. Ph.D. he following four directors’ terms will expire at this annual year’s meeting. Eachthese of directors has been Class of 2009Class of T nominated and is standing for election to serve a term that will expire of this proxy See in 2012. page statement 113 information. more for Board of Directors Board Directors’ Biographies PROXY STATEMENT The following four directors will continue inoffi continue will directors four following The 2010 of Class 7474 ing under interim election since December 2008. December since election interim under ing serv- been has Mr. Trust. Oberhelman America Wetlands the and Seals, Easter Institute, ing Manufactur- the ofManufacturers, Chapter, Association National the Conservancy—Illinois offi executive ofCaterpillar’s member and president agroup elected was he and division ucts prod- engine the for responsibility with president vice became he In1998, 1998. November 1975. Dr. Prendergast serves on the board of trustees of the Mayo Foundation. Mayo ofthe oftrustees board the on serves Dr.1975. Prendergast since School Medical Mayo the at positions teaching other several held has He Medicine. Individualized for Center Clinic Mayo ofthe director the and School Medical Mayo at tics Therapeu- Experimental and Pharmacology ofMolecular Professor and Biology Molecular and ofBiochemistry Professor Guggenheim Marion and Edmond the is Dr. Prendergast Mayo Clinic CancerCenter Emeritus, Director and Medicine; Individualized for Center Clinic Mayo Director, School; Medical Mayo Therapeutics, Experimental and Pharmacology Molecular of Professor Oberhelman R. Douglas E Ph.D. M.D., G.Prendergast, Franklyn Directors. ofOutstanding Institute ofthe president in1999. ofFame Hall past is He Accounting ofthe member 62nd the named was and Governance Corporate on Panel Ribbon Blue Directors ofCorporate Association National ofthe a member was He Committee. sory Advi- Audit of Defense Department ofthe chairman is and States United ofthe General troller Comp- tothe Council Advisory Accountability ofthe chairman is He Inc. &Fragrances Flavors International and Corporation ofComcast boards the on serves He Institute. Research Scripps ofThe atrustee is and Board Oversight Accounting Company Public ofthe Council Advisory ofthe 1989. member through Mr. 1986 emeritus an is from Cook executive chief and man chair- as in1964 served and &Sells Haskins in1999. Deloitte, joined He retirement until his offi executive chief and chairman as Mr. served Cook G Re Cook J. Michael plc. Prudential and Inc. Companies, McGraw-Hill ofThe director anonexecutive is He plc. ofSchroders executive chief group and &Co. Schroder ofJ. Henry chairman including there, ofpositions a number in1966 held and Group Schroder the joined He plc. ofSchroders chairman was he to 2000, 1995 From to2007. 2000 from Europe ofCitigroup chairman as served He 2009. February until 2007 December from Inc. ofCitigroup chairman as served Bischoff Winfried Sir for Caterpillar Americas Co; region fi region Co; Americas Caterpillar for fi senior including ofpositions, avariety held has in1975 and Caterpillar joined He Inc. ofCaterpillar president agroup is Mr. Oberhelman elected a vice president in 1995, serving as Caterpillar’s chief fi chief Caterpillar’s as serving in1995, president avice elected affi Caterpillar’s Mitsubishi, Caterpillar Shin at planning strategic for director managing and Division; Commercial American North Bischoff Winfried Sir Re dmond and Marion Guggenheim Professor of Biochemistry and Molecular Biology and and Biology Molecular and Biochemistry of Professor Guggenheim Marion and dmond roup President, Caterpillar Inc. Inc. Caterpillar President, roup ce in 2002. Mr. Oberhelman serves on the boards of Ameren Corporation, The Nature Nature The Corporation, ofAmeren boards the on serves Mr. Oberhelman ce in2002. tired Chairman and Chief Executive Offi Executive Chief and Chairman tired tired Chairman, Citigroup Inc. Citigroup Chairman, tired

ce until2010. nance manager and district manager for the company’s company’s the for manager district and manager nance Age 63 Director since 1995 since Director 63 Age liated company in Tokyo, Japan. Mr. Oberhelman was was Mr. inTokyo, Japan. Oberhelman company liated Age 56 Director since 2008 since Director 56 Age Age 66 Director since 2005 since Director 66 Age Age 67 Director since 2000 since Director 67Age cer, Deloitte &Touchecer, LLP Deloitte nance representative based in South America America inSouth based representative nance cer of Deloitte & Touche LLP from 1989 1989 from &Touche LLP ofDeloitte cer nancial nancial offi cer from 1995 to from cer PROXY STATEMENT 7575 cer and president of cer of McDonald’s Corporation since cer of UnitedParcel Service, Inc., from 53 cer, United Parcel Service,cer, Inc. Age 59 Director since 2008 Age 59 Director since 1995 cer, McDonald’s Corporation cer, ce until 2011. ce until 2011. tired Executive Vice President, Kimberly-Clark Corporation rmer Chairman and Chief Executive Offi resident andChief Operating Offi Michael L. Eskew Fo Ralph Alvarez Age P Ms. Seifert served as executive vice president for Kimberly-Clark Corporation until June 2004. She joined Kimberly-Clark and 1978 in served in several capacities in connection with both the domestic and international consumer products businesses. Prior to joining Kimberly- Clark, Ms. Seifert held management positions at Procter & Gamble, Beatrice Foods, and Fort Howard Paper Company. She is chairman of Katapult, LLC. Ms. Seifert serves on the boards of Supervalu Inc.; Revlon Consumer Products Corporation; Lexmark International, Inc.; Appleton Papers Inc.; the U.S. Fund for UNICEF; and the Cities Fox Performing Arts Center. AlvarezMr. has been president and chief operatingoffi August 2006. Previously, he served as president of McDonald’s North America, with responsibility for all the McDonald’s restaurants the in U.S. and Canada. Prior to that, he was president of McDonald’s USA. Alvarez Mr. joined and McDonald’s has held in 1994 a variety of leadership roles throughout including his career, chief operations offi the Central Division, both with McDonald’s USA, and president of McDonald’s Mexico. Prior to joining McDonald’s, he held leadership positions at Burger King Corporation and Wendy’s International, Alvarez Inc. Mr. serves on the boards of McDonald’s Corporation and Key- Corp. He currently serves on the President’s Council and the International Advisory Board of the University of Miami, and he is a member of the board of trustees for Field Chicago’s Museum. Kathi P. SeifertKathi P. Re Mr. Eskew servedMr. as chairman and chief executive offi January 2002 until December He 2007. continues to serve on the UPS board of directors. Mr. Eskew began his UPS career as 1972 in an industrial engineering manager and held various positions of increasing responsibility, including time with operations UPS’s in Germany and with UPS Airlines. Eskew was In 1993, Mr. named corporate vice president for industrial engineering. years Two later he became group vice president for engineering. In 1998, he was elected to the UPS board Eskew of directors. was Mr. named executive In 1999, vice president and a year later was given the additional title of vice chairman. Eskew serves Mr. as chairman of the board of trustees of the Annie E. Casey Foundation. He also serves on the boards of 3M Corporation and IBM Corporation. Class of 2011 The following four directors will continue in offi In addition, beginning Alvarez on April 2009, Mr. will 1, serve as a director under interim election for a term that will expirein 2010. PROXY STATEMENT 7676 Re Ph.D. Horn, N. Karen in1994. Medicine or in Physiology Prize Nobel ofthe arecipient Dr.Inc. was Gilman Pharmaceuticals, ofRegeneron in1977. there adirector is He ofpharmacology a professor named 1971 to1981 was from and ofMedicine School ofVirginia University ofthe faculty the on Dr. in1995. was Gilman professor aregental named was and university the at Science inMedical Chair M.D., Gill, James Atticus the and Science, inMedical Chair Distinguished Tom and Nadine the Craddick Neuropharmacology, ofMolecular Chair Distinguished Willie Ellen and 1981.Raymond the since holds Center He Medical ofTexas Southwestern versity Uni- the at ofpharmacology professor and 2005 since School Medical Texas Southwestern of University ofthe dean and Dallas at Center Medical ofTexas Southwestern University ofthe provost and affairs academic for president vice executive as Dr. served has Gilman Center Medical Texas of Southwestern University The Biology, Systems and Computational, Molecular, for Center Green Ida and Cecil the of Director and Pharmacology of Professor Regental and School; Medical Southwestern Dean, Dallas; at Center Medical western Age 67 Director since 1995 since Director 67 Age E Ph.D. M.D., G.Gilman, Alfred C Ph.D. Lechleiter, C. John 2004. since Group Capital ofBrock director managing senior been has Horn Ms. Corporation. Southern Norfolk and Inc.; Group, Property Simon appointment; apresidential Fund, Investment Russia U.S. The Funds; Mutual ofT. Price Rowe director as serves Horn Ms. ofBoston. Bank National First of president vice and ofPennsylvania; Telephone Company ofBell treasurer of Cleveland; Bank Reserve Federal ofthe president offi N.A.; executive chief Cleveland, One, ofBank cer and chairman Trust Company; Bankers at banking private ofinternational head and director managing senior was she Marsh, tojoining Prior in2003. retirement untilher 1999 from Inc. ofMarsh, director managing and Services Client ofPrivate president as served Horn Ms. Way of Central Indiana board of directors. ofdirectors. board Indiana ofCentral Way United ofthe amember and ofIndianapolis Children’s Museum toThe advisor distinguished a as serves he Inaddition, Ohio). (Cincinnati, University ofXavier oftrustees board of the amember and School Business ofHarvard Committee Visiting ofthe amember as serves also He Council. Business the and Roundtable Business ofthe amember as and (PhRMA) of America Manufacturers and Research ofPharmaceutical ofdirectors board of the mittee com- executive ofthe amember as Dr. serves Society. Lechleiter Chemical American of the amember is He in2004. operations ofpharmaceutical president vice executive named was He in2001. development corporate and products ofpharmaceutical president vice executive and in1998, products ofpharmaceutical president vice senior Dr. became Lechleiter affairs. regulatory and development for president vice named in1994. In1996, was he affairs tory ofregula- president vice and in1993 development product ofpharmaceutical president vice named was He U.S. the and inEngland positions management held has and chemist organic offi operating chief and president offi executive chief and president named was 1, Dr. 2009. Lechleiter January on Company and Lilly ofEli chairman became Dr. Lechleiter hairman, President, and Chief Executive Offi Executive Chief and President, hairman, xecutive Vice President for Academic Affairs and Provost, The University of Texas of South- University The Provost, and Affairs Academic for President Vice xecutive tired President, Private Client Services, and Managing Director, Marsh, Inc. Marsh, Director, Managing and Services, Client Private President, tired cer from 2005 to 2008. He joined Lilly in 1979 as a senior asenior in1979 as Lilly joined He to2008. 2005 from cer Age 65 Director since 1987 since Director 65 Age Age 55 Director since 2005 since Director 55 Age cer of the company in April 2008. He served as as served He 2008. inApril company ofthe cer cer cer PROXY STATEMENT 7777 rm rm cer other cer rm and who ce. cer, and cer, cer of an organization cers from may, time to time, be board members, but no offi or in paper form upon request to the company’s corporate secretary. r-Directors ce cers cer should expect to be elected to the board by virtuehis of or her offi audit, assurance,rm’s or tax compliance (but not tax planning) practice; or (iv) the director or cally, a director is not considered independent the director if (i) or an immediate family member is a compensating other executive offi executive other compensating Specifi In addition, a director is not considered independent if any of the following relationships existed within the will not disqualify cer offi chairman or chief executive as interim by an independent director service Temporary of that service. completion being independent following from the director in direct than $120,000 per year more member receives family or whose immediate compensation, employee. as a nonexecutive service for other than Lilly from compensation board. of that company’s committee on the compensation serves cer offi executive any Lilly where company • ensuring that a succession plan is in place for all senior executives. for plan is in place • ensuring that a succession Lilly. of cer offi member is an executive family or whose immediate of Lilly, who is an employee • a director normal director the director’s other than Lilly from compensation any direct who receives • a director by another cer) offi as an executive member is employed family (or whose immediate who is employed • a director • providing general oversight of the business of the business oversight general • providing strategy corporate • approving initiatives major management • approving conduct and ethical legal of oversight • providing risks business cant management of signifi company’s the • overseeing directors and evaluating compensating, • selecting, and performance processes board • evaluating offi the chief executive replacing and, when necessary, evaluating, compensating, • selecting, cer should be a board Other member. offi heir responsibilitiesheir include: II. Composition of the Board Mix of Independent Directors and Offi current partner of Lilly’s independent auditor (currently Ernst LLP); the & Young director (ii) is a current employee rm; the director (iii) has an immediate family memberof such who fi is a current employee of such fi an immediate family member was within the last three years (but is no longer) a partner or employee of such fi Independence DeterminationsIndependence The board annually determines the independence of directors based on a review by the directors and corporate governance committee. No director is considered independent unless the board has determined that he or she has no material relationship with the company, either directly or as a partner, shareholder, or offi previous three years: than the chief executive offi Selection Director Candidates of The board is responsible for selecting candidates for board membership and for establishing the criteria to be used in identifying potential candidates. The board delegates the screening process to the directors and corporate governance committee. For more information on the director nomination process, including the current selection criteria, see “Directors and Corporate Governance Committee Matters” on pages 85–86. that has a material relationship with the company. Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable, and familial relationships, among evaluate others. the materiality To of any such relationship, the board has adopted categorical independence standards consistent with the New York Stock Exchange listing guidelines. participates in the fi and personally worked on the listed company’s audit within that time. There should always be a substantial majority (75 percent or more) of independent directors. The chief executive offi Highlights of the Company’s Corporate Governance Guidelines Guidelines Governance Corporate of the Company’s Highlights The board of directors has established guidelines that it follows matters in of corporate governance. The following summary provides highlights of those guidelines. A complete copy of the guidelines is available online at h ttp://investor.lilly.com/governance.cfm I. Role of the Board The directors are elected by the shareholdersoversee to the actionsand results of the company’s management. T PROXY STATEMENT 7878 certifi following resignation her or his tender promptly shall cast votes ofthe amajority toreceive fails who director for nominee any election, uncontested In an director tenure: for expectations following the establish guidelines governance the documents, charter company’s tothe Subject TenureDirector Voting for Directors for Voting exceeded the thresholds described above or otherwise compromise the independence of the named director. named ofthe independence the compromise otherwise or above described thresholds the exceeded transactions or relationships ofthese None terms. commercial standard have relationships, commercial are they extent tothe and, ofbusiness course normal inthe arm’s intoat length entered were transactions and tionships rela- ofthese All independent. are directors the that determination its inreaching above) listed tothose addition (in board the by considered arrangements or relationships, oftransactions, types or ofcategories a description includes below table The independence. her or his compromise would that company the with relationship material (ii) other or any above listed relationships (i) ofthe any years three last the during had has below listed 11 directors ofthe none that determined board the and committee The board. full the by adopted was conclusion this and sion, deci- its for basis the explained and board tothe conclusion this recommended committee The above. referenced tests independence the meet also committees governance corporate and directors and compensation, audit, the of members the that and independent, are below listed directors 11 all that nonemployee determined committee The directors. tothe related parties or directors the and company the between arrangements or relationships, confl potential other and members) family immediate oftheir those (and company the with relationships their about asking questionnaire Service. Revenue Internal and Commission, Exchange and Securities Exchange, York Stock New ofthe tests independence applicable Ms. Seifert Dr. Prendergast Mr. Oberhelman Marram Ms. Horn Ms. Dr. Gilman Citi various and Lilly between relationships trustee Mr. Fyrwald indenture and markets, capital banking, Commercial Dr. Feldstein Mr. Eskew Yes Mr. Cook Bischoff Winfried Sir Name • Anonemployee director whoretires orchangesprincipaljobresponsibilities willoffer to resign from theboard. • Directors maystand for reelection even thoughtheboard’s retirement policywould prevent themfrom • Nonemployee directors willretire from theboard notlater thantheannualmeetingofshareholders thatfollows • Acompany officer-director, including thechiefexecutive officer, willresign from theboard atthetimeheorshe • adirector whoisanexecutive officer ofanonprofi t organization thatreceives grants or contributions from Lilly • adirector whoisemployed by,whoisa10percent shareholder of,orwhoseimmediate family memberisan whether to accept theresignation. The directors andcorporate governance committee will assess thesituationandrecommend to theboard completing afullthree-year term. their seventy-second birthday. retires orotherwiseceases to beanactive employee ofthecompany. In February 2009, the directors and corporate governance committee reviewed directors’ responses toa responses directors’ reviewed committee governance corporate and directors the 2009, In February all meet must committees governance corporate and directors and compensation, audit, ofthe Members a single fi in asingle fiscal year exceeding thegreater of$1millionortwo percent ofthatorganization’s gross revenues in that exceed thegreater of$1millionortwo percent ofthatcompany’s gross revenues inasingle fi executive officer ofacompany thatmakes paymentsto orreceives paymentsfrom Lilly for property orservices scal year. needn Transactions/Relationships/Arrangements Independent Yes Lilly grants and contributions to Mayo Clinic and Mayo Foundation—immaterial Mayo and Clinic Mayo to contributions and grants Lilly None Yes None Yes None Center—immaterial Medical Southwestern Texas of University the to Yes contributions and grants Lilly services—immaterial and products Yes Nalco and DuPont of purchase Lilly’s University—immaterial Harvard to Yes contributions and grants Lilly Yes Yes e None Yes None Yes e None Yes icts of interest, as well as material provided by management related to transactions, totransactions, related management by provided material as well as ofinterest, icts banks—immaterial cation of the shareholder vote. The directors and corporate governance governance corporate and directors The vote. shareholder ofthe cation scal year. group PROXY STATEMENT 7979 ll ll dential dential cant portion of cer and considered by the compen- cer, believing cer, this generally provides ve years to reach this ownership level. a supplemental code for our chief executive our chief executive for code a supplemental cation the of shareholder vote. Board action on cer; Succession Planning

