Eli Lilly and Company

2007 Annual Report

Notice of 2008 Annual Meeting

Proxy Statement

Eli Lilly and Company Lilly Corporate Center Indianapolis, Indiana 46285 USA www.lilly.com Trademarks

Actos® (pioglitazone hydrochloride) Alimta® (pemetrexed disodium) Arxxant® (ruboxistaurin mesylate) Axid® (nizatidine) Byetta® (exenatide injection) Ceclor® (cefaclor) Cialis® (tadalafi l) Coban® (monensin sodium), Elanco Cymbalta® (duloxetine hydrochloride) Effi ent™ (prasugrel) Evista® (raloxifene hydrochloride) Forteo® (teriparatide of recombinant DNA origin) Gemzar® (gemcitabine hydrochloride) Humalog® (insulin lispro of recombinant DNA origin) Humatrope® (somatropin of recombinant DNA origin) Humulin® (human insulin of recombinant DNA origin) On the Cover Year in Review Permax® (pergolide mesylate) Prozac® (fl uoxetine hydrochloride) 1 Financial Highlights ® ™ Candy Edwards is a wife, mother, grandmother and self-taught artist Prozac Weekly (fl uoxetine hydrochloride) 2 Letter to Shareholders ® with a passion for helping others. She also is a Cymbalta® patient. ReoPro (abciximab), Centocor 6 Innovation at Lilly: The Portfolio and the Pipeline Rumensin® (monensin sodium), Elanco Just two years ago, Candy developed a staph infection that kept her 9 Beyond Medicine: Providing Answers That Matter Strattera® (atomoxetine hydrochloride) hospitalized and bedridden for several months. The infection was so Surmax® (avilamycin), Elanco severe that it nearly killed her. Although Candy survived, she found Symbyax® (olanzapine/fl uoxetine hydrochloride) herself in a world of intense pain, fear, anger and despair. The spirited Financials Tylan® (tylosin), Elanco woman her family, friends and community knew so well soon became 10 Review of Operations Vancocin® (vancomycin hydrochloride) someone they hardly recognized. Candy lost interest in everything she 14 Consolidated Statements of Income Xigris® (drotrecogin alfa [activated]) cared about—even her family and her art. 19 Consolidated Balance Sheets Yentreve® (duloxetine hydrochloride) ® “I cried all the time and I had terrible mood swings,” said Candy. “I felt 20 Consolidated Statements of Cash Flows Zyprexa (olanzapine) ® ® like I was in this deep hole—it was like I was pinned down. Suicide 21 Consolidated Statements of Comprehensive Income Zyprexa Zydis (olanzapine) seemed to be the only way out.” 30 Segment Information 31 Selected Quarterly Data Actos® is a trademark of Takeda Chemical Industries, Ltd. Fortunately, Candy’s husband of 30 years, Freddie, recognized that 32 Selected Financial Data AIR® is trademark of Alkermes, Inc. something was seriously wrong with the woman he loved, and he 33 Notes to Consolidated Financial Statements Axid® is a trademark of Reliant Pharmaceuticals, LLC. pleaded with her to talk to her doctor. Although she was reluctant 57 Management’s Reports Byetta® is a trademark of Amylin Pharmaceuticals, Inc. at fi rst to accept her diagnosis of depression and initially refused to 58 Report of Independent Registered Public Accounting Firm Cialis® is a trademark of Lilly ICOS LLC. take the medicine her doctor gave her, Candy eventually decided to EVA® is a trademark of Stern Stewart & Co. give it a try. Sarafem® is a trademark of Galen (Chemicals) Limited Proxy Statement Vancocin® is a trademark of ViroPharma Incorporated Candy’s doctor had prescribed Cymbalta, and she recalls that within a Zydis® is a trademark of Cardinal Health. week, she could tell a difference. 60 Notice of 2008 Annual Meeting and Proxy Statement 61 General Information All trademarks listed above are trademarks of Eli Lilly and Company unless otherwise noted. “Cymbalta works for me,” she said. The turning point was the day she 65 Board of Directors woke up and decided to put on her make-up—something she hadn’t 69 Highlights of the Company’s Corporate Governance Guidelines done for nearly 6 months. “I fi nally started to feel like I was back.” 77 Directors and Corporate Governance Committee Matters Today, Candy is using her love of art to help raise awareness about 78 Audit Committee Matters For More Information highway safety in her home state of Georgia. She has created 80 Compensation Committee Matters characters such as “Boostie,” who promotes the importance of booster 81 Executive Compensation seats for young children, and “Buckley,” a character who encourages 101 Ownership of Company Stock Lilly corporate responsibility and report of political fi nancial support . . www.lilly.com/about/citizenship/index.html motorists to wear seatbelts. 102 Items of Business To Be Acted Upon at the Meeting 115 Other Matters Lilly clinical trials registry ...... www.lillytrials.com Candy isn’t shy about telling her story to others, and by doing so she Lilly Grant Offi ce ...... www.lillygrantoffi ce.com has become a source of hope and inspiration for others suffering from depression in her community. Corporate Information Multi-drug resistant tuberculosis initiative ...... www.lillymdr-tb.com “I always tell them to talk to their physician,” Candy said. “If I hadn’t 124 Senior Management and Board of Directors Medicare prescription drug coverage...... www.lillymedicareanswers.com sought help, I might have lost everything. I have my family and my life 126 Corporate Information Pharmaceutical industry patient assistance programs ...... www.pparx.org back. It was a blessing.” 127 Annual Meeting Admission Ticket Lilly Cares...... www.lillycares.com or call toll-free 1-800-545-6962

© 2008 Eli Lilly and Company 2007AR 2007 Financial Highlights

ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Year Ended December 31 2007 2006 Change % Net sales ...... $18,633.5 $15,691.0 19 Net sales—pro forma1 ...... 18,706.2 16,446.2 14

Research and development ...... 3,486.7 3,129.3 11

Research and development as a percent of net sales ...... 18.7% 19.9%

Net income ...... $ 2,953.0 $ 2,662.7 11

Earnings per share—diluted...... 2.71 2.45 Reconciling items2: Acquired in-process research and development ...... 63 — Asset impairments, restructuring, and other special charges . . . .15 .73 Reduction in expected insurance recoveries for product liabilities ...... 06 — Pro forma adjustment as if the ICOS acquisition was completed on January 1, 20061 ...... (.01) (.15) Adjusted earnings per share—diluted...... 3.54 3.03 17

Dividends paid per share...... 1.70 1.60 6

Capital expenditures ...... 1,082.4 1,077.8 —

Employees ...... 40,600 41,500 (2)

1Pro forma sales and earnings per share assume that the ICOS acquisition was completed January 1, 2006. The pro forma results are presented in order to provide additional insights into the underlying trends in the business.

2For more information on these reconciling items, see the Financial Results section of the Executive Overview on page 10.

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1 To Our Shareholders

Eli Lilly and Company delivered outstanding results in increased 14 percent, to $18.706 billion. Our sales growth 2007, highlighted by 14 percent pro forma sales growth, outpaced the overall pharmaceutical sector in each of the 17 percent growth in pro forma adjusted net income, and world’s largest markets—the U.S., Europe, and Japan— the movement of no fewer than 16 new molecules into and we achieved a 7 percent increase in sales volume clinical testing. Measured more broadly by the growth worldwide on a pro forma basis. of our recently launched products in diverse markets, Demonstrating our continued commitment to grow the success of our business development efforts, and the sales faster than operating expenses, pro forma adjusted progress of discoveries through our development pipe- net income and earnings per share (EPS) both grew by line, 2007 was one of the most thoroughly successful 17 percent in 2007, to $3.863 billion and $3.54, respec- LETTER SHAREHOLDERS TO years in Lilly’s history. tively. On a reported basis, the growth was 11 percent, to Just as importantly in 2007, we asserted a new vision $2.953 billion and $2.71. The pro forma adjusted results of the company—dedicated to improving outcomes for in- assume we owned ICOS for both years and also adjust for dividual patients—and we accelerated the transformation product liability expenses, asset impairments, and restruc- of Lilly to realize this aspiration. turing in both years as well as for charges related to the In this letter, we look forward to reporting on all of acquisition of compounds in development in 2007 (for a these accomplishments in more detail. reconciliation, see page 1).

Leadership Transition Product Performance Near the end of 2007, we announced a leadership Lilly’s top-selling product, Zyprexa, is beginning transition between us that had been carefully planned to face competition from generic formulations in some for some time. Sidney Taurel will retire as chief executive countries—notably Canada and Germany—but overall offi cer at the end of March 2008, turning over that role to demand for this neuroscience therapy grew in markets John Lechleiter. Taurel will remain chairman of the board outside the United States during 2007, helping to drive until the end of 2008. worldwide sales up 9 percent to $4.761 billion. In the Lechleiter assumes his new role as well prepared as any U.S., a longstanding downward trend in Zyprexa’s share of his nine predecessors at the helm of Eli Lilly and Com- of new retail prescriptions continued to slow in 2007, pany. A Ph.D. chemist who joined Lilly in 1979 in process in spite of new competitive products, label changes, and research and development (R&D), Lechleiter will redouble negative advertising by trial lawyers. Lilly’s commitment to develop fi rst-in-class and best-in-class Wider loss of patent protection on Zyprexa and other products. He also brings extensive experience in product products early in the next decade heightens the impor- development, regulatory affairs, and global operations. tance of strong sales growth among our newer products— Already, he has held the reins as operational leader of Lilly and they have risen to the challenge. Pro forma sales of for more than two years, a period of solid sales growth and Lilly products launched in this decade collectively grew steady performance in R&D, manufacturing, and marketing. by 33 percent in 2007 and represented 32 percent of our Our partnership in leading Lilly during the past two total sales, up from 28 percent in 2006. years has been close and fruitful, and the nature of our Cymbalta remains of particular importance to Lilly’s transition demonstrates a broader unity of purpose inside overall performance in the years ahead, and we are the company. Lilly’s vision of delivering optimal outcomes pleased that its success in 2007 is essentially unquali- for individual patients is not “Sidney’s” or “John’s.” It is a vision that we share and one that embodies the promise EgdYjXihAVjcX]ZYI]^h9ZXVYZ8dcig^WjiZY of new science, the realities of the external environment, +#%7^aa^dc^cHVaZh9jg^c\'%%,

and the aspirations of our Lilly colleagues worldwide. *Àœ^ÒSÍÄʏ:җSƒg^Ê̓†ÄÊ^gS:^gʆ—SÒ^gÊ Û”J:Í:[Ê '+ We also share a belief that the Lilly CEO’s most im- -ÍÀ:ÍÍgÀ:[Ê
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EgdYjXihAVjcX]ZYI]^h9ZXVYZ Financial Results ') OnegZmV In 2007, Lilly sales increased 19 percent on a reported 6aaDi]Zg basis, to $18.634 billion. On a pro forma basis, which as- '%%+ sumes we owned ICOS in both 2006 and 2007, our sales

2 LETTER TO SHAREHOLDERS 3 cer Chairman of the Board and Chief Executive Offi in the percentage of pa- cant improvements John C. Lechleiter, Ph.D. President and Sidney Taurel Chief Operatingcer Offi Our osteoporosis treatment Forteo, sold as Forsteo sold as Forsteo Our osteoporosis treatment Forteo, with the diabetes product Lilly co-developed Byetta, said that reacceler- we last year, In our letter to you in some countries, had a good year as well, growing 19 as well, had a good year in some countries, Demonstrating our on the market. fth year percent in its fi devel- we commitment to individual patient outcomes, adherence to treatment with oped programs to improve major factor in determining its success—and Forteo—a saw signifi tients who continued to use the product for the optimal 18 to 24 months. sales growth of 51 percent in 2007, achieved Amylin, begin to will Sales outside the U.S. mainly in the U.S. in Byetta launched contribute on a larger scale, as we in up to 45 22 countries during 2007 and plan to launch record track are pleased with Byetta’s more in 2008. We on its favor- access and reimbursement—based of market as a true breakthrough in the treatment able evaluation shows that Byetta Clinical research of type 2 diabetes. better glucose control patients achieve is helping many while losing weight. larger diabetes business—based heavily on ating Lilly’s bromyalgia. of ted in 2007 from the approval rst time. We believe that the quality of our believe rst time. We Lilly’s cancer-fi another Alimta was ghting therapy cancer-fi Lilly’s Cymbalta also benefi very strong performer in 2007, growing by 40 percent strong performer in 2007, growing by very in 86 to $854 million. Alimta is now approved worldwide leader in second-line market countries; it is the worldwide are pursu- and we treatment of non-small cell lung cancer, ing additional indications for other tumor types. fi ed. Worldwide sales of Cymbalta grew by 60 percent sales of Cymbalta grew by ed. Worldwide fi the $2 billion mark in annual in 2007, pushing it above sales for the fi in advertising our investment sales force interactions, strong access to and the product’s directly to consumers, formularies all play a role in its success—but no factor ability to address is more important than Cymbalta’s of this The patient on the cover important medical needs. people whose health has annual report is one of the many with the help of Cymbalta. improved new indications. The U.S. Food and Drug Administration Food The U.S. new indications. Cymbalta for generalized anxiety disorder approved (FDA) disor- and for maintenance treatment of major depressive also submitted Cymbalta In 2007, we der (MDD) in adults. for consideration as a treatment for fi s er d l the Humalog insulin family—was a key goal. Lilly made 2007 to strengthen our sales performance and our R&D