cant corporate strategy decisions are broughtto the board for approval. cer cer will be selected. cient transfer of his or her responsibilities the in event of an emergency or his or her cant organizational level of the company, culminating full in a review of senior leadership talent by ve times their annual cash retainer; new directors are allowed fi cient and effective leadership model for the company. The board anticipates that, in certain circum- cer. The results cer. of this review are discussed with the chief executive offi Directors should hold meaningful equity ownership positions in the company; accordingly, a signifi Any director who tenders his or her resignation under this provision will not participate in the committee or The company will disclose the board’s decision on Form a 8-K furnished to the Securities and Exchange and to our board of directors our board and to In addition, the CEO maintains in place at all times, and reviews with the independent directors, a confi A key responsibility of the CEO and the board is ensuring that an effective process is place in to provide conti- , a comprehensive code of ethical and legal business conduct applicable to all employees worldwide worldwide all employees to applicable conduct business and legal of ethical code • The Red Book, a comprehensive Financial Management, Conduct for Lilly Code of Ethical • the company’s or changes are made to the full board by the committee. III. Director Compensation and Equity Ownership The directors and corporate governance committee annually reviews board compensation. Any recommendations f board deliberations regarding whether to accept the resignation If each member offer. of the directors and corporate governance committee fails to receive a majority of the votes cast at the same election, then the independent directors who did receive a majority of the votes cast will appoint a committee amongst themselves to consider the resignation offers and recommend the to board whether to accept them. the vacancy or reduce the size of the board. Commission within four business days after thedecision, including a full explanation of the process by which the decision was reached and, if applicable, the reasons why the board rejected the director’s resignation. If the resignation is accepted, the directors and corporate governance committee will recommend to the board whether to fi Code of Ethics of Code The board approved the company’s code of ethics, which complies with the requirements of the New Stock York Exchange and the Securities and Exchange Commission. This code is set out in: Once each year, theOnce board each year, devotes an extended meeting to an update from management regarding the strategic issues and opportunities facing the company, allowing the board an opportunity to provide direction for the corporate strategic plan. Throughout signifi the year, Corporate Strategy sation committee in establishing his or her compensation for the next year. IV. Key ResponsibilitiesIV. of the Board Selection of Chairman and Chief Executive Offi The board customarily combines the roles of chairman and chief executive offi the independent directors. During this review, the CEO and the independent directors discuss future candidates for senior leadership positions, succession timing for those positions, and development plans for the highest-potential candidates. This process ensures continuity of leadership over the long term, and it forms the basis on which the company makes ongoing leadership assignments. It is success a key factor in managing the long planning and investment lead times of our business. nuity of leadership over the long term at all levels in the company. succession Each year, planning reviews are held at every signifi Evaluation of Chief Executive Offi the matter will require the approval of a majority of the independent directors. the most effi stances, and particularly during relatively short periods of leadership transition, these roles may be assigned to two different persons. The presiding director recommends to the board an appropriate process by which a new chairman and chief executive offi plan for the timely and effi incapacitationsudden departure. or The presiding director leads the independent directors annually in assessing the performance of the chief executive offi committee will consider the resignation offer and recommend to the board whether to accept it. The board will act on the committee’s recommendation within 90 days following certifi overall director compensation is in the form of company equity. Directors are required to hold Lilly stock valued at a minimum of fi PROXY STATEMENT Policy direct or indirect material interest). a has person arelated inwhich $120,000 exceeding amounts involving transactions (generally, rules SEC relevant the under statement proxy inthe disclosure for threshold minimum the meets that transaction related-person fi owning shareholders or bers, offi executive mem- and family immediate their (directors cers, persons” “related and company the involving tions oftransac- monitoring and approval, review, for procedures written and policy awritten adopted has board The Persons Related with Transactions of Approval and Review offi executive chief ofthe removal and evaluation, selection, the and compensation executive include These directors. independent the by solely made are 8080 issue. the on discussions from excused be will director affected the cases, Inappropriate disinterested. are issue an on voting directors all that to ensure ate aconfl to confl confl that interest toan rise give may relationships personal or business adirector’s Occasionally Confl director: presiding The Horn). Ms. (currently directors independent the among from director apresiding appoints board The Director Presiding offi executive chief the with session inexecutive meet directors ayear, independent the twice least at T Directors of Session Executive Board the of V. Functioning ofethics. code inthe covered tomatters respect with programs secretary. corporate company’s tothe request upon he independent directors meet alone in executive session at every regularly scheduled board meeting. In addition, Inaddition, meeting. board scheduled regularly every at session inexecutive alone meet directors independent he • Theboard orrelevant committee willperiodically monitor thetransaction to ensure thatthere are nochanged • Related-person transactions must beapproved bytheboard orby acommittee oftheboard consisting solely • hastheauthorityto retain independentcounsel orotheradvisors to theboard. • hastheauthorityto call meetingsoftheindependentdirectors; and • approves meeting agendas andschedules andgenerally approves information sent to theboard; • serves asaliaisonbetween thechairmanand independentdirectors; • presides atallmeetingsofthe board atwhichthechairmanisnotpresent, includingexecutive sessions of • leads theboard’s process for selecting andevaluating thechiefexecutive offi circumstances that would render itadvisable for thecompany to amendorterminate thetransaction. such actualorapparent conflicts; and(v) theoverall fairness ofthe transaction to thecompany. for thetransaction to lead to anactualorapparent conflict ofinterest andanysafeguards imposedto prevent available to third parties,orinthecase ofemployment relationships, to employees generally; (iv)thepotential to entering into arelated-person transaction; (iii)whetherthetransaction isonterms comparable to those including asapplicable (i)thecompany’s business rationale for entering into thetransaction; (ii)thealternatives of thecompany. Inconsidering thetransaction, theboard orcommittee willconsider all relevant factors, of independentdirectors, whowillapprove thetransaction only ifthey determine thatitisinthebest interests To confl any avoid independent director shouldpreside; the independentdirectors unless thedirectors decidethat,dueto thesubjectmatter ofthesession, another The audit committee and public policy and compliance committee assist in the board’s oversight of compliance ofcompliance oversight board’s inthe assist committee compliance and policy public and committee audit The at online available are documents Both in assuring proper accounting, financial reporting, internal controls, andfi officer andallmembers offi nancial managementthatrecognizes theuniqueresponsibilities ofthoseindividuals icts of Interest of Interest icts ict, with the interests of the company. Directors must disclose to the company all relationships that cre- that relationships all company tothe disclose must Directors company. ofthe interests the with ict, ict or an appearance of a confl ict. The board, after consultation with counsel, takes appropriate steps steps appropriate takes counsel, with ofaconfl consultation appearance after an or ict board, The ict. ict or appearance ofaconfl appearance or ict ve percent or greater of the company’s outstanding stock). The policy covers any any covers policy The stock). outstanding company’s ofthe greater or percent ve cer. http://www.lilly.com/about/compliance/conduct/ ict, board decisions on certain matters of corporate governance governance ofcorporate matters certain on decisions board ict, nancial stewardship. cer; or in paper form form inpaper or icts, or appears appears or icts, cer. PROXY STATEMENT 8181 ed as ed or in paper form ent and Independent Advisers Independent and ent cers are invited. also We afford directors the opportunity to attend external director education pro- All six committee charters are available online at http://investor.lilly.com/governance.cfm Committee membership and selection of committee chairs are recommended to the board by the directors the presiding director, the chair of the directors and corporate governance committee, or the secretary. committee, governance and corporate directors the chair of the director, the presiding committee) governance and corporate chair of the directors with the in consultation determine other shall of only consisting committees or by one of its existing by the board should be considered whether the matter independent directors. transaction. promptly as practicable. as practicable. promptly interests. best the company’s The only related-person transaction is a time-share arrangement (now ended) between the company and • Management or the affected director or executive offi cer will bring the matter to the attention of the chairman, of the chairman, the attention to will bring the matter cer offi or executive director or the affected • Management the in the transaction, is involved (or, if either determine shall jointly director and the presiding • The chairman and decisions about the all discussions from or she will be recused he in the transaction, is involved • If a director be ratifi must and if not practicable, practicable, whenever in advance be approved must • The transaction • The board or relevant committee will review the transaction annually to determine whether it continues to be in to whether it continues determine to annually the transaction will review committee or relevant • The board he duties and membership of the six board-appointed committees are described below. Only independent direc- Functioning of Committees of Functioning Each committee reviews and approves its own charter annually, and the directors and corporate governance committee reviews and approves all committee charters annually. The board may form new committees or disband a current committee (except the audit, compensation, and directors and corporate governance committees) as it deems appropriate. The chair of each committee determines the frequency and agenda of committee meetings. In addition, the audit and compensation committees meet alone in executive session on a regular basis; all other committees meet in executive session as needed. and corporate governancecommittee after consulting the chairman of the board and after considering the desires of the board members. tors may serve on the audit, compensation, directors and corporate governance, and public policy and compliance committees. Only independent directors may chair any committee. Procedures VI. Board Committees Structure, Independence and Number, T Assessment of Board Processes and Performance The directors and corporate governance committee annually assesses the performance of the board, its committees, and board processes based on inputs from all directors. The committee also considers the contributionsof individual directors at least every three years when considering whether to recommend nominating the director to a new three-year term. Director Managem Access to Independent directors have direct accessto members of management whenever they deem it necessary. The independent directors and the committees are also free to retain their own independent advisers, at company expense, whenever they feel it would be desirable to do so. In accordance with New Stock York Exchange listing standards, the audit, compensation, and directors and corporate governance committees have sole authority to retain independent advisers to their respective committees. grams. Orientation Continuing Education and A comprehensive orientation process is in place for new directors. In addition, directors receive ongoing continuing education through educational sessions at meetings, the annual strategy retreat, and periodic mailings between meetings. hold We periodic mandatory training sessions for the audit committee, to which other directors and executive offi Mr. Taurel as described Taurel The compensation onMr. page 110. committee approved and monitored this arrangement consistent with the above policy. upon request to the company’s corporate secretary. PROXY STATEMENT 8282 4 3 2 1 below. table inthe shown are in2008 committee each and board the of ofmeetings number the and membership committee Current in2008. attended one but all and of shareholders, meeting annual the toattend expected are members board all Inaddition, serves. she or he which on committees the and board ofthe ofmeetings number total ofthe percent 85 than more attended director each In 2008, Me mbership andMeetingsoftheBoardItsCommittees Committee Compliance and Policy Public 99. page on shown is Report” Committee “Compensation the and 88–89, pages on described are committee compensation ofthe duties The Committee Compensation 85. page on described are committee governance corporate and directors ofthe duties The Committee Governance Corporate and Directors 86–87. pages on found Report” “Audit inthe Committee described are committee audit ofthe duties The Committee Audit Committees oftheBoardDirectors Finance Committee Science and Technology Committee Technology and Science Ms. Marram Dr. Lechleiter Horn Ms. N Mr. Oberhelman Dr. Gilman Mr. Fyrwald Mr. Alvarez Name Mr. Taurel Ms. Seifert Dr. Prendergast Mr. Fisher Dr. Feldstein Member Mr. Eskew Mr. Cook Sir Bischoff Winfried Mr. Taurel retired from the board as of December 31, ofDecember 2008. as Mr. board the Taurelfrom retired 1, 2008. ofDecember as board the joined Mr. Oberhelman 21, 2008. ofApril as board the from Mr. retired Fisher 1, 2009. April begins Mr. term Alvarez’s u • reviews andmakes recommendations regarding policies,practices, andprocedures ofthecompany thatrelate to • oversees theprocesses bywhichthecompany conducts itsbusiness sothatthecompany willdosoinamanner • reviews andmakes recommendations regarding capital structure andstrategies, includingdividends,stock • reviews scientific aspectsofsignifi cant business development projects. • reviews new developments, technologies, andtrends inpharmaceutical research anddevelopment • reviews andmakes recommendations regarding thecompany’s strategic research goalsandobjectives m b public policyandsocial,political, andeconomic issues thatmayaffect thecompany. that complies withlawsandregulations andreflects thehighest standards ofintegrity repurchases, capital expenditures, financings andborrowings, andsignificant business development projects. e r o f 4 2 2 1 0 0 8 M 3 e e t i n g s Member Member 996555 9 Member Chair Director Presiding Member Member Member Member Member Board Member Member Chair Member Member Member ebrMember Member Audit ebrChair Member Chair Member Compensation Member ebrChair Member oenneFinance Governance Corporate and Directors Member ebrChair Member ebrMember Member Member ebrChair Member Compliance and Policy Public Member ebrMember Member Member Technology and Science PROXY STATEMENT 8383 Funds in this account earn interest each year at a rate of 120 percent of the of 120 percent at a rate each year earn interest in this account Funds This account allows the director, in effect, to invest his or her deferred cash cash his or her deferred invest to in effect, the director, allows This account applicable federal long-term rate, compounded monthly, as established the preceding December by the U.S. December the preceding as established monthly, compounded rate, long-term federal applicable 2009 is 5.2 percent. for rate Code. The Revenue Department under Section 1274(d) of the Internal Treasury was $148,138, at a rate the participating directors for in 2008 that accrued amount of interest The aggregate of 5.5 percent. Both accounts may be paid in a lump sum or in annual installments years, for up to 10 beginning the second compensation in Lilly stock. In addition, the annual award of shares to each director noted above (4,513 shares (4,513 shares above noted each director to shares of In addition, the annual award stock. Lilly in compensation as hypothetical credited are in this account Funds annual date. on a pre-set this account to in 2008) is credited otherwise have would at the time the compensation of the stock price based on the market stock Lilly of shares of the stock price based on the market in additional shares “reinvested” dividends are been earned. Hypothetical or not issued and are hypothetical are accounts share in the deferred paid. All shares dividends are on the date on the board. her service ends his or until the director transferred Deferral Plan (as described below), payable after service on the board has ended. on the board service after payable Plan (as described below), Deferral chairperson’s preparation time preparation chairperson’s Deferred Compensation Account. Compensation Account. • Deferred • shares of Lilly stock equaling $145,000, deposited annually in a deferred share account in the Lilly Directors’ Directors’ in the Lilly account share in a deferred annually equaling $145,000, deposited stock Lilly of • shares Account. Share • Deferred • retainer of $80,000 per year (payable monthly) monthly) (payable per year of $80,000 • retainer meeting attended each committee • $1,000 for the for as compensation meeting conducted committee each for chairpersons the committee • $2,000 to director the presiding to per year of $20,000 • retainer expenses. and usual travel customary for • reimbursement January following the director’s departure from the board. Amounts in the deferred share account are paid in shares of Lilly stock. Lilly Directors’ Deferral Plan This plan allows nonemployee directors to defer receipt of all or part of their retainer and meeting fees after until their service on the board has ended. Each director can choose to invest the funds in one or both of two accounts: Stock CompensationStock Stock compensation for nonemployeedirectors consists of: Cash Compensation The company provides nonemployee directors the following cash compensation: Directors’ Compensation Directors’ Directors who are employees receive no additional compensation for serving on the board orits committees. PROXY STATEMENT 8484 Compensation Directors’ employees: not are who todirectors compensation following the provided we In 2008, 4 3 2 1 Each nonemployee director, other than Mr. Fisher and Mr. Oberhelman, received an award of stock with a grant agrant with ofstock award an received Mr. than Mr. director, other and Fisher Oberhelman, nonemployee Each Lilly the under accounts share deferred intotheir compensation cash 2008 deferred directors following The Directors do not participate in a Lilly pension plan or non-equity incentive plan. plan. incentive non-equity or plan pension inaLilly participate not do Directors gift matching its under Inc. Foundation, Company and Lilly Eli the by donated amounts includes column This i ifidBshf 1600$4,0 1,4 $267,844 $16,844 $145,000 $106,000 Mr. Fyrwald Dr. Feldstein Mr. Eskew Mr. Cook Sir Winfried Bischoff Current Name Ms. Marram Ms. Horn Dr. Gilman Mr. Oberhelman Mr. Fisher Retired Ms. Seifert Dr. Prendergast Directors’ Deferral Plan (further described above): above): described (further Plan Deferral Directors’ by the company for each director’s stock award. stock director’s each for company the by recognized expense the shows table The Plan.” Deferral Directors’ “Lilly under above described further as board, the on service her or his ends director untilthe issued not are however, shares the toforfeiture; subject not are they inthat vested fully are awards stock prior all and award stock This (4,513 shares). of$145,000 value fair date participate in board functions that included spouse participation. spouse included that functions inboard participate toand totravel spouses directors’ the for toexpenses related reimbursements tax include also column in this amounts the Mr. except Seifert, Ms. and Fisher, $17,382. Mr. directors all For Dr.and Oberhelman, Prendergast, $12,437; $16,119; Dr. Bischoff, Feldstein, $10,969;Winfried $19,045; Dr. Marram, $10,376; Ms. Horn, Gilman, Ms. Sir participation: spouse included that functions inboard participate toand to travel spouses directors’ the for expenses for amounts following the includes also column This $34,676. Seifert, $16,590; Ms. and Oberhelman, Mr. $33,000; Marram, Ms. $8,275; Horn, Ms. Dr.Mr. $36,000; $10,000; Gilman, Fisher, Mr. $1,000; Fyrwald, $27,000; Dr. Mr. Feldstein, $5,500; Eskew, Mr. $24,500; Cook, charity: recipient tothe directly made payments via in2008 directors outside for donations following the matched foundation The individual. each for year per $90,000 of uptoamaximum charities, toeligible made $25 over donations ofcharitable percent 100 matches foundation the program, this Under directors. outside the as well as employees toU.S. available generally is which program, Mr. Fisher Retired Mr. Fyrwald Current Name or Paid in Cash ($) Cash in Paid or Fees Earned Earned Fees $108,000 $133,000 $100,000 $102,000 $106,000 $121,000 $93,000 $87,333 $94,000 $28,667 $7,667 2008 Cash Deferred 2008 $102,000 $14,333 1 Stock Awards ($) Awards Stock $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $0 $0 2 Shares 2,354 284 Compensation ($) All Other Other All $48,699 $20,478 $29,320 $34,676 $13,295 $48,173 $33,915 $16,590 $50,191 $8,399 $1,549 3 Total ($) Total $295,320 $260,295 $240,732 $258,478 $301,699 $273,676 $295,191 $299,173 $311,915 $24,257 $30,216 4 PROXY STATEMENT 8585 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 (Exercisable) Outstanding Stock Options Options Stock Outstanding 5.92 $73.11 $73.11 $73.11 $73.11 $73.11 $73.11 $73.11 $75.94 $75.94 $75.94 $75.94 $57.85 $57.85 $57.85 $57.85 $57.85 $57.85 $57.85 $7 $75.92 $75.92 $75.92 $73.98 $75.92 $73.98 $73.98 $73.98 $75.92 $73.98 Exercise Price 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2014 4/19/2010 4/19/2010 4/19/2010 4/19/2010 2/18/2011 2/18/2011 2/18/2011 2/18/2011 2/18/2011 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/18/2013 ned in the New Stock York Exchange listing requirements. Expiration Date or in paper form upon request to the company’s corporate secretary. ect diversity in its broadest sense, including persons diverse in geography, gen- 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/19/2002 2/19/2002 2/19/2002 2/17/2004 2/19/2002 2/19/2002 2/19/2002 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/20/2001 2/20/2001 2/20/2001 2/20/2001 2/20/2001 4/20/2000 4/20/2000 4/20/2000 4/20/2000 Grant Date n——— 0 a m l d ——— 0 l e elds. a h w ——— 0 r k ——— 0 e w e o k r b o s y All committee members are independent as defi Board membership should refl fi nance or banking, and marketing or sales or banking, and marketing nance fi O F E C . . . . • active or retired chief executive offi cers and senior executives, particularly those with experience in operations, in operations, those with experience particularly and senior executives, cers offi chief executive or retired • active business • international • medicine and science and public policy • government and policy. environment • health care r r r r nd board committees. The committee also oversees matters of corporate governance, director indepen- M Ms. Marram Ms. Seifert Ms. Dr. Prendergast Dr. Ms. Horn Ms. M Dr. Gilman Dr. M Dr. Feldstein Dr. M Sir Winfried Bischoff Name Director Process Nomination The board seeks independent directors who represent a mix of backgrounds and experiences that will enhance the quality of the board’s deliberations and decisions. Candidates shall have substantial experience with one or more publicly traded national or multinational companies or shall have achieved a high level of distinction in their chosen fi dence, director compensation, and board performance. The committee’s charter is available online at http://investor.lilly.com/governance.cfm Overview The directors and corporate governance committee recommends candidates for membership on the board a Directors and Corporate Governance Committee Matters Governance Directors and Corporate Directors’ Outstanding Stock Options der, and ethnicity. Theder, board is particularly interested in maintaining a mix that includes the following backgrounds: PROXY STATEMENT and to terminate the engagement of the independent auditor. independent ofthe engagement the toterminate and interim election beginning April 1, 2009, were referred to the committee by an independent executive search fi search executive independent an by committee tothe referred 1, were 2009, April beginning election interim to fi candidate the (or toselect shareholders the by election for candidate the tonominate board tothe recommendation afi makes committee the favorable, are discussions these If candidacy. the inpursuing ofinterest levels mutual the todetermine discussions direct for directors independent ofthe more or one and board ofthe chairman the by confl candidate’s the qualifi on data additional gathers fi search the or management by assisted committee, the favorable, is evaluation initial committee’s the and teria cri- selection the tosatisfy appears candidate the If candidate. the recommending party the by supplied information additional any and information available publicly on based acandidate evaluates initially committee The holders. 8686 signifi ofthe areview including fi audited the discussed and reviewed have we and principles, accounting accepted generally with inaccordance prepared were statements fi consolidated company’s the that tous represented auditor. Management independent the and management with discussions held and met have we context, Inthis controls. disclosure and controls ofinternal systems the ing fi the for responsibility primary the has Management board. ofthe fi behalf company’s on the process reviews committee”) “the or (“we” reporting nancial committee audit The Report Committee Audit Commission. fi committee audit are Eskew L. Michael Mr. Mr. that and Cook J. determined Michael has ofdirectors board The members. committee toaudit applicable defi as independent are committee audit ofthe members All Membership Committee Audit Matters Committee Audi t secretary. corporate the http://investor.lilly.com/governance.cfm at online available is bylaws ofthe Acopy 1.9 bylaws. ofthe inSection detail inmore described as candidate the proposing shareholder the about and candidate the about information prescribed contain must notice The 46285. Indiana Center, Indianapolis, Corporate Lilly at secretary corporate tothe addressed be should notice The 2009. 