ho progress against that goal in 2007, though we are not yet pipeline. Most prominently, our successful integration satisfied. Humalog is gaining share again in some mar- of ICOS’s operations allowed us to realize considerable re kets, driving 20 percent growth outside the U.S. for 2007 efficiencies in the selling and marketing of Cialis—which as a whole and 32 percent in the fourth quarter. In the posted a 25 percent increase in worldwide sales in 2007, U.S., our total Humalog prescription volume grew in 2007 to $1.216 billion. o sha for the first time in four years, and we aim to sustain that Lilly’s acquisition of Hypnion in 2007 gave us access trend along with gaining new-prescription market share. to a promising new compound for sleep disorders as well Our summary of Lilly’s progress in 2007 would not as a broader presence in this area of research. In addition, be complete without attention to the remarkable contribu- we entered into licensing agreements with OSI Phar- tions of our Elanco Animal Health business unit. Elanco’s maceuticals and MacroGenics to gain access to exciting LETTER t worldwide sales reached nearly $1 billion in 2007, an in- compounds and research platforms focused on diabetes crease of 14 percent. The acquisition in 2007 of Ivy Animal and various autoimmune diseases, with Glenmark Phar- Health and the ongoing launches of products for compan- maceuticals to obtain the rights to a portfolio of potential ion animals—six are planned within four years—position pain-fighting compounds, and with BioMS Medical on a Elanco for continued significant growth in the years ahead. potential therapy for multiple sclerosis. Growing cash flow also allowed us to increase our Pipeline Progress quarterly dividend in the fourth quarter of 2007 by The long-term health of any pharmaceutical company almost 11 percent, and it will give us continued freedom is determined by its R&D pipeline—the promise of future to seek growth opportunities and improved pipeline value breakthroughs. By that measure, we believe that the through acquisitions and licensing in the years ahead. outlook for Lilly is robust. In 2007, Lilly brought 16 new molecular entities (NMEs) into human trials—a record Transformation unparalleled in our history. We increased our portfolio Earlier, we referred to Lilly’s vision of becoming a of new molecules being tested on patients by nearly 50 truly patient-centered enterprise, focused on optimiz- percent, to 44, and in 2008 we are poised to add another ing individual patient outcomes. While we realize that 15 clinical candidates. the achievement of this vision will take many years, we A highlight of our late-stage development in 2007 were pleased that 2007 brought early, tangible evidence was the submission of prasugrel to the FDA for approval of Lilly’s transformation into a company that offers an at year’s end, after an all-out effort by Lilly’s medical and unmistakable value proposition to the people who depend regulatory affairs teams. Prasugrel (the proposed trade- on its products. mark is Effient™) is a potential new treatment for patients For example, the effort to “tailor” our medicines to with acute coronary syndrome (ACS) who are undergoing individual patients’ needs—delivering the right drug at angioplasty. the right dose at the right time—is bearing fruit. This will In addition to prasugrel, Lilly has seven other NMEs lead to a clearer benefit/risk understanding for patients, or NME-like therapies in Phase III trials or pending doctors, and payers alike—based on a higher degree of regulatory approval, including potential new treatments confidence that a medicine will work effectively and with for osteoporosis, diabetes, multiple sclerosis, and non- manageable side effects. Hodgkin’s lymphoma, an inhaled version of insulin, a Lilly’s large clinical trial of prasugrel is a great ex- weekly formulation of Byetta, and a long-acting injectable ample. Completed in 2007, the so-called TRITON study form of Zyprexa. Lilly also has more than a dozen new yielded robust data on patients for whom the benefits of indications, line extensions, and delivery devices in Phase prasugrel clearly outweigh the risks; patients who ben- III trials or under regulatory review. efited from the drug but who also had increased risk of If successful, most of those therapies will be approved bleeding (and might therefore be best served by a lower between 2008 and 2011, further strengthening Lilly’s prod- dose); and the small percentage of patients who did not uct portfolio as older patents expire. At the same time, Lilly appear to gain greater benefit from prasugrel compared to has the strongest mid-stage pipeline of molecules in its his- the potential risk. tory, and we are accelerating the development of some of Lilly also has made considerable progress in trans- them in a concerted strategy. As a result, Lilly should have forming itself from a fully-integrated pharmaceutical com- at least 10 NMEs in Phase III trials by 2011—with the goal pany—the old “FIPCO” model—into what we refer to as of launching two novel medicines per year starting at that a fully-integrated pharmaceutical network—or “FIPNET.” time, increasing to three per year in 2014. In the new model, we draw on a broad range of resources outside our company’s walls—to increase our effective Business Development capacity and access to external capabilities, to reduce our On the basis of increasing cash flow, Lilly invested level of risk and accelerate development, and ultimately to nearly $3 billion in acquisitions and licensing during help lower our average cost of R&D per molecule.

4 LETTER TO SHAREHOLDERS 5 t- cer cacy and the benefi cer environment external Lilly’s cult nature of les of products coming through our pipeline. We our pipeline. We les of products coming through At Lilly, we have chosen to regard such environmen- such to regard chosen have we At Lilly, Lilly do these things—and do them well—then If we The Jam also left us more convinced than ever that than ever also left us more convinced The Jam The diffi

has not changed in the last year. Populations, on aver- Populations, in the last year. has not changed getting older throughout most of age, are healthier and demand for health care and therefore driving the world, account Prescription medicines generally cost. its overall govern- total health care spending by for a small share of of our products insurers—and the use ments and private forms of treat- often reduces spending on more expensive the pharmaceutical industry regularly ment. Nevertheless, levels experiences acute pressure on our reimbursement do business to- we access almost everywhere and market as an easy target are often viewed we Unfortunately, day. term or to assign in attempts to limit spending in the near of health care sys- blame for the inevitable shortcomings At the same time, the growing expectations tems overall. only added to the expense and of industry regulators have complexity of pharmaceutical R&D. but as motivators tal realities not as excuses for decline transformation. for our own performance and ongoing underlying conditions that keep cannot eliminate the We and scrutiny. the pharmaceutical industry under pressure the can control our own expenses and improve But we are learning about can harness what we We work. we way the effi human biology to improve risk profi how patients are diag- things to improve can do many pa- can help to improve nosed and therapies are used. We understanding tients’ access to our products and to build And we of our business practices through transparency. care chal- on more responsibility for the health can take lenges facing society as a whole, as our corporate social responsibility report (see page 9) demonstrates. will realize its vision of improving outcomes for individu- secure our own bright future. as we al patients even the Board of Directors, For Sidney Taurel Offi Chairman of the Board and Chief Executive C. Lechleiter John President and Chief Operating Offi explore them in an uninhibited way. The Jam left Lilly The Jam way. in an uninhibited explore them discussion threads, ideas, thousands of fresh with literally transformation. focused on our debates and well-argued before this report will be implemented of the ideas Many follow quickly. more will many goes to press—and creativity and commitment among Lilly has the necessary our customers. the expectations of its people to exceed

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. '-%  %( %) %* %+ %, FIPNET ammation. Clearly, 2007 would have left us with very favorable favorable left us with very have 2007 would Clearly, More than ever, Six Sigma is an invaluable disci- Six Sigma is an invaluable More than ever, The emergence of Lilly as the hub of a “ The emergence of Lilly as the hub of a Some of this transformation involves fairly traditional Some of this transformation involves CZiHVaZhEZg:beadnZZ8dci^cjZid>cXgZVhZ  i]djhVcYh —ÊÑßßÇ[ÊÙgÊSœ—͆—Òg^ʜÒÀÊsœSÒÄʜ—ʨÀœ^ÒS͆؆ÍÛ[ʏg^Ê JÛʜÒÀÊÍg:”ÊœsÊ-†ÚÊ-†z”:ÊJ:SŽÊJgÍÄ®Ê gÍÊÄ:gÄʨgÀÊ g”¨œÛggʆ—SÀg:Äg^ÊѣʨgÀSg—ÍÊ͜Êdxu˜[ßßß®Ê.ƒgÊ †—SÀg:ÄgÊÙ:ÄÊ:ÍÍÀ†JÒÍ:JgÊ͜Ê̓gʆ—SÒƜ—ÊœsÊ †:†ÄÊ Ä:gÄÊƗSgʜÒÀÊ:SµÒ†Ä†Í†œ—ÊœsÊ !-Ê:—^Ê:ÊSœ—͆—Òg^Ê Àg^ÒS͆œ—ʆ—ʃg:^SœÒ—Í® should contribute as well to our productivity gains across to our productivity gains should contribute as well headcount Since 2003, Lilly has reduced its the business. increased its net sales about 11 percent worldwide, by gross margin as a 64 percent, improved by per employee and ad- and reduced manufacturing, R&D, percent of sales, output. infrastructure while increasing overall ministrative outsourcing—for example, the early-stage development development outsourcing—for example, the early-stage of our ChemExplorer and PharmExplorer partner- work in efforts with Jubilant ships in China; and our discovery are pioneering new we India. At the same time, however, as our partnership such to share risks and rewards, ways for milestone pay- Piramal. In exchange with Nicholas this the market, if a product reaches and a royalty ments, selected molecules is developing India-based company II—during from our pipeline up to the end of Phase into our Lilly to bring them back may opt time we which Lilly has a similar risk-sharing collaboration portfolio. will be Pharmaceuticals in Hyderabad, which with Suven entered into a partnership have expanded in 2008. And we MediPhar- Hutchison in the preclinical arena with China’s infl ma, focused on targets in oncology and Jamming per- of breakout case at Lilly—as a year memories in any dence in our transformation. formance and increased confi ended on a particularly hopeful note, however, The year more than 22,000 involving Jam” with a global “Vision IBM, the by Facilitated and contractors. Lilly employees brought together Lilly event round-the-clock four-day, people in an online setting to brainstorm new ideas and pline at Lilly, as an important driver of productivity and as an important driver pline at Lilly, started applying Six broader transformation. Since we Sigma in 2005, Lilly has completed some 2,000 projects that are having an impact not just on expenses but also and indeed cutting R&D cycle times, on improving sales, improving all aspects of the business. PORTFOLIO AND PIPELINE

6 1995 1996 1996 1998 1999 2001 2002 2003 2003 2004 2004 2004 2004 2005 Products Marketed Major Innovation atLilly:ThePortfolio andthePipeline

Alimta Cymbalta

Gemzar Humalog Zyprexa Evista Actos Xigris Forteo Strattera Cialis Yentreve Symbyax Byetta ® ® ® ® ® ® for type2diabetes

® for severe sepsisin

for erectiledysfunction for malignantpleuralmesothelioma for type2diabetes

for prevention ofosteoporosisinpostmenopausalwomen ® ® for treatmentofmenandpostmenopausalwomen withosteoporosiswhoareat ® for non-small-celllungcancer for schizophrenia ® ® ® ® for stressurinaryincontinence(approved andlaunched outsidetheU.S.)

for bipolardepression Lyspro RapidActingInsulinfor treatment

for majordepressive disorder for attention-deficithyperactivity disorderinchildren, adolescents, andadults invasive breastcancer(2007) for reductioninriskofinvasive breastcancerinpostmenopausalwomen athighriskfor osteoporosis (2007) for reductioninriskofinvasive breastcancerinpostmenopausalwomen with for treatmentofosteoporosisinpostmenopausalwomen (1999) for biliarytractcancer(2006;Japan) for recurrentovarian cancer(2004) for metastaticbreastcancer(2003) for bladdercancer (1999;approved and launched outsidetheU.S.) for pancreaticcancer (1996) for second-linetreatmentofnon-smallcelllung cancer(2004) for once-dailyuse(2007) Zyprexa Rapid-acting IntraMuscularformulation (2004) for bipolarmaintenance(2003) as combinationtherapywithlithiumorvalproate for acute bipolarmania(2002) for schizophrenia maintenance(2001) (Dates indicate the year of first global launch) global first of year the indicate (Dates (in collaborationwithTakeda outsidetheU.S.) Japan, andwithBoehringerIngelheimelsewhereintheworld) (in collaborationwithQuintilesTransnational Corp. intheU.S., Shionogi&Co. Ltd.in for themaintenancetreatmentofmajordepressive disorder(2007) for generalizedanxietydisorder(2007) for diabeticperipheralneuropathicpain(2004) Zyprexa for acutebipolarmania(2000) high riskfor afracture Humalog (in collaborationwithAmylin Pharmaceuticals, Inc.) for useincombinationwithathiazolidinedione (2007) Humalog ® ® granules(2004;launched inJapan only) Zydis ® ® Mix50/50(1999) Mix75/25(1999) ® tablet(2000) adultpatientsathighriskofdeath oftype1and2diabetes PORTFOLIO AND PIPELINE 7 ciency ciency (1995) ciency lung cancer rst-line treatment of non-small-cell bromyalgia (in collaboration with Centocor, except in Japan) Centocor, (in collaboration with (in collaboration with Alkermes, Inc.) (in collaboration with Alkermes, for prevention/reduction of atherothrombotic events in patients with acute coronary of atherothrombotic events for prevention/reduction (PCI) coronary intervention syndromes who undergo percutaneous Ltd.) Company, Sankyo (in collaboration with Daiichi for the prevention and treatment of osteoporosis and breast cancer risk reduction for the prevention for type 1 diabetes (in collaboration with MacroGenics) for replacement therapy for adult growth hormone defi for replacement therapy for short stature caused by Turner syndrome (1997) syndrome Turner by for short stature caused stature (2003) for idiopathic short for poor prognosis patients with diffuse large B-cell lymphoma for once-weekly dosing for once-weekly for adolescent schizophrenia and bipolar disorder for adolescent schizophrenia for chronic pain for chronic for fi long-acting injection delivery for schizophrenia long-acting injection delivery for secondary progressive multiple sclerosis (SPMS) and relapsing-remitting multiple for secondary progressive (in collaboration with BioMS Medical Corp.) for glucocorticoid-induced osteoporosis (GIOP) for diabetic retinopathy hormone defi pediatric growth caused by for growth failure for treatment-resistant depression ® for fi for for type 1 and type 2 diabetes

complications in patients undergoing of cardiac ischemic for prevention for type 1 and type 2 diabetes ®

®

Humulin ReoPro Humatrope

Inhaled insulin Inhaled ® as angioplasty such intervention, coronary for unstable angina associated with stent procedure (1997)

page) next (continued

Teplizumab MBP8208 Enzastaurin Exenatide Duloxetine Arzoxifene AIR Select Drug Candidates Late-Stage in Investigation Teriparatide (rDNA origin) Teriparatide injection Ruboxistaurin mesylate Ruboxistaurin Pemetrexed disodium Pemetrexed Prasugrel Olanzapine-Fluoxetine Duloxetine Olanzapine Olanzapine LAI New Drug Applications Submitted For Review to the U.S. Food and Drug Administration 1983 1987 1995 sclerosis (RRMS) sclerosis PORTFOLIO AND PIPELINE

8 Remaining scientificandregulatoryhurdlesmay causepipelinecompoundstobedelayed oreven tofailreach themarket. Information iscurrentasofJanuary 31,2008.Thesearch for newdrugsisrisky anduncertain,therearenoguarantees. TRPV1 antagonist Survivin ASO OpRA II NERI IV mGlu2/3 prodrug LP10152 (FGF-21) IL-1 beta antibody HY10275 Glucokinase activator GLP-Fc analog Gemcitabine prodrug Factor Xainhibitor ASAP Anti-CD20 (AME133v) (Gamma secretase inhibitor) A-beta lowering A-beta antibody Investigation Mid-Stage in Candidates Drug Select

for venous thromboembolism(VTE)prophylaxis, VTEtreatmentandatrial stroke prophylaxis (in collaborationwithOSIPharmaceuticals, Inc.) for type2diabetes for Alzheimer’s disease for non-Hodgkin’s lymphoma(NHL) for rheumatoidarthritis for alcoholdependence for solidtumors for schizophrenia for diabetes for type2diabetes for solidtumors for solidtumors for depression(phaseII);for ADHD(phaseI) (in collaborationwithGlenmarkPharmaceuticals) for treatmentfor various painconditions, includingosteoarthriticpain for insomnia for Alzheimer’s disease fibrillation CORPORATE RESPONSIBILITY

Beyond Medicine: Providing Answers That Matter

Throughout our history, Lilly has been a leading corporate Improving Access to Medicines citizen. While our greatest contributions to society are Access to health care—and to affordable medicines— breakthrough medicines for patients around the world, is a major problem in many countries, and Lilly has taken we realize that positive patient outcomes are about more steps to assist. For example, in 2007, we helped more than than just medicine. 145,000 patients in the U.S. obtain medicines through six At Lilly, our corporate responsibility is focused on different assistance programs. These programs are part of making a measurable difference in business and soci- a broader industry effort. Through the Partnership for Pre- ety. We are committed to operating our business at the scription Assistance program (PPARx), the pharmaceutical highest standards, including being an industry leader in industry has helped more than 4 million people get afford- transparency, using our resources to strengthen the com- able access to needed medicines. Additional information munities in which we live and work, and looking beyond on PPARx may be found at www.pparx.org. our operations to help address health challenges. While we regard this as a journey, we are proud of Fighting Multidrug-Resistant Tuberculosis (MDR-TB) our record as a global corporate citizen. Here are some MDR-TB is a growing global health threat. Begun in examples: 2003, Lilly’s groundbreaking MDR-TB Partnership seeks to increase the supply and availability of two important medi- Commitment to Transparency cines to treat the deadly disease in the hardest-hit countries. We continue to be an industry leader in transparency. In March 2007, we increased our fi nancial commitment In 2004, we were the fi rst pharmaceutical company to by an additional $50 million. And in June, we announced publish online the results of all our clinical trials. We have the creation of an ambitious public–private consortium in an unwavering commitment to publicly disclosing medi- Seattle to conduct early-phase discovery research of new cal research results—whether favorable or unfavorable medicines urgently needed to treat tuberculosis, including for Lilly—in an accurate, objective, and balanced manner emerging resistant strains, with another $15 million invest- to ensure our customers have the information they need ment—bringing our total contributions to $135 million. In about our products. 2007, our efforts were recognized by the Global Business In addition, in 2007 Lilly became the fi rst pharmaceu- Coalition, which described our MDR-TB program as a “su- tical company to disclose publicly all of our grants to U.S. perlative model” for other businesses to follow. nongovernmental organizations, research institutions, and others. This information is available online at www. Supporting Novel Approaches in the Battle Against lillygrantoffi ce.com. Diabetes In keeping with Lilly’s strong and historic commit- Philanthropy and Community Support ment to diabetes, the Lilly Foundation is contributing up Lilly also continues to build on its long tradition to $15 million to the American Academy of Family Physi- of philanthropy and community support. According to cians Foundation to establish “Peers for Progress,” a pro- the Chronicle of Philanthropy, the company’s 2006 giv- gram that will identify and train lay volunteers who have ing placed it sixth among the 91 major U.S. companies diabetes and empower them to be “diabetes mentors.” responding to its survey. In 2007, our philanthropic These mentors will then assist other people with diabetes contributions totaled about $315 million, including about to better manage the emotional, social, and daily self- $240 million in products for patient assistance programs care demands of the disease. The goal of this ambitious and international humanitarian causes. Our total 2007 initiative is to empower 200,000 volunteers, or 1 percent giving represents about 6 percent of our adjusted income of Americans with diabetes, to become diabetes mentors before taxes and has positioned Lilly once again as one of and to expand this program globally. In addition, Lilly is the most charitable companies in the world. providing an educational grant of $10 million to the Inter- We also launched a new employee volunteer initia- national Diabetes Federation to fund “Project BRIDGES,” a tive called “Hands and Hearts,” which aims to enhance global effort to identify and share successful strategies for employee involvement with nonprofi t organizations while managing diabetes. allowing us to track and measure results. By encouraging volunteerism, we strengthen our communities and in- For a full report on Lilly’s corporate citizenship initiatives, crease the commitment and engagement of our workforce. please visit www.lilly.com/about/citizenship.