9, notice November by written the company mustboard give through above) described the process recommendation the by nominated otherwise not is who election for acandidate topropose (i.e., meeting 2010 the at annual date board. the on inserving interested expressly and willing be must and above described criteria selection the meet must candidate The 46285. Indiana Indianapolis, Center, Corporate Lilly at secretary, corporate ofthe incare committee, governance corporate and directors of the candidate’s qualifi the about information and candidate’s name the forward should process tothis pursuant committee the by evaluation for candidate adirector torecommend wishes who A shareholder Nominations and Recommendations Submitting for Process several sources, including: identifi are candidates Potential members. board other from input direct receives • anindependentexecutive search firm retained bythecommittee to assist inlocating andscreening candidates • shareholders • management • incumbentdirectors ll a vacancy, as applicable). Mr. Oberhelman, who is standing for election, and Mr. Alvarez, who will serve under under serve will who Mr. and Alvarez, election, for standing is who Mr. applicable). Oberhelman, as avacancy, ll icts of interest. If the committee’s subsequent evaluation continues to be favorable, the candidate is contacted contacted is candidate the favorable, tobe continues evaluation subsequent committee’s the If ofinterest. icts Under Section 1.9 of the company’s bylaws, a shareholder who wishes to directly nominate a director candi- adirector nominate todirectly wishes who ashareholder 1.9 bylaws, company’s ofthe Section Under We have discussed with the independent auditor matters required to be discussed by Statement on Auditing on Statement by discussed tobe required matters auditor independent the with discussed We have ratifi toshareholder (subject toappoint authority sole We have tous. reports auditor independent The share- by submitted those including candidates, all evaluating for process same the employs committee The which committee, governance corporate and directors tothe process screening the delegates board The meeting theboard’s selection criteria. nancial statements and related disclosures with management and the independent auditor, independent the and management with disclosures related and statements nancial cant management judgments underlying the fi the underlying judgments management cant nancial experts, as defi as experts, nancial . The bylaws will also be provided by mail without charge upon request to request upon charge without mail by provided be also will bylaws . The cations, availability, probable level of interest, and any potential potential any and ofinterest, level probable availability, cations, nancial statements and the reporting process, includ- process, reporting the and statements nancial ned in the New York Stock Exchange listing standards standards listing Exchange York Stock New inthe ned ned in the rules of the Securities and Exchange Exchange and Securities ofthe rules inthe ned nancial statements and disclosures. and statements nancial ed by recommendations from from recommendations by ed cations to the chairman chairman tothe cations cation) nancial rm. nal rm, PROXY STATEMENT 8787 cer) to discuss cation, for 2009. nancial statements. nancial ling with the Securities and Exchange Com- cer and the chief accounting offi nancial statements be included in the company’s nancial offi nancial cant judgments, and the clarity the of disclosures in the fi nancial reporting. also We periodically meet executive in session. In reliance on the reviews and discussions referred to above, we recommended to the board (and the board We discussedWe with the company’s internal and independent auditors the overall scope and plans for their After the end management of the audit year, provides the committee with a summary of the actual fees conditions, and fees resulting from changes in audit scope, company structure, or other matters. The committee The committee or other matters. structure, company changes in audit scope, from resulting and fees conditions, reasonably the independent auditor that only those services which are other audit services, may also preapprove 404 of the under Section work attestation controls included internal have 2004, audit services Since provide. can Act. Sarbanes-Oxley the provision that believes The committee by the independent auditor. performed traditionally audit, and that are of the auditor. does not impair the independence of these services independence. without impairing the auditor’s advice planning, and tax tax services, compliance not would of the services the provision believes (ii) the committee rules, under SEC and PCAOB permissible to choice is the best auditor that the and (iii) management believes of the auditor, impair the independence the services. provide as any other engagements as well audit year the upcoming for reviews and quarterly audits, audit, statutory audit the upcoming for of all fees estimate at that time an at that time. Management will also present known approval. for the committee to forward brought are they ed thereafter, identifi c engagements are As specifi year. authority is meetings, preapproval committee scheduled regularly between required are approvals the extent To chair. the committee to delegated For each engagement, management provides the committee with information about the services and fees suf- engagement and, if necessary, any changes in terms, any changes in terms, engagement and, if necessary, the annual audit services approves • The committee of the the performance to related reasonably that are services and related assurance are services • Audit-related tax provide can the independent auditor cases, that, in appropriate believes The committee services. • Tax are if (i) the services by the independent auditor be provided to other services may approve • The committee of the annual approval prior committee management requests At the beginning of each audit year, • Process. ciently detailed to allow the committee to make an informed judgment about thenature and scope of the services the results of their examinations, their evaluations of the company’s internal controls, and the overall quality of the company’s fi respective audits, including internalcontrol testing under Section 404of the Sarbanes-Oxley Act. periodically We meet with the internal and independent auditors, with and without management present, and in private sessions with members senior of management (such as the chief fi incurred for the completed audit year. and the potential for the services to impair the independence of the auditor. fi The audit committee preapproves all services performed by the independentpart in auditor, to assess whether the provision of such services might impair the auditor’s independence. The committee’s policy and procedures are as follows: Services Performed Auditor Independent the by Audit Committee MichaelJ. Cook, Chair Michael L. Eskew Martin S. Feldstein, Ph.D. Douglas R. Oberhelman SeifertKathi P. Standards (Communication No. 61 with Audit Committees), as amended and as adopted by the Public Company Accounting Oversight Board (PCAOB) in Rule 3200T, including the quality, not just the acceptability, of the accounting principles, the reasonableness of signifi In addition, we have received the written disclosures and the letter from the independent auditor required by applicable requirements of the PCAOB regarding communications with the audit committee concerning independence, and have discussed with the independent auditor the auditor’s independence from the company and its management. In concluding that the auditor is independent, we determined, among other things, that the nonaudit services provided by Ernst LLP & Young (as described below) were compatible with its independence. Consistent with the requirements of the Sarbanes-Oxley Act of 2002, we have adopted policies to avoid compromising the independence of the indepen- such asdent prior auditor, committee approval nonaudit of services and required audit partner rotation. subsequently approved the recommendation) that the audited fi annual report on Form 10-K for the year ended December 2008, 31, forfi mission. have We also appointed the company’s independent subject auditor, to shareholder ratifi PROXY STATEMENT 8888 include: procedures and processes Additional 90–91. “ inthe found be can compensation executive overseeing and establishing for processes primary committee’s The Procedures and Processes Committee’s The offi executive the affecting matters for authority any delegate not may However, committee the documents. award approving and parameters, plan within levels award determining participants, selecting including tation, offi tocompany authority delegate may committee the plans, those Inoverseeing executives. covering plans bonus and plans, stock management plans, compensation deferred p com- the establishes and philosophy compensation global company’s the oversees committee compensation The Scope of Authority Compensation CommitteeMatters policy. preapproval the with dance inaccor- committee the by preapproved were services such 2007. All and auditor, in2008 independent company’s &Young LLP, Ernst the by basis aworldwide on rendered services for incurred fees the shows table following The Independent Auditor Fees Compensation Discussion and Analysis” section under “The Committee’s Processes and Analyses” on pages pages on Analyses” and Processes Committee’s “The under section Analysis” and Discussion Compensation • Assurance and related services reasonably related to the performance of the audit or reviews of the fi the of reviews or audit the of performance the to related reasonably services related and •Assurance Audit-Related Fees fi regulatory and statutory with connection in auditor the by provided normally services •Other fi attestation 404 quarterly of •Reviews Sarbanes-Oxley including fi statements, nancial subsidiary and consolidated of audit •Annual Audit Fees Total U.S. the outside services compliance to related primarily 2007: and •2008 Fees Other All services compliance and consulting to related primarily 2007: and •2008 Fees Tax ensation of executive offi ofexecutive ensation • Role ofExecutive Officers andManagement. • Role ofIndependentConsultant. • Meetings.Thecommittee meetsseveral timeseachyear (ninetimesin2008).Committee agendasare —2008 and 2007: primarily related to employee benefi t plan and other ancillary audits, and due diligence services on on services diligence due and audits, ancillary other benefi and t plan employee to related primarily 2007: and —2008 philosophy, plandesign,andthe specific compensation recommendations for executive offi resources, thecompany’s global compensation group formulates recommendations onmatters ofcompensation oversight andwith theknowledge andpermission ofthecommittee chairperson. The consultant interacts directly withmembers ofLilly managementonly onmatters under thecommittee’s the following: neither henorhisfirm ispermitted to perform anyservices for management.Theconsultant’s dutiesinclude programs andinsettingexecutive officers’ compensation. Mr. Cookreports directly to thecommittee, and Co., asitsindependentcompensation consultant to assist thecommittee inevaluating executive compensation consultant. Thecommittee meetsinexecutive session after eachmeeting. established inconsultation withthecommittee chairandthecommittee’s independentcompensation —Undertake specialprojects attherequest ofthe committee chair. —Proactively advise committee onbest practices ideasfor board governance of executive compensation —Review draft CompensationDiscussion andAnalysis report andrelated tables for proxy statement —Provide independentanalyses andrecommendations to thecommittee ontheCEO’s pay —Review thecompany’s total executive compensation program andadvisethecommittee ofplansorpractices —Review thecompany’s total compensation philosophy, peergroup, andtarget competitive positioningfor —Review committee agendasandsupportingmaterials inadvance ofeachmeetingandraise questions with that mightbechangedto better reflect evolving best practices reasonableness andappropriateness the company’s global compensation group andthecommittee chairasappropriate acquisitions nancial statements cers. The committee also acts as the oversight committee with respect to the company’s company’s tothe respect with committee oversight the as acts also committee The cers. The committee hasretained Frederic W. Cookandhisfirm, Frederic W. Cook& Withtheoversight oftheCEOandseniorvice president ofhuman cers for day-to-day plan administration and interpre- and administration plan day-to-day for cers lings nancial statements cers (other (millions) 1. $8.9 $10.7 2008 80$7.0 $8.0 02$0.1 $0.2 08$0.4 $0.8 17$1.4 $1.7 cers. cers. (millions) 2007 PROXY STATEMENT 8989 t programs t Executive Compensation Executive Philosophy: >cY^k^YjVaeZg[dgbVcXZ 8dbeVcneZg[dgbVcXZ Adc\"iZgb[dXjh :[[^X^Zci :\VaîVg^Vc 8dbeZiî^kZeVn Highlights: Higdc\eZg[dgbVcXZ 8dch^hiZciegd\gVbh CZlX]V^gVcY8:D We delivered delivered We In 2008, Lilly performed in the top tier of its in the top performed In 2008, Lilly We link all employees’ pay link all employees’ We . We lowered the overall cost of our equity cost the overall lowered . We ver been an offi cer or employee of the company or employee cer been an offi ver The CEO does not participatein the formulation or discussion of his pay recommendations and has no performance and shareholder returns. and shareholder performance short of falls individual performance where compensation but lower-tier performance, lags the industry. performance and/or company expectations their pay. affect their efforts how understand —As employees assume greater responsibilities, more of their pay is linked to company company to of their pay is linked more responsibilities, greater assume —As employees individual and company top-tier given compensation top-tier deliver seek to —We easily can so that employees and clear, be simple to design our programs —We prior knowledge of the recommendations that the consultant makes to the committee. than the CEO as noted below). The CEO gives the committee a performance assessment and compensation compensation and assessment a performance the committee CEO gives The below). as noted than the CEO then considered are Those recommendations cers. offi the other named executive each of for recommendation president senior vice The CEO and the consultant. compensation of its with the assistance by the committee any or for sessions executive the for not present but are meetings committee attend resources of human attend consultant and the committee’s directors nonemployee (Only compensation. of their own discussion sessions.) executive to individual and company performance. performance. individual and company to peer group in expected sales and adjusted earnings-per-share growth; this strong top- and bottom-line growth growth and bottom-line top- this strong growth; earnings-per-share and adjusted sales in expected peer group target. above substantially payouts compensation and equity incentive cash to led employee and a strong and equity incentives, cash performance-based of salary, a balance and encouraged incentives pay-for-performance reinforced these elements Together, t program. benefi and engagement. retention employee program in 2007—while maintaining its competitiveness and motivational impact—by and motivational its competitiveness maintaining in 2007—while program equity total and by lowering awards value of shareholder favor options in eliminating stock in 2008 with some increases this program maintained positions. We most for values grant in equity value. related-person transactions) related-person • has e Compensation should refl performance. ect individual and company • Compensation should refl • Cost-effective equity design maintained for 2008 Strong operating results yield strong incentive compensation payouts. payouts. compensation incentive yield strong operating results • Strong and engagement. achievement, retention, fosters employee program • A balanced • is or was a participant in a related-person transaction in 2008 (see page 80 for a description of our policy on a description in 2008 (see page 80 for transaction in a related-person • is or was a participant of directors. on the board serves cers offi one of our executive of another entity, at which cer offi • is an executive xecutive compensation for2008 aligned well with the objectives of our compensation philosophy and with our Compensation CommitteeInterlocks Participation Insider and None of the compensation committee members: Our success depends on our ability develop, to discover, and market stream a of innovative medicinesthat address important medical needs. In addition, we must continually improve productivity in all that we do. To achieve these goals, we need to attract, engage, and retain highly talented individuals who are committed to the company’s core values of excellence, integrity, and respect for people. Our compensation and benefi Executive Compensation Philosophy Mr. Taurel retired Taurel as CEO effectiveMr. 2008, March 31, but remained as chairman of the board and a director through December 2008. 31, His salary and cash bonus were reduced by half for the period of April through December 2008. Lechleiter Dr. was elected CEO effective April 2008, 1, and received increases to his salaryand target cash ect his increased responsibilities.bonus at that time to refl are based on these objectives: Compensation Discussion Analysis and 2008 Summary E performance, driven by these factors: Executive Compensation Executive PROXY STATEMENT :miZgcVaVYk^hdg EZZg\gdjeVcVanh^h >cY^k^YjVabZig^Xh 8dbeVcnbZig^Xh Committee Tools: Compensation 9090 objectives. Among those are: those Among objectives. company meet that programs compensation structure it tohelp tools several uses committee compensation The Analyses and Processes Committee’s The • Peer group analysis. Thecommittee compares thecompany’s programs withapeergroup ofglobal • Compensationshouldbeeffi • Compensationandbenefi • Compensationshouldbebasedonthelevel ofjobresponsibility. • Compensationshouldfosteralong-term focus.Along-term focus iscritical to success inourindustry. As • Assessment ofindividualperformance • Compensationandbenefi • Compensationshouldrefl • Assessment ofcompany performance. compete withthesecompanies for talent. Thecommittee usesthepeergroup data intwo ways: companies’ needsfor scientific andsales andmarketing talent are uniqueto theindustry andassuch,Lilly must plc; Johnson&Johnson;Merck &Co.;Pfizer, Inc.;Schering-Plough Corporation; andWyeth. Pharmaceutical pharmaceutical companies: AbbottLaboratories; AmgenInc.;Bristol-Myers SquibbCompany;GlaxoSmithKline who are looking for theopportunityto buildcareers. benefit programs provide acompetitive advantage byhelpingusattract andretain highly talented employees premier employers withwhichwe compete for talent. compensation committee for itsconsideration insettingtheCEO’s compensation. accomplishments. Thisevaluation isshared withtheCEObypresiding director andisprovided to the achievement oftheagreed-upon objectives, contribution to thecompany’s performance, andotherleadership independent directors againmeetinexecutive session to review theperformance oftheCEObasedonhisorher the beginningofyear to agree upontheCEO’s performance objectives for theyear. Attheendofyear, the independent directors, underthedirection ofthepresiding director, meetwiththeCEOinexecutive session at term performance. employees progress to higherlevels oftheorganization, agreater portionofcompensation istiedto ourlonger- benefit programs shouldbebroadly similaracross theorganization. job responsibilities, geographies, andmarketplace considerations, theoverall structure ofcompensation and employees inacost-effective manner. the jobs. differences amongjobsshouldbecommensurate withdifferences inthelevels ofresponsibility andimpactof —For theotherexecutive officers, thecommittee receives aperformance assessment andcompensation — —The committee establishes specific company performance measures thatdetermine payouts underthe —In establishing total compensation ranges, thecommittee compares theperformance ofLilly anditspeer We balance theobjectives of pay-for-performance andemployee retention. Even duringdownturns incompany within therange. remains withinthebroad middle range ofpeergroup pay. Thecommittee doesnottarget aspecifi contribution to thecompany’s performance, andotherleadership attributes andaccomplishments. achievement ofobjectives established between theexecutive andhisorhersupervisor,theexecutive’s the executive officer. Aswith the CEO,executive’s performance evaluation isbasedontheexecutive’s recommendation from theCEOandalsoexercises itsjudgmentbasedontheboard’s interactions with performance, theprograms shouldcontinue to motivate andengagesuccessful, high-achieving employees. company’s cash andequityformula-based incentive programs. return. Thecommittee usesthisdata asareference pointrather thanapplying aformula. group withrespect to sales, earningspershare, return onassets, return onequity,andtotal shareholder peer group data; thepeergroup data isusedasa“market check”to ensure thatindividual pay driven primarily byindividualandcompany performance andinternal relativity rather thanthe if thejobsare sufficiently similar,to make thecomparison meaningful.Theindividual’s payis —Individual competitiveness. Thecommittee compares theoverall payofindividualexecutives, range. the targeted performance levels. Thecommittee doesnottarget aspecific positionwithinthe middle range ofcomparative payofthepeergroup companies whenthecompany achieves that theexecutive compensation program asawhole iscompetitive, meaningwithinthebroad competitiveness —Overall t programs employees shouldattract whoare interested in acareer atLilly. t programs shouldbeegalitarian.While compensation willalways reflect differences in ect themarketplace fortalent. cient.To deliver superiorlong-term shareholder returns, we must deliver value to Thecommittee usescompany performance measures intwo ways: . Individualperformance hasa strong impactoncompensation. The . Thecommittee usesaggregated data asareference pointto ensure We aimto remain competitive withthepayofother We seekinternal payrelativity, meaningthatpay Ouremployee c position PROXY STATEMENT 9191 rm prepares prepares rm 8dgedgViZWjY\Zi >cY^k^YjVaeZg[dgbVcXZ >ciZgcVagZaVi^kîn EZZg\gdjeYViV Base Salary Considerations: cerswere . The company generally maintained the same pay ranges and mix of pay the same pay ranges maintained generally . The company the company’s overall budget for merit-based salary increases. The corporate The corporate merit-based salary increases. budget for overall the company’s . Lilly’s total pay to executive offi cers for 2007 was in the broad middle range. range. middle 2007 was in the broad for cers offi executive pay to total . Lilly’s . In 2007, Lilly performed in the upper tier of the peer group in adjusted earnings per share per share earnings in adjusted tier of the peer group in the upper performed . In 2007, Lilly To provide further assurance of independence, the compensation recommendation for for recommendation the compensation of independence, further assurance provide To . The 2008 program consisted of base salary, a cash incentive bonus award, and two forms forms and two bonus award, incentive of base salary, a cash consisted . The 2008 program Mr. Taurel’s accomplishment of objectives that had been established at the beginning of the year and their year at the beginning of the own established had been that objectives of accomplishment Taurel’s Mr. in 2007, the company: leadership Taurel’s that under Mr. noted They of his performance. assessment subjective program without encouraging excessive risk-taking excessive without encouraging program that of our peers. to comparable performance The independent directors assessed Mr. Taurel’s 2007 performance. They considered the company’s and the company’s considered They 2007 performance. Taurel’s Mr. assessed The independent directors —encourages retention and employee engagement by delivering competitive cash and equity components and equity components cash competitive by delivering engagement and employee retention —encourages incentive equity a balanced through returns shareholder and performance company link to a strong —maintains pay relativity internal appropriate —maintains company pay given peer group of expected range middle pay within the broad total opportunity for —provides — growth, sales growth, return on assets, and return on equity and in the lower tier in fi ve-year total shareholder shareholder total ve-year tier in fi on equity and in the lower and return on assets, return growth, sales growth, return. delivery effective a cost provide to continues program this overall believes as in 2007. The committee elements that: compensation of total of performance-based equity grants: performance awards and shareholder value awards (SVAs). Executives Executives (SVAs). awards value and shareholder awards performance equity grants: of performance-based equity and the mix of cash balances t package. This program benefi employee the company also received goals, and the nancial and market mix of fi the compensation, and longer-term mix of current the compensation, above. discussed objectives the compensation ts in a way that furthers benefi security of foundational the CEO is developed by an independent consultant (Frederic W. Cook and his fi rm, Frederic W. Cook & Co.) W. Frederic rm, Cook and his fi W. (Frederic consultant an independent by developed the CEO is fi The Cook staff. company support from and with limited of the CEO input or knowledge without the annual of base salary, target terms in group among the peer median CEO compensation showing analyses Cook develops Mr. compensation. direct total and resulting value, grant equity recent most award, incentive equity grant target, annual incentive base salary, change in the CEO’s any for of recommendations a range pay the peer competitive account into CEO pay take target for recommendations Cook’s and mix. Mr. value, and proposed executives senior company other to the position of the CEO in relation and, importantly, analysis its discretion exercise to the committee for allows The range company. of the employees all key pay actions for and takes of the recommendations no prior knowledge The CEO has individual performance. based on the CEO’s or decisions. discussions, committee no part in the recommendations, The peer group is reviewed for appropriateness at least every three years. The group was reviewed in June 2008, in June 2008, was reviewed group The years. three every at least appropriateness for is reviewed group The peer decisions. of 2009 compensation purposes for performance company assess will be used to group and the new within the corporate merit budget of four percent. merit budget of four within the corporate performance by individual largely driven were base salary increases Analyses,” assessments. merit budget was established based on company performance for 2007, expected performance for 2008, and for performance 2007, expected for performance based on company merit budget was established allow of the merit budget is to The objective merit trends. external general to a reference maintaining while performers successful and reward motivate, retain, to salary increases or be more can plan. Individual pay increases business within the company’s affordability increases but aggregate than the budget amount depending on individual performance, less offi executive all for merit increases The aggregate within the budget. stay must Pay relative to peer group relative • Pay elements • Program • Company performance ranges elements and mix of pay • Pay • CEO compensation. . As described above under “The Committee’s Processes and Processes under “The Committee’s . As described above • Individual performance The corporate “merit budget,” • The corporate The committee determined the following: Overview—Establishment of Overall Pay In making its pay decisions for 2008, the committee reviewed 2007 company performance data and peer group data as discussed above, and also considered expected competitive trends in executive That pay. review showed: Executive Compensation for 2008 Base SalaryBase In setting base salaries for 2008, the committee considered the following: PROXY STATEMENT Cash Incentive Bonuses Incentive Cash 9292 offi executive for downward payout award an to adjust discretion has committee the period, performance ofthe end the At measures. performance topredetermined ative fi company’s the on depending oftarget percent to200 zero from range year. payouts each Bonus of beginning the at participants all for salary) ofbase (a percentage amounts bonus target sets company the plan, the Under Plan. Bonus Company and Lilly Eli the under determined are U.S., inthe employees nonmanagement most as well as worldwide, employees management all for bonuses year. incentive Cash current the for objectives growth earnings and sales company’s the with goals employees’ align programs bonus cash annual company’s The • Peer group data • Internalrelativity, • Companyperformance measures • Bonustargets The committee reviewed similarperformance considerations for eachoftheothernamedexecutives. necessary for competitiveness. were withinthebroad middle range ofexpected competitive payand,therefore, nofurtheradjustments were as amarket checkfor reasonableness andcompetitiveness. Thesalariesasdetermined bytheotherfactors importance to thecompany. We usedthepeergroup data notto target aspecific positioninrange, butinstead percent weighting onsales growth anda75percent weighting ongrowth inadjusted EPS(reported earningsper given medianpeergroup performance. The2008targets for thenamedexecutives were asfollows: relativity andwould maintain cash compensation withinthebroad middle range ofexpected competitive pay trends orinternal relativity. Thecommittee determined thatthesetargets appropriately refl committee maintained thesamebonustargets as2007; for some,targets were increased dueto peergroup greater responsibilities, more oftheirpayislinked to company performance. For most executive offi internal relativity, andpeergroup data. Consistent withourcompensation objectives, asexecutives assume awards: 2008 the establishing when following the considered committee The —With regard to Dr. Lechleiter, thecommittee considered hisnew positionaschiefexecutive offi —Mr. Taurel’s decisionto retire asCEOofApril1,2008,andchairmanDecember 31,2008,resulted —Mr. Armitage—80 percent (increased from 75percent dueto internal relativity). —Mr. Rice—80 percent (increased from 75percent dueto internal relativity) —Mr. Carmine—85percent —Dr. Paul—85 percent —Dr. Lechleiter—140 percent (100percent through March 31,2008) —Mr. Taurel—140 percent (increased from 125percent to approximate thepeergroup median) —In establishing Mr. Armitage’s annualsalary(afive percent increase), thecommittee noted hisleadership in —Mr. Rice’s annualsalarywasincreased 13percent inrecognition ofhisassumption ofincreased operational —Mr. Carmine’s annualsalarywas increased by79percent uponhispromotion, effective April1,2008,to —With regard to Dr. Paul, thecommittee noted thatLilly Research Laboratories metorexceeded nearly all2007 reduce itbyone-halffor theremainder of2008. in thecommittee’s decisionto maintain hisannualsalaryatthe2007level through March 31,2008,andthen and implementing effective litigationstrategies. driving aculture ofcompliance andtransparency, shapingintellectual property policyto foster innovation, management ofthecompany. responsibilities, hisstrong leadership ofthefinancial component, andoutstanding contributions to the recognize hissignificantly expanded responsibilities. committee increased Dr. Paul’s annualsalarybyfour percent. pipeline progress goalsandimplemented several strategic actionsto increase flexibility andproductivity. The transformational agenda. considered Dr. Lechleiter’s strong leadership in2007drivingthecompany’s operational results and increased Dr. Lechleiter’s annualsalaryby21percent effective April1,2008,to $1,400,000.Thecommittee • metorexceeded itstargets for research pipelineprogress andacquisitionofnew compounds. • strengthened itspublicimage;and • exceeded itsSixSigmaandrelated productivity goals; • madesignificant progress onthetransformation agenda,includingprogressing thetailored therapy • exceeded itssales andearningstargets; strategy; . Bonustargets (expressed asapercentage ofbasesalary)were basedonjobresponsibilities, specific to certain positionsinwhichthejobswere viewed ascomparable incontent and meaningtherelative paydifferences between different joblevels. . Thecommittee established 2008company performance measures witha 25 cers, but not upward, from the amount yielded by the formula. formula. the by yielded amount the from upward, not but cers, ected internal nancial results rel- nancial results cer and cers, the PROXY STATEMENT 9393 2 1.8 2 Bonus Weighting: growth 25% sales 75% adjusted EPS growth Targets: growth 4% sales 8% adjusted EPS growth 1.6 1.8 1.4 1.6 1.2 1.4 1.0 1.2 Sales Growth Sales Adjusted EPS Growth Adjusted 0.8 1.0 0.6 0.8 (0.25 x 1.556) + (0.75 = 1.54 x 1.475) bonus multiple 0.4 0.6 0.2 2008 Sales Multiple 0 -2% 0% 2% 4% 6% 8% 10% 12% 14% 12% 10% -2% 8% 4% 6% 0% 2%

2.5 2.0 1.5 1.0 0.5 Bonus multiple X bonus target X base salary earnings = payout Multiple Sales 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 16% 14% 12% 10% 0% 2% 4% 6% 8% (0.25 x sales multiple) x adjusted + (0.75 EPS multiple) = bonus multiple In establishing the 2008 target growth rates, the committee considered the expected 2008 performance 2008 Adjusted EPS Multiple -2%

2.5 2.0 1.5 1.0 0.5 Adjusted EPS Multiple EPS Adjusted See page for 96 a reconciliation of 2008 reported and pro forma sales and adjusted EPS. of our peer group, based on published investment analyst estimates. The target growth rates of four percent for sales and eight percent for adjusted EPS were slightly above the median expected growth rates for our peer group. These targets are consistent with our compensation objectives because they produce above-target payouts if Lilly outperforms the peer group and below-target payouts if Lilly performance lags the peer group. Payouts were formula: this by determined share adjusted as described below under “Adjustments for Certain Items”). This mix of performance measures measures mix of performance This Items”). Certain for under “Adjustments below as described adjusted share with special earnings, and bottom-line sales top-line both on improving appropriately employees focuses also are The measures improvements. productivity to directly tie rewards to on earnings in order emphasis and understand. track to employees for easy are they because motivators effective Together, the sales multiple and theTogether, adjusted EPS multiple yielded a bonus multiple of 1.54. 2008 pro forma adjusted EPS growth percent of 13.6 resulted in an adjusted EPS multiple of 1.556. 2008 pro forma sales growth percent of 8.7 resulted in a sales multiple of 1.475. 2008 sales and adjusted EPS multiples are illustrated by these charts: Equity Incentives—Total Equity Program Equity Incentives—Total In 2008, we employed two forms of equity incentives grantedunder the 2002 Lilly Stock Plan:performance awards and shareholder value awards. These incentives ensure that our leaders are properly focused on long-term share- value. holder PROXY STATEMENT '%%-iVg\Zi\gVcikVajZh IVg\Zi\gVcikVajZhhZi EZg[dgbVcXZbZig^Xhd[ Equity Compensation: ^cXgZVhZY eZg[dgbVcXZ!VcYeZZgYViV WVhZYdc^ciZgcVagZaVi^kîn! h]VgZ]daYZg^ciZgZhih h]VgZeg^XZVa^\clî] \gdli]^cVY_jhiZY:EHVcY 6XijVa\gdli]&(#+ IVg\Zi\gdli]-ha^\]ian EVndjihbjhiWZ]ZaYdcZ Ild"nZVgeZg[dgbVcXZ DcZ"nZVgeZg[dgbVcXZ Performance Awards: eZg[dgbVcXZ VWdkZZmeZXiZYeZZg\gdje nZVg ^c'%%. eZg^dYe]VhZY^cWZ\^cc^c\ eZg^dY^c'%%- 9494 target ofthe percent to200 zero from range payouts in2010. Possible beginning granted awards performance all for period performance toatwo-year atransition as award, atwo-year and aone-year both grant will company specifi over levels EPS) (adjusted share per earnings adjusted ofspecifi achievement company’s the on based stock ofLilly ofshares aschedule as structured are awards The company. inthe stake ownership an providing and interests shareholder with employees aligning achieved, are goals performance company certain if stock ofLilly shares with employees provide awards Performance Awards Incentives—Performance Equity The SVA program delivers equity compensation that is strongly linked to long-term shareholder returns. It is more more is It returns. shareholder tolong-term linked strongly is that compensation equity delivers program SVA The period. the over performance price stock on depending amount, target ofthe percent to140 zero from range outs Pay- period. performance the during awards the on paid are dividends No period. athree-year over stock pany’s com- of the performance the on based stock ofLilly shares out pays SVA The program. option stock our replaced which (SVA), award value shareholder the program, equity anew implemented company in2007, the Beginning Awards Value Incentives—Shareholder Equity EPS. adjusted forma pro and reported of2008 96areconciliation for page See oftarget. 175 at out percent • Target values grant payouts. Payouts were determined according to thisschedule: target payouts, while Lilly performance lagging theexpected peer-group medianwould result inbelow-target compensation objectives, Lilly performance exceeding theexpected peer-group medianwould result inabove- over aone-year period,basedonpublished investment analyst estimates. Accordingly, consistent withour on internal relativity, performance, andpeergroup data suggesting thatthe2007grant values were below the Pro forma adjusted EPS growth of 13.6 percent ($4.02 per share) resulted in a 2008 performance award pay- award performance ina2008 resulted share) per ($4.02 of13.6 percent growth EPS adjusted forma Pro ecn fTre 0 5 0%15 5%15 200% 175% 150% 125% 100% 75% 50% 0 16.00%+ 13.00-15.99% 11.00-12.99% 9.00-10.99% 7.00-8.99% 5.00-6.99% 3.00-4.99% Percent ofTarget Less than3.00% Adjusted 2008EPSGrowth were asfollows: incentives ofthetwo programs. Target values for 2008equitygrants for thenamedexecutives awards appropriately balances thecompany financial performance andshareholder equityreturn determined thata50/50splitfor executives between performance awards andshareholder value higher levels received agreater proportion oftotal payintheform ofequity. Thecommittee refl broad middle range. Inaddition,Dr. Lechleiter’s andMr. Carmine’s targets were increased to Mr. Armitage Mr. Rice Mr. Carmine Dr. Paul Dr. Lechleiter Mr. Taurel Name above themedianexpected adjusted earningsperformance ofcompanies inourpeergroup is easily understood byemployees. Thetarget growth percentage ofeightpercent wasslightly because itisclosely linked to shareholder value, isbroadly communicated to thepublic,and a two-year award. Thecommittee believes adjusted EPSgrowth isaneffective motivator for Certain Items”) over aone-year period,withaone-year holdingperiod,thuscreating as adjusted EPSgrowth (reported EPSadjusted asdescribedbelow under “Adjustments • Companyperformance measure named executives andmaintained a50/50splitbetween performance awards andSVAs. • Target values grant following: the considered committee the grants, 2008 the For formula. the by yielded amount the from upward, not but downward, payout award an toadjust discretion has tee commit- the period, performance ofthe end the At period. performance the during awards the on paid are dividends No period. the over growth EPS adjusted on depending amount, ect theirnew roles. Consistent withthecompany’s compensation objectives, individualsat . For 2008,thecommittee increased aggregate grant values for most namedexecutives based . Asdescribedabove, thecommittee increased equityawards for most efrac wrsShareholder Value Awards Performance Awards $1,200,000 $1,500,000 $1,500,000 $3,250,000 $4,000,000 . Thecommittee established theperformance measure $855,000 ed time periods of one or more years. In 2009, the the In2009, years. more or ofone periods time ed $1,200,000 $1,500,000 $1,500,000 $3,250,000 $4,000,000 $855,000 c PROXY STATEMENT 9595 eZg^dY Veean^c\VcZmeZXiZY i]gZZ"nZVggViZd[gZijgc[dg aVg\Z"XVeXdbeVc^Zh nZVg Shareholder Value Value Shareholder Awards: I]gZZ"nZVgeZg[dgbVcXZ IVg\Zi^hYZiZgb^cZYWn EVndjihbjhiWZ]ZaYdcZ cers receive receive cers . The SVA is designed to pay above target if Lilly stock stock if Lilly target pay above is designed to . The SVA ation or defl ation of awards due to the unusual items in either the award year or the year in either the award the unusual items due to ation of awards ation or defl cial infl cial . As described above, the committee increased target grant sizes for most most for sizes grant target increased committee the above, . As described The starting price for the 2008 SVAs was $52.71 per share, representing the average of the closing prices Ending Stock PriceEnding Stock than $46.79 Less of TargetPercent $46.79-$52.39 $52.40-$57.99 $58.00-$61.99 0 $62.00-$65.99 $66.00-$69.99 $69.99 + 40% 60% 80% 100% 120% 140% For the 2008 awards calculation, the committee made these adjustments to EPS: The adjustments were intended to align award payments more closely to underlying business growth trends previous (comparator) year year (comparator) previous to in order proceedings legal or settling legacy disposing of underutilized assets defer or to technologies new bonus payments. current protect charges impairments and restructuring asset cant and (ii) signifi and development research of practices and marketing of prior sales investigations of government the resolution to related special charges the company. In addition, to eliminate the distorting effect of the acquisition of ICOS Corporation (completed in late Janu- named executives and maintained a 50/50 split between performance awards and SVAs. awards performance a 50/50 split between and maintained named executives and companies large-cap for of return rate annual compounded an expected outperforms used of return rate expected The return. of that rate underperforms stock if Lilly target below would investor that a reasonable return total considering was determined in this calculation input based on U.S. company, of a large-cap in the stock investing for appropriate consider offi dividend yield. Executive current Lilly’s less managers, money external from the three-year over does not grow rate) of dividends at the current years three (less price if the stock no payout or negative. period is zero the three-year for return shareholder if total words, period—in other performance of Lilly stock for all trading days in November andDecember 2007. The ending price to determine payouts will be the average of the closing prices of Lilly stock for all trading days in November and December 2010. • eliminate certain counterproductive short-term incentives—for example, incentives to refrain from acquiring from refrain to incentives example, incentives—for short-term counterproductive certain • eliminate in-process the acquisition of for charges the impact of (i) one-time accounting • Both 2007 and 2008: Eliminated liability litigation product to related the impact of special charges • 2007: Eliminated audit and (ii) of a tax settlement from resulting income t to the impact of (i) a one-time benefi • 2008: Eliminated • align award payments with the underlying growth of the core business of the core growth payments with the underlying • align award artifi volatile, • avoid Company performance measure • Company performance Target grant size • Target and eliminate volatile swings or down) (up caused by the unusual items. This is demonstrated by the 2006, 2007, and 2008 adjustments: To assure the integrityTo of the adjustments, the committee establishes adjustment guidelines at the beginning Theseof the year. guidelines are consistent with the company guidelines for reporting adjusted earnings to the investment community, which are reviewed by the audit committee of the board. The adjustments apply equally to income and expense items and must exceed a materiality threshold. The committee reviews all adjustments and retains “downward discretion”—i.e., discretion to reduce compensation below the amounts that are yielded by the adjustment guidelines. ary 2007) on year-over-year growth rates, the committee adjusted sales and EPS for 2007 on a pro forma basis as if the acquisition had been completed at the beginning The of 2007. committee also eliminated the impact on 2008 sales and EPS of the acquisition of ImClone Systems Incorporated (completed in late November 2008). Adjustments for Certain Items Consistent with past practice, the committee adjusted the results on which 2008 bonuses and performance awards were determined to eliminate the distorting effect of certain unusual income or expense items on year-over-year growth percentages. The adjustments are intended to: Payouts of the 2008 grant will be determined by this grid when they are paid out in early 2011: cost-effective than the stock option program it replaced because the SVA program delivers, ata lower cost to the company, an equity incentive that is equally or more effective in aligning employee interests with long-term shareholder returns. For the 2008 grants, the committee considered the following: PROXY STATEMENT 9696 on: based toshares converted are values those date, grant the On date. grant tothe prior incentives equity for values grant target approves committee The Timing and Mechanics Grant Incentive Equity 2008. for $4.02 and 2007 for of$3.54 EPS adjusted the between growth 13.6 on percent based was management toall paid bonus The ing is driven by these considerations: these by driven is ing tim- date grant mid-February The meeting. October committee’s the at inadvance—typically well committee the by established is date This inmid-February. is employees eligible all for date grant equity annual The gain. employee bers were used for calculating growth percentages for the compensation programs. programs. compensation the for percentages growth calculating for used were bers

EPS asreported Sales—pro forma adjusted EPS—pro forma adjusted EPS—adjusted Sales asreported ($millions) NM—Not meaningful Pro forma ImClone adjustment Eliminate beneﬁt from resolution ofIRSaudit special charges (includingproduct liabilitycharges) Eliminate asset impairments,restructuring andother transactions Eliminate IPR&Dcharges for acquisitionsandin-licensing Eliminate charges related to Zyprexa investigations Eliminate netimpactassociated withImClone acquisition Pro forma ICOSadjustment Pro forma ICOSadjustment • thesamevaluation methodology thecompany usesto determine theaccounting expense ofthegrants under • theclosing price ofLilly stock onthegrant date • I • Itcoincides withthecompany’s calendar-year-based performance managementcycle, allowing supervisors to The committee’s procedure for timing of equity grants assures that grant timing is not being manipulated for for manipulated being not is timing grant that assures grants ofequity timing for procedure committee’s The Statement ofFinancialAccounting Standards (SFAS) 123R. strengthening thelinkbetween payandperformance. deliver theequityawards close intimeto performance appraisals, whichincreases theimpactofawards by Grants to new hires and other off-cycle grants are effective on the ﬁ the on effective are grants off-cycle other and hires tonew Grants num- shaded The below. are share per earnings and sales reported toour adjustments ofthe Reconciliations reasonably beexpected to fairly represent themarket’s collective view ofourthen-current results andprospects. t follows theannualearningsrelease byapproximately two weeks, sothatthestock price atthattimecan –5 10 15 20 25 30 35 2006 eotd Adjusted Reported 0 5 Percent Growthvs.PriorYears 2006 2,4. $18,706.2 $20,342.4 2,7. $18,633.5 $20,378.0 eotd r om dutd eotd ProFormaAdjusted Reported ProFormaAdjusted Reported 2007 ($1.89) ($0.19) 2008 $35.6 $0.34 $0.21 $0.10 $0.63 $1.20 $4.46 $4.02 $4.02 $3.55 — ($0.01) — 2007 2007 $2.71 $3.54 $72.7 — — — — rst trading day of the following month. following ofthe day trading rst 08v.20 2006 2008 vs. 2007 % Growth 13.6% 8.7% .%$5610 18.8% $15,691.0 9.4% NM 2008 $16,446.2 EPS Growth Sales Growth ($0.15) $755.2 $3.03 24 10.6% $2.45 $0.73 $3.18 2008 — — — — — 2007 vs. 2006 % Growth 16.8% 13.7%

PROXY STATEMENT - - - 9797 - - - - The benefits available are the same for allU.S. employees and include medical and dental coverage, disability In addition, the Lilly Plan 401(k) and the Lilly Retirement Plan provide a reasonable level of retirement income The cost of both employee and post-employment benefits is partially borne by the employee, including each primary Taurel’s Mr. use of the corporate aircraft for personal flights in 2008 wasto attend outside board The company has adopted a change-in-control severance pay program for nearly all employees of the com Although there are some differences in benefit levels depending on the employee’s job level and seniority, the within of employment loss by an involuntary followed trigger”—a change in control a “double requires generally with a employees provide which is to with the purpose of the program, This is consistent thereafter. years two for performance is made exception A partial of employment. loss upon of financial protection level guaranteed • provide our global workforce with a reasonable level of financial support in the event of illness or injury or injury of illness event in the of financial support level a reasonable with workforce our global • provide balance. on work/life focus that programs through and job satisfaction productivity • enhance . Unlike “single trigger” plans that pay out immediately upon a change in control, the Lilly program program the Lilly upon a change in control, trigger” plans that pay out immediately “single trigger. Unlike • Double ment and is also made available other to executive officers for the more limited purpose of travelto outside board meetings. In addition, depending on seat availability, family members of executive officers may travel on the com Perquisites The company provides very limited perquisites executive to officers. The company aircraft is made available for the personal Lechleiter, where use the of Dr. committee believes the security and efficiency benefits to the company clearly outweigh the expense. The company aircraft was similarly made available prior Taurel his to retire Mr. to Deferred Compensation Program Executives may defer receipt of part or all of their cash compensation under the company’s deferred compensa insurance, and life insurance. reflecting employees’ careers with the company.U.S. employees are eligibleto participate in these plans.To the extent that any employee’s retirement benefit exceeds IRS limits for amounts that can be paid through a qualified plan, Lilly also offersa nonqualified pension plan and a nonqualified savings plan. These plans provide only the dif executive officer. meetings for the two public companies at which he serves as an independent director. The committee believes that service Taurel’s Mr. on these boards, and his ability conduct to Lilly business while traveling board to meetings, provided clearTaurel benefits entered into a time-shareto the company. Mr. arrangement(now ended) for use of corporate aircraft under which he paid the company a lease fee for personal use, other than for attending outside board meetings. This amount offset part of the company’s incremental cost of providing the aircraft. Lechleiter Dr. had minimal use of the corporate aircraft for personal flights during personal2008. Rice’s use Mr. of the aircraft was limited travel to outside to board meetings. Severance Benefits Except in the case of a change in control of the company, the company is not obligated pay to severance named to executive officers upontermination of their employment. ference between the calculated benefits and the IRS limits, and the formula is the same for allU.S. employees. pany aircraft accompany to executiveswho are traveling on business. There is no incremental cost the to company for these trips. tion program. The program allows executives save to for retirement in a tax-effective way at minimal cost the to company. Under this unfunded program, amounts deferred by the executive are credited at an interest rate of 120 percent of the applicable federal long-term rate, as described in more detail following the Nonqualified Deferred Compensation in 2008 table on page 107. pany, including the executive officers. The program is intendedto preserve employee morale and productivity and encourage retention in the face of the disruptive impact of an actual or rumored change in control of the company. In addition, for executives, the program is intended align to executive and shareholder interests by enabling execu tives consider to corporate transactions that are in the best interests of the shareholders and other constituents of the company without undue concern over whether the transactions may jeopardize the executives’ own employ Employee and Post-Employment Benefits The company offers core employee benefits coverage in orderto: basic elements of the program are comparable for all employees: ment. Because this program is guided by different objectives than the regular compensation program, decisions made under this program do not affect the regular compensation program. PROXY STATEMENT Ild"nZVgegdiZXi^dceZg^dY 9djWaZig^\\Zg 6aa"ZbeadnZZeaVc Severance: Change InControl pensation objectives. pensation com- overall our with consistent and feasible extent tothe deductibility corporate full for programs compensation incentive our toqualify is policy Our requirements. other meet and shareholders by approved are programs the if offi executive tocertain of$1,000,000 excess in paid compensation certain for deduction atax taking from company the prohibits law tax income federal U.S. Compensation Executive on Cap Tax Deductibility transactions. derivative or sales achieved. is level ownership requisite untilthe shares net all retain must guideline ship offi owner- executive any stock year.the one meet not Inaddition, least at does for who cer taxes, and costs sition salary. his times seven at 2008, ofyear-end as valued, shares holds Dr. currently and Lechleiter salary his times 50 at Mr. valued retirement, Taurel ofhis shares held As period. offi executive of new case inthe or guideline, offi executive all and stock, inLilly holdings extensive ofmaintaining history a long signifi changes job their when or periodically individual each for reset be will and 2008, offi executive promoted or hired newly for offi executive fi least at valued stock Lilly toown CEO the requiring a guideline adopted has committee The growth. long-term on afocus tofoster help guidelines retention and ownership Share Prohibition Hedging Guidelines; Retention and Ownership Share 9898 • Excise tax.Insomecircumstances, thepaymentsorotherbenefits received bytheemployee inconnection with • Accelerated ofequityawards vesting • Two-year protections • Covered terminations.Employees are eligible for paymentsif,withintwo years ofthechangeincontrol, their Employees are not permitted to hedge their economic exposures to the Lilly stock that they own through short short through own they that stock Lilly tothe exposures economic their tohedge permitted not are Employees offi Executive cutback threshold willberaised to five percent above theIRSlimit. program thatare upto three percent over theIRSlimitwillbecutbackto theIRSlimit.Effective in2010,this be bornebythecompany. To avoid triggeringtheexcise tax, paymentsthatwould otherwisebedueunderthe employees willnotbesubjectto thetax. The costs ofthisexcise tax—but nottheregular income tax—would the excise tax iscalculated, itcan imposealarge burden onsomeemployees while similarly compensated The employee would thenbesubjectto anexcise tax ontop ofnormalfederal income tax. Because oftheway a changeincontrol mayexceed certain limitsestablished under Section280GoftheInternal Revenue Code. become vested. income andcore employee benefits uponwhichthey dependfor fi protection. Thepurposeoftheseprovisions isto assure employees areasonable periodofprotection oftheir constitutes achangeincontrol. is defined intheprogram. Seepages108–110for amore detailed discussion, includingadiscussion ofwhat employment isterminated (i)withoutcause bythecompany or(ii)for goodreason bytheemployee, eachas awards ispaidout,basedontimeworked upto the changeincontrol andthemerger price for Lilly stock. on thesurvivingcompany’s EPS.Likewise, ifLilly isnotthesurvivingentity,aportionofshareholder value partial paymentisappropriate because ofthedifficulties inconverting theLilly EPStargets into anaward based control andthetarget orforecasted payout level atthetimeofchangeincontrol. Thecommittee believes this awards, aportionofwhichwould bepaidoutuponachangeincontrol, basedontimeworked up to thechangein —Pension supplement beginning in2010. eligibility andbenefit levels underthecompany’s defi entitled to asupplement oftwo years ofagecredit andtwo years ofservice credit for purposesofcalculating cers to own at least three times their annual base salary. A phase-in ofuptofi Aphase-in salary. base annual their times three least at toown cers cers are required to retain all shares received from the company equity programs, net ofacqui- net programs, equity company the from received shares all toretain required are cers reduced to 18monthsbeginningin2010. named executive officers, are entitled to two years’ benefit continuation. Thisperiodwillbe continued for upto two years following termination ofemployment. Allexecutives, including —Benefi the last bonuspaidpriorto thechangeincontrol). plus cash bonus(withestablished asthehigherofthen-current year’s target bonusor from sixmonths’ to two years’ basesalary. Executives are alleligible for two years’ basesalary payment —Severance . Employees whosuffer acovered termination receive upto two years ofpayandbenefi . Undertheportionofprogram covering executives, aterminated employee would be t continuation. Basicemployee benefits suchashealthandlife insurance would be . Anyunvested equityawards atthetimeoftermination ofemployment would . Eligible terminated employees would receive aseverance paymentranging cers. Individual shareholding requirements were set at the beginning of beginning the at set were requirements shareholding Individual cers. cers. However, performance-based compensation is fully deductible deductible fully is compensation However, performance-based cers. cers, are on track to meet or exceed the guideline within the phase-in phase-in the within guideline the exceed or tomeet track on are cers, ned benefi ve times his or her annual base salary, and other other and salary, base annual her or his times ve nancial security. t pensionplan.Thisbenefi t willbeeliminated cers already meet or exceed the the exceed or meet already cers cantly. Lilly executives have have executives Lilly cantly. ve years is provided provided is years ve t PROXY STATEMENT - 9999 - nancial nancial ted from misstated c claw-back policy to the shareholder ed that the “Compensation Discussion and Analysis” fairly fraudulentcer’s conduct leads to “ill-gotten gains” due to misstated cult to isolate the amount, by if which any, the stock price benefi nancial results that were subsequently the subject of a restatement if an executive offi ling with the Securities and Exchange Commission. t, and perquisite programs. Management has the primary responsibility for the company’s cers. Under this policy, the company may recover incentive compensation (cash or equity) that was We haveWe taken steps to qualify cash bonus compensation, performance awards, and SVAs for full deduct- rs and oversees the deferred compensation plan, the company’s management stock plans, and other manage- nancial results, the committee will “claw back” the portion bonus of a or performance award attributed to the nancial statements and reporting process, including the disclosure of executive compensation. With this in mind, Compensation Committee Report The compensation committee (“we” or “the committee”) evaluates and establishes compensation for executive offi earnings over the three-year performanceperiod. In this case, the committee has the authority to exercise negative discretion to reduce or withhold payouts. ce Executive Compensation Recovery Policy Any incentive awards, including SVAs, are subject to forfeiture prior to payment for termination of employment or disciplinary reasons. In addition, the committee has adopted an executive compensation recovery policy applicable to executive offi based on achievement of fi cer engaged in intentional misconduct that caused or partially caused the need for the restatement and the effect of the wrongdoing was to increase the amount of bonus or incentive compensation. The committee and management have implemented a three-pronged approach to minimizing the risk of compensation programs encouraging misconduct or undue risk-taking. First, incentive programs are designed using a diversity of meaningful fi metrics (growth in total shareholder return, measured over three years, net sales, and EPS, measured over one and two years), thus providing a balanced approach between short- and long-term performance. The committee reviews incentive programs each year against the objectives of the programs and makes changes as necessary. Second, management has implemented effective controls that minimize unintended and willful reporting errors. Third, if despite these actions an executive offi fi misstatement. The committee does not believe it is practical to apply a specifi value award since it is very diffi ibility as “performance-based compensation.” The committee may payments make that are not fully deductible if, in its judgment, such payments are necessary to achieve the company’s compensation objectives and to protect shareholder interests. For 2008, the non-deductible compensation under Lechleiter this law for was Dr. essentially equal to the portion of his base salary that exceeded $1,000,000 as shown in the Summary Compensation Table. non-deductible Taurel’s Mr. compensation was approximately the amount listed Other under Compensation” “All in the Summary Compensation Table. ment incentive, benefi fi we have reviewed and discussed with management the “Compensation Discussion and Analysis” found on pages 89–99 of this proxy statement. The committee is satisfi Compensation Committee Karen N. Horn, Ph.D., Chair Michael L. Eskew ErikJ. Fyrwald Ellen R. Marram and completely represents the philosophy, intent, and actions of the committee with regard to executive compensation. recommended We to the board directors of that the “Compensation Discussion and Analysis” be included in this proxy statement for fi PROXY STATEMENT 5 4 3 2 1 100100 Table Compensation Summary The table below shows the components of this column for 2006 through 2008, which include the company match match company the include which 2008, through 2006 for column ofthis components the shows below table The offi executive named No individual. each for value inpension change the are column inthis amounts The Plan. Bonus Company and Lilly Eli the under 2009 inMarch made were performance 2008 for Payments fi audited 2008 8toour inNote found be may values these incalculating used assumptions ofthe A discussion offi executive toanamed paid was bonus No for each individual’s savings plan contributions, tax reimbursements, and perquisites. perquisites. and reimbursements, tax contributions, plan savings individual’s each for expensed. being still are Mr. only options and Rice’s 2008, outstanding during entirely expensed were Mr. options aresult, Armitage’s As toretire. eligible are who individuals for rate afaster at expensed are options Outstanding in2008. granted were options stock No report. annual ofour 50–52 pages on statements cial received preferential or above-market earnings on deferred compensation. compensation. deferred on earnings above-market or preferential received John C. Lechleiter, Ph.D. Lechleiter, C. John Robert A. Armitage A. Robert M.D. Paul, M. Steven Science and Technology and Science President, Vice Executive Offi Executive Chief and President, Chairman, General Counsel General and President Vice Senior Offi Financial Chief and President Vice Senior Sales and Marketing Global President, Vice Executive oiinYear Chairman Emeritus Position Principal and Name Sidney Taurel Derica W. Rice Bryce D. Carmine D. Bryce 2 1 These amounts include the incremental cost to the company of use of the corporate aircraft to attend outside outside toattend aircraft corporate ofthe ofuse company tothe cost incremental the include amounts These involv- functions company certain toattend spouse executive’s each for expenses for Tax reimbursements corporate aircraft to attend outside board meetings. board outside toattend aircraft corporate ofthe use for Mr. For imputed income Taurelinclude Mr. and amounts participation. these Rice, spouse ing included spouse participation. In addition, Mr. Taurel’s family members have occasionally accompanied him on on him accompanied occasionally Mr. have Inaddition, Taurel’s members family participation. spouse included that functions board toattend expenses Nelson-Rice’s Taurel’s Mrs. Mrs. and include also column in this amounts The in2008. $25,839 was $107,105 aircraft Mr. $91,069 and Rice’s in2006. corporate ofthe use in2007 $10,218 was in2008, ofMr. aircraft cost Taurel’s corporate incremental ofthe The use agreement. time-share Mr. the by under Taurel’s in2007, offset Mr. trip for reimbursement and, meetings Taurel, personal one board r amn 08$697$,1 0$ $53,497 $0 $0 $6,510 $46,987 2008 2008 2008 Mr. Rice Mr. Carmine Dr. Paul Mr. Armitage 2008 Dr. Lechleiter Name Mr. Taurel cer cer 2008 $2,958,333 $783,113 2008 2008 2008 2008 2008 2006 2006 2006 2006 2006 2007 2007 2007 2007 2007 2008 2008 2006 2006 2006 2006 2006 2007 2007 2007 2007 2007 Year $1,650,333 $1,000,250 $1,080,313 $1,339,125 $1,112,000 $1,149,083 1 $1,717,417 Salary $960,333 $701,657 $615,000 $778,767 $747,583 $834,117 $741,667 $916,167 ($) Savings Plan Plan Savings $103,045 $44,500 $44,855 $80,348 $42,099 $36,900 $54,970 $46,726 $50,047 $66,720 $64,819 $68,945 $13,800 $13,500 $99,020 Match $6,443,000 $8,353,333 $5,400,000 $2,485,000 $1,864,460 $6,621,333 $4,641,000 $3,510,000 $1,852,500 $2,852,671 $1,394,053 $1,995,000 $1,995,000 $3,194,250 Awards cer except as part of a non-equity incentive plan. incentive ofanon-equity part as except cer $675,000 Stock Stock ($) 2 Reimbursements $752,768 $15,030 $6,246 $4,572 $2,070 $6,759 $1,382 $2,731 $6,412 $1,051 $1,816 Tax Tax $3,805,333 $822 $1,240,000 $592 $819 $1,339,911 $3,967,976 Awards Option $600,000 $390,000 $375,000 $200,000 $590,928 $716,400 $473,675 $318,133 $0 ($) 3 4 2 0$,0,3 11870$579$5,962,090 $55,789 $1,158,720 $1,006,135 $0 $0 $0 $0