9 FINANCIALS 10 Cymbalta primarily ofkeyproducts, insupport expenses selling and inmarketing investments additional Our of ICOS. acquisition the from resulting involume increase this asignifi with ofkeyproducts, number ina increases volume by driven primarily was growth This of19 percent. growth sales worldwide We achieved Financial Results industry. pharmaceutical the and company our affecting matters other and latory, regu- legal, and developments, pipeline late-stage and signifi sults, fi ofour overview an provides section This EXECUTIVE OVERVIEW Review ofOperations • We incurred• aspecialcharge following asettlement We recognized• asset impairments,restructuring, 2007 fi dated fi signifi following the of 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 per or 11 to $2.95 billion, percent, increased share per ings earn- and income net aresult, As increased. rate tax effective the and decreased income—net other sales, as rate same the approximately at grew aggregate the in expenses operating and ofsales cost in 2007. While 11 percent development and inresearch investment our toincrease us enabled and growth sales to this • We incurred• in-process research anddevelopment nancial results (see Notes 3, 4, and 13 and consoli- tothe 4, 3, Notes (see results nancial with oneofourinsurance carriers over Zyprexa decreased earningspershare by$.08(Note 4). research facilities of$123.0million(pretax), which strategic decisionsaffecting manufacturing and similar charges associated withpreviously announced share by$.07.Inthefirst quarter, we recognized in thefourth quarter, whichdecreased earningsper and otherspecialcharges of$98.2 million(pretax) the fourth quarter (Note 3). (pretax), whichdecreased earningspershare by$.05in arrangement withMacroGenics, Inc.,of$44.0million India of$45.0million(pretax) and ourlicensing arrangement withGlenmark Pharmaceuticals Limited (IPR&D) charges associated withour licensing quarter (Notes 4and13). decreased earningspershare by$.06inthethird resulted inacharge of$81.3million(pretax), which expected product liabilityinsurance recoveries. This product liabilityclaims,whichled to areduction ofour nancial statements for additional information): additional for statements nancial ® and the diabetes care products, contributed contributed products, care diabetes the and cant business development, recent product product recent development, business cant cant items that are refl are that items cant cant portion of portion cant nancial re- nancial ected in our inour ected ®

• On December 26,2007,together withourcollaboration • Pipeline year, past the including: within transactions development business recent and developments line pipe- late-stage with ofsuccesses anumber achieved We have companies. or pharmaceutical biotechnology other by indevelopment currently compounds on rate collabo- or acquire and products pharmaceutical tive innova- develop and to discover tocontinue ability our on extent, toagreat depends, success long-term Our Development Activity Business and Developments Pipeline Late-Stage • We recognized• asset impairments,restructuring, and 2006 We incurred• IPR&Dcharges associated withthe We incurred• IPR&Dcharges associated withthe submission follows therelease of results ofthe proposed trademark for prasugrel isEffi to the U.S.Food and DrugAdministration (FDA). The submitted aNew DrugApplication (NDA) for prasugrel partner DaiichiSankyo Company, Limited, we TRITON TIMI-38 lion (pretax), or$.42pershare (Notes 4and13). Zyprexa product liabilitylitigationmatters of$494.9mil- In thefourth quarter, we incurred acharge related to $.31 (Note 4). fourth quarter, whichdecreased earningspershare by other specialcharges of$450.3 million(pretax) inthe share by$.29inthefirst quarter (Note 3). of $25.0million(pretax), whichdecreased earningsper and alicensing arrangement withOSIPharmaceuticals acquisition ofICOS$303.5million(notax benefi quarter (Note 3). decreased earningspershare by$.29inthesecond Health, Inc.(Ivy),of$37.0million(pretax), which (no tax benefit) andtheacquisitionofIvyAnimal acquisition ofHypnion,Inc.(Hypnion),$291.1million Sœ”¨:—†œ—Ê:—†”:Ê¨Àœ^ÒSÍʏ:җSƒgÄ®ÊÊ œsÊØÛÊ
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11 PROTÉGÉ . In November ™ led Phar- by Teva ed by the U.S. Attor- , and Prozac Weekly ® ce for the Eastern District of Pennsylvania In June, wereceived notice of two court rulings haveWe reached agreements with claimants’ In March 2004, we were notifi trial, a global pivotal Phase II/III clinical trial for trial for Phase II/III clinical pivotal trial, a global diabetes. type 1 with recent-onset individuals and held applied research Health, Inc., a privately focused company development product pharmaceutical provides The acquisition industry. on the animal health those of our lines that complement us with product animal health business. drug discovery neuroscience held Inc., a privately The deal expands disorders. on sleep focused company research disorder of sleep in the area our presence Phase II insomnia a novel of ownership and provides dual mechanism of action aimed at with a compound maintenance. onset and sleep sleep better promoting $2.3 billion. The acquisition of approximately a cost us us and enables of Cialis to brings the full value ciencies in the further effi operational realize to selling of this product. and marketing, development, the treatment for (GKA) program activator glucokinase Lilly compound. including the lead of type 2 diabetes, market and develop to license an exclusive received the GKA program. from derived any compounds autoimmune diseases. As part of the arrangement, As part of the arrangement, diseases. autoimmune the molecule. rights to the exclusive acquired we in the being studied is currently Teplizumab etitions for certiorari that were fi 2007, we2007, received a grand jury subpoena from the EDPA • acquisition of Ivy Animal the completed In June, we • acquisition of Hypnion, the completed In April, we • the acquisition of ICOS at completed In January, we its • OSI Pharmaceuticals from licensed In January, we LEGAL, REGULATORY, AND OTHER MATTERS theIn October, United States Supreme Court denied the p maceuticals Reddy’s Laboratories, and Dr. bringing to an end the two companies’ challenges to the validity of Lilly’s U.S. Zyprexa patent. by theCanadian Federal Court and the German Pat- ent Court that permit the entry of generic olanzapine (Zyprexa) by competitors into the Canadian and German markets. Generic olanzapine is now available for sale by competitors in Canada and Germany. attorneys involved in U.S. Zyprexa product liability litigation to settle a total of approximately 31,200 claims against us relating to the medication. Approximately 1,235 claims remain. As a result of our product liability exposures, since the beginning of 2005, we have re- corded aggregate billion net pretax for charges of $1.61 Zyprexa product liability matters. offiney’s (EDPA) that it had commenced an investigation relating to our U.S. marketing and promotional practices for Zyprexa, Prozac for once- for ® for a new a new for ® , in combination with , in combination ® (exenatide) injection taken twice twice taken injection (exenatide) ® velopment agreement with BioMS Medical Corp. with BioMS Medical agreement velopment bromyalgia. bromyalgia. FDA and the European Medicines Agency (EMEA) for for Medicines Agency (EMEA) and the European FDA injection. long-acting of olanzapine (Zyprexa) approval daily in patients with type 2 diabetes. in patients with type 2 diabetes. daily maintenance treatment of major depressive disorder in disorder of major depressive treatment maintenance the for Cymbalta approved the FDA adults. In February, During 2007, disorder. anxiety of generalized treatment Drug Application New a Supplemental submitted we the management of for Cymbalta for the FDA to fi Inc., we Inc., and Alkermes, Pharmaceuticals, comparator a 30-week from results positive announced release long-acting exenatide of once-weekly study injection and Byetta daily use to treat erectile dysfunction. Cialis was dysfunction. Cialis erectile treat use to daily once-daily for Commission European by the approved 2007. use in June prasugrel versus clopidogrel in November. in November. clopidogrel versus prasugrel with MacroGenics, Inc., to develop and commercialize and commercialize develop Inc., to with MacroGenics, a humanized anti-CD3 monoclonal teplizumab, next-generation as other potential antibody, as well of use in the treatment for anti-CD3 molecules Glenmark Pharmaceuticals Limited India whereby we we India whereby Limited Pharmaceuticals Glenmark receptor of transient a portfolio the rights to acquired 1 (TRPV1) antagonist sub-family vanilloid potential The compound. including a clinical-phase molecules, as a development in Phase II is currently compound pain various for treatment next-generation potential pain. including osteoarthritic conditions, whereby we acquired exclusive worldwide rights to rights to worldwide exclusive acquired we whereby The compound (MS) compound. sclerosis a multiple Phase III pivotal in two evaluated being is currently MS (SPMS) and progressive trials in secondary clinical MS trial in relapsing-remitting one Phase II clinical will we with this agreement, (RRMS). In connection IPR&D of $87.0 acquired earnings for to incur a charge in which will be included as expense million (pretax), of 2008. quarter rst the fi centralized review of Alimta review centralized use to reduce the risk of invasive breast cancer cancer breast risk of invasive the reduce use to with women populations: postmenopausal in two at high risk women and postmenopausal osteoporosis cancer. breast invasive for de cisplatin, for the fi rst-line treatment of non-small cell of non-small cell treatment rst-line the fi cisplatin, for lung cancer. • In September, the FDA approved Evista • approved the FDA In September, • the to NDAs submitted we quarter, In the second • In November, the FDA approved Cymbalta for the the for Cymbalta • approved the FDA In November, • Amylin partners our collaboration with In October, • In January 2008, the FDA approved Cialis • approved the FDA In January 2008, • In October, we entered into a global strategic alliance alliance strategic a global • into entered we In October, • In October, we entered into an agreement with an agreement • into entered we In October, • We submitted an application to the EMEA for the EMEA for • to an application submitted We Business Development and a licensing into • entered we In December, FINANCIALS Sa OPERATING RESULTS—2007 protection. property intellectual ofour value the reduce or controls price additional impose indirectly or directly would that proposals including measures, cost-containment additional for proposals many are there and regulations, market and price to extensive Zyprexa sales in the U.S. increased 6 percent in 2007, in2007, 6percent increased U.S. in the sales Zyprexa maintenance. bipolar and Idisorder bipolar with ated associ- episodes manic or mixed acute schizophrenia, Cymbalta. and Gemzar, Alimta, ofZyprexa, growth sales and of Cialis, inclusion the by primarily driven billion, to$8.49 cent, per- 20 increased U.S. the outside Sales ofCialis. sion inclu- the and Byetta, and Alimta, Zyprexa, Cymbalta, of sales increased by to $10.15 primarily driven billion, 18 percent, increased U.S. inthe Sales torounding.) due add not do (Numbers 3percent. by sales increased each rates exchange foreign and prices selling while percent, 12 Gemzar Alimta, Zyprexa, ofCymbalta, growth sales and ofICOS acquisition 29, 2007 January our since $ to 19 percent, increased 2007 for sales worldwide Our fi or liquidity, ofoperations, results consolidated toour material to be impact the expect not do however, we sales; Medicaid for prices selling net ofreducing effect the has which fi the implemented We have pharmaceuticals. for Price Best and Price Manufacturer ofAverage use and calculation the for amethodology out sets things, other among and program Medicaid tothe relates Defi ofthe sections afi released Services tocontinue. levels state and federal the at pressures pricing We expect patients. Medicaid to sales on pay we rebates the increase would that introduced been have proposals various Additionally, manufacturers. pharmaceutical with Ddirectly Part Medicare within prices drug tonegotiate Services man Hu- and ofHealth Secretary the require, or allow, either and drugs ofprescription importation the to legalize proposals 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 aprescription provide toeffectively continues (MMA) of2003 Act Modernization and Improvement, Drug, toZyprexa. related documents requesting and Humalog and 18.63 billion, driven primarily by the inclusion of Cialis ofCialis inclusion the by primarily driven billion, 18.63 les International operations also are generally subject subject generally are also operations International Zyprexa, our top-selling product, is a treatment for for atreatment is product, top-selling our Zyprexa, In 2007, the Centers for Medicare and Medicaid Medicaid and Medicare for Centers the In 2007, Prescription Medicare the States, United In the t under the Medicare program (known as as (known program Medicare the t under nancial nancial position. ® . Worldwide sales volume increased 12 increased volume sales . Worldwide cit Reduction Act of 2005. This rule rule This of2005. Act Reduction cit nal rule seeking to implement toimplement seeking rule nal nal rule, nal rule, ® , and the favorable impact of foreign exchange rates. exchange offoreign impact favorable the and demand increased by driven 16 percent, increased U.S. the outside Sales demand. increased and prices higher by driven U.S., inthe 10 percent increased cancers, ous rates. exchange offoreign impact favorable the and demand increased by driven percent, 70 increased U.S. the outside Sales demand. strong by primarily driven U.S., inthe percent 58 increased disorder, anxiety generalized and pain, neuropathic peripheral disorder, diabetic depressive of major demand. increased and rates exchange offoreign impact favorable the by driven cent, 12 per- increased U.S. the outside Sales demand. lower by offset partially prices, selling net higher by driven exchange rates, partially offset by declining prices. prices. declining by offset partially rates, exchange offoreign impact favorable the and demand increased by driven percent, 20 increased U.S. the outside Sales demand. increased and prices higher by driven U.S., the in 9percent increased ofdiabetes, treatment the for log :ÄÊSœ”¨:Àg^Ê͜ÊÑßßÈ®Ê †:†ÄÊÄ:gÄʆ—SÀg:Äg^Êd˜Ñl®ßʔ††œ—ʆ—ÊÑßßÇÊ œ—Ê:—Ò:ÀÛÊ£[ÊÑßßÈ®Ê!—Ê:—Ê:ÄÊÀg¨œÀÍg^ÊJ:ĆÄ[Ê :ÄÄҔgÊ̓gÊ:SµÒ†Ä†Í†œ—ÊœsÊ !-ʜSSÒÀÀg^Ê JÛÊ؜Ò”gʆ—SÀg:ÄgÄ®Ê †:†ÄÊÄ:gÄÊăœÙ—Ê œØgÀÊÑßßÈ®Ê.ƒ†ÄÊzÀœÙ̓ÊÙ:ÄʨÀ†”:À†ÛÊ^À†Øg—Ê ¨Àœ^ÒSÍÄÊzg—gÀ:Íg^Ê:—ʆ—SÀg:ÄgʜsÊdÑ®ÎÊJ††œ—Ê œSSÒÀÀg^ʜ—Ê:—Ò:ÀÛÊ£[ÊÑßßÈ[Ê̓gÄgÊg†zƒÍÊ ÑßßÈ®Ê
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569.4 569.4 Total Our revenues from Actos, an oral agent for the Sales of Alimta, a second-line treatment for non- Sales of Forteo, an injectable treatment for osteo- Sales of Strattera, a treatment for attention-defi 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 hyperactivity disorder in children, adolescents, and adults, decreased 9 percent in the U.S., as a resultof decreased demand. Sales outside the U.S. increased 50 percent, driven by increased demand and the favor- able impact of foreign exchange rates. driven by increased demand and the favorable impact of foreign exchange rates, partially offset by lower prices. small cell lung cancer and in combination with another agent, for the treatment of malignant pleural meso- thelioma, increased 28 percent in the U.S., 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. porosis in postmenopausal women and men at high risk for fracture, increased percent in the 19 U.S., driven by higher net selling prices. U.S. salesgrowth benefi from access to medical coverage through the Medi- care 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. Year Ended Outside U.S. December 2007 31,