1 Incentive Plan Plan Incentive Compensation Non-Equity Non-Equity $4,035,929 $2,764,308 $1,054,093 $2,709,053 $1,045,750 $1,490,080 $2,160,277 $1,309,327 $1,043,514 $1,027,632 $2,329,154 $1,534,613 Perquisites $580,466 $109,268 $705,165 $959,441 $92,007 $21,840 ($) $29,741

3 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 2 in Pension Pension in $2,221,597 $1,417,434 $1,156,247 Change $455,226 $456,787 $396,687 $607,463 $232,697 $997,863 $231,862 $439,374 $168,627 $921,394 Value $194,469 ($) 4 $0 $18,902 Other $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Compensation All Other Other All 5 $839,428 $215,044 $192,409 $86,034 $45,551 $68,790 $55,789 $42,691 $78,787 ($) $13,500 $53,138 $18,372 $37,722 $87,107 $70,761 5 Compensation” Total “All Other Other “All Total $839,428 $215,044 $192,409 Compensation $86,034 cer $45,551 $68,790 $55,789 $42,691 $78,787 $13,500 $18,372 $53,138 $37,722 $87,107 $70,761 $11,305,093 $12,978,215 $15,229,817 $13,011,390 $13,059,014 $4,543,607 $4,458,219 $6,520,062 $4,415,339 $4,777,065 $5,727,393 $5,206,142 $5,957,804 $9,332,515 $2,667,743 Total Total ($) nan- PROXY STATEMENT 101101 Shares $855,000 $855,000 of Equity Fair Value Value Fair Grant Date Date Grant $4,000,000 $4,000,000 $3,250,000 $3,250,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,200,000 $1,200,000 ed pen- ed 3 0 0 0 0 0 0 Option Awards: Awards: Options All Other Securities Number of Underlying Underlying 58,571 55,838 58,571 55,838 46,857 44,670 33,385 31,828 156,189 148,897 126,904 120,980 2 Maximum (# shares) cers (page 106). 78,094 63,452 86,414 29,285 39,884 29,285 39,884 23,428 31,907 16,693 22,734 106,355 Target Target (# shares) Payouts Under Equity Payouts cers. See, the description however, of Incentive Plan Awards Incentive 8,346 9,093 Estimated Possible and Future and Future Possible Estimated 39,047 42,542 31,726 34,565 14,643 15,953 14,643 15,953 11,714 12,762 Threshold Threshold (# shares) ts he accrued under the company’s nonqualifi ($) 1 Maximum cers in 2008. ($) Target Target xed costs that do not change based on usage, such as pilots’ salaries, Under Non-Equity Incentive Plan Awards Plan Awards Incentive Estimated Possible Payouts Payouts Possible Estimated ($) $93,452 $623,013 $1,246,027 $98,000 $653,334 $1,306,669 $100,094 $667,293 $1,334,587 $226,866 $1,512,438 $3,024,875 $263,869 $1,759,125 $3,518,250 $127,532 $850,213 $1,700,425 Threshold Threshold — — — — — — 12/17/2007 12/17/2007 12/17/2007 12/17/2007 12/17/2007 12/17/2007 12/17/2007 12/17/2007 12/17/2007 12/17/2007 12/17/2007 12/17/2007 Committee Committee Action Date Compensation 4 5 4 5 4 5 4 5 4 5 4 5 2/7/2008 2/7/2008 2/7/2008 2/7/2008 2/7/2008 2/7/2008 2/7/2008 2/7/2008 2/7/2008 2/7/2008 2/7/2008 2/7/2008 the purchase costs of the company-owned aircraft and the cost of maintenance not related to trips. business trips, at no incremental cost to the calculate company. We the incremental cost to the companyany of personal use of the corporate aircraft based on the cost of fuel, trip-related maintenance, crew travel expenses, on-board catering, landing fees, trip-related hangar and parking costs, and smaller variable costs, offset by any time-share lease payments by the executive. Since the company-owned aircraftare used primarily for business travel, we do not include the fi overseas assignment. overseas payment on benefi made Taurel by the company for Mr. note below. 5 sion plan. ed pension All participants plan are eligible for this in the one-time nonqualifi reimbursement upon retirement. Payments are made directly to the IRS, not to the employee. Reimbursement for an over-withholding of taxes by the company in a prior Rice year was when on an Mr. This amount includes tax payments and relatedreimbursements totaling $720,360 related to the FICA tax Rice, this amount in tax includesFor reimbursements Mr. $13,051 in 2007 for the payment described in foot- 5 3 4 We haveWe no employment agreements with our named executive offi Dr. LechleiterDr. — PaulDr. CarmineMr. — — RiceMr. ArmitageMr. — — Name Date Grant Mr. TaurelMr. — Compensation Discussion and Analysis,” beginning on and page include 89, the Eli Lilly and Company Bonus Plan, described in the sections titled “Equity Incentives—Performance Awards” and “Equity Incentives—Shareholder Value Awards” in the “Compensation Discussion and Analysis.” Company Bonus Plan. As described in the section titled “Cash Incentive Bonuses” in the “Compensation Discus- sion and Analysis,” bonus payouts range from zero to 200 percent of target. The 2009 bonus payment for 2008 performance has been made based on the metrics described, at percent 154 of target, and is shown in the Sum- mary Compensation in the column titled Table “Non-Equity Incentive Plan Compensation.” No stock options were granted to named executive offi These columns show the range of payouts targeted for 2008 performance under the 2002 Lilly Stock Plan as These columns show the threshold, target, and maximum payouts for 2008 performance under the Eli Lilly and additional years of service that may be credited to certain named executive offi Grants Plan-Based of 2008 During Awards The compensation plans under which the grants in the following table were made are generally described in the “ 3 2 1 a non-equity incentive plan, and the 2002 Lilly Stock Plan, which provides for performance awards, shareholder value awards, stock options, restricted stock grants, and stock units. PROXY STATEMENT the following shares or restricted share units: share restricted or shares following the 102102 5 4 according to the grid shown on page 95 of the “Compensation Discussion and Analysis.” and Discussion “Compensation ofthe 95 page on shown grid tothe according 31, 2008. December on pany com- the from retirement Mr. his upon ofshares. Taurel’s vested form inthe shares out paid be will units the time 2010, which at untilFebruary resigns) executive the if toforfeiture subject (and restricted remain will units the and identifi units share the awarded was executive Each vesting. upon paid and period restriction one-year the during accrued are dividends Non-preferential units. share inrestricted payment received ofpayout time the offi executive an was who executive an Inaddition, retirement). or disability, death, of case (exceptinthe 31, December 2008 through company the with employed remained have must a participant These rows show SVA grants. SVA payouts range from zero to 140 percent of target. The payout for the 2008 2008 the for payout The oftarget. percent to140 zero from range payouts SVA grants. SVA show rows These These rows show performance award grants. The dollar amount recognized as expense by the company for for company the by expense as recognized amount dollar The grants. award performance show rows These shareholder value award will be determined in January 2011. inJanuary determined be will award value shareholder in more detail below. below. detail in more shown is and 2009 inJanuary made was payout award performance 2008 The oftarget. percent to200 zero from range payouts award Performance table. 2tothat infootnote referenced are assumptions valuation their and Awards” “Stock Table titled column inthe Compensation Summary inthe shown is awards performance these Mr. Armitage Mr. Rice Mr. Carmine Dr. Paul Lechleiter Dr. Mr. Taurel Name Our performance awards granted in 2008 paid out in January 2009, and the named executive offi executive named the and 2009, inJanuary out paid in2008 granted awards performance Our Our shareholder value awards granted in 2008 will pay out at the end of the three-year performance period period performance three-year ofthe end the at out pay will in2008 granted awards value shareholder Our payout, award aperformance toreceive Inorder oftarget. 175 percent were payouts performance, 2008 For Performance Awards Value on December 31, 2008 December on Value Awards Performance 136,665 111,041 40,999 51,249 51,249 29,213 $2,063,797 $2,063,797 $4,471,605 $5,503,514 $1,651,030 $1,176,408 cer at the time of grant and at at and ofgrant time the at cer cers received cers received ed above, PROXY STATEMENT 103103 $769,922 $769,922 $915,498 $415,586 Market or Vested ($) $1,606,129 $1,606,129 $1,791,089 $2,755,515 $4,282,916 $1,080,605 $3,479,892 $1,284,895 of Unearned Payout Value Plan Awards: That Have Not Shares, Units, or Other Rights Equity Incentive 3 4 3 4 3 4 3 4 3 4 3 4 19,119 19,119 31,907 86,414 10,320 39,884 39,884 22,734 44,477 68,426 26,834 106,355 Unearned Vested (#) Number of Plan Awards: That Have Not Shares, Units, or Other Rights Equity Incentive 2 Stock Awards $201,350 of Stock $1,269,794 $1,269,794 $1,176,408 $1,782,189 Vested ($) $1,651,030 $2,953,966 $5,503,514 $4,471,605 $2,063,797 $2,063,797 That Have Not Shares or Units Market Value of 2 5 9 6 5 5 5 6 5 6 5 6 5,000 29,213 51,249 51,249 31,532 31,532 40,999 73,354 44,256 111,041 136,665 Shares or Number of Vested (#) Units of Stock That Have Not Date Option 2/9/2016 2/9/2016 2/9/2016 2/9/2016 2/9/2016 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2012 10/4/2011 10/4/2011 10/4/2011 10/4/2011 10/4/2011 10/4/2011 2/18/2011 2/18/2011 2/18/2011 2/18/2011 2/10/2015 2/10/2015 2/10/2015 2/10/2015 2/10/2015 2/15/2013 2/15/2013 2/15/2013 2/15/2013 2/15/2013 2/15/2013 4/29/2016 2/14/2014 2/14/2014 2/14/2014 2/14/2014 2/14/2014 Expiration 12/17/2010 12/17/2010 12/17/2010 12/17/2010 12/17/2010 12/17/2010 12/31/2013 12/31/2013 12/31/2013 10/16/2009 10/16/2009 10/16/2009 10/16/2009 10/16/2009 10/16/2009 $73.11 $73.11 $73.11 $73.11 $73.11 $73.11 $56.18 $56.18 $56.18 $56.18 $56.18 $56.18 ($) $79.28 $79.28 $57.85 $79.28 $79.28 $79.28 $79.28 $57.85 $57.85 $57.85 $57.85 $57.85 $75.92 $75.92 $75.92 $75.92 $75.92 $75.92 $73.98 $73.98 $73.98 $73.98 $88.41 $88.41 $88.41 $88.41 $88.41 $88.41 $55.65 $55.65 $55.65 $55.65 $55.65 $55.65 $52.54 $66.38 $66.38 $66.38 $66.38 $66.38 $66.38 Option Exercise Price

1 10 Option Awards 27,108 37,651 54,217 72,289 30,000 140,964 50,000 Securities Number of Underlying Options (#) Unexercised Unexercisable

10 10 8 7 1 7,000 5,000 11,200 23,100 25,000 25,000 57,000 12,000 10,000 10,000 75,900 10,000 14,000 23,077 25,000 50,600 85,207 60,000 50,000 42,604 55,000 50,000 80,000 80,000 80,000 23,000 23,000 46,000 46,000 46,000 23,800 53,254 127,811 216,867 175,000 255,621 120,000 120,000 120,000 100,000 350,000 350,000 350,000 200,000 350,000 400,000 Securities Number of Underlying Options (#) Exercisable Unexercised Mr. TaurelMr. Mr. RiceMr. Name Mr. ArmitageMr. Dr. PaulDr. Mr. CarmineMr. Dr. LechleiterDr. Outstanding Equity Awards at December 2008 31, PROXY STATEMENT Options Exercised and Stock Vested in 2008 in Vested Stock and Exercised Options 104104 10 9 8 7 6 5 4 3 2 1 2 1 These shares will vest on December 20, 2010. 20, December on vest will shares These benefi the for toatrust option ofthis 118,683 shares Dr. transferred Lechleiter benefi the for toatrust option ofthis shares 348,683 Mr. Taurel transferred performance. 2007 for 2008 inJanuary out paid plan Award Performance company’s the under granted Shares perfor- 2008 for 2009 inJanuary out paid plan Award Performance company’s the under granted units Share 31, number The 2009. December vest will that plan Award Value Shareholder company’s the under granted Shares 31, number 2010. The December vest will that plan Award Value Shareholder company’s the under granted Shares period aholding with units share or shares inrestricted paid shares award performance show columns two These Mr. date. upon vested Taurel’s all expiration by options below table inthe listed is option ofeach date vesting The Amounts refl Amounts refl Amounts awards issued in January 2007 for company performance in 2006, which were subject to forfeiture for one year year one for toforfeiture subject were which in2006, performance company for 2007 inJanuary issued awards r arl0$ 100,000 $0 0 Mr. Taurel Mr. Rice 0 $0 0 $0 $0 $1,238,026 $994,098 $1,650,701 0 $3,218,867 24,030 9,796 32,040 62,478 $0 $0 $0 $0 $0 0 0 0 0 0 Mr. Armitage Mr. Rice Mr. Carmine Dr. Paul Dr. Lechleiter Name These options were granted outside of the normal annual cycle and vest in three installments, as follows: 25 per- 25 follows: as installments, inthree vest and cycle annual normal ofthe outside granted were options These cent on December 19, 2005; 25 percent on December 18, 2008; and 50 percent on November 2, 2009. 2, November on percent 50 and 18, 2008; December on 19, percent 25 December on cent 2005; These shares vested in February 2009. 2009. in February vested shares These retirement. 2010. Mr. his upon vested Taurel’s inFebruary shares vest will shares These mance. period. performance three-year ofthe refl year amount, second the payout ofhis after thirds retirement Mr. his two ecting Taurel receive will oftarget. percent zero been have would payout the 2008, end year at ended period performance the Had of target. percent to140 zero from vary may payouts $66.99. Actual and $63.00 between is 2009 December and November refl table inthe reported of shares period. performance year refl amount, fi the payout ofhis after Mr. third one retirement his Taurel receive ecting will oftarget. percent zero been have would payout the 2008, end year at ended period performance the Had of target. percent to140 zero from vary may payouts $65.99. Actual and $62.00 between 2010 is December and November refl table inthe reported of shares preferential. not are dividends the but period, restriction the during dividends pay shares stock restricted The performance. 2007 for in2008 out paid year. award of one This 31, 2013: December or below listed date expiration ofthe earlier the on expire will they and retirement his and the remainder have been transferred back toDr. back Lechleiter. transferred been have remainder the and benefi the for intrust held are option ofthis shares 50,734 2002. 30, April on vested toMr. back Taurel. transferred been have remainder the benefi 149,172 the for intrust 2002. held 30, are option ofthis April on shares vested xiainDt etn aeEprto aeVesting Date Expiration Date Vesting Date Expiration Date 42/0605/01/2009 04/29/2016 21/0402/19/2007 02/14/2014 20/0602/10/2009 02/09/2016 21/0302/17/2006 02/15/2013 21/0502/11/2008 02/10/2015 ect the difference between the exercise price of the option and the market price at the time ofexercise. time the at price market the and option ofthe price exercise the between difference the ect ect the market value of the stock on the day the stock vested. These shares represent performance performance represent shares These vested. stock the day the on stock ofthe value market the ect Number of Shares Acquired Acquired Shares of Number on Exercise (#) Exercise on ects the target payout amount, which will be made if the average stock price in price stock average the if made be will which amount, payout target the ects in price stock average the if made be will which amount, payout target the ects 01/0910/18/2002 10/16/2009 00/0110/03/2003 10/04/2011 21/0102/20/2004 02/18/2011 21/0202/18/2005 02/17/2012 21/0012/18/2003 12/17/2010 pinAad Stock Awards Option Awards Value Realized on Exercise Exercise on Realized Value ($) 1 Number of Shares Acquired Acquired Shares of Number on Vesting (#) Vesting on t of his children, and these shares shares these and children, t ofhis t of his children, and these shares shares these and children, t ofhis 96,120 t of Dr. Lechleiter’s children, t ofDr. children, Lechleiter’s t ofMr. and Taurel’s children, rst year of the three- ofthe year rst Value Realized on Vesting Vesting on Realized Value 2 $4,952,102 $3,967,000 ($) PROXY STATEMENT 105105 ed ed cers: cers. $0 $0 $0 $0 $0 $0 Fiscal Year ($) Payments During Last ve percent less than his full 1 t ($) t t plan that provides monthly monthly t plan that provides $259,527 $999,084 $1,198,148 $9,519,242 $1,258,611 $1,164,665 $8,699,133 $3,399,861 $4,413,493 $4,287,525 $3,998,445 $5,573,334 $29,699,031 $30,863,696 t of 25 percent. Present Value of Accumulated Benefi es for approximately eight percent less than his cers are entitled to under the retirement plan. ed plan’s limit. The nonqualifi ed pension plan limit.ed plan’s is The nonqualifi ed defi ned benefi ned defi ed t, which is approximately fi es for approximately 20 percent less than his full ts. ts. 19 16 19 10 36 36 29 33 Credited ServiceCredited Number of Years of ts are further described below. ed pension benefi pension ed total total total total total total ts that named executive offi ed plan ed edplan ed plan ed edplan edplan 10 $2,201,713 ed plan ed plan ed plan ed plan ed 29plan ed plan ed 16 33 $820,109 $289,080 $1,159,841 ed plan ed t shown above by $1,531,259. Plan nonqualifi nonqualifi nonqualifi nonqualifi nonqualifi nonqualifi (the retirement plan), a tax-qualifi (the retirement tax-qualifi tax-qualifi tax-qualifi tax-qualifi tax-qualifi tax-qualifi t ($230,0002008). in since the 1975 However, company has maintaineda non-tax-quali- t. Early retirement benefi ed plan ($185,000 in 2008) as well as on the amount of annual earnings that can be used to ts t. Dr. Paul’s potentialt. additional Dr. service credit, described below, increased the present value of t. ts in 2008 in ts

ed pension benefi pension ed 2 5 4 3 Section 415 of the InternalSection Revenue Code 415 generally places a limit on the amount of annual pension that can be retirement benefi ts to eligible employees. See the Summary Compensation Table on page 100 for additional on page 100 for Table See the Summary Compensation employees. eligible ts to benefi retirement of these pension benefi about the value information The following table shows benefi Internal Revenue Code. Eligible employees may elect to contribute a portion of their salary to the plan, and the a portion of their salary to contribute to may elect employees Code. Eligible Revenue Internal salary. of base six percent up to contributions employees’ on the contributions matching provides the company contributions, company contributions, The employee stock. of Lilly form in the are contributions The matching participant. See the Summary made by the with elections paid out in accordance are and earnings thereon offi executive the named to contributions about company information on page 100 for Compensation Table a defi ned contribution plan qualifi of the ed under Sections 401(a) and 401(k) plan qualifi ned contribution Plan, a defi 401(k) Employee • The Lilly Plan Retirement • The Lilly Dr. Lechleiter Dr. Name Mr. Taurel Mr. Dr. Paul Dr. CarmineMr. Rice Mr. Mr. Armitage Mr. following theseTaurel, issuance. amounts For Mr. also include a performance award issued in January 2008 for company performance which in 2007, vested upon his retirement. change the present value of his nonqualifi 2000CH (post-retirement decrement only), andjoint and survivor benefi full retirement benefi retirement full benefi retirement his nonqualifi benefi retirement Mr. Carmine is currentlyMr. eligible for full retirement benefi ArmitageMr. is currently eligible for early retirement. His additional service credit, described below, does not Dr. Paul is currentlyDr. eligible for early retirement. He qualifi The calculation of presentt assumes value a discount of accumulated rate percent, of 6.9 benefi mortality RP Lechleiter isDr. currently eligible for early retirement. He qualifi ed pension plan that pays eligible employees the difference between the amount payable under the tax-qualifi fi paid from a tax-qualifi calculate a pension benefi plan and the amount they would have received without the qualifi unfunded and subject to forfeiture in the event of bankruptcy. Pension Benefi Retirement Benefi 4 5 3 2 1 We maintainWe two programs to provide retirement income to all eligible U.S. employees, including executive offi PROXY STATEMENT for an additional period, if requested by Mr. by Taurel. requested if period, additional an for arrangement this toextend elect may ofdirectors board ofthe committee compensation the point which at ment, offi aperiod for granted been has arrangement This programs. retirement normal toMr. to Taurel, inaddition arrangement support administrative following the providing are we appointment, that ofdirectors. board ofthe committee compensation the by approved be must employee Benefi Pension inthe (shown to begin reduced benefi eligible him made credit service additional The ofservice. years only, 20 purposes eligibility for has, he though as treated been has he 9.75 ofservice, with 60 years age reached Mr. Since 60. age at Armitage earnings and service benefi aretirement with him toprovide in1999, agreed company company the the joined Mr. When Armitage 60. turns he before terminated involuntarily is or 60, age past company the by employed retiree’s the life. during payment annuity options: two lowing benefi annual The survivor. qualifying any and retiree ofthe life the for annuity amonthly as paid generally are they sum; 25, 50, or 75 percent of the retiree’s annuity benefi retiree’s ofthe annuity percent 75 or 50, 25, benefi annuity survivor pay will plan the retiree’s the death, upon that, elect may dependents unmarried 106106 2 1 receive an unreduced benefi unreduced an receive fi least at with 65 (i) age at retire who Employees ofservice. years plus age her or ofhis sum the equaling points employee’s “points,” an with Benefi ofretirement. time the at ofservice years retiree’s and the on age depends also benefi ofthe amount The payouts. award performance includes calculation the to2003, prior years for addition, In credited). or earned than (rather paid are earnings inwhich year the for and credited) than (rather paid bonus of amount the for calculated years) relevant the for statements proxy company’s inthe disclosed (amounts bonus (fi ofservice years The incremental cost to the company is calculated by estimating the cost of computer hardware, software, and IT IT and software, hardware, ofcomputer cost the estimating by calculated is company tothe cost incremental The company. tothe cost incremental no at headquarters corporate inthe provided is space this Currently support, as well as part-time administrative support. administrative part-time as well as support, akn tcmayfclte — facilities company at Parking Offi Benefi Administrative and computer/technology support computer/technology and Administrative • Employees whohave less than80points,butwhohave reached age55andhave atleast 10years ofservice, may • Employees withbetween 80and90pointsmayretire withabenefit thatisreduced bythree percent for eachyear ce space Upon retirement, Mr. Taurel was appointed chairman emeritus, effective January 1, 2009. In connection with with 1, Inconnection 2009. January effective emeritus, Mr. chairman retirement, Taurel appointed Upon was remains he if credit service ofadditional 10 years Dr. receive in1993. will company Paul Dr. the joined Paul All U.S. retirees are entitled to medical insurance under the company’s plans. Retirees with spouses or or spouses with Retirees plans. company’s the under insurance tomedical entitled are retirees U.S. All the employee hasleft to reach 80 pointsorage65. retire withabenefit thatisreduced asdescribedabove andisfurtherreduced bysixpercent for eachyear that that theemployee hasleft to reach 90pointsorage62. The retirement plan benefi plan retirement The t t under the plan is calculated using the average of the annual earnings for the highest fi highest the for earnings annual ofthe average the using calculated is plan the t under 1 nal average earnings). Annual earnings covered by the retirement plan consist of salary and and ofsalary consist plan retirement the by covered earnings Annual earnings). average nal ts nine months early, but did not change the timing or amount of his unreduced benefi unreduced ofhis amount or timing the change not did but early, months nine ts ve years of service, (ii) at age 62 with at least 80 points, or (iii) with 90 or more points points more or 90 (iii) or with points, 80 least at with 62 (ii) age at ofservice, years ve t. Employees may elect early retirement with reduced benefi reduced with retirement early elect may Employees t. ts in 2008 table on page 105). A grant of additional years of service credit to any toany credit ofservice years ofadditional 105). Agrant page on table in2008 ts ts shown in the table are net present values. The benefi The values. present net are table inthe shown ts 2 to the Company (annualized) Company the to Incremental Cost $40,000 t. Election of the higher survivor benefi survivor higher ofthe Election t. — t based on his actual years of years actual his on t based ve years following his retire- his following years ve t calculations are based on on based are t calculations ts are not payable as a lump alump as payable not are ts ts under either of the fol- ofthe either under ts t will result in a lower inalower result t will ve out of the last 10 last ofthe out ve ts at either either at ts ts t PROXY STATEMENT 107107 — — 3 ($) $215,816 $198,920 $485,199 $729,866 $729,866 $963,203 $963,203 $304,756 $304,756 $3,597,219 $2,170,064 $2,170,064 $9,024,790 $9,024,790 $4,207,892 Aggregate Aggregate Fiscal Year End Balance at Last $0 $198,920 $0 $1,179,019 $0 $4,937,758 $485,199 $0 $0 $11,194,854 ($) Aggregate Aggregate Withdrawals/ Withdrawals/ Distributions in Last Fiscal Year ed savings plan is designed $218,711 $410,795 $182,604 $3,879,530 $3,706,384 $3,623,003 Total ($) ($) ($) $47,278 $47,278 $179,099 $210,586 $473,727 $473,727 ($84,211) ($62,423) ($213,476) Aggregate Aggregate Fiscal Year Year Fiscal Earnings Last in $0 — — — — — $110,110 2 $218,711 $3,520,965 $2,620,075 $2,666,297 $51,019 $51,019 ($902,296) $33,187 $32,926 $32,926 ($136,712) $36,247 ($) $66,548 $66,548 ($282,414) Registrant Previous Years ($) Last Fiscal Year Contributions in — — $0 $0 ($213,476) $0 $0 1 cers and other executives may also defer receipt of all or part of their $0 ($) Executive Executive $72,494 $410,795 Last Fiscal Year $102,038 Contributions in $1,213,233 $1,086,309 2008 ($) n——— n——— o o i i t t total($62,423) $36,247 $36,247 total $1,053,383 $32,926$42,387 $0 $3,901,975 total total($36,933) $377,609 $33,187 total($71,828) $1,146,686 $66,548 total($428,569) $51,019$51,019 a a s s n n e e p p ed savings ed $32,926 ed savings ed $33,187 ed savings ed $36,247 ed savings ed $51,019 savings ed ed savings ed $66,548 m m o o c c Plan d d e e r r r r e e nonqualifi nonqualifi nonqualifi nonqualifi ed savings) or the “Non-Equity Incentive Plan Compensation” column (deferred compensation). ed savings plan and a deferred compensation plan. The nonqualifi f f ed Deferred Compensation in 2008 table above shows information about two company pro- e e deferred compensation $1,020,457 deferred compensationdeferred $344,422 d deferred compensation deferred d deferred compensation $1,080,138 2008 Compensation Deferred in ed Mr. Taurel Mr. Lechleiter Dr. Paul Dr. Mr. Carmine Name Mr. Rice Mr. Armitage Mr. The Nonqualifi Mr. ArmitageMr. nonqualifi Mr. Carmine Mr. Mr. RiceMr. Dr. PaulDr. Name TaurelMr. Dr. LechleiterDr. nonqualifi Compensation” column as a portion of the savings plan match. for this yearTable and for previous years: column (nonqualifi The amounts in this column are also included in the SummaryCompensation on page Other 100, Table in the“All Of the totals in this column, the followingamounts have previously been reported in the Summary Compensation The amounts in this column are also included in the Summary Compensation on page 100, Table in the “Salary” 2 3 1 Nonqualifi grams: a nonqualifi to allow each executive to contribute up to six percent his of or her base salary, and receive a company match, beyond the contribution limits prescribed by the IRS with regard plans. to 401(k) This plan is administered in the same manner as the company Plan, 401(k) with the same participation and investment elections, and all employees are eligible to participate. Executive offi cash compensation under the company’s deferred compensation plan. Amounts deferred by executives under this program are credited with interest percent at 120 of the applicable federal long-term rate as established for the preceding December by the U.S. Treasury Department under Section of the Internal Revenue 1274(d) Code with monthly compounding, which was 5.5 percent for 2008 and is 5.2 percent for 2009. Participants may elect to receive the funds in a lump annual sum or installments in up to 10 following retirement, but may not make withdrawals during their employment, except in the event of hardship as approved by the compensation committee. All deferral elections and associated distribution schedules are irrevocable. Both plans are unfunded and subject to forfeiture in the event of bankruptcy. PROXY STATEMENT Accrued Pay and Regular Retirement Benefi Retirement Regular and Pay Accrued 108108 2 1 Employment of Termination Upon Payments Potential offi executive named entitle that plans or arrangements, Benefi “Retirement under described and below shown as arrangements pension (ii) and certain below, described as company, ofthe incontrol achange following terminations (i) for certain Except offi executive named the towhich arrangements and plans benefi and payments potential the describes table following The Control in Change or Termination Upon Payments Potential termination of employment. These include: These ofemployment. termination benefi and tive offi tive benefi or payments such toprovide agreement Any employment. oftheir termination upon These amounts refl amounts These Benefi Retirement Regular and Pay “Accrued See tion about Dr. Paul’s retirement benefi Dr. about retirement tion Paul’s informa- more 106 for page (see 60 age reaches he before occur it should cause, for than other termination, tary tion of medical and welfare benefi welfare and ofmedical tion Mr. Armitage Mr. Rice Dr. Paul Mr. Carmine Dr. Lechleiter Mr. Taurel noutr rgo esntriainatrCC$,8,8 4804$400$,7,5 15285$7,861,906 $1,572,805 $2,278,154 $24,000 $498,064 $3,488,882 CIC after termination reason good or • Involuntary • noutr rgo esntriainatrCC$,5,6 1145$400$,8,6 14818$8,123,749 $1,498,108 $2,684,962 $24,000 $161,415 • Voluntary retirement $3,755,264 CIC after termination reason good or • Involuntary • • Involuntary termination • Involuntary noutr rgo esntriainatrCC$,7,7 2968$400$249,352 $24,000 $289,618 • $3,772,270 CIC after termination reason good or • Involuntary • Involuntary or good reason termination after after termination reason good or • Involuntary • Voluntary retirement • • noutr rgo esntriainatrCC$,3,5 $4,695,338 $4,632,054 CIC after termination reason good or • Involuntary • Voluntary retirement • Voluntary retirement • Voluntary retirement (12/31/08) $0$0$0$0$0$0 I I V I I • Distributions ofplanbalances undertheLilly 401(k) Plan andthenonqualified savingsplan.See thenarrative • Welfare benefits provided to allU.S.retirees, includingretiree medical and dental insurance. The amounts • Regularpensionbenefits undertheLilly Retirement Planandthenonqualified pensionplan.See“Retirement • Accrued salaryandvacation pay. change in control (CIC) control in change n n n n o v v v v following the Nonqualified Deferred Compensation in2008table onpage107for information about the 401(k) shown inthetable above as“Continuation ofMedical /Welfare Benefits” are explained below. explained below. Benefits” onpages 105–106.Theamountsshown inthetable above as“Incremental Pension Benefi l o o o o u l l l l n u u u u cer (other than following a change in control) would be at the discretion of the compensation committee. compensation ofthe discretion the at be would incontrol) achange following than (other cer t n n n n a t t t t r a a a a y ts to the extent they are provided on a non-discriminatory basis to salaried employees generally upon upon generally employees tosalaried basis anon-discriminatory on provided are they extent tothe ts r r r r t y y y y e t t t t r e e e e m r r r r m m m m i n i i i i a n n n n t a a a a i o t t t t i i i i n o o o o ect an additional 10 years of service credit that would be credited toDr. involun- an upon credited Paul be would that credit ofservice 10 years additional an ect n n n n ts” on pages 108–110. pages on ts” ts). 82816$,1,3 $24,000 $1,616,631 $8,218,106 Severance Payment ts. Cash The amounts shown in the previous table do not include payments payments include not do table previous inthe shown amounts The $ $0 $ 0$3,327,394 $0 $ $0 $ $ $0 $0 ts” and “Change-in-Control Severance Pay Program—Continua- Pay Severance “Change-in-Control and ts” 0$ 0$ 0$ 0$ 0$ Incremental cers to severance, perquisites, or other enhanced benefi enhanced other or perquisites, toseverance, cers (present (present Pension Benefi cers would be entitled upon termination of employment. ofemployment. termination upon entitled be would cers value) t $0 $0 $0 $0 0$ 0$ 0$ ts under the company’s compensation and benefi and compensation company’s the under ts 0$ 0$ 2 2 Continuation of Medical/ (present (present Benefi Welfare Welfare value) $114,076 $90,076 ts $0 $0 $0 $0 1 0$ 0$ 0$ 0$ 0$ 2 2 ts” above, there are no agreements, agreements, no are there above, ts” expense as of (unamortized (unamortized Continuation Acceleration 12/31/08) of Equity 2130$,3,6 $13,180,286 $3,537,468 $201,350 Awards Awards and $0 $0 0$,7,3 $13,537,267 $3,678,530 $0 $0 $0 $0 0$ 0$ 0$ 0$ 0$ ts to a terminating execu- toaterminating ts Excise Tax Excise Gross-Up $0 $0 0$4,335,240 $0 $0 $0 0$3,417,470 $0 0$ 0$ 0$ 0$ 0$ t” are Termination Termination Benefi Total Total ts ts t $0 $0 $0 $0 0 0 0 0 0 PROXY STATEMENT 109109 t of t nes a change in ed Deferred Compensation in 2008 t: cers (the “CIC Program”). The CIC Program defi 6.9 percent 25% of pension RP 2000CHRP ts that are not available to salaried employees generally. Represents the present value of an incremental nonqualifi ed pension benefi nonqualifi of an incremental value the present t. Represents Represents the CIC Program benefi salary plus two times the 2008 annual base t of two benefi the CIC Program Represents The table assumes a termination of employment that is eligible for severance under the severance for is eligible that of employment a termination assumes The table cally, but generally the term includes the occurrence or entry of, into, an agreement to do one of ts” on pages 97–98, the company maintains a change-in-control severance pay program for near- employee’s willful and continued refusal to perform, without legal cause, his or her material duties, resulting duties, resulting his or her material cause, without legal perform, to refusal continued willful and employee’s misconduct or gross dishonesty, (ii) any act of fraud, the company; to harm economic in demonstrable of the company; reputation the business harm to cant harm or other signifi economic cant signifi in resulting a felony. to contendere of guilty or nolo of a plea of or the entering or (iii) conviction or authority, duties, responsibilities relationship, reporting position, title, of the executive’s status or nature his or her workload; increase that materially him or her of additional responsibilities to or the assignment in the executive’s reduction base salary; (iii) a material then-current in the executive’s (ii) any reduction (iv) a the change in control; prior to the year for those in effect bonuses below earn incentive opportunities to prior to immediately in effect t levels the benefi ts from benefi employee in the executive’s reduction material shares, units, performance options, stock stock the executive to grant to (v) the failure the change in control; the basis on the change in control following (12) month period rights during each twelve or similar incentive as those the executive to as favorable at least terms or units and all other material of a number of shares prior to period immediately (3) year the three basis for or her on an annualized average him to rights granted fty (50) miles. than fi by more of the executive or (vi) relocation the change in control; Mortality (post-retirement only): Mortality (post-retirement Joint & survivor t: benefi Discount rate: —A termination of an executive offi cer by the company is for cause if it is for any of the following reasons: (i) the reasons: any of the following for if it is cause is for by the company cer offi of an executive —A termination diminution in the (i) a material from if it results reason good is for cer offi by the executive —A termination stock options are terminated 30 days thereafter. However, when a retirement-eligible employee terminates, his or terminates, employee when a retirement-eligible However, 30 days thereafter. terminated are options stock date. normal expiration or the option’s retirement after years ve until the earlier of fi in force her options remain plan, the deferred compensation plan, and the nonqualifi plan. ed savings plan, and the nonqualifi compensation deferred plan, the of unvested vesting accelerated receive retirement-eligible while employment terminate who plans, employees outstanding forfeited), which are retirement, before in the 12 months granted options for options (except stock during worked time for basis paid on a reduced (which are awards value and shareholder awards performance awards. performance in payment of previous awarded stock period), and restricted the award terms of the current plan, based on the named executive’s compensation, benefi ts, age, and service credit at credit ts, age, and service benefi compensation, named executive’s plan, based on the of the current terms or a other than cause, reasons for termination include an involuntary terminations Eligible 31, 2008. December the change in control. following years within two good reason, for by the executive termination voluntary times the cash bonus for 2008 under the Eli Lilly and Company Bonus Plan. the Eli Lilly 2008 under bonus for times the cash two years of age credit and two years of service credit that is provided under the CIC Program. The incremental The incremental under the CIC Program. that is provided credit of service years and two credit of age years two actuarial assumptions standard 20, 2010. The following October effective t will be discontinued pension benefi pension benefi incremental each individual’s calculate used to were The value of option continuation upon retirement. When an employee terminates prior to retirement, his or her retirement, prior to terminates employee When an retirement. upon continuation of option The value • The value of accelerated vesting of certain unvested equity grants upon retirement. Under the company’s stock stock company’s Under the upon retirement. grants equity unvested of certain vesting of accelerated • The value • Covered terminations. • Covered • Cash severance payment. pension benefi • Incremental cers any to payments or benefi ly all employees, including the named executive offi “Severance Benefi the following: acquisition (a) percent (20 of 15 percent beginning October 20, or more 2010) of the company’s stock; replacement(b) by the shareholders of one third (one half beginning October 20, or more 2010) of the board of directors; consummation (c) share a merger, of exchange, or consolidation of the company; liquidation or (d) of the company or sale or disposition of all or substantially all of its assets. The amounts shown in the table for “involuntary or good reason termination” following a change in control are based on the following assumptions and plan provisions: Deferred Compensation.Deferred The amounts shown in the table do not include distributions of plan balances under the Lilly deferred compensation plan. Those amounts are shown in the Nonqualifi Death and Disability. A termination of employment due to death or disability does not entitle the named executive offi table on page 107. Change-in-Control Severance Pay Program. As described in the “Compensation Discussion and Analysis” under control very specifi PROXY STATEMENT purposes of determining taxable fringe benefi fringe taxable ofdetermining purposes for Service Revenue Internal the by established as Levels Fare Industry (ii) or Standard the available) mercially 110110 fl the fl and crew including Mr. aircraft, company the agreement, Taurel leased time-share the Under aircraft. ofcompany use personal his f toMr. retirement tohis Taurel available prior made was aircraft company the reasons security for above, noted As Transaction Related-Person elapsed. period performance three-year ofthe portion the for prorated and price stock change-in-control the on based out pay will SVA the entity, surviving the not is Lilly which fi then-current company’s the on based calculated award, performance ofthe value ofthe one-half receive would employee the 30, June on occurred to refl reduced made, be would awards performance ofoutstanding payment apartial incontrol ofachange summation con- upon that except alone, incontrol achange upon payments receive not do Employees incontrol. change the following years two within ofemployment termination acovered suffers employee the if only made are payments Alone. Control in Change Upon Payments or all travel. The company entered into a time-share arrangement (now ended) with Mr. with with ended) (now Taurel inconnection arrangement intoatime-share entered company The travel. all or • Excise taxreimbursement. Uponachangeincontrol, employees maybesubjectto certain excise taxes under • Acceleration andcontinuation ofequityawards. • Continuationofmedical andwelfare benefi For Dr. Paul, the amounts in the table above refl above table inthe Dr. amounts For the Paul, ight but capped at the greater of (i) an amount equivalent tofi equivalent of(i) amount an greater the at capped but ight is to avoid triggeringtheexcise tax underSection280G. employee’s severance willbecutbackbyupto three percent (five percent effective October 20,2010)iftheeffect federal, state, andlocal income tax rate. To reduce thecompany’s exposure to thesereimbursements, the reimbursement. Theamountsinthetable are basedona280Gexcise tax rate of20percent anda40percent for thoseexcise taxes aswell asanyincome andexcise taxes payable bytheexecutive asa result ofthe Section 280GoftheInternal Revenue Code.Thecompany hasagreed to reimburse theaffected employees to thecompany for thiscontinuation because theoptionwould already have beenfully expensed. stock optionsfor upto three years following termination ofemployment. There would benoincremental expense retirement-eligible, Mr. Rice, would receive thebenefit undertheCICPlanofcontinuation ofhisoutstanding connection withtheacceleration ofunvested equitygrants. Inaddition,thenamedexecutive officer whoisnot reason. Theamountsinthiscolumn represent thepreviously unamortizedexpense thatwould berecognized in other unvested equityawards (withtheexception oftheSVA) automatically vest uponretirement regardless of and term extension because oftheCICPlanwould be5,000shares ofrestricted stock heldbyDr. Paul; all Lechleiter, Dr. Paul, Mr. Carmine,andMr. Armitage, theonly otherequityaward receiving accelerated vesting of achangeincontrol inwhichLilly isnotthesurvivingentity. For thefour retirement-eligible employees, Dr. three years following termination. Payment oftheshareholder value award (SVA) isaccelerated inthecase stock options,restricted stock, orotherequityawards would vest, andoptionswould beexercisable for upto calculate incremental pensionbenefits, withtheadditionofanassumed COBRArate of$12,000peryear. same actuarialassumptions were usedto calculate continuation ofmedical andwelfare benefits aswere usedto service credit describedonpage106,whichmakes himeligible for anenhanced retiree medical benefi period willbereduced to 18months.For Dr. Paul, theamountintable reflects the10years ofadditional employee medical, dental, life, andlong-term disabilityinsurance. Effective October 20,2010,thecoverage two years following acovered termination ofcontinued coverage equivalent to thecompany’s current active ect only the portion of the year worked prior to the change in control. For example, if a change in control incontrol achange if example, For incontrol. change tothe prior worked year ofthe portion the only ect ight services, for personal fl personal for services, ight nancial forecast for the year. Likewise, in the case of a change in control in incontrol ofachange case inthe year. the for Likewise, forecast nancial the CIC Program is a “double trigger” program, meaning meaning program, trigger” a“double is Program CIC the In general, ts.Represents thepresent value oftheCICPlan’s guarantee for ts. ights. He paid a time-share fee based on the company’s cost of cost company’s the on based fee atime-share paid He ights. UndertheCICPlan,uponacovered termination, anyunvested ect the 10 years of additional service credit described on page 106. page on described credit service ofadditional 10 the years ect rst-class airfare for the relevant fl relevant the for airfare rst-class ight (if com- ight t. The PROXY STATEMENT 111111 958,775 2,447,488 February 3, 2009 3, February able Within 60 Days of Stock Options Exercis- Options Stock 3 4 2 cially owned by each cially owned by the directors, cially

1,925,653 Benefi Total Shares Owned 1 cers as a group, as of February 3, 2009. Plan Shares Directors’ Deferral Directors’ cers 401(k) Plan Shares 401(k) cers, and all directors and executive offi The table shows shares held by named executives in the Lilly Employee Plan, 401(k) shares credited to the percentcers of the as outstanding a group own0.17 common stock Cook’s of the shares company. 1,800 of Mr. Robert A.Armitage Sir Winfried BischoffBryce D. CarmineJ. Michael CookMichael L. Eskew Ph.D.Martin Feldstein, S. J. Erik FyrwaldAlfred G. Gilman, M.D., Ph.D.Karen N. Horn, Ph.D.John C. Lechleiter, Ph.D. 1,932 — 4,717 — — — — — 16,237 14,163 — — — 14,529 15,683 4,513 63,424 22,424 18,237 16,673 44,348 35,769 — 15,529 17,483 335,371 22,424 4,513 11,200 361,855 16,786 229,400 35,769 8,400 14,000 — — 14,000 — All directors and executivecers as a group offi (22 people): Name Ellen R. MarramDouglas R. OberhelmanSteven M. Paul, M.D.Franklyn G. Prendergast, M.D., Ph.D.Derica Rice W. Seifert P. Kathi TaurelSidney — — — 552 28,317 5,559 14,529 — 0 18,061 — 28,317 — 15,529 24,176 43,538 0 — 14,000 59,689 5,600 27,709 1,064,059 568,396 — 123,385 14,000 that are owned by a family has foundation shared Taurel for voting which power he is Mr. a director. and shared investment power over the shares held by the foundation. director. Dr. Lechleiter has Dr. director. shared voting power and shared investment power over the shares held by the foundation. ment power with respect to the shares shown in the table to be owned by that person. No person listed in the table owns more than 0.09 percent of the outstanding common stock of the company. All directors and executive offi were on deposit in a margin account as of February 3, 2009. The shares are presented Taurel shown for as of his Mr. retirement, December 2008, 31, and include shares 17,304 The shares shown Lechleiter for include Dr. shares 13,470 that are owned by a family foundation for which he is a Unless otherwise indicateda footnote, in each person listed in the table possesses sole voting and sole invest- See description of theLilly Directors’Deferral Plan, page 83. 4 3 2 individual, including the shares in the respective plans. addition, In the table shows shares that may be purchased pursuant to stock options that are exercisable within 60 days of February 3, 2009. 1 accounts of outside directors in the Lilly Directors’ Deferral Plan, and total shares benefi The following table sets forth the number of shares of company common stock benefi the named executive offi Ownership of Company Stock of Company Ownership Common Stock Ownership by Directors and Executive Offi PROXY STATEMENT 112112 below: listed shareholders the are stock common company’s ofthe shares benefi only the knowledge, To company’s ofthe best the Stock of Holders Principal respect to all of its shares. ofits toall respect with power investment sole and outstanding) ofshares percent 1.54 (approximately to17,464,474 shares respect shares. ofits toall respect with power investment shared and outstanding) 1.71 ofshares percent (approximately shares to19,428,434 respect with power shares. ofits toall respect with power investment sole and 0.11 outstanding) (approximately ofshares shares percent to1,240,000 respect with company. ofthe ashareholder indirectly, or directly either is, directors ofthe Each director). (emeritus F. Eugene and Ratliff II, Lilly Eli Golden, E. Charles P. Daniel Carmichael, Messrs. and G.Enright; William and Bowen R. Otis Drs. Lisher; K. Mary Mrs. president; Mr. Robbins, chairman; Clay N. ofMr. Lofton, M. composed is Thomas Endowment the of ofdirectors board The shares. toits respect with power investment sole and voting sole has Endowment The Name and Address and Name Boston, Massachusetts 02109 Massachusetts Boston, Street State 75 LLP Company, Management Wellington 90071 California Angeles, Los Street Hope South 333 Investors World Capital 46208 Indiana Indianapolis, Street Meridian North 2801 “Endowment”) (the Inc. Endowment, Lilly Pasadena, California 91101 California Pasadena, #400 Ave., Lake South 225 Company Management PRIMECAP PRIMECAP Management Company acts as investment advisor to various clients. It has sole voting power with with power voting sole has It clients. tovarious advisor investment as acts Company Management PRIMECAP voting shared has It clients. tovarious advisor investment as acts LLP Company, Management Wellington power voting sole has It Company. Management and Research ofCapital adivision is Investors World Capital

cial owners of more than ﬁ than ofmore owners cial outstanding ofthe percent ve Beneﬁ Number of Shares Shares of Number (as of12/31/08) (as of12/31/08) (as (as of12/31/08) (as (as of2/3/09) (as 135,670,804 135,670,804 66,088,590 59,240,937 59,240,937 65,015,094 cially Owned cially Percent of Class of Percent 11.9% 5.2% 5.8% 5.7% PROXY STATEMENT 113113 ll ll ed. This proposal would not change lled by interim election of the board, with ling of amended and restated articles of incor- rm of Ernst LLP & Young as principal independent auditor for the com-