1

(Dollars in millions) ...... 213.6 227.2 440.8 ® ...... 464.6 104.8 ...... 365.2 620.0 985.2 ® ® ...... 494.1 ® ...... 150.8 ...... 423.8 720.0 1,143.8 ® 2 Sales of Evista, a product for the prevention and Sales of Humulin, an injectable human insulin for 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. 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 reportedconsolidated in other income—net income statement. Subsequent to the acquisition, all Cialis product sales are reported in our net sales. Actos Humatrope Strattera

Gemzar ...... Gemzar ...... Humalog Cialis 670.0 888.0 922.4 586.6 1,592.4 1,474.6 tile dysfunction, were billion $1.22 and million $971.0 during 2007 and 2006, respectively. This includes $72.7 million of sales in the Lilly ICOS joint-venture territo- riesfor the 2007 period prior to the acquisition of ICOS. Worldwide sales grew 25 percent in 2007. U.S. sales in- creased 20 percent in 2007, driven by increased demand and higher prices. Sales outside the U.S. increased 28 percent driven in 2007, by increased demand, the favor- able impact of foreign exchange rates, and higher prices. Prior to the ICOS acquisition, Cialis sales in our terri- tories were reported in net sales, while our 50 percent share of the joint-venture net income was reported in other income—net. All sales of Cialis subsequent to the ICOS acquisition are reported in our net sales. 1 2 NM—Not meaningful NM—Not 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 ...... 706.1 480.9 384.6 1,090.7 Alimta ...... Alimta Forteo 448.0 406.0 854.0 treatment of osteoporosis in postmenopausal women and for risk reduction of invasive breast cancer in post- menopausal women with osteoporosis and postmeno- pausal women at high risk for invasive breast cancer, increased 6 percent in the U.S., driven 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. the treatment of diabetes, decreased 1 percent in the U.S., driven by lower demand, partially offset by higher prices. Sales outside the U.S. increased percent, 11 Other pharmaceutical 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 U.S. Product Humulin FINANCIALS — fi toconsolidated notes See . income. Net . principle. inaccounting ofachange effect Cumulative . . principle inaccounting ofachange effect cumulative before Income — (Note 10) share—diluted per Earnings . . income. Net . principle. in accounting ofachange effect Cumulative . principle inaccounting ofachange effect cumulative before Income — (Note 10) share—basic per Earnings income Net . (Note 2) oftax net . principle, inaccounting ofachange effect Cumulative . principle inaccounting ofachange effect cumulative before Income (Note 11) taxes Income . facag nacutn rnil...... principle. inaccounting ofachange effect cumulative and taxes income before Income 14 2005 2006 2007 31 December Ended Year . ofsales Cost . sales Net data) per-share except millions, in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Consolidated StatementsofIncome . income—net. Other (Note 4) charges . special other and restructuring, impairments, Asset (Note 3) development and research . in-process Acquired administrative and . selling, Marketing, . development and Research . nancial statements. ,756.7

$18,633.5 ,6. $1,979.6 $2,662.7 $ 2,953.0 14 4,248.8 3,486.7 6,095.1 2,953.0 3,876.8 (122.0) 302.5 923.8 745.6 $2.71 $2.71 $2.71 $2.71 4,889.8 4,497.0 1,7. 11,927.8 12,273.0 3,129.3 3,025.5 2,662.7 2,001.6 2,662.7 $15,691.0 $15,691.0 $14,645.3 945.2 1,245.3 — — — 755.3 715.9 755.3 3,418.0 2,717.5 3,418.0 3565 3,474.2 3,546.5 (237.8) (314.2) (237.8) $2.45 $1.81 $2.45 $1.83 $2.45 $1.82 $2.45 $1.84 $2.45 — — — (22.0) (0.02) (0.02) FINANCIALS

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,-#, &-#, '!(*%  %( %) %* %+ %,  %( %) %* %+ %, Other income—net million, decreased to $115.8 incurredWe tax expense of $923.8 million in GZhZVgX]VcY9ZkZadebZci>ckZhibZci >cXgZVh^c\ b^aa^dch!eZgXZcid[cZihVaZh ,gÄg:ÀSƒÊ:—^Ê^gØgœ¨”g—ÍÊgÚ¨g—^†ÍÒÀgÄÊ †—SÀg:Äg^ÊJÛÊ££Ê¨gÀSg—Í[Ê͜ÊdήuÊJ††œ—[ʆ—ÊÑßßÇÊ ^ÒgÊ͜ʆ—SÀg:ÄgÄʆ—Ê^†ÄSœØgÀÛÊÀgÄg:ÀSƒÊ:—^Ê :Íg ÄÍ:zgÊS†—†S:ÊÍÀ†:ÊSœÄÍÄ®Ê.ƒ†ÄÊÄÒÄÍ:†—g^ʏgØgÊ œsʆ—ØgÄ͔g—Íʆ—ÊÀgÄg:ÀSƒÊ:—^Ê^gØgœ¨”g—ÍÊ g—:Jg^ÊÒÄÊ͜ʔœØgÊ:—Êҗ¨ÀgSg^g—Íg^ʗҔJgÀÊ œsÊ^ÀÒzÊS:—^†^:ÍgÄʆ—͜ʃҔ:—ÊS†—†S:ÊÍÀ†:Äʆ—Ê ÑßßÇ[ÊÄÒ¨¨œÀ͆—zʜÒÀÊSœ””†Í”g—ÍÊ͜Ê^gØgœ¨Ê JgÄÍ †— S:ÄÄÊ:—^Ês†ÀÄÍ †— S:ÄÄʔg^†S†—gÄÊÍœÊ ¨ÀœØ†^gÊ:—ÄÙgÀÄÊsœÀÊ̓gÊҗ”gÍʔg^†S:Ê—gg^ÄÊ œsʜÒÀÊSÒÄ͜”gÀÄ®ÊÊ

FINANCIALS 17 n territory territory 39.6 39.6 NM 169.9 169.9 27 Total from 2005 679.7 679.7 94 414.4 414.4 0 389.3 53 493.0 (9) 552.1 552.1 5 863.7 1 463.2 32 1,197.7 1,197.7 9 Year Ended Percent 1,805.1 1,805.1 (24) 1,036.1 1,036.1 1 1,004.7 (8) 1,334.5 6 December 2005 31, Change asresult a of the European ®

611.8 611.8 219.0 219.0 415.6 415.6 215.8 215.8 594.3 Total Operating expenses increased 7 percent in 2006. Other income—net decreased million, $76.4 to — 69.8 69.8 579.0 169.4 169.4 448.5 157.7 157.7 1,316.4 261.7 261.7 469.6 469.6 875.5 557.4 557.4 925.3 212.1 212.1 877.2 1,373.3 to $238.1 million. This increase was a result of higher of higher was a result $238.1 million. This increase to ales compared with percent 76.3 for 2005. This in- Union’s growthUnion’s promotion use ban on the product, effective January 2006. 1, Gross Margin, Costs, and Expenses The 2006 gross margin increased percent to 77.4 of s creased 5 percent, driven primarily by the decrease in the sales of Surmax crease was primarily due to increased productprices and increased production volume, partially offset by higher manufacturing expenses. Investment in research and development increased 3 percent, billion, to $3.13 primarily due to increases in discovery research and clinical trial costs. contin- We uedbe to a leader in our industry peer group by invest- ing approximately 20 percent of our sales into research and development during 2006. Marketing, selling, and administrative expenses increased 9 percent in 2006, to $4.89 billion. This increase was largely attributable to increased marketing and selling expenses in support of key products, primarily Cymbalta and the diabetes care franchise, increase an litigation-related and in costs. million. $237.8 $132.9 million, 2006 increased for • expense Interest Year Ended Outside U.S. December 2006 31, cantly cantly 3.7 3.7

1

. Sales outside the U.S. de- ® ects the impact of market share (Dollars in millions) demand. strong ecting and Tylan ® ...... 2 ted from patients’ access to medical coverage Sales of Alimta increased percent 18 and 57 percent Sales of Forteo increased 57 percent in the U.S. In Sales of Strattera increased 2 percent in the U.S. productTotal sales of Cialis increased 38 percent Animal health product sales in the U.S. increased Cialis had worldwide 2006 sales of $971.0 million, representing an increase of 30 percent compared with 2005. The sales shown i U.S. sales include sales in Puerto Rico. the table above represent results only in the territories in which we marketed Cialis exclusively. The remainingjoint-venture sales territories relate to the of Lilly ICOS LLC (North America, excluding Puerto Rico, and Europe).sales, Our share net of the of expenses joint-venture and income taxes, is reported in other income—net in our consolidated statements of income. Strattera ...... Strattera 509.2 Alimta ...... Alimta 350.1 Byetta ...... 219.0 Actos ...... Actos ...... Humatrope 279.1 202.3 213.3 Humalog ...... Humalog Evista...... Humulin...... Animal healthproducts...... 811.0 664.0 367.9 405.9 488.5 381.3 1,299.5 1,045.3 Forteo ...... Forteo 416.2 178.1 net sales Total ...... $8,599.2 $7,091.8 $15,691.0 $14,645.3 7 Other pharmaceutical products. . 496.1

Cialis through the Medicare Part D program and from de- creased utilization of our U.S. patient assistance pro- gram, LillyAnswers. Sales outside the U.S. increased 43 percent, refl in the U.S. and outside the U.S., respectively, due pri- marily to increased demand. addition to increased demand, U.S. sales signifi benefi to higher prices, offset partially by a decline in demand. Outside the U.S., sales of Evista decreased 1 percent, driven by lower prices, offset by an increase in demand. 1 2 NM—Not meaningful NM—Not Cymbalta...... 1,158.7 Zyprexa ...... Zyprexa ...... Gemzar 2,106.2 $ 609.8 $2,257.4 $ 4,363.6 798.3 $ 4,202.3 1,408.1 4 The following table summarizes ournet sales activity in 2006 compared with 2005: Product U.S. Product

due to higher prices as well as the reductions in U.S. wholesaler inventory levels in 2005, offset by a decline in demand. Sales outside the U.S. increased percent 31 due primarily to increased demand in addition to a mod- est favorable impact of foreign exchange rates, offset partially by lower prices. in the U.S. and 24 percent outside the U.S. Worldwide Cialis sales growth refl gains, market growth, and price increases during 2006. percent,10 due primarily to increased demand led Rumensin by FINANCIALS 10.6 percent increase), resulting in an indicated annual annual indicated in an resulting increase), 10.6 percent (a share per to$.47 increased was dividend quarterly fi the for 2007, effective of quarter fourth Inthe 2006. from of 6 percent increase respectively. Aa3, and AA at remain Moody’s and &Poor’s Standard from ratings debt current Our lion. of$1.06 bil- repayment debt long-term by offset ICOS, tofi in2007 issued of we debt acquisition our nance refl billion, to $5.01 billion, products. care diabetes our of growth long-term inthe invest and systems, quality and productivity toenhance facilities manufacturing our toupgrade continue initiatives, development and search re- and biotech inour invest we while levels 2007 as same the approximately toremain expenditures capital near-term We expect spending. ofcapital agement man- tothe primarily due 2006, with consistent were 18 of$1.08 billion. equipment and ofproperty chases pur- and of$1.85 billion, paid dividends billion, of $2.67 acquisitions corporate for paid cash net ofthe total the exceeded of$1.45 billion debt oflong-term issuance the from proceeds of$5.15 net and billion in2007 operations fl Cash 31, 2006. December at billion $3.89 with compared billion $4.83 totaled investments short-term and equivalents, cash 31, cash, 2007, ofDecember As FINANCIAL CONDITION information. additional for statements fi 11 Note See consolidated tothe charge. the todeduct expect reasonably we inwhich countries the benefi tax the as rate, tax effective our than less was charges benefi tax The respectively. lion, $1.07 and bil- of$494.9 million charges liability product the by primarily affected were 2005 and 2006 for rates tax effective The 2005. for percent 26.3 with pared com- of22.1 percent, rate tax effective inan resulting Net othermiscellaneous income items decreased• The Lilly ICOSjoint-venture• income was$96.3mil- Interest income• for 2006increased $49.8million,to products andpartnered compounds indevelopment. of less income related to theoutlicensing oflegacy $78.5 million,to $117.7million,primarily asaresult decreased sellingandmarketing expenses. The increase wasdueto increased Cialissales and lion in2006ascompared to $11.1millionin2005. $261.9 million,dueto highershort-term interest rates. facilities. the completion inlate 2005ofcertain manufacturing interest rates andless capitalized interest dueto Dividends of $1.70 per share were paid in 2007, an an in2007, paid of$1.70 were share per Dividends $1.29 increased 31, 2007 Total ofDecember as debt 2007 during of$1.08 billion expenditures Capital We incurred tax expense of $755.3 million in 2006, in2006, million of$755.3 expense tax We incurred t was calculated based upon existing tax laws in laws tax existing upon based calculated t was rst-quarter dividend in 2008, the the in2008, dividend rst-quarter ecting the $2.50 billion of billion $2.50 the ecting t associated with these these with t associated nancial ow from been adversely affected by the recent illiquidity in the inthe illiquidity recent the by affected adversely been not has markets tocredit access Our program. paper commercial our backs ofwhich $1.20 billion facilities, credit bank committed ofunused $1.24have billion We currently necessary. if borrowings, short-term fund to adequate be should markets paper commercial isting ex- through accessible amounts that We believe 2008. in taxes and dividends, litigation, liability product with associated costs expenditures, capital service, debt ing suffi be will equivalents, cash and cash available with along have been increased. dividends inwhich year consecutive 40th the and ments pay- dividend made we inwhich year consecutive 123rd the was 2007 year The share. of$1.88 per 2008 for rate may affect our operating results and cash gener cash and results operating our affect may section, 2008 for Expectations Financial inthe discussed those including uncertainties, and risks Various market. of fi fl These values. rency tofl exposed are operations. from zÀœÙ̓ʜsʜÒÀÊ^†:JgÍgÄÊS:ÀgʨÀœ^ÒSÍÄ®ÊÊ :—^ʵÒ:†ÍÛÊÄÛÄÍg”Ä[Ê:—^ʆ—ØgÄÍʆ—Ê̓gʏœ—z ÍgÀ”Ê ”:—Òs:SÍÒÀ†—zÊs:S††Í†gÄÊ͜Êg—ƒ:—SgʨÀœ^ÒS͆؆ÍÛÊ ^gØgœ¨”g—Íʆ—†Í†:͆ØgÄ[ÊSœ—͆—ÒgÊ͜ÊÒ¨zÀ:^gʜÒÀÊ Ùƒ†gÊÙgʆ—ØgÄÍʆ—ÊœÒÀÊJ†œÍgSƒÊ:—^ÊÀgÄg:ÀSƒÊ:—^Ê ÍÀg—^ʆ—ÍœÊÑßßlÊJÛʔ:—:z†—zʜÒÀÊS:¨†Í:ÊĨg—^†—zÊ d£®˜ÊJ††œ—ʆ—ÊÑßßx®Ê5gÊgÚ¨gSÍÊ͜ÊSœ—͆—ÒgÊ̓†ÄÊ ÄÍ:JgʏgØgÊœsÊd£®£ÊJ††œ—ʆ—ÊÑßßÇ[ÊsÀœ”Ê:ʨg:ŽÊœsÊ 5gʔ:†—Í:†—g^ʜÒÀÊS:¨†Í:ÊgÚ¨g—^†ÍÒÀgÄÊ:ÍÊ:Ê b^aa^dch id8Vh];adl 8Ve^iVa:meZcY^ijgZBVcV\ZbZci8dcig^WjiZh Sœ””†Í”g—ÍÊ͜Êg—ƒ:—S†—zÊă:Àgƒœ^gÀÊÀgÍÒÀ—®Ê .ƒ†ÄÊÄÒJÄÍ:—͆:Ê†—SÀg:ÄgÊÀgsgSÍÄʜÒÀÊSœ—͆—Òg^Ê ÑßßlÊ^†Ø†^g—^ÊJÛʣ߮ÈʨgÀSg—Í[Ê͜Êd®xÇʨgÀÊă:Àg®Ê ÀgÄҏÍÄÊg—:Jg^ÊÒÄÊ͜ʆ—SÀg:ÄgÊ̓gÊs†ÀÄÍ µÒ:ÀÍgÀÊ †—SÀg:Ägʆ—Ê:——Ò:Ê^†Ø†^g—^Ä®Ê!ÒÀÊÄÍÀœ—zÊÑßßÇÊ ¨gÀÊă:Àg®Ê.ƒ†ÄÊSœ—Ä͆ÍÒÍgÄÊ̓gÊxß̓ÊSœ—ÄgSÒ͆ØgÊ †Ø†^g—^Äʨ:†^Ê^ÒÀ†—zÊÑßßÇʆ—SÀg:Äg^Ê͜Êd£®ÇßÊ YdaaVgh 9^k^YZcYhEV^YEZgH]VgZ8dci^cjZid