If approved, this proposal will become effective upon the fi Article of the 9(b) company’s amended articles of incorporation contains the provisions that will be affected if e directors standing for election The each term year. for directors elected this year will expireat the annual cation. Ernst served & Young as the principal independent auditor for the company in 2008. Representatives • Martin S. Feldstein, Ph. D. • Martin S. Feldstein, • J. Erik Fyrwald R. Marram • Ellen • Douglas R. Oberhelman The company’s amended articles of incorporation currently provide that the board of directors is divided into three classes, with each class elected every three years. On the recommendation of the directors and corporate governance committee, the board has approved, and recommends to the shareholders for approval, amendments to provide for the annual election of directors. This proposal was brought before shareholdersin April 2007 and again in April 2008, and received the vote of more than 75 percent of the outstanding shares at each meeting; however, the proposal requires the vote of 80 percent of the outstanding shares to pass. poration containing these amendments with the Secretary of State of Indiana, which the company intends to do promptly after shareholder approval is obtained. Directors elected prior to the effectiveness of the amendments will stand for election for one-year terms once their then-current terms expire. This means that directors whose terms expire annual at meetings the and 2010 2011 of shareholders would be elected for one-year terms, and beginning with annual the 2012 meeting, all directors would be elected for one-year termsat each annual meeting. In addition, in the case of any vacancy on the board occurring after the 2009 annual meeting, including a vacancy created by an increase in the number of directors, the vacancy would be fi the new director to serve a term ending at the next annual meeting. At all times, directors are elected to serve for their respective terms and until their successors have been elected and qualifi the present number of directors, and it would not change the board’s authority to change that number and to fi Item 3. Proposal to Amend the Company’s Articles of Incorporation to Provide for Annual Election of All Directors The board recommends that you vote FOR ratifying the appointment of Ernst LLP & Young as principal independent auditor for 2009. The audit committee has appointed the fi pany for the year 2009. In accordance with the bylaws, this appointment is being submitted the to shareholders for ratifi of Ernst are expected & Young to be present at the annual meeting and will be available to respond to questions. Those representatives will have the opportunity to make a statement if they wish to do so. Item 2. Proposal to Ratify the Appointment of Principal Independent Auditor Biographical information about these nominees may be found on pages of this proxy 73–74 statement. Information about certain legalmatters may be found on page 122. The board recommends that you vote FOR each of the following nominees: this proposal is adopted. This article, set forth in Appendix A to thisproxy statement, shows the proposed changes with deletions indicated by strike-outs and additions indicated by underlining. The board has also adopted con- forming amendments to the company’s bylaws, be to effective immediately upon the effectiveness of the amendments to the amended articles of incorporation. meeting of shareholders held Each in 2012. of the nomineeslisted below has agreed to serve that term. If any director is unable to stand for election, the board by may, resolution, provide for a lesser number of directors or designate a substitute. In the latter event,shares represented by proxies may be voted for a substitute director. any vacancies or newly created directorships. Under the company’s articles incorporation, of the board is divided into three classes with approximately one-third of th Items of Business To Be Acted Upon at the Meeting at the Meeting Acted Upon Be of Business To Items ElectionItem 1. of Directors PROXY STATEMENT directors annually, and to the 77 percent favorable vote for management’s proposal in 2008 (75 percent in 2007). in2007). percent (75 in2008 proposal management’s for vote favorable percent 77 tothe and annually, directors the toelect steps necessary all take board the that requesting proposal ofashareholder meeting annual 2006 the toinfl shareholders for means primary the is ofdirectors election The basis. annual an on directors all elect and toevaluate of shareholders classifi because toshareholders ofdirectors accountability the ofreducing effect the have under the plan, but certain executive offi executive certain but plan, the under bonuses cash togrant continue will committee the adopted, not is proposal this If plan. the altering or amending not We are goals. performance the toreapprove shareholders the asking now are we awards, tothe related expense compensation the deduct tofully tocontinue company the toallow thereby and performance-based, as bonuses ny ofcompa- status tax the To preserve in2004. approved was itself plan the when was plan the for approval such last fi every least at shareholders the by approved be must goals performance ofthe terms material the that is performance-based as toqualify conditions ofthe One 162(m) Code. ofthe Section under compensation based 114114 plan: ofthe features material ofthe asummary is following The Plan the of Features Principal reductions. tobonus lead will inperformance shortfalls and inbonuses, toincreases lead will company the and individuals by performance Exceptional performance. corporate and individual toboth directly linked are payments Bonus measures. performance corporate toimportant bonuses cash annual linking by pany com- ofthe levels all at employees by teamwork and performance superior tomotivate is plan ofthe purpose The Plan the of Purpose thatqualifi compensation offi executive named ofthe toany paid of$1 million inexcess compensation classifi the ofmaintaining disadvantages and advantages the considered committee, governance corporate and directors the by assisted board, The board. the by matters governance ofcorporate review ofongoing aresult is proposal The Proposal of Background ti ofcompensa- amount the limits “Code”), (the amended as of1986, Code Revenue 162(m) Internal ofthe Section Plan Bonus Company and Lilly Eli the for Goals Performance Terms of Material of Reapproval 4. Item ofannual all election directors. for provide to incorporation of articles company’s the amending FOR vote you that recommends board The affi The Required Vote bids. takeover toinadequate to respond defenses appropriate maintaining while toshareholders accountable are directors the that assurance further ers sharehold- provide can it action, this taking by that believes and change this tosupport continues board the 2008, in pass not did proposal this Although them. approve shareholders the that recommends now and amendments, law. ofIndiana provisions certain and bylaws, and articles ofits 117), page 5on toItem provisions other response company’s inthe described (as tion ofincorpora- articles amended inits requirements vote “supermajority” certain including board, the with negotiate aclassifi without even that notes also it benefi potential those recognizes board the While election. inasingle board entire the replace cannot entity the because company, ofthat board the with discussions arms-length toinitiate company ofatarget control seeking classifi that assert also Proponents company. of the directors as experience prior have always ofdirectors amajority because ofacompany affairs and business of the ofaclassifi Proponents law. corporate on expense that the company can deduct for income tax purposes. In general, a public corporation cannot deduct deduct cannot corporation apublic Ingeneral, purposes. tax income for deduct can company the that expense on • Administration. Theplanisadministered bythecompensation committee oftheboard, whichiscomposed On the recommendation of the directors and corporate governance committee, the board approved the the approved board the committee, governance corporate and directors ofthe recommendation the On The Eli Lilly and Company Bonus Plan (the plan) allows the grant of cash bonuses that qualify as performance- as qualify that bonuses ofcash grant the allows plan) (the Plan Bonus Company and Lilly Eli The benefi considered also board The ed board structure. The board considered the view of some shareholders who believe that classifi that believe who shareholders ofsome view the considered board The structure. board ed rmative vote of at least 80 percent of the outstanding common shares is needed to pass this proposal. proposal. this topass needed is shares common outstanding ofthe percent 80 least ofat vote rmative uence corporate governance policies. The board gave considerable weight to the approval at at approval tothe weight considerable gave board The policies. governance corporate uence es as “performance-based” is not subject to this deduction limitation. limitation. deduction tothis subject not is “performance-based” as es ts of retaining the classifi the ofretaining ts ed structure believe it provides continuity and stability in the management management inthe stability and continuity provides it believe structure ed ed board, the company has other means to compel a takeover bidder to bidder atakeover tocompel means other has company the board, ed cer bonuses would no longer be fully tax deductible by the company. the by deductible tax fully be longer no would bonuses cer ed boards may enhance shareholder value by forcing an entity entity an forcing by value shareholder enhance may boards ed ed board structure, which has a long history in history along has which structure, board ed cers in the proxy statement. However, statement. proxy inthe cers ed boards limit the ability ability the limit boards ed ve years. The The ve years. ed boards ts, PROXY STATEMENT 115115 cers for cers cers): $7,382,020 cers): cers. cers. officers as a group (10 bonus target amount expressed as a percentage of regular earnings for the year. the year. earnings for regular of as a percentage expressed amount bonus target return sales; in growth or earnings per share; in net income growth measures: among the following from or any added; value added; market value economic return; shareholder on equity; total return on assets; corporate changes, changes in accounting of acquisitions, divestitures, effect the before of the foregoing criteria objective to according or gains (determined and special charges restructurings, capitalization, the committee Unless the year). the beginning of days after than 90 not later by the committee established growth on earnings-per-share based 75 percent are measures performance chooses otherwise, the company on this measure. 2009 will be based Bonuses for growth. on sales and 25 percent peer group expected considering after and earnings growth sales benchmarks for performance establishes of the bonus percent be 100 would the bonus multiple met exactly, If the benchmarks are performance. the benchmarks. to relative performance depending on company will vary Actual bonus multiples target. of is 25 percent multiple and the threshold of the bonus target is 200 percent The maximum bonus multiple the bonus reduce to has discretion that the committee except cers), offi executive for (zero the bonus target the multiple. increase to discretion does not have The committee zero. or to percentage a lower to multiple Mr. Taurel—no longer eligible Taurel—no Mr. Lechleiter—$2,100,000 Dr. Paul—$933,210Dr. Carmine—$831,600Mr. Rice—$720,800Mr. Armitage—$653,120Mr. All executive offi are established for participants based on a schedule that associates job responsibilities with a job responsibilities that associates participants based on a schedule for established are —Bonus targets one or more may select committee The the year. for established are measures —Company performance The committee performance. company for account to target the bonus adjust is used to —A bonus multiple Puerto Rico nonmanagement employees, and selected employees outside the United States. The committee may committee The States. the United outside employees and selected employees, nonmanagement Rico Puerto participate. to eligible were 17,500 employees 2008, approximately For at its discretion. employees include other the bonus calculation: for necessary elements the following entirely of independent directors. The committee has authority to delegate plan administration with respect to to with respect plan administration delegate authority to has The committee of independent directors. entirely offi the executive other than employees performance multipliers which correspond to individual performance ratings on an annual basis. Executive on an annual basis. Executive ratings individual performance to which correspond multipliers performance upward. may not be adjusted awards cers’ offi Participants $7 million in any one year. bonus payment may exceed cer’s offi executive No the year. for results death, of retirement, in the case a bonus, except receive to the year until the end of employed remain must of absence. leaves disability, and certain tax- preserve to or advisable deems it necessary the company the extent of amendments may be sought to the Code. deductibility under Section 162(m) of Plan participants include all executive offi cers, all management employees worldwide, most U.S. and U.S. and most worldwide, employees all management cers, offi executive include all Plan participants • Eligibility. establishes the committee beginning of each year, the Prior to Bonus Calculation. and Measures • Performance For employees other than executive offi cers, the committee will establish will establish the committee cers, offi than executive other employees For Adjustments. • Individual Performance actual performance of the company’s by the committee cation certifi will be made following Payment • Payment. approval Shareholder or the committee. by the board • Amendment. The plan may be amended at any time It is not possible to estimate the aggregate 2009 bonuses that would be payable to all eligible employees as a group. It is not possible to predict with certainty the bonuses thatcers would with be payable respect to the executive offi to 2009 performance. if the company However, were to meet the target performance benchmarks for earningsper-share growth and sales growth, and assuming no change in the regular earnings of the executive offi the year, the followingthe year, bonuses would be paid for 2009 (before taxes): PROXY STATEMENT I of Articles Company’s the from Provisions Voting Supermajority Eliminating on Proposal Shareholder 5. Item Plan. Bonus Company and Lilly Eli the for goals performance of terms material the reapproving FOR vote you that recommends board The 116116 in 2008: companies following the at support upto89% won also topic proposal This proposal. ashareholder as meeting annual 2008 disappointments. two these after director ofeach election annual toadopt necessary vote the tosecure management our enable will proposal this director. Ibelieve ofeach election threshold. 80% ofour short disappointingly fell still it outstanding shares of 77% and of75% support strong won management and responded we although director. But ofeach election board. the ing declassify- as known director, also ofeach election annual for proposals management the toadopt vote necessary Statement: Supporting bylaws. and charter inour provision 80% each to applies proposal This laws. applicable with incompliance proposals related against and for cast votes ofthe ity toamajor- changed be vote, majority simple than agreater for calls that bylaws, and charter inour requirement RESOLVED Vote Standard Majority Simple proposal: following the submitted has shares, 100 Dana Chatfi 2 1 issuance. for authorized been have stock ofLilly shares which under plans compensation other our about 31, 2008, ofDecember as information presents table following The Information Plan Compensation Equity ncorporation and Bylaws and ncorporation The Lilly GlobalShares Stock Plan was terminated in February 2009. No more grants can be made under this plan. this under made be can grants more No 2009. inFebruary terminated was Plan Stock GlobalShares Lilly The tonon- options stock togrant company the permits which Plan, Stock GlobalShares Lilly inthe shares Represents ing grants, and the exercise price of outstanding grants. ofoutstanding price exercise the and grants, ing tooutstand- subject ofshares number the grant, for available ofshares number the adjust may administrator the recapitalizations, other or splits ofstock event Inthe death. and disability, ofretirement, event inthe options the of termination early and vesting early for provisions are There administrator. plan the by established schedules tovesting subject be shall and 11 induration exceed not shall years options The ofgrant. time the at value market nonqualifi are options stock The resources. human for responsible president vice senior the by administered is plan The worldwide. employees management Plan category Total Equity compensation plans not approved by security holders security by approved not plans compensation Equity holders security by approved plans compensation Equity Additionally this proposal topic to adopt simple majority voting received 63% of our yes and no votes at our our at votes no and yes of our 63% received voting majority simple toadopt topic proposal this Additionally annual toadopt vote one and to50% 80% from threshold the reduce will Vote proposal Majority Simple This annual for proposals ofmanagement infavor vote we that recommended management our 2008 and In 2007 i lion LZ 89% 88% 79% (LIZ) Claiborne Liz (LEA) Corp. Lear (WHR) Whirlpool

, Shareholders request that our board take the steps necessary so that each shareholder voting voting shareholder each that so necessary steps the take board our that request , Shareholders eld Jones, 1354 Campus Drive, Berkeley, California 94708, beneﬁ 94708, California Berkeley, Drive, Campus 1354 Jones, eld This proposal is submitted in part to support our Board and management in securing the the insecuring management and Board our tosupport inpart submitted is proposal This ed for U.S. tax purposes. The option price cannot be less than the fair fair the than less be cannot price option The purposes. tax U.S. for ed 1 securities to be issued issued be to securities warrants, and rights outstanding options, options, outstanding upon exercise of of exercise upon (a) Number of of Number (a) 20468$69.35 87,996,763 72,024,698 63,429,738 8,594,960 (b) Weighted-average warrants, and rights outstanding options, options, outstanding cial owner of approximately ofapproximately owner cial exercise price of $68.48 $68.48 $75.76 0 $75.76 issuance under equity (excluding securities securities remaining securities compensation plans available for future future for available reﬂ (c) Number of of Number (c) ected in (a)) in ected 87,996,763

² PROXY STATEMENT

117117 or higherrst vote. 51% cant matters that would require an 80 percent vote would removal be (i) of duciary duty under the lawact to in a manner it believes to be in the best interests of the The board believes that these supermajority voting provisions protect all shareholders by making it more dif- Please encourage our board to respond positively to this proposal and take the steps necessary to adopt a The Council of Institutional Investors recommends adoption of simple majority voting. The Council also rec- board of directors board The board has a fi the amendment of the articles of incorporation’s provisions relating to the terms of offi ce and removal of directors and removal ce of offi terms the to relating provisions of incorporation’s the amendment of the articles • merger, consolidation, recapitalization, or certain other business combinations that are not approved by the not approved that are combinations other business or certain recapitalization, consolidation, • merger, combinations. and business such mergers to relating provisions of incorporation’s • the amendment of the articles • terms of offi ce of directors (i.e., the classifi ed board structure) ed board (i.e., the classifi of directors ce of offi • terms term the end of their elected prior to of directors • removal • rticles of Incorporation and Bylaws ecommends that you vote againstit. cult for one or a few large shareholders to restructure the company to further a special interest, or to take control Statement in Opposition to the Proposal on Eliminating Supermajority Voting Provisions from the Company’s A simple majority voting standard. ommends timely adoption of shareholder proposals upon receiving their fi Under Item 3 of this proxy statement the board is recommending a vote to provide for annual election of directors. If Item 3 is successful, the only signifi company and itsshareholders. In the event of an unsolicited bid to take over or restructure the company, these supermajority voting provisions encourage bidders to negotiate with the board and give the board substantial bargaining leverage. The provisions also give the board valuable time to consider alternative proposals that might provide greater value for all shareholders. The vote requirements help the board preserve long-term value for shareholders in the face of short-term opportunistic threats. The board believes that in adopting these supermajority votingprovisions, the shareholders intended to preserve and maximize the value of Lilly stock for all shareholders by protecting againstshort-term, self-interested actions by one or a few large shareholders who would seek to make fundamental changes to the company without the involvement of the board of directors. directors other than through the annual election process approval and (ii) of mergers and business combinations that are opposed by the board. These are rare and dramatic corporate actions that should not be undertaken without the approvalof a very large majority shareholders. of The board recommends that you vote AGAINST this proposal. In today’s troubled markets, takeover defenses are especially important. In our analysis, the evidence does not support the view that large-scale pharmaceutical mergers have produced sustained operating performance, competitive advantage, or superior returns for shareholders. Thus, under any circumstances—and especially during a period of depressed stock prices—it is important that a board be able to respond to opportunistic takeover bids from a position of strength, ensuring that the outcome is in the best interests the of company and all shareholders. The supermajority vote requirements were approved by shareholders and are very limited. Nearly all proposals submitted to a vote of shareholders can already be adopted by a simple majority vote. How- in 1985 the company’s shareholdersever, voted to increase the approval requirement established in the articles of incorporation for a few fundamental corporate actions. These actions, which require the approval of at least 80 percent of the outstanding shares, relate to: The board of directors believes that this proposal is not in the best long-term interestsof the shareholders and r of the company, without negotiating with the board to assure that the best results are achieved for all shareholders. fi PROXY STATEMENT ers holding signifi ers sharehold- meeting), the at voted ofshares amajority only (requiring proponent the by endorsed standard vote ity major- the Under shareholders. tominority detrimental be would that principles operating inthese changes adopt shareholders—could other tothe duties no have who interests—and special own their toadvance wish who holders share- oflarge number small arelatively that risk tothe shareholders expose would vote shareholder a majority by amended tobe bylaws the allowing that believes board The investors. individual and institutions, small tutions, 118118 directors. the by only amended be may bylaws the otherwise, provide incorporation of articles the unless that states which law, Indiana under provision default the adopted has Lilly corporations, Indiana other many Like ofincorporation. articles the or law by prohibited not business ofthe operation the ing regulat- provision any contain can bylaws the law, Indiana Under issuance. stock for procedures and transactions, offi and ofdirectors duties and election shareholders, and ofdirectors meetings for rules including principles, operating governance corporate offundamental anumber establish bylaws company’s The groups. shareholder interest special by abused being from bylaws the prevent rules current The r and shareholders ofthe interests long-term best in the not is proposal this that believes ofdirectors board The Bylaws Company’s the Amend to Shareholders Allowing on Proposal the to Opposition in Statement fi long-term its and governance corporate togood committed is Company this that statement astrong be would it proposal, this toimplement steps to take were Company the If governance. corporate excellent have that ofcorporations shares for apremium topay willing are shareowners that believes also tofi related CalPERS closely are impose, they performance. nancial ability ofaccount- level the and practices, and procedures governance corporate that believes CalPERS stock, common Company’s ofthe shares million 3.4 ofapproximately owner the as and participants, 1.5 than million more with fund atrust As vote. majority by bylaws the toamend shareowners allowing by toshareowners accountable more proposal. tothis identical aproposal passed it when agreed 81% ofshareowners approximately Corporation, Lee Sara the At shareowners. most by supported but ofdirectors board the and management by opposed initiatives toblock opinion, inCalPERS’ used, often most are requirements supermajority shareowners, minority to protect ability the corporations toprovide is requirements ofsupermajority purpose the that corporations by stated often is it While proposal. ofthe infavor were cast ofvotes percent 90 approximately though even outstanding of shares fi ofdirectors board the todeclassify proposal a example, For non-votes. broker and ofabstentions in light toobtain impossible almost be can vote majority 03/2005). revised 491 No. (09/2004, Paper Discussion School, Law Harvard Ferrell, &Allen Cohen Alma Bebchuk, Lucian Governance?” inCorporate Matters “What See formance. per- company with correlated negatively are that mechanisms entrenching ofsix one tobe found been has bylaws the toamend ability shareowner limiting Infact, disenfranchised. are ofacompany shareowners the ments, amend- bylaw through governance acompany’s toimpact mechanism aformal Without provisions. other among rules, election director provisions, anti-takeover directors, toremove ability the meeting, aspecial tocall ability power. this shareowners give not does that 500 S&P inthe companies few very ofthe one is pany Com- The bylaws. the toamend shareowners allow 1000 Russell the and 500 S&P inthe ofcompanies 95% mately Approxi- bylaws. acompany’s toamend tovote able are shareowners directors, toelect tovote power the having Statement: Supporting vote. majority asimple by bylaws Company’s the toamend shareowners its toallow law, applicable with incompliance sary, RESOLVED be 94229-2707, California P.O. (CalPERS), 942707, Box Sacramento, System Retirement Employees’ Public California Bylaws Company’s the Amend to Shareholders Allowing on Proposal Shareholder 6. Item ecommends that you vote against it. against vote you that ecommends nefi The board of directors has fi has ofdirectors board The proposal. this FOR vote Please Company the make would implemented, and passed if that, proposal this sponsoring is CalPERS why is This asuper- since Company ofthe bylaws the toamend standard vote majority asimple for asks proposal This the e.g., toshareowners, importance utmost ofthe provisions governance corporate contain typically Bylaws cial owner of approximately 3,488,440 shares, has submitted the following proposal: following the submitted has shares, 3,488,440 ofapproximately owner cial , that the shareowners of Eli Lilly & Company (“Company”) urge the Company to take all steps neces- steps all totake Company the urge (“Company”) &Company Lilly ofEli shareowners the , that cantly less than half of the outstanding shares could adopt bylaw amendments to further their their tofurther amendments bylaw adopt could shares outstanding ofthe half than less cantly The most important shareowner power is the power to vote. In most cases, in addition to inaddition cases, Inmost tovote. power the is power shareowner important most The duciary obligations to the company and all its shareholders, including large insti- large including shareholders, its all and company tothe obligations duciary nancial performance. led at Goodyear Tire & Rubber Company failed to pass by a majority amajority by topass failed Company &Rubber Tire Goodyear at led cers, authority to approve toapprove authority cers, PROXY STATEMENT 119119 Institutional Shareholder Services White Paper. cers set (“NEOs”) forth in the proxy cial owner of approximately shares, 120

led close to 100 “Say on Pay” resolutions. duciary duties to consider and balance theinterests of all found that companies that permit shareholders to amend 1 cation of Executivecation of Compensation