December 31 31 December 2007 2006 ...... nancial statements. nancial t (Note 12) ...... 12) t (Note (Notes 7 and 9) t trust ...... t trust

......

Sundry 8). (Note ...... Accrued retirement benefi retirement Accrued Long-term income ...... taxes payable 11) (Note Other noncurrent ...... liabilities 8) (Note Deferred income taxes (Note 11) ...... Deferred income taxes 11) (Note Goodwill and other intangibles—net 3) (Note ...... current Total liabilities ...... Other Liabilities ...... Long-term debt 6) (Note AssetsOther Prepaid pension 12) (Note ...... Investments 5) (Note Dividends...... payable Income taxes payable (Note 11) ...... Income taxes payable 11) (Note Other current liabilities...... 8) (Note Prepaid expenses...... current Total assets Sales rebates and discounts...... Inventories ...... Inventories Deferred income taxes (Note 11) ...... Deferred income taxes 11) (Note Employee benefi Employee Retained earnings ...... Retained earnings Employee compensation...... Other receivables ...... 8) (Note shares Less cost of common stock in treasury 2007—899,445 2006—909,573 shares...... Additional paid-in...... capital ...... Deferred costs—ESOP ...... See notes to consolidated fi Liabilities and Shareholders’Liabilities Equity and Current Liabilities Short-term borrowings and current maturities of long-term debt . 6) (Note . . Accounts payable...... Commitments and contingencies 13) (Note Equity Shareholders’ Common stock—no par value 3,200,000,000 shares: Authorized Issued (2007) shares: 1,135,212,894 and (2006). 1,132,578,231 ...... Property and Equipment, net Short-term investments...... Accounts receivable, net of allowances (2007) of $103.1 and $82.5(2006). . . Assets Current Assets Cash and cash equivalents...... Consolidated Balance Sheets Balance Consolidated ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions)

Accumulated other comprehensive income (loss) 14). (Note ......

FINANCIALS See notes to consolidated fi toconsolidated notes See . Year of End at Equivalents Cash and Cash ahadcs qiaet tbgnigo er . . ofyear beginning at equivalents cash and Cash equivalents cash and in cash . (decrease) increase Net cash on changes rate ofexchange . . Effect ...... Activities Financing for Used Cash Net te,nt Other, . net ucae fcmo tc ...... — 121 (377.9) (122.1) — plans stock under stock ofcommon . Issuances . . stock ofcommon Purchases eamnso ogtr et . debt oflong-term Repayments debt oflong-term . issuance from Proceeds . borrowings ofshort-term repayments Net iied ad paid . . Dividends Flows FromCash Financing Activities Activities Investing for) by (Used Provided Net Cash Other, . . net acquired ofcash net . acquisitions, for paid Cash conspybeadohrlaiiisices dces).. . (decrease) liabilities—increase other and payable Accounts . assets—increase Other netre—ices)dces...... decrease. Inventories—(increase) . decrease Receivables—(increase) ofacquisitions net liabilities, and assets inoperating Changes ucae fpoet n qimn ...... equipment and . ofproperty Purchases From Flows Activities Cash Investing Activities by Provided Net Operating Cash 20 2005 2006 2007 31 December Ended Year income Net . Flows FromCash Activities Operating millions) in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Consolidated StatementsofCashFlows ucae fi-rcs eerhaddvlpet development and research . ofin-process Purchases investments . ofnoncurrent Purchases rcesfo ae n auiiso ocretivsmns . investments ofnoncurrent maturities and sales from Proceeds Net (repayments) proceeds of short-term investments investments ofshort-term . proceeds (repayments) Net ipsl fpoet n qimn . equipment and ofproperty Disposals tc-ae opnainepne . expense compensation Stock-based . taxes indeferred Change . amortization and Depreciation From Activities Operating To Flows Income Net Cash To Reconcile Adjustments Other, net oftax . net . . charges, special other and restructuring, impairments, Asset oftax net . development, and research in-process Acquired . . . nancial statements. . .

271.5 17.0)

$3,220.5 $2,953.0 (4,328.1) (2,673.2) (1,853.6) (1,082.4) (1,059.5) 5, 2,512.6 5,154.5 1,047.9 3,109.3 (844.9) (842.7) (468.5) (750.7) (355.8) (376.9) (166.3) (111.0) (1 800.1 282.0 154.3 692.6 122.9 927.2 181.5 129.7 111.2 24.7 32.3 (0.6) (8.4) 1577 545.1 1,507.7 346.8 346.8 (347.5) 801.8 726.4 97.1 (175.8) 59.6 105.9 $3,109.3 $3,006.7 4,771.2 3,860.7 3959 1,913.6 3,975.9 $,6. $1,979.6 $2,662.7 — 3,000.0 359.3 403.5 797.4 1,128.7 3,006.7 5,365.3 3,006.7 — — — 102.6 102.6 (2,358.6) (60.2) 72.1 (60.2) 6. 11.1 65.2 (936.0) (936.0) (1,463.4) 608.4 608.4 (2,215.9) (4,578.8) (1,880.5) (4,578.8) 1275 62.7 1,247.5 243.9 (286.4) 243.9 (1,313.2) (1,183.1) (1,313.2) 9.9 9.9 39.8 (1,736.3) (1,654.9) (1,736.3) — — — (795.3) (795.3) (1,947.1) (2,781.5) (1,004.7) (2,781.5) (8.4) (8.4) (1,988.7) (43.0) (43.0) (269.4) 179.0 (353.6) (1,077.8) (1,298.1) (1,077.8) (9.) (30.0) (196.8) — — — FINANCIALS 21 ows, nancial condition, nancial (18.8) (18.8) (87.8) (3.2) 0.3 (43.1) (43.1) 63.4 143.3 (81.7) — — 542.4 (533.4) 542.4 $2,662.7 $2,662.7 $1,979.6 663.7 (702.6) 663.7 (639.2) 620.6 $3,283.3 $1,340.4 $3,283.3 (0.1) nancial instruments outstanding at (11.4) 943.8 756.6 (287.0) 1,401.9 1,688.9 $2,953.0 $4,354.9 nancial condition, revenues or expenses, uctuations on the existing assets, liabilities, ect the impact of the exchange gains or losses changes in fi results of operations, liquidity, capital expenditures, or capital resources. acquire We and partner assets still in development and enter into research and development arrangements with third parties that often require mile- stone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone pay- ments may be required contingent upon the successful achievement of an important point in the development life cycle of the pharmaceutical product (e.g., approval of the product for marketing by the appropriate regula- tory agency or upon the achievement of certain sales Off-Balance Sheet Arrangements and Contractual Obligations haveWe no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our fi hedge coverage of such exposures. Gains and losses on these derivative positions offset, in part, the impact of currency fl commitments, and anticipated revenues. Consider- ing our derivative fi 2007December31, and 2006, a hypothetical percent 10 change in exchange rates (primarily against the U.S. dollar) as of December 2007 31, and 2006, respectively, would have no material impact on earnings, cash fl or fair values of foreign currency rate risk-sensitive instruments over a one-year period. These calculations do not refl on the underlying positions that would be offset, in part, by the results of the derivative instruments. t xed uctuations uctuated from the ow hedges...... nancial statements. nancial t pension and retireehealth benefi ows, or fair values of interest rate risk- ned benefi ned oating rate debt positions andmay enter into Our primary interest rate risk exposure results Our foreign currency risk exposure results from uctuating currency exchange rates, primarily the U.S. nancial instruments. The objective of controlling these Effective portion of cash fl Other comprehensive income (loss) before ...... income taxes Provision for income taxes relatedother to comprehensive ...... income (loss) items Other ...... comprehensive income (loss) 14) (Note Comprehensive income...... plans 12) (Note portion of these risks through a controlled program of risk management that includes the use of derivative fi risks is to limit the impact on earnings of fl in interest and currency exchange rates. All derivative activities are for purposes other than trading. 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 and fl interest rate derivatives to help maintain that balance. Based on our overall interest rate exposure at Decem- 2007ber 31, and 2006, including derivatives and other interest rate risk-sensitive instruments, a hypothetical percent10 change in interest rates applied to the fair value of the instruments as of December 2007 31, and 2006, respectively, would have no material impact on earnings, cash fl sensitive instruments over a one-year period. Minimum pension liabilityadjustment 12) (Note Defi ...... — See notes to consolidated fi Other comprehensive income (loss) Foreign currency translation ...... gains (losses) Net unrealized gains (losses) on securities...... Netincome ...... Consolidated Statements of Comprehensive Income of Comprehensive Statements Consolidated ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions) Year Ended December 31 2007 2006 2005 dollar against the euro and the Japanese yen, and the British pound against the euro. face We transactional currency exposures that arise when we enter into transactions, generally on an intercompany basis, de- nominated in currencies other than the local currency. alsoWe face currency exposure that arises from trans- lating the results of our global operations to the U.S. dollar at exchange rates that have fl fl beginning of the period. use We forward contracts and purchased options to manage our foreign currency ex- posures. Our policy outlines the minimum and maximum FINANCIALS Purchase obligations Purchase Other generate cash fl cash generate to likely more is or generating now is and development through moving successfully is product the that signify they because positive as payments these view we tive, perspec- abusiness from that, note We also objectives. testing clinical achieves successfully compound the if development tocease unlikely are however, we ments; pay- contingent the making toavoid us allow would which product, ofthe development terminate laterally touni- discretion the us give often arrangements these Inaddition, high. very is indevelopment products for rate occur, will failure this the that as unlikely it makes development inpharmaceutical risk inherent The period. one inany ofoperations results tothe material be could toexpense charge aggregate the period, ing report- same inthe reached tobe happen would ments arrange- these by covered products multiple for stones However, mile- if period. reporting annual one in any modifi or minated, ter- completed, are contracts existing and initiated are contracts new as time over materially tochange expected oa...... 1,3. $,7. $,5. $,9. $8,012.0 $1,392.1 $1,156.8 $5,476.6 $16,037.5 . Total. 22 5Years obligations. ofcontractual table inthe included not are they payments, ofthese nature contingent of the Because obtained. is marketing for approval regulatory Years that event inthe product pharmaceutical ofthe sales ofthe apercentage upon based payments make royalty to have may we arrangement, the by required If levels). Years 1Year 4 3 Total 2 1 payments interest including debt, Long-term (in millions): follows as are payments cash future require will that obligations contractual noncancelable current Our Operating leases ...... 305.4 305.4 72.5 leases . Operating . obligations. lease Capital refl liabilities long-term Other not be made regarding the timing of future cash outfl ows associated with those liabilities. liabilities. those with outfl cash associated ows future of timing the could regarding made be estimates not reasonable as excluded benefi are tax $1.57 billion of ts unrecognized for Liabilities liabilities. compensation deferred debt instruments and swaps. and variab the on instruments interest for debt obligation contractual the of amount the compute to 31, 2007 December at curve forward rate interest Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. Weuse swaps. rate interest our and obligations interest and principal expected our both include obligations debt long-term Our This category comprises primarily minimum pension funding requirements. requirements. funding pension minimum primarily comprises category This We have included our long-term liabilities consisting primarily of our nonqualifi our of primarily consisting liabilities long-term our included We have We have included the following: the included We have • Contractual payment obligations with each of our signifi cant vendors, which are noncancelable and are not contingent. not are and noncancelable are which signifi our of each vendors, cant with obligations payment • Contractual signifi our at orders purchase open all of primarily consisting obligations, • Purchase Individually, these arrangements are not material material not are arrangements these Individually, be can obligations ofthese 31, amount 2007. The ofDecember as current is table obligations contractual The 2007. Some of these purchase orders may be cancelable; however, for purposes of this disclosure, we have not distinguished obligations. purchase and noncancelable cancelable between distinguished not have we disclosure, this of purposes for however, cancelable; be may orders purchase these of Some 2007. 4 ected on our balance sheet balance our on ected ...... 146.3 146.3 146.3 146.3 . 1 ...... 9523 656 524 1007 $7,413.6 $1,000.7 $522.4 $645.6 $9,582.3 . ows from sales ofproducts. sales from ows ed. 2 ...... 5,101.7 4,575.5 330.3 330.3 4,575.5 5,101.7 . 3 . . 829.3 829.3 . esTa – 35 More Than 3–5 1–3 Period by Due Payments Than Less In preparing our fi our In preparing APPLICATION POLICIES ACCOUNTING OF CRITICAL assumes the risks and rewards of ownership. For more more For ofownership. rewards and risks the assumes tim the at ofproducts sales from revenue We recognize Ac Discount and Rebate Sales and Recognition Revenue below. described are and committee audit our with discussed been have policies accounting critical most Our report. inthis presented periods the for liquidity or fi ofoperations, results consolidated our on effect adverse amaterial cause would judgment reasonable other such any applying that unlikely is it circumstances, and facts current given that, believe We estimates. different develop could circumstances and facts same tothe judgment reasonable applying people other that possible is it make, we sumption as- or estimate individual given any For estimates. those from differ could results actual consequently and complex, and subjective be can judgments those of Some disclosures. related and expenses, revenues, liabilities, ofassets, amounts reported the affect that assumptions and estimates make often must we (GAAP), principles accounting accepted generally with cruals 37 129.5 93.7 e title of goods passes to the buyer and the buyer buyer the and buyer tothe passes ofgoods e title 15.5 — ed supplemental pension funding requirements and and requirements funding pension supplemental ed cant operating locations as of December 31, December of as locations operating cant

nancial statements in accordance inaccordance statements nancial 154.3 154.3 20.3 20.3 — nancial position, nancial position, 5. 515.3 159.7 4. 46.2 149.7 62 6.0 76.2 — . 30.9 5.8 le rate d the d the — FINANCIALS - 23 cit cit 2006 cits,is (1,242.2) 1,246.1 1,314.1 $ 379.4 $ 383.3 $ $ 383.3 $ 468.8 $ (1,228.6) cant U.S. rebate and discount ective of the actual pharmaceuti- cit, we adjust our rebate reserves...... 1 We believeWe that our accruals for sales rebates and Approximately 75 percent and 85 percent of our Most of our rebates outside the U.S. are contractual Adjustments of the estimates for these rebates and discounts to actual results were less than 0.3 percent of net sales for each of the years presented. Cash payments discounts of Rebate and discount liability, and rebates ...... end of year 1 2007 2007 Rebate and discount liability, beginning of year...... determining the appropriate accrual amount, we consid- er our historical Medicaid rebate payments by product as a percentage of our historical sales as well as any signifi cant changes in sales trends, an evaluation of the current Medicaid rebate laws and interpretations, the percent- age of our products that are sold to Medicaid recipients, and our product pricing and current rebate/discount contracts. Although we accrue a liability for Medicaid rebates at the time we record the sale (when the prod- uct is shipped), the Medicaid rebate related to that sale is typically paid up to six Due months to the time later. lag, in any particular period our rebate adjustments may incorporate revisions of accruals for several periods. Reduction of net sales rebates due to discounts and or legislatively mandated and are estimated and recog- nized in the same period as the related sales. In some large European countries, government rebates are based on the anticipated pharmaceutical budget defi in the country. A best estimate of these rebates, updated as governmental authorities revise budgeted defi recognized in the same period as the related sale. If our estimates are not refl cal budget defi discounts are reasonable and appropriate based on current facts and circumstances. Federally mandated Medicaid rebate and state pharmaceutical assistance programs (Medicaid) and Medicare rebates reduced sales by $642.1 million, million, $571.7 mil- and $637.1 lion in 2007, 2006, and2005, respectively. A 5 percent change in the Medicaid and Medicare rebate amounts we recognized in 2007 would lead to an approximate $32 million effect on our income before income taxes. As of December 2007, our Medicaid 31, and Medicare rebate liability was $308.8 million. global rebate and discount liability resulted from sales of our products in the U.S. as of December 2007 31, and 2006, respectively. The following represents a roll-for- ward of our most signifi liability balances, including Medicaid millions): (in cantly as a percent of sales. ed structure eliminates the incentive for specula- We regularlyWe review the supply levels of our sig- As a result of restructuring our arrangements with establishWe sales rebate and discount accruals in The largest of our sales rebate/discount amounts cant products sold to major wholesalers in the U.S. uctuated signifi uctuated nifi and major in 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 of unusual wholesaler buying patterns include actual or anticipated product supply issues, weather patterns, anticipated changes in the transportation network, redundant holiday stocking, and changes in wholesaler business operations. An unusual buying pattern com- pared with underlying demand of our products outside the U.S. couldalso be the result of speculative buying by wholesalers in anticipation of price increases. When we believe wholesaler purchasing patterns have caused an unusual increase or decrease in the sales of a major product compared with underlying demand,we dis- close this in our product sales discussion if the amount is believed to be material to the product sales trend; wehowever, are not always able to accurately quantify the amount of stocking or destocking. our U.S. wholesalers in early 2005, reductions occurred in wholesaler inventory levels for certain products (primarily Strattera, Prozac, and Gemzar) that reduced our 2005 sales by approximately million. $170 The modifi tive wholesaler buying and provides us improved data on inventory levels at our U.S. wholesalers. Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of actual prod- uct returns, which have been approximately 1 percent of our net sales over the past three years and have not fl the same period as the related sales. The rebate/dis- count amounts are recorded as a deduction to arrive at our net sales. Sales rebates/discounts that require the use of judgment in the establishment of the accrual in- clude Medicaid, managed care, Medicare, chargebacks, long-term-care, hospital, patient assistance programs, and various other government programs. base We these accruals primarily upon our historical rebate/dis- count payments made to our customer segment groups and the provisions of current rebate/discount contracts. are rebates associated with sales covered by Medicaid. In than 90 percent of our sales, this is at the time prod- ucts are shipped typically to the customer, wholesale a distributor ora major retail chain. The remaining sales are recorded at the point of delivery. Provisions for dis- counts and rebates are established in the same period the related sales are recorded. FINANCIALS views of leading fi ofleading views the and investments); growth are ofwhich percent to 95 percent 85 (approximately allocations asset and ditions con- market ofcurrent analysis an results; actual with compared assumptions historical our companies; other of rates trend health-care-cost the and assets plan on return expected rates, discount ofthe evaluation an ing includ- factors, many consider we assumptions, these benefi health retiree and pension 24 defi inour assets plan on return expected benefi retirement our regarding information fi consolidated to the 12 Note see below, analysis tothe Inaddition reported. asignifi have assumptions These rates. trend health-care-cost and assets, plan on return expected age, retirement rate, discount the for assumptions include costs plan medical Retiree assets. plan on return expected and age, retirement rate, count Pension benefi Assumptions Plan Medical Retiree and Pension circumstances. and facts current on based appropriate are contingencies other and abilities li- litigation product for established have we recoveries sheets. balance consolidated our on respectively, been refl have recoverables insurance estimated related the and collection. for oftime length the and fi the company, insurance the by ofcoverage denial for potential the exclusions, and limits coverage policy the consider we coverage, insurance our Inassessing ance. insur- by covered periods for exposure the to diminish estimable. and reasonably probable when contingencies signifi with inconnection incurred tobe expected costs defense legal We accrue usage. product regarding data and experience claims historical on primarily based expenses these We estimate costs. oftheir estimate areasonable formulate can we extent fi not but incurred, claims liability product certain for accrue we any. if Inaddition, discussions, ofsettlement state current and ofsettlement likelihood the and litigation, tothe subject science ofthe sessment as- current the and product ofthe nature the cases, litigation past and current similar ofother number the and nature the litigation, ofthe jurisdiction and merits the include amounts liability contingent other and reserves liability litigation product our in developing consider we factors The probabilities. and judgments b are, contingencies other and liabilities litigation Product Litigation LiabilitiesandProduct Contingencies Other nancial position of the insurers, and the possibility of possibility the and insurers, ofthe position nancial y their nature, uncertain and are based upon complex complex upon based are and uncertain nature, y their Periodically, we evaluate the discount rate and the the and rate discount the evaluate we Periodically, insurance related and accruals the that We believe liabilities environmental and accruals litigation The have we coverage insurance the consider We also ected on a gross basis as liabilities and assets, assets, and liabilities as basis agross on ected