t shareholders, but we do not believe that this proposal will cant steps to demonstrate its continuing commitment good to corporate Investors are increasingly concerned about mushrooming executive compensation espe- ac submitted an Advisory resulting Vote in a 93% indicating vote in favor, strong investor ciently linked to performance. In 2008, shareholders fi that shareholders of Eli Lilly and Company request the board of directors to adopt a policy that pro- (see Item 3). (see Item An Advisory establishes Vote an annual referendum process for shareholders about senior executive com- In its 2008 proxy Afl To date eight other companiesTo have also agreed to an Advisory including Vote, Verizon, MBIA, H&R Block, • In this proxy statement, the board is seeking shareholder approval to provide for annual election of all directors of all directors annual election for provide to approval is seeking shareholder the board statement, • In this proxy beginning this year. elections director uncontested for standard a majority voting adopted • The board in 2008. expire rights plan to shareholder company’s the allowed • The board Brown, L.D. and M.L. Caylor. 2004. The Correlation between Corporate Governance and Company Performance. 1 RESOLVED, vides shareholders the opportunity at each annual shareholder meeting to vote on an advisory resolution, proposed by management, to ratify the compensation of the named executive offi Supporting Statement: has submitted the following proposal: statement’s Summary Compensation (the “SCT”) Table and the accompanying narrative disclosure of material factors provided to understand the SCT (but not the Compensation Discussion and Analysis). The proposal submitted to shareholders should make clear that the vote is non-binding and would not affect any compensation paid or awarded to any NEO. when insufficially improve the company’s corporate governance or lead to better performance. In fact, a 2004 study by Lawrence D. Brown and Marcus L. Caylor of Georgia State University Gretchen Parrish, 2820 Senour Road, Indianapolis, Indiana 46239, benefi The proponent also suggests that adopting this proposal will enhance company performance. certainly We agree that strong corporate governance practices benefi This proposal is not necessary to foster good governance or create growthin shareholder value. The proponent suggests this proposal is necessary to foster good governance principles and make the directors more accountable the to shareholders. On the contrary, the board has been for many years, and intends to remain, a leader in corporate governance. The company has adopted comprehensive corporate governance principles, consistent with best practices, that ensure the company remains fully transparent and accountable to shareholders. the Further, board has taken signifi shareholders when considering bylaw provisions, and is better positioned to ensure that any bylaw amendments are prudent and are designed to protect and maximize long-term value for all shareholders. governance and accountability to shareholders: own special interests.The board,on the other hand, has fi Item 7. Shareholder Proposal Ratifi Shareholder Shareholder on 7. Item The board recommends that you vote AGAINST this proposal. the bylaws performed no better or worse than those which reserve that power to the directors.This is consistent with our view that adopting this proposal would not enhance our already strong corporate governance practices and instead would expose minority shareholders to actions detrimental to their best interests. pensation. believe We the results of this vote would provide the board and management useful information about shareholder views on the company’s senior executive compensation. Votes on these resolutions have averaged 43% with in favor, ten votes over50%, demonstrating strong shareholder support for this reform. Ingersoll Rand, Data. Blockbuster, and TIAA-CREF, Tech the country’s largest pension fund, has successfully utilized the Advisory twice. Vote support for good disclosure and a reasonable compensation package. Daniel Amos, Chairman and CEO said, “An advisory vote on our compensation report is a helpful avenue for our shareholders to provide feedback on our pay- for-performance compensation philosophy and pay package.” PROXY STATEMENT 120120 practices. best compensation executive on views shareholder ofevolving mittee com- the advises and groups shareholder with consults routinely consultant independent committee’s the Finally, compensation. executive and issues governance todiscuss representatives shareholder and shareholders large with meet periodically representatives company Inaddition, board. or committee compensation the with municate com- can shareholders how on instructions 71for page on ofdirectors?” board the Icontact do “How See tees. commit- its or board the with directly to communicate shareholders for avenue an established has company The opinions. their express to way effi an have effective already and cient Shareholders shareholders. ofthe interests long-term best inthe not are that changes tomakecompensation committee the pressure could and programs compensation executive company’s tothe unrelated toevents areaction be could vote negative aheavily Likewise, ofshareholders. minority asmall by raised concerns legitimate todiscount committee the lead could vote tive posi- aheavily example, For misconstrued. be could results Further, voting them. toaddress how or addressed be should programs company’s ofthe aspects intowhat insight no committee the give would vote advisory down” “up however, or asimple compensation; executive on input shareholder welcomes committee compensation The compensation. executive our regarding opinions shareholder communicate to way ineffective an is vote advisory An directors. independent ofthe judgment informed fully the for asubstitute be not could therefore and analysis and information less on based be necessarily would shareholders by votes Any information. tional confi and public ofboth analysis involves it time-consuming; and complex is work committee’s The shareholders. its and company the for value long-term fi its seriously very takes consultant, independent an by assisted and directors ofindependent composed committee, compensation The directors. independent of judgment informed the for asubstitute not is vote advisory An r and shareholders ofthe interests long-term best inthe not is proposal this that believes ofdirectors board The utive compensation programs that were infl were that programs compensation utive Statement in Opposition to on the Shareholder Proposal Ratifi Vote. Advisory an through tool. Vote ahelpful fi would toinvestors effectively communicates and toperformance, pay links compensation. executive senior shape help could that voice clear a shareholders gives but isn’t avote binding, Such compensation. executive discloses which report,” remuneration “directors’ the on avote tocast shareholders allow companies public Kingdom, United inthe Incontrast, sation. suffi with shareholders provide not do law. by required before Vote voluntarily Advisory an toadopt is leaders company for approach [sic] like statement the a2-to-1 We believe by margin. ofRepresentatives House the accountability.” board inenhancing forward step another is compensation executive on vote advisory An process. referendum annual an establishing by practices compensation ofexecutive opinions their toexpress shareholders toallow companies es ecommends that you vote against it. against vote you that ecommends • enhanced thetransparency andclarityofour disclosures onexecutive compensation. • implemented aclaw-backprovision to recoup performance-based compensation from executives inthecase of • substantially reduced benefits underthechange-in-control severance payprogram for executives • extended theperformance period for performance awards from oneto two years andaddedadditionalstock • eliminated stock optionsinfavor ofperformance-based shareholder value awards restatement ofresults attributable to misconduct retention periodsfor executive offi We urge our board to allow shareholders to express their opinion about senior executive compensation compensation executive senior about opinion their toexpress shareholders toallow board our We urge reasonably metrics, and philosophy compensation explained aclearly has that acompany that We believe standards listing exchange stock and rules Commission Exchange and Securities U.S. existing that We believe passed votes advisory annual toallow abill and votes advisory endorsed Investors ofInstitutional Council The These communications yield results. In recent years, the committee has made a number of changes to our exec- toour ofchanges anumber made has committee the years, Inrecent results. yield communications These Infl uential proxy voting service RiskMetrics Group, recommends votes in favor, noting: “RiskMetrics encourag- infavor, “RiskMetrics noting: votes recommends Group, RiskMetrics service voting proxy uential duciary duties to oversee executive compensation programs that are designed to promote topromote designed are that programs compensation executive tooversee duties duciary cient mechanisms for providing input to boards on senior executive compen- executive senior on toboards input providing for mechanisms cient cers dential information, including competitively sensitive strategic and opera- and strategic sensitive competitively including information, dential uenced at least in part by shareholder views expressed to us directly: tous expressed views shareholder by inpart least at uenced

cation of Executive Compensation ofcation Executive nd a management sponsored Advisory Advisory sponsored amanagement nd PROXY STATEMENT 121121 able and defensible pay levels and ect evolving best practices.Enacting this resolution would be a distraction and not helpful to a programs that refl The board recommends that you vote AGAINST this proposal. We shouldWe not adopt advisory voting ahead of proposed U.S. legislation that would apply to all companies. In the U.K., advisory votes are mandated by law. In the U.S., legislation is expected to be introduced Congress in that would mandate advisory votes, but the nature and scope of the advisory vote is not at all clear at this time. We should not adopt advisory voting until the rules are clear and apply to all companies equally. The committee takes seriously its responsibilities to provide competitively justifi process that is already working well. PROXY STATEMENT 122122 9,March 2009 Secretary B.Lootens James ofdirectors, board ofthe order By expenses. out-of-pocket ofcustomary $17,500 exceed not reimbursement will plus services those for fee the that We expect mail. electronic and mail, fax, telephone, interview, personal by proxies solicit may Georgeson ofproxies. solicitation and distribution inthe toassist Inc. Communications Shareholder Georgeson retained have offi directors, but mail, by primarily proxies tosolicit We expect company. ofthe stock hold they whom for persons from instructions obtaining toand material proxy sending for expenses reasonable their custodians other or ries, Company, etal.,Lilly and Company, etal., ofIndiana; District Southern the for Court District States 17, United inthe January 2008, lawsuits: derivative shareholder seven with served been have we 2008, ary Janu- Since inresponse. take should any, if company the action, what determine and demands the toconsider sons per- ofindependent acommittee appointed has §23-1-32), board the Code (Ind. Law Corporation Business Indiana the under established procedures with Inaccordance Zyprexa. and Prozac, ofEvista, marketing improper through t to company the cause ofdirectors board the that shareholders from demands two received company In 2007, the Matters Legal Certain fi timely were reports all that concluded we review, that on Based information. and records other as well as company, tothe provided ofreports copies reviewed We have inbenefi changes and ofholdings reports Commission Exchange and Securities offi executive and directors our rules, Commission Exchange and Securities Under 16(a) Benefi Section Other Matters York; York; We will pay all expenses in connection with our solicitation of proxies. We will pay brokers, nominees, fi nominees, brokers, pay We will ofproxies. solicitation our with inconnection expenses all pay We will Solicitation Proxy Company’s the Regarding Information Other vigorously. them against todefend prepared are and merit without are suits these We believe suits. inthe named are Mr. than Mr. other and Eskew Oberhelman, directors, current ofthe Each of1934. Act Exchange Securities ofthe 10(b) 20(a) and Sections violated defendants certain that claims also suit Zemprelli The Prozac. and Evista suits, incertain and ofZyprexa, marketing improper the through pany offi and directors former and current ous fi nominally are lawsuits seven All above. described demands the served fi were lawsuits Two ofthese ofIndiana. District Southern the for Court District States and York; ofNew District Eastern the for Court District York; Indiana; ake legal action against current and former directors and others for allegedly causing damage to the company company tothe damage causing allegedly for others and directors former and current against action ake legal cers, and other employees of the company may also solicit in person or by telephone, fax, or electronic mail. We mail. electronic or fax, telephone, by or inperson solicit also may company ofthe employees other and cers, Solomon v. Company, etal., fi Eli Lilly and Solomon City of Taylor General Employees Retirement System v. System Taurel, Retirement etal., Employees ofTaylorCity General Robbins v.Robbins Taurel, etal., fi led March 27, 2008, in Marion County Superior Court in Indianapolis, Indiana; Indiana; inIndianapolis, Court Superior County inMarion 27, March led 2008, cial Ownership Reporting Compliance Compliance Reporting Ownership cial fi led February 11, 2008, in the United States District Court for the Eastern District of New ofNew District Eastern the for Court District States 11, United inthe 2008, February led fi led April 9, 2008, in the United States District Court for the Eastern District of New ofNew District Eastern the for Court District States United inthe 9, 2008, April led cers and allege that the named offi cers and directors harmed the com- offi the named the that harmed allege and cers directors and cers led March 27, 2008, in Marion County Superior Court in Indianapolis, inIndianapolis, Court Superior County inMarion 27, March led 2008, led. Zemprelli v.Zemprelli Taurel, etal., fi led April 15, 2008, in the United States States United inthe 15, 2008, April led led on behalf of the company, against vari- against company, ofthe behalf on led Lambrecht, et al. v. etal. Taurel,Lambrecht, etal., cial ownership of company stock. stock. ofcompany ownership cial fi led June 24, 2008, in the United United inthe 2008, 24, June led

cers are required tofi required are cers led by the shareholders who who shareholders the by led Staehr, v. etal. Eli Lilly and Waldman, et al. v. etal. Waldman, Eli ducia le with the le with fi led - PROXY STATEMENT 123123 ce ce for a cation of their No decrease ce at any time, ce for a three rmative vote of until the next Items of Business To BeItems of Business Acted Upon To at the rmative vote of the holders of any particu- ce until the election and qualifi ce of one class expiring At the each year. rst class shall be elected to hold offi ce. Commencing with the annual meeting of shareholders ...... lled by election of the Board of Directors with the director ve directors of the second class shall be elected to hold offi ve directors of the fi xed from time to time solely by resolution of the Board of Directors, rmative vote of at least 80% of the votes entitled to be cast by holders of ce. When thenumber of directors is changed, any newly created directorships or 2010, each class of directors whose term shall then expire shall be elected hold to offi Prior annual to the 2010 meeting of shareholders, the Board of Directors (exclusive of Preferred Stock are shown below. Additions are indicated by underlining and deletions are indicated by strike-outs. ce, though less than a quorum, as to make all classes as nearly equal in number as possible. ce for a term expiring at the 1988 annual meeting. in 1986 annual meeting of shareholders. All directors shall continue in offi any decrease in directorships shall be so assigned among the classes by a majority of the directors then in offi director, fordirector, the remainder of the term of the class to which the director has been assigned. annual meeting of shareholders in 1985, fi term expiring at the 1986 annual meeting, fi for a term expiring at the 1987 annual meeting,and six directors of the third class shall be elected to hold offi one-year term expiring at the next annual meeting of shareholders. In the case of any vacancy on the Board of Directors occurring after the 2009 annual meeting of shareholders, including a vacancy created by an increase in the number of directors, the vacancy shall be fi so elected to serve for the remainder of the term of the director being replaced in the case of an additional or, in the number of directors shall have the effect of shortening the term of any incumbent Election director. of directors need not be by written ballot unless the By-laws so provide. Any(c) director or directors (exclusive of Preferred Stock Directors) may be removed from offi but only for cause and only by the affi ned in Articleall the outstanding hereof), 13 voting shares together Stock of Voting as a single (as defi class. Notwithstanding(d) any other provision of these Amended Articles of Incorporation or of law which might otherwise permit a lesser vote or no vote, but in addition to any affi lar class Stock of Voting required by law or these Amended Articles of Incorporation, the affi at least 80% the of votes entitled to be cast by holders of all the outstanding shares Stock, of Voting voting together as a single class, shall be required amend or repeal to alter, this Article 9. Directors) shall be divided into three classes, with the term of offi (b) The(b) (a) The(a) number of directors of the Corporation, exclusive of directors who may be elected by theholders of any one or more series of Preferred Stock pursuant to Article 7(b) (the “Preferred Stock Directors”), shall not be less than nine, the exact number to be fi acting by notless than a majority the of directors then in offi respective successors in offi Meeting, Appendix A Appendix Proposed Amendments to the Company’s Articles of Incorporation The changes to the company’s articlesincorporation of proposed Item in 3, 9. The following9. provisions are inserted for the management of thebusiness and for the conduct of the affairs of the Corporation, and it is expressly provided that the same are intended to be in furtherance and not in limitation or exclusion of the powers conferred by statute: SENIOR MANAGEMENT 124 Manufacturing fortheAmericas Vice President, DrugProduct Crowe Maria and InternationalCorporate Affairs Pricing, Reimbursement,andAccess; Vice President,GlobalPublicPolicy; F.Newton Crenshaw President, LillyUSA,LLC Conterno Enrique Research Laboratories and ClinicalInvestigation, Lilly Vice President,Discovery Research W. M.D. Chin, William Marketing andSales Executive Vice President,Global D. Carmine Bryce Molecular Evolution Laboratories; andPresident,Applied Discovery Research, LillyResearch Vice President,Biotechnology F. Ph.D. Thomas Bumol, President, EuropeanOperations Bitar Karim Markets, LillyUSA,LLC Vice President,Account-Based John Bailey E. Affairs andCommunications Senior Vice President,Corporate II Azar M. Alex Research Laboratories Research andDevelopment, Lilly Vice President,GlobalExternal Ph.D. W. Armstrong, Robert Counsel Senior Vice PresidentandGeneral Armitage A. Robert Manufacturing Vice President,GlobalAPI Ph.D. Ahern, Paul E. Executive Offi Chairman, President,andChief C.Lechleiter, Ph.D. John Senior Management cer .

1 Management and Vice President,EnterpriseRisk Chief EthicsandCompliance Offi Anne Nobles Resources Senior Vice President,Human Ph.D. J. Murphy, Anthony and ContinuousImprovement Vice President,CorporateEngineering Moody W. Darin Vice President,GlobalDiversity Patricia A. Martin Vice President,SixSigma Klimes H. Elizabeth Executive Director, CorporateStrategy J. Johnson Peter and ChiefInformationOffi Vice President,InformationTechnology, C.Heim Michael Laboratories and Development, LillyResearch Vice President,ProductResearch F. Jr.,William Heath Ph.D. Vice PresidentandTreasurer W. Grein Thomas and Safety;LillyResearch Laboratories President, GlobalMedical,Regulatory, Chief MedicalOfficer andVice M.D. J. Garnett, Timothy Lilly Research Laboratories Vice President,ProjectManagement, Egan, Ph.D. J. Carmel Lilly USA,LLC Vice PresidentandGeneralCounsel, Alecia DeCoudreaux A. President, ManufacturingOperations M. Ph.D. Deane, Frank Lilly Research Laboratories, Europe Vice President,LRLOperationsand Ph.D. Dahlem, M. Andrew . .

cer cer Sharon L. Sullivan Sullivan Sharon L. President, ElancoAnimalHealth Simmons N. Jeffrey Strategy andBusinessDevelopment Senior Vice President,Corporate Santini Gino Financial Offi Senior Vice PresidentandChief W. Rice Derica Research Laboratories and Technology andPresident,Lilly Executive Vice President,Science M.D. Paul, M. Steven Vice President,Finance G. O’Farrell Elizabeth Japan President andGeneralManager, Lilly Zulueta Alfonso Manufacturing forEuropeandAsia Vice President,DrugProduct F. Andreas Witzel Offi Vice PresidentandChiefProcurement Ward A. James Vice President,Quality Ph.D. Walsh, Fionnuala Laboratories Development, LillyResearch President, GlobalProduct Ph.D. Verhoeven, R. Thomas President, IntercontinentalOperations Tapiero Jacques and HRServices Vice President,GlobalCompensation cer cer BOARD OF DIRECTORS 125 cer cer, United Parcel Service, Inc. United Parcel cer, 1 3 2 Mr. Oberhelman was elected to the board effective December 1, 2008. elected to the board effective Oberhelman was Mr. Effective January 1, 2009, Dr. Lechleiter assumed the role of chairman. Lechleiter 1, 2009, Dr. January Effective April 1, 2009. elected to the board effective was Alvarez Mr. Notes 1 2 3 Kathi P. SeifertKathi P. President, Kimberly-Clark Corporation Vice Retired Executive Group President, Caterpillar Inc. Franklyn G. Prendergast, M.D., Ph.D. and Molecular Biology and Professor of Molecular Edmond and Marion Guggenheim Professor of Biochemistry Clinic Center for Individualized Mayo Director, Medical School; Mayo Pharmacology and Experimental Therapeutics, Clinic Cancer Center Mayo Medicine; and Director Emeritus, President, The Barnegat Group LLC President, The Barnegat Douglas R. Oberhelman Retired President, Private Client Services, and Managing Director, Marsh, Inc. and Managing Director, Client Services, Retired President, Private Ellen R. Marram Karen N. Horn, Ph.D. Alfred G. Gilman, M.D., Ph.D. Medical Center at Southwestern of Texas The University for Academic Affairs and Provost, President Vice Executive the Cecil and Ida and Regental Professor of Pharmacology and Director of Medical School; Dallas; Dean, Southwestern Center Medical Southwestern of Texas The University and Systems Biology, Computational, Green Center for Molecular, J. ErikJ. Fyrwald Holding Company Nalco cer, Offi Chairman, President, and Chief Executive Martin S. Feldstein, Ph.D. University Harvard Professor of Economics, Baker George F. Michael L. Eskew Offi Chairman and Chief Executive Former J. MichaelJ. Cook LLP Deloitte & Touche cer, Offi Chief Executive Retired Chairman and President and Chief Operating Offi cer, McDonald’s Corporation McDonald’s cer, Operating Offi President and Chief Sir Winfried Bischoff Inc. Retired Chairman, Citigroup Chairman, President, and Chief Executive Offi Executive President, and Chief Chairman, Ralph Alvarez Board of Directors Board John Ph.D. C. Lechleiter, Corporate Information

Annual meeting Transfer agent and registrar The annual meeting of shareholders will be held at Wells Fargo Shareowner Services the Lilly Center Auditorium, Lilly Corporate Center, Mailing address: Indianapolis, Indiana, on Monday, April 20, 2009, at Shareowner Relations Department 11:00 a.m. EDT. For more information, see the proxy P.O. Box 64854 statement section of this report, beginning on page 68. St. Paul, Minnesota 55164-0854 Overnight address: 10-K and 10-Q reports 161 North Concord Exchange CORPORATE INFORMATION CORPORATE Paper copies of the company’s annual report to the South St. Paul, Minnesota 55075 Securities and Exchange Commission on Form 10-K and Telephone: 1-800-833-8699 quarterly reports on Form 10-Q are available upon written E-mail: [email protected] request to: Internet: Eli Lilly and Company http://www.wellsfargo.com/com/shareowner_services P.O. Box 88665 Indianapolis, Indiana 46208-0665 Dividend reinvestment and stock purchase plan To access these reports more quickly, you can fi nd all of Wells Fargo Shareowner Services administers the Share- our SEC fi lings online at: http://investor.lilly.com/sec.cfm owner Service Plus Plan, which allows registered shareholders to purchase additional shares of Lilly common Stock listings stock through the automatic investment of dividends. Eli Lilly and Company common stock is listed on the New The plan also allows registered shareholders and new York, London, and Swiss stock exchanges. NYSE ticker investors to purchase shares with cash payments, either symbol: LLY. Most newspapers list the stock as “Lilly (Eli) by check or by automatic deductions from checking or and Co.” savings accounts. The minimum initial investment for new investors is $1,000. Subsequent investments must be CEO and CFO certifi cations at least $50. The maximum cash investment during any The company’s chief executive offi cer and chief fi nancial calendar year is $150,000. Please direct inquiries concern- offi cer have provided all certifi cations required under ing the Shareowner Service Plus Plan to: Securities and Exchange Commission regulations with Wells Fargo Shareowner Services respect to the fi nancial information and disclosures in Shareowner Relations Department this report. The certifi cations are available as exhibits to P.O. Box 64854 the company’s Form 10-K and 10-Q reports. St. Paul, Minnesota 55164-0854 In addition, the company’s chief executive offi cer has Telephone: 1-800-833-8699 fi led with the New York Stock Exchange a certifi cation to the effect that, to the best of his knowledge, the company Online delivery of proxy materials is in compliance with all corporate governance listing Shareholders may elect to receive annual reports and standards of the Exchange. proxy materials online. This reduces paper mailed to the shareholder’s home and saves the company printing and mailing costs. To enroll, go to http://investor.lilly.com/services.cfm and follow the directions provided.

126 Annual Meeting Admission Ticket

Eli Lilly and Company 2009 Annual Meeting of Shareholders Monday, April 20, 2009 11 a.m. EDT

Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285

The top portion of this page will be required for admission to the meeting.

Please write your name and address in the space provided below and present this ticket when you enter the Lilly Center.

A reception (beverages only) will be held from 10:00 a.m. to 10:45 a.m. in the Lilly Center.

Name

Address

City, State, and Zip Code

Detach here Detach here Detach

Directions and Parking

From I-70 take Exit 79B; follow signs to McCarty Street. Turn right (east) on McCarty Street; go straight into Lilly Corporate Center. You will be directed to parking. Be sure to take the admission ticket (the top portion of this page) with you to the meeting and leave this parking pass on your dashboard.

127 Take the top portion of this page with you to the meeting. Detach here

Detach here

Eli Lilly and Company Annual Meeting of Shareholders April 20, 2009 Complimentary Parking Lilly Corporate Center

Please place this identiﬁ er on the dashboard of your car as you enter Lilly Corporate Center so it can be clearly seen by security and parking personnel.

128 Trademarks

Actos® (pioglitazone hydrochloride) Alimta® (pemetrexed disodium) Byetta® (exenatide injection) Ceclor™ (cefaclor) Cialis® (tadalafi l) Coban® (monensin sodium), Elanco Comfortis® (spinosad), Elanco Cymbalta® (duloxetine hydrochloride) Effi ent™ (prasugrel) Efi ent™ (prasugrel) Erbitux® (cetuximab) Evista® (raloxifene hydrochloride) Forsteo® (teriparatide of recombinant DNA origin) Forteo® (teriparatide of recombinant DNA origin) Gemzar® (gemcitabine hydrochloride) Humalog® (insulin lispro of recombinant DNA origin) HumaPen® Luxura HD™ (insulin lispro injection, USP (rDNA origin)) Humatrope® (somatropin of recombinant DNA origin) Humulin® (human insulin of recombinant DNA origin) KwikPen™ (insulin lispro injection, (rDNA origin)) Posilac® (sometribove), Elanco Prozac® (fl uoxetine hydrochloride) Prozac® Weekly™ (fl uoxetine hydrochloride) ReoPro® (abciximab), Centocor Rumensin® (monensin sodium), Elanco Strattera® (atomoxetine hydrochloride) Symbyax® (olanzapine/fl uoxetine hydrochloride) Tylan ® (tylosin), Elanco Vancocin ® (vancomycin hydrochloride) Xigris® (drotrecogin alfa [activated]) Yentreve ™ (duloxetine hydrochloride) Zypadherea™ (olanzapine) Zyprexa® (olanzapine) Zyprexa® Zydis® (olanzapine)

Actos® is a trademark of Takeda Chemical Industries, Ltd. AIR® is a trademark of Alkermes, Inc. Axid® is a trademark of Reliant Pharmaceuticals, LLC Byetta® is a trademark of Amylin Pharmaceuticals, Inc. Erbitux® is a trademark of ImClone LLC Vancocin ® is a trademark of ViroPharma Incorporated Zydis® is a trademark of Cardinal Health.

All trademarks listed above are trademarks of Eli Lilly and Company unless otherwise noted.

For More Information

Lilly corporate responsibility ...... www.lilly.com/responsibility/ Lilly clinical trials registry ...... www.lillytrials.com Lilly Grant Ofﬁ ce ...... www.lillygrantofﬁ ce.com LillyPAC contributions report...... www.lilly.com/about/public_affairs/ Multidrug-Resistant Tuberculosis Partnership...... www.lillymdr-tb.com Medicare prescription drug coverage...... www.lillymedicareanswers.com Pharmaceutical industry patient assistance programs ...... www.pparx.org Lilly Cares...... www.lillycares.com or call toll-free 1-800-545-6962