t costs include assumptions for the dis- the for assumptions include t costs nancial advisers and economists. We economists. and advisers nancial nancial statements for additional additional for statements nancial cant effect on the amounts amounts the on effect cant t plans. In evaluating Inevaluating t plans. cant product liability liability product cant ned benefi led, to the tothe led, ts. t of total plan assets at December 31, 2007. December at assets plan of total benefi tirement postre- accumulated total ofthe percent 80 proximately ap- represent plans U.S. The million. $31 approximately by affected be would taxes income before income our year, one by adjusted were plans U.S. for retirees future of age expected 2007 the regarding assumption our If $14 million. approximately by change would taxes income before income point, percentage aquarter by changed tobe were plans U.S. for assets plan on return expected 2007 the If million. $32 approximately by change would taxes income before income point, percentage a quarter health benefi tions of future retirement ages. benefi medical and sion pen- for eligible employees past ofour ages retirement the consider we assumption, age retirement expected our Inevaluating rate. discount the todetermine curve company-specifi determined, actuarially an use We recognize the tax benefi tax the We recognize systems. court tax jurisdictions’ various the through ed and/or regulation as conclud- legislation, from resulting law intax tochanges due positions tax ofmany timates ines- exist uncertainties Inherent authorities. these by assessments penalty and interest, tax, infuture result may which authorities, taxing various by to examination subject are returns tax our ofbusiness, course normal Inthe interpretations. and judgments these on based estimates record and regulations and laws oftax tion fi and We prepare Income Taxes estimates. these from vary could results Actual judgment. management’s require projections, and fl cash future estimated The adjusted. is basis cost the and value, fair its over value book net asset’s ofthe excess the identifi is animpairment If fl cash undiscounted projected comparing by determined is Impairment recoverable. be not may asset ofan value carrying the indicate incircumstances changes or events whenever and basis aperiodic on impairment potential for assets oflong-lived value carrying the We review Assets Long-lived of Impairment rate for the U.S. defi U.S. the for rate discount 2007 the If million. $23 approximately by cost interest and cost service 2007 ofthe aggregate the lower would decrease Aone-percentage-point million. $28 approximately by increase would expense annual 2007 ofthe components cost interest and cost service of the year, aggregate the future each point percentage one by increased tobe were rates trend health-care-cost the If factors. above the upon based appropriate are sumptions ows, based on reasonable and supportable assumptions assumptions supportable and reasonable on based ows, value. carrying toits asset the by generated tobe ows We believe our pension and retiree medical plan as- plan medical retiree and pension our We believe t plans (U.S. plans) were to be changed by by changed tobe were plans) (U.S. t plans t obligation and approximately 83 percent percent 83 approximately and t obligation le tax returns based on our interpreta- our on based returns tax le ned benefi ts together with our expecta- our with together ts ed, a loss is recorded equal to equal recorded is aloss ed, t from an uncertain tax posi- tax uncertain an t from t pension and retiree retiree and t pension c yield c yield FINANCIALS 25 seeking cant of these are nancial position or liquidity, but could cally noted below, the resolution of all such Actual results could differ materially and will ent investigations. The most signifi rs brought pursuant to procedures set out in the Barr Laboratories, Inc. (Barr), submitted an Abbreviated an Abbreviated Inc. (Barr), submitted Barr Laboratories, in 2002 (ANDA) Drug Application New permission to market a generic version of Evista prior of Evista a generic version market to permission (expiring U.S. patents of our relevant the expiration to are that these patents in 2012-2017) and alleging or not infringed. In November not enforceable, invalid, Barr in the U.S. District a lawsuit against led fi 2002, we of Indiana, seeking a the Southern District Court for and enforceable, valid, are ruling that these patents an has also submitted Teva being infringed by Barr. 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 is currently Teva of Indiana. The lawsuit against District no 9, 2009, while trial beginning March for scheduled Barr. has been set in the lawsuit against trial date for invasive breast cancer risk reduction, Humalog, and Byetta, offset by decreases in other areas. Research and development expenses are expected to grow in the high- single to low-double digits. Other income—net is expected contribute to less million. than $100 The effective tax rate is expected to be approximately 23 percent.ex- We pect capital expenditures billion. of approximately $1.1 Hatch-Waxman Act (the Drug Price Competition and Patent Restoration Term Act of 1984): • described below. While it is not possible to determine the outcome of these matters, we believe that, except specifi as matters will not have a material adverse effect on our consolidated fi possibly be material to our consolidated results of operations in any one accounting period. Patent Litigation areWe engaged in the following patent litigation mat- te depend on, among other things, the continuing growth of our currently marketed products; developments with competitive products; the timing and scope of regula- tory approvals and the successof our new product launches; asset impairments, restructurings, and acquisitions of compounds under development result- ing in acquired in-process research and development charges; foreign exchange rates; changes in effec- tive tax rates; wholesaler inventory changes; other regulatory developments, litigation, and government investigations; and the impact of governmental actions regarding pricing, importation, and reimbursement for pharmaceuticals. undertake We no duty to update these forward-looking statements. LEGAL AND REGULATORY MATTERS areWe a party to various legal actions and govern- m statementsnancial from ts in income tax expense. ts is adjusted for changes in cient to pay assessments that cant amendments to existing tax ts recognized in the fi t that has a greater than 50 percent likelihood of We haveWe recorded valuation allowances against believeWe that our estimates for the uncertain tax For the full year of 2008, we expect earnings per share to be in the range of $3.80 to $3.95. This guidance includes the anticipated acquired in-process research and devel- opment charges of $.05 related to the BioMS in-licens- ing agreement. expect We sales to grow in the mid-to high-single digits, driven primarily by increased volume and strong sales growth for Cymbalta, Cialis, Byetta, Alimta, and Humalog. expect We modest improvement in gross margin as a percent of net sales, driven primar- ily by manufacturing expenses growing more slowly than sales. In addition, we expect operating expensesto grow more slowly than sales in 2008, with growth in the mid-single digits. Marketing, selling, and administrative expenses are expected to grow in the low-single digits, driven by investments in prasugrel, Cymbalta, Evista law and the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We believe that our estimates for uncertain tax positions are appropriate and suffi such a positionare measured based on the largest benefi being realized upon ultimate resolution. Theamount of unrecognized tax benefi facts and circumstances. For example, adjustments could result from signifi may result from examinations of our tax returns. We recognize both accrued interest and penalties related unrecognizedto tax benefi tion only if it is more likely than not that the tax position will be sustained on examination by the taxing authori- ties, based on the technical merits of the position. The tax benefi FINANCIAL EXPECTATIONS FOR 2008 FOR EXPECTATIONS FINANCIAL certain of our deferred tax assets, primarily those that have been generated from net operating losses in certain taxing jurisdictions. In evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed any future taxable income or tax planning strategies in the jurisdictions associ- ated with these carryforwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense. positions and valuation allowances against the deferred tax assets are appropriate based on current facts and circumstances. A 5 percent changein the amount of the uncertain tax positions and the valuation allowance would result in a change in net income of approximately $78 million and $26 million, respectively. FINANCIALS 26 • Actavis ElizabethLLC (Actavis), Glenmark• Pharma- Sicor Pharmaceuticals, Inc.(Sicor), MaynePharma • Apotex, Aurobindo, Synthon, andZydusasdefendants. lawsuit to addGlenmark, Sun,Sandoz, Mylan,Teva, 2007, we amendedthecomplaint intheNew Jersey court, butitscase hasbeendismissed. In September Sandoz filed adeclaratory judgment actioninthesame Court for theDistrict ofNew Jersey inAugust 2007. a lawsuitagainst Actavis intheUnited States District 2017), andalleging thatthispatent isinvalid. We fi expiration ofourrelevant U.S.patent (expiring in to market genericversions ofStrattera priorto the (Zydus) eachsubmitted anANDA seekingpermission (Synthon), andZydusPharmaceuticals, USA,Inc. Pharma Ltd.(Aurobindo), SynthonLaboratories, Inc. USA, Inc.(Teva), Apotex Inc.(Apotex), Aurobindo Pharmaceuticals Inc.(Mylan),Teva Pharmaceuticals Industries Limited (Sun),Sandoz Inc.(Sandoz),Mylan ceuticals Inc., USA(Glenmark), SunPharmaceutical liquidity, andfi impact onourconsolidated results ofoperations, unfavorable outcome could have amaterial adverse can provide noassurance thatwe willprevail. An the outcome ofthislitigation,andaccordingly, we without merit.However, itisnotpossible to determine in thislitigationandbelieve thattheseclaimsare Mayne for anew dosagestrength. We expect to prevail against Mayneinresponse to asecond ANDA fi action. InJanuary2008,we filed asecond lawsuit has now beenaddedto thedeclaratory judgment also challenging ourcompound patent, andthatpatent product. Suninformed usinDecember 2007thatitis or would notbeinfringedbythesale ofSun’s generic our method-of-usepatent isinvalid orunenforceable, the Eastern District ofMichigan,seekingarulingthat judgment actionintheUnited States District Courtfor court. AlsoinNovember 2007,Sunfiled adeclaratory Mayne wasstayed andadministratively closed bythe infringed. InNovember 2007,thelawsuitagainst rulings thatthesepatents are valid andare being (February 2006)andMayne(October 2006),seeking for theSouthernDistrict ofIndianaagainst Sicor invalid. We filed lawsuitsintheU.S.District Court expiring in2013),andalleging thatthesepatents are patent expiring in2010andmethod-of-use patent expiration ofourrelevant U.S.patents (compound to market genericversions ofGemzarpriorto the Inc. (Sun)eachsubmitted ANDAs seekingpermission (USA) Inc.(Mayne),andSunPharmaceutical Industries of operations, liquidity,andfi material adverse impactonourconsolidated results we willprevail. Anunfavorable outcome could have a and accordingly, we can provide noassurance that possible to determine theoutcome ofthislitigation, merit andwe expect to prevail. However, itisnot We believe thatBarr’s andTeva’s claimsare without nancial position. nancial position. led by led basis. We cannot determine the outcome of this litiga- ofthis outcome the determine We cannot basis. acountry-by-country on patents Zyprexa toour lenges We have received• challenges inanumberofother In Germany,genericpharmaceutical manufacturers• In Canada,several genericpharmaceutical • U.S.: the outside ofcountries a number has tentatively beensetfor July 2008. from genericmanufacturers. IntheU.K.,atrialdate challenge, butwe anticipate furtherlegal challenges court levels indefeating thegenericmanufacturers’ have beensuccessful atboththetrialandappellate and several smaller European countries. InSpain,we countries, includingSpain,theUnited Kingdom(U.K.), quarter of2007. was launchedbycompetitors inGermanythefourth We are appealingthedecision.Genericolanzapine Federal Patent Courtheldthatourpatent isinvalid. patents (expiring in2011).InJune2007,theGerman validity ofourZyprexa compound andmethod-of-use Egis-Gyogyszergyar and NeolabsLtd.challenged the our favor inFebruary 2007.Apotex willlikely appeal. use patents (expiring in2011).Thetrialcourt ruled in the invalidity ofourZyprexa compound andmethod-of- 2007, Apotex filed anactionseekingadeclaration of infringement. Theappealwasdismissed. InNovember that decisionandsuedNovopharm for patent Canada inthethird quarter of2007.We have appealed Novopharm begansellinggenericolanzapinein marketing approval for genericolanzapineinCanada. request thatNovopharm beprohibited from receiving Ltd. (Novopharm), were justified anddeniedour allegations ofasecond challenger, Novopharm the CanadianFederal Courtheldthattheinvalidity and Apotex hasappealed thatruling.InJune2007, ruled against thefirst challenger, Apotex Inc.(Apotex), in 2011).InApril2007,theCanadianFederal Court Zyprexa compound andmethod-of-usepatent (expiring manufacturers have challenged thevalidity ofour liquidity, andfi impact onourconsolidated results ofoperations, unfavorable outcome could have amaterial adverse can provide noassurance thatwe willprevail. An the outcome ofthislitigation, andaccordingly, we merit. However, itisnotpossible to determine litigation andbelieve thattheseclaimsare without a permanentinjunction.We expect to prevail inthis validity andenforceability ofthepatent andagreed to of aconsent judgmentinwhichZydusconceded the New Jersey. InDecember 2007,Zydusagreed to entry Synthon hasfiled amotionto dismiss ourlawsuitin States District Courtfor theEastern District ofVirginia. fi We We are vigorously contesting the various legal chal- legal various the contesting vigorously We are in patents toZyprexa challenges received We have led asecond actionagainst SynthonintheUnited nancial position. FINANCIALS 27 t con- nes ce seeking pro- nes, penalties, or nancial position. We ttorneys general. We These attorneys general are , Evista, Humalog, Humulin, ® In June 2005, we received a subpoena from the In September 2006, we received a subpoena from In February 2007, we received a subpoena from the Beginning August in 2006, we have received civil We areWe cooperating in each of these investigations, ce of the Attorney General, Medicaid FraudControl ce of the Attorney General of the State of Illinois, are aware that approximately 30 states are participating in this joint effort, and it is possible that additional states will join the investigation. investigative demands or subpoenas from the attorneys general of a number of states under various state Prozac, and Zyprexa. The inquiryincludes a review of ourMedicaid best price reporting related to the product sales covered by the rebate agreements. Offi Unit, of the State of Florida, seeking production of docu- ments relating to sales of Zyprexa and our marketing and promotional practices with respectto Zyprexa. the California Attorney General’s Offi duction of documents related to our efforts obtain to and maintain Zyprexa’s status on California’s formulary, marketing and promotional practices with respect to Zyprexa, and remuneration of health care providers. Offi seeking production of documents and information relat- ing sales to of Zyprexa and our marketing and promo- tional practices, including our communications with physicians and remuneration of physician consultants and advisors, with respect to Zyprexa. sumer protection laws. Most of these requests are now part of a multistate investigative effort being coordinat- ed by an executive committee of a seeking a broad range of Zyprexa documents, including documents relating to sales, marketing and promotion- al practices, and remuneration of health care providers. In addition, we have been named as a defendant in a pri- vate suit in California State Court, which was removed to federal court, alleging violations of the California False Claims Act with respect to certain Zyprexa mar- andketing promotional practices. This suit was brought by an individual on behalf of the government, under the qui tam provision of the California False Claims Act. including providing a broad range of documents and information relating to the investigations. It is pos- sible that other Lilly products could become subject to investigation and that the outcome of these matters could include criminal charges and fi other monetary or nonmonetary remedies. cannot We determine the outcome of these matters or reasonably estimate the amount or range of amounts of any fi or penalties that might result from an adverse outcome. It is possible, that an however, adverse outcome could have a material adverse impact on our consolidatedre- sults of operations, liquidity, and fi manager covering Axid is also conducting an inquiry regarding certain rebate agreements we entered into with a pharmacy benefi and Evista, ® nal judgment indicating that ce (USPTO) commenced a re- ce of the U.S. Attorney for the nding damages in the amount of $65 million plus a In June 2002, Ariad Pharmaceuticals, Inc., the Eastern District of Pennsylvania (EDPA) advised us that it had 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 November Weekly. 2007, we received a grand jury subpoena from the for EDPA a broad range of documents related to Zyprexa. A number of State Medicaid Fraud Control Units are coordinat- ing with the in its EDPA investigation of any Medicaid- related claims relating to our marketing and promotion of Zyprexa. In October 2005, the advised EDPA that it Massachusetts Institute the Whitehead of Technology, Institute for Biomedical Research, and the President and Fellows of Harvard College the in U.S. District Court for the District of Massachusetts sued us, alleg- ing that sales of two of our products, Xigris tion. The availability of generic olanzapine in Canada and Germany will have a material adverse impact on our consolidated results of operations. The availability of generic olanzapine in additional markets could have a material adverse impact on our consolidated results of operations. Government Investigations Related and Litigation In March 2004, the Offi 2.3 percent royalty on net U.S. sales of Xigris and Evista since the time of the jury decision. the Court However, deferred the requirement to pay any damages until after all rights to appeal have been exhausted. planWe to appeal this judgment. 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. Ariad’s claims are patentable, valid, and enforceable, and fi 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 the patent through the date of trial. In addition, a separate bench trial with the U.S. District Court of Mas- sachusetts was held in August 2006, on our contention that the patent is unenforceable and impermissiblycov- ers natural processes. In June 2005, the United States Patent and Trademark Offi examination 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. In September 2007, the Court entered a fi FINANCIALS has been certifi been has lawsuits four ofthese One Zyprexa. took who patients of behalf on inCanada status action class seeking plaintiffs. U.S. ofthe several for York, ofNew District Eastern inthe 2008, 23, June for set been have Trial dates plaintiffs. 1,235 approximately covering U.S. inthe lawsuits 325 approximately include agreements tothese subject not claims liability product Zyprexa U.S. The claims. remaining inall of Zyprexa 2007. during paid were settlements 2007 January The 2005. during paid follows: as were settlements primary two previously fi of number alarge including claimants, 31,200 mately ofapproxi- atotal cover agreements The claims. of the majority asubstantial tosettle litigation liability product 28 York1596). (MDL No. New of District Eastern the for Court District Federal in the Weinstein Jack Honorable The before proceeding (MDL) Litigation ofaMulti-District 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 cuse ac- 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 ries ofinju- avariety “claims”) allege the (together claims fi not have who als notifi been have and ofindividu- claims other ofmany ed of Zy number inalarge adefendant as named been We have Litigation Related and Liability Product laws and regulations. applicable with comply reporting price best Medicaid and arrangements, care managed professionals, care ofhealth remuneration communications, physician es, practic- promotional and marketing our that to ensure designed activities compliance-related comprehensive includes that program compliance based a broadly enhance and toreview continue and implemented have with various claimants’ attorneys involved in U.S. Zyp inU.S. involved attorneys claimants’ various with • In January2007,we reached agreements• witha In June2005,we reached anagreement• inprinciple Since June 2005, we have entered into agreements intoagreements entered have we 2005, June Since In early 2005, we were served with four lawsuits lawsuits four with served were we 2005, In early defense vigorous our tocontinue prepared We are was million $700.0 totaling settlement 2005 The 18,000 claimsfor approximately $500million. number ofplaintiffs’ attorneys to settle more than settlement. $10.0 millionto cover administration ofthe more than8,000claimsfor $690.0millionplus (and inSeptember 2005afinal agreement) to settle prexa product liability lawsuits in the United States States United inthe lawsuits liability product prexa led lawsuits and other asserted claims. The The claims. asserted other and lawsuits led ed for residents of Quebec, and a second asecond and of Quebec, residents for ed led suit. The lawsuits and unfi and lawsuits The suit. led led rexa now been consolidated into a single lawsuit, which is is which lawsuit, intoasingle consolidated been now have actions These Zyprexa. prescribed being patients insured or members their for payments make will or made have which entities, governmental excluding ors, pay- third-party and consumers ofall behalf on actions class nationwide to be York purporting ofNew District 2008. 3, March beginning trial for scheduled is case Alaska The York. ofNew District Eastern in the proceedings MDL ofthe part now are and court tofederal removed been have cases Virginia West and Mexico, New Montana, Mississippi, The states. respective ofthe courts inthe Virginia West and Utah, Carolina, South Pennsylvania, Mexico, New Montana, pi, fi lawsuits similar with served been We have illnesses. Zyprexa-related totreat incur will and incurred has it alleges partment drug-benefi other and Medicaid through Zyprexa for paid it costs the torecover seeks Hospitals and ofHealth Department the actions, Inthese York. ofNew District Eastern in the proceedings MDL ofthe part now are and court federal to removed been have cases These drug. the promoted improperly we that and levels, blood-glucose high or todiabetes contributed or caused Zyprexa that alleging Hospitals, and ofHealth Department Louisiana of the behalf on inLouisiana court instate brought lawsuits following: the covered eries, recov- insurance expected and actual our into account take which charges, net The matters. liability product of$1.61 charges Zyprexa for pretax billion net gregate of2007. end tothe prior tous paid were proceeds insurance ofthe aportion and claims, ance insur- disputed ofthe majority vast the resolving ments settle- reached of2007,we half second Inthe carriers. other against inBermuda inarbitration and carriers ofthe certain against inIndianapolis court federal the in oflitigation subject the was dispute The policies. the torescind seeking are and policies the under liability totheir defenses raised have carriers insurance party third- The exposure. claims liability product Zyprexa U.S. inthe pending litigation inthe tothose similar are actions Canadian inthe allegations The Columbia. British and ofQuebec residents for except residents, certifi been has • Reserves for product• liabilityexposures anddefense The cost oftheZyprexa• product liabilitysettlements In 2005, two lawsuits were fi were lawsuits two In 2005, two with served were we 2004, In December ag- recorded have we of2005, beginning the Since ofour aportion for coverage insurance We have probable numberandcost oftheclaims. we could formulate areasonable estimate ofthe claims andexpected future claimsto theextent costs regarding theknown Zyprexa product liability to date; and t programs, as well as the costs the de- the costs the as well as t programs, ed in Ontario and includes all Canadian Canadian all includes and inOntario ed led by the states of Alaska, Mississip- ofAlaska, states the by led led in the Eastern Eastern inthe led FINANCIALS 29 culties obtaining in product liabil- led with the Securities and Exchange es Litigation Reform Act of 1995, we caution investors 995—A CAUTION CONCERNING FORWARD-LOOKING STATEMENTS Under the safe harbor provisions of the Private Securi- ti that any forward-looking statements or projections made by us, including those made in this document, are based on management’s expectations at the time they are made, butthey are subject to risks and uncertain- ties that may cause actual results to differ materially from projected. those competitive, govern- Economic, mental, technological, legal, and other factors that may affect our operations and prospects are discussed ear- lier in this section and our most recent report on Forms 10-Q and 10-K fi Commission. undertake We no duty to update forward- looking statements. have experienced diffi ity insurance due a very to restrictive insurance market. Therefore, for substantiallyall of our currently mar- keted products, we have been and expect thatwe will continue to be largely self-insured for future product liability losses. In addition, as noted above, there is no assurance that we will be able to fully collect from our insurance carriers on past claims. REFORM ACT OF SECURITIES LITIGATION PRIVATE 1 led in the Eastern District We cannotWe determine with certainty the additional In addition, we have been named as a defendant Because of the nature of pharmaceutical products, nancial position. nancial number of lawsuits and claims that may be asserted. The ultimate resolution of Zyprexaproduct liability and related litigation could have a material adverse impact on our consolidated results operations, of liquidity, and fi brought under certain state consumer protection stat- utes, the federal civil RICO statute, and common law theories, seeking a refund of the cost of Zyprexa, treble damages, punitivedamages, and attorneys’ fees. Two lawsuitsadditional were fi of New in 2006 York on similar grounds. In 2007, The Pennsylvania Employees Fund Trust broughtclaims in state court in Pennsylvania as insurer of Pennsylvania state employees, who were prescribed Zyprexa on simi- lar grounds as described in the New cases. York As with the product liability suits, these lawsuits allege that we inadequatelytested for and warned about side effects of Zyprexa and improperly promoted the drug. in numerous other product liability lawsuits involving primarily diethylstilbestrol (DES) and thimerosal. The majority of these claims are covered by insurance, sub- ject to deductibles and coverage limits. it is possible that we could become subject to large numbers of product liability and related claims for other products in the future. In the past few years, we FINANCIALS 30 ReoPro Cialis, of ily primar consist products Cardiovascular Alimta. and Gemzar of primarily consist products Oncology Humatrope. and Forteo, Evista, Byetta, Actos, Humulin, Humalog, of primarily consist products Endocrinology Prozac. and Strattera, Cymbalta, Zyprexa, includes which group, neurosciences the is products of category largest The 2 1 assets Long-lived customers unaffiliated sales—to Net Information Geographic sales Net customers unaffiliated sales—to Net reporting. segment of purposes for products pharmaceutical with included are they Therefore, products. ceutical pharma as characteristics operating and economic same the of many share and material not are segment ness busi health animal the of Operations products. segment—pharmaceutical business significant one in We operate millions) in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Segment Information for livestock and poultry. The other pharmaceuticals category includes anti-infectives, primarily Ceclor primarily anti-infectives, includes category pharmaceuticals other The poultry. and livestock for Vancocin rency exchange rates. exchange rency cur foreign in fluctuations by affected are assets foreign our of value the and operations of results our and tions, assets. sundry certain and equipment and property of consist above disclosed assets Long-lived respectively. 2005, and 2006, 2007, in $215 and million $184 million, $173 million, approximately was business health animal the for taxes income before Income statements. financial consolidated 1to the Note in cies poli accounting significant of summary the in described those as same the substantially are segments individual the of policies accounting The taxes. income before operations from loss or profit on based evaluated is formance distributors. to wholesale primarily sold are products health 31, Animal 2007. December of as receivable accounts of 13 percent and 9percent between for accounted each they Further, sales. net consolidated of 16 and 12 percent percent tween be for accounted each wholesalers largest three our 2007, In hospitals. and professionals, care health other and Net sales are attributed to the countries based on the location of the customer. the of location the on based countries the to attributed are sales Net Cialis sales for 2007 are included in Cardiovascular, and 2006 and 2005 Cialis sales have been reclassified from other pharmaceuti other from reclassified been have sales Cialis 2005 and 2006 and Cardiovascular, in included are 2007 for sales Cialis cals to be consistent with the 2007 presentation. presentation. 2007 the with consistent be to cals Other foreign countries foreign Other Europe States United countries foreign Other Europe States United pharmaceuticals Other health Animal Cardiovascular Oncology Endocrinology Neurosciences We are exposed to the risk of changes in social, political, and economic conditions inherent in foreign opera foreign in inherent conditions economic and political, social, in changes of risk to the exposed We are business. products pharmaceutical the of those with intermixed are business health animal the of assets The Per animals. or humans product: the of user end ultimate the by distinguished are segments business Our physicians pharmacies, serve that wholesalers through distributed are products pharmaceutical our of Most . . . . ® . , and other miscellaneous pharmaceutical products and services. services. and products pharmaceutical miscellaneous other , and ...... 2

. ® , and Xigris. Animal health products include Tylan, Rumensin, Coban Rumensin, Tylan, include products health Animal Xigris. , and . . .

1

31 December Ended Year

$ 9,731.7 $ 5,905.4 $10,145.5 $18,633.5 $18,633.5 $ 7,851.0 4,844.5 3,643.5 2,057.7 1,624.1 1,768.6 5,479.6 2,446.4 236.6 995.8 2007

875.5

$ 6,728.5 $ $ 6,207.4 $ $15,691.0 $15,691.0 8,599.2 $ $ 9,659.6 ® , and other products products other , and 2,020.2 3,197.5 3,894.3 5,014.5 1,733.8 1,718.4 730.4 321.9 2006

863.7

$ 7,798.1 $ 9,828.3 $ $14,645.3 $14,645.3 $ 6,080.0 $ 6,524.5 ® and and 4,636.9 3,028.6 1,554.9 3,818.6 1,801.0 1,748.9 484.9 778.8 2005 ------FINANCIALS 31 6.1 4.7 — — .12 .12 .80 .76 .77 .78 .78 .85 .61 .47 .12 .12 .80 .40 .76 .40 .77 .40 .40 .78 .78 .85 .425 .425 .61 .425 .47 .425 2006 Fourth Third Second First Earnings per share—basic ...... Earnings per share—basic Our common stock is listed on the New York, London, and Swiss stock exchanges. Cost of sales...... Operating expenses...... Asset impairments, restructuring, and 1,019.0 2,168.8 other special chargesOther income—net...... Income 860.4 before income taxes...... 1,953.9 ...... Net income (102.7) 945.2 2,012.7 215.0 860.6 132.3 (56.0) 1,883.7 Earnings — per 1,105.8 share—diluted...... 806.5 873.6 Dividends paid per share...... (46.9) 1,040.5 Common stock closing prices 1,056.7 822.0 (32.2) High...... Low...... 834.8 58.25 51.35 57.32 54.26 55.27 50.41 58.86 54.98 Net sales...... $4,245.3 $3,864.1 $3,866.9 $3,71 Earnings per share—basic ...... Earnings per share—basic Cost of sales...... Operating expenses...... Acquired in-process research and development. 1,272.8 ...... Asset impairments, restructuring, and other 2,709.4 1,054.6 special chargesOther income—net...... 2,322.3 89.0 Income before income taxes...... Net income 998.9 2,379.1 (32.1) 98.2 1,052.3 — 854.4 2,171.0 922.5 1,178.4 (49.8) Earnings per share—diluted...... 81.3 926.3 328.1 Dividends paid per share...... 926.7 (1.8) 328.5 — Common stock closing prices 663.6 719.4 (38.3) High...... 508.7 Low...... 123.0 59.47 49.09 58.44 54.09 60.56 54.39 54.99 51.63 Netsales ...... $5,189.6 $4,586.8 $4,631.0 $4,22 Selected Quarterly Data (unaudited) Quarterly Selected ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) 2007 Fourth Third Second First FINANCIALS ubro hrhleso eod of record . ofshareholders Number . . ofemployees Number . employee. per sales Net rate tax . Effective . amortization. and Depreciation expenditures Capital . assets on . . Return equity shareholders’ on . Return Data Supplementary . equity Shareholders’ debt . Long-term . Total assets. . equipment—net and Property . . liabilities. Current Current assets assets Current . Financial Position . (thousands). outstanding—diluted number of shares Weighted-average . share. per declared Dividends . share—diluted per income Net . . ofsales apercent as income Net 32 2 1 income Net . . taxes. Income principle inaccounting ofachange effect . cumulative and taxes income before Income Other . . administrative and . selling, Marketing, . development and Research 2007 . ofsales Cost . sales Net Operations data) per-share and employee per sales net except millions, in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Selected Financial Data(unaudited) Refl Refl earnings per share impact of this cumulative effect of a change in accounting principle was $.02. The net income per diluted share before the cumulative information. cumulative the additional 2for before Note See share $1.83. diluted was per income net principle The $.02. accounting in was achange of principle effect accounting in achange of effect cumulative this of impact share per earnings œÀ¨œÀ:͆œ—ÆÊ:—^Ê5Ûg̓®ÊÊ œƒ—Äœ—ÆÊgÀSŽÊAÊ œ®[Ê—S®ÆÊ*s†ÞgÀÊ—S®ÆÊ-SƒgÀ†—z *œÒzƒÊ ÛgÀÄÊ-µÒ†JJÊ œ”¨:—ÛÆʏ:ڜ-”†Íƒ†—gÊ*SÆÊœƒ—Äœ—ÊAÊ gÚgSÒ͆Øgʜss†SgÀÄZÊ
JJœÍÍÊ:JœÀ:͜À†gÄÆÊ
”zg—Ê—S®ÆÊ À†Ä͜ Ê †—^ÒÄÍÀÛÊ̓:ÍÊÙgÊÒÄg^Ê͜ÊJg—Sƒ”:ÀŽÊÑßßÇÊSœ”¨g—Ä:͆œ—ÊœsÊ zÀ:¨ƒ®ÊÍÊSœ”¨À†ÄgÄÊ̓gʗ†—gÊSœ”¨:—†gÄʆ—Ê̓gʨƒ:À”:SgÒ͆S:Ê G5gÊSœ—ÄÍÀÒSÍg^Ê̓gʨggÀÊzÀœÒ¨Ê:ÄÊ̓gʆ—^ÒÄÍÀÛʆ—^gÚÊsœÀÊ̓†ÄÊ JÛÊ:ÊSœ”¨:—ÛÊ:ÀgÊÀg†—ØgÄÍg^ʆ—Ê̓:ÍÊSœ”¨:—Û½ÄÊÄ͜SŽ® JœÍƒÊÄ͜SŽÊ¨À†SgÊ:—^Ê^†Ø†^g—^Ä®ÊÍÊ:ÄÄҔgÄÊ̓:ÍÊ^†Ø†^g—^Äʨ:†^Ê ”g:ÄÒÀgÄÊ͜Í:Êă:Àgƒœ^gÀÊÀgÍÒÀ—[Êك†SƒÊÍ:ŽgÄʆ—ÍœÊ:SSœÒ—ÍÊ -͜SŽÊ—^gÚ[Ê:—^Ê̓gʨggÀÊzÀœÒ¨½ÄÊSœ””œ—ÊÄ͜SŽ®Ê.ƒgÊzÀ:¨ƒÊ Σ[ÊÑßßÑ[Ê:ʨgÀĜ—ʆ—ØgÄÍg^Êd£ßßÊg:SƒÊ†—ʆÛÊÄ͜SŽ[Ê̓gÊ-A*ÊußßÊ Ûg:ÀÄÊÑßßÎÊ̓ÀœÒzƒÊÑßßÇ®Ê.ƒgÊzÀ:¨ƒÊ:ÄÄҔgÄÊ̓:Í[ʜ—Ê gSg”JgÀÊ -Í:—^:À^ÊAÊ*œœÀ½ÄÊußßÊ-͜SŽÊ—^gÚÊ:—^ʜÒÀʨggÀÊzÀœÒ¨ÊsœÀÊ̓gÊ .ƒ†ÄÊzÀ:¨ƒÊSœ”¨:ÀgÄÊ̓gÊÀgÍÒÀ—Êœ—ʆÛÊÄ͜SŽÊن̓Ê̓:ÍʜsÊ̓gÊ 8dbeVg^hdcd[;^kZ"NZVg8jbjaVi^kZIdiVaGZijgc6bdc\A^aan!HE*%%HidX`>cYZm!VcYEZZgckZhiZYdcAVhi7jh^cZhh9Vnd['%%' ects the impact of a cumulative effect of a change in accounting principle in 2005 of $22.0 million, net of income taxes of $11.8 million. The diluted diluted The $11.8 of million. taxes income of net million, $22.0 of 2005 in principle accounting in achange of effect acumulative of impact the ects ects the ICOS acquisition, effective January 29, 2007. See Note 3 for additional information. additional 3for Note See 29, 2007. January effective acquisition, ICOS the ects A^aan HE*%% EZZg

2007 2007 2006 659.1 ,523.7

nancial statements. Where our ownership of con- hedge or a cash fl rst-out (FIFO) method. FIFO cost approximates current statementsnancial been prepared have accordance in rst-in,fi ur derivative activitiesare initiated within the guidelines of documented corporate O uence but not a controlling interest are accounted for using the equity method with cant Accounting Policies he accompanying consolidated fi nancial statements and during the reporting period. Actual results could differ from nancial statements in conformity with GAAP requires management to make estimates T cant infl cant We consider We all highly liquid investments, with a maturity of three months or less, to be cash Substantially all debt and marketable equity securities are classifi We state We all inventories at the lower of cost or market. use We the last-in, fi nancial condition of the industry. do not We evaluate cost-method investments for impairment unless ...... The preparation of fi All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis, that is, For derivative contracts that are designated and qualify as fair value hedges, the derivative instrument is Risk-management instruments: Risk-management tion of the initial cost adjusted for any other-than-temporary declines in fair value. Investments in companies over which we have signifi our share of earnings or losses reported in other income—net. own We no investments that are considered to be trading securities.

Raw materials and supplies ...... able-for-sale securities are carried at fair value with the unrealized gains and losses, net of tax, reported in other comprehensive income. Unrealized losses considered to be other-than-temporary are recognized in earnings. Factors we consider in making this evaluation include company-specifi tus of projects in development, near-term prospects the length of the issuer, of time the value has been depressed, and the fi there is an indicator of impairment. review We these investments for indicators of impairment on a regular basis. Realized gains and losses on sales of available-for-sale securities are computed based upon specifi

solidated subsidiaries is less than100 percent, the outside shareholders’ interests are refl rent liabilities. All intercompany balances and transactions have been eliminated. Work in process...... Finished products ...... with accounting practices generally accepted the in United States (GAAP). The accounts of all wholly owned and majority-owned subsidiaries are included in the consolidated fi Basis of presentation: of Basis Note 1: SummaryNote 1: of Signifi Notes to Consolidated Financial Statements Financial to Consolidated Notes ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclo- sures at the date of the fi those estimates. Investments: Reductionto LIFO cost ...... larger investmented consistent pool, with the classifi they are classifi Inventories: equivalents. The cost of these investments approximates fair value. If items meeting this defi Cash equivalents: Cash based on the weighted-average number of outstanding common shares plus the effect of dilutive stock options and other incremental shares. risk-management policies and do not create additional risk because gains and losses on derivative contracts offset losses and gains on the assets, liabilities, and transactions being hedged. As derivative contracts are initiated, we designate the instruments individually as either a fair value correlation and effectiveness of our derivatives on a quarterly basis. substantially all our inventories located in the continental United States, or approximately 39 percent of our total inventories. Other inventories are valuedby the fi replacement cost. Inventories at December consisted 31 of the following: FINANCIALS useful lives (12 to 50 years for buildings and 3 to 18 years for equipment). We review the carrying value of long-lived oflong-lived value carrying the We review equipment). for 3to18 and years buildings (12 for years lives to 50 useful estimated their on based rates at method straight-line the by generally computed are equipment and buildings and equipment: Property 2005. or in2007,2006, assets intangible other or goodwill ofour value carrying tothe respect with occurred impairments material No present. are indicators impairment Total intangibles—net . . . intangibles—net Other . amortization. accumulated Less . . intangibles—gross Other technology—net . product Developed further discussion of goodwill and other intangibles acquired in2007. acquired intangibles other and ofgoodwill discussion further 3for Note See ofsales. incost included is expense amortization ofthe all year. per Substantially tax, before million fi the for expense amortization estimated The respectively. tax, before lion mil- $5.4 and $7.6 $172.8 million, million, was 2005 and 2006, 2007, for expense Amortization 10 years. proximately ap- is technology product developed for period amortization weighted-average The method. straight-line the using fi have alliances research 34 . amortization. accumulated Less . technology—gross product Developed . Goodwill intangibles: other and Goodwill 12 exceeding not months. maturities have generally contracts option and offi hedges value fair as swaps currency and contracts forward currency into foreign cash fl as designated are contracts year. next These the within tooccur expected activities inventory intercompany marily pri- transactions, currency foreign anticipated tohedge used are contracts option purchased The income. other in recognized loss or gain the with value fair at recorded are contracts These currencies. inforeign denominated receivables and payables loan and trade subsidiary from arising exposures tomanage used principally are tracts con- Forward exposures. underlying the as duration and currencies like or same the using inplace put are hedging for used derivatives currency Foreign yen). Japanese the and pound, British the euro, the (principally rates change ofchange. period the during earnings incurrent recognized loss or gain the with value fair at recorded are ments instru- hedging as designated not are that contracts Derivative inearnings. recognized immediately is fectiveness reclassifi and income comprehensive ofother acomponent as reported is contracts these on losses and ofgains portion effective the es, fl cash as qualify and designated are that contracts derivative For exposure. underlying the on recognized gains and losses respective the tooffset inincome currently recognized losses and gains with tomarket marked es. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements. swap the under received or made payments the toinclude adjusted is debt the on expense Interest es. fl convert that collars or swaps rate toafl investments or debt rate fi our convert that collars or swaps rate Interest balance. that maintain tohelp collars or swaps rate into interest fi between balance acceptable an toachieve strive we exposures, rate interest tomanage effort Inan rates. interest dollar U.S. inshort-term changes from results offl impact the tolimit is risks these fi ofderivative use the includes that management ofrisk program offi costs the vary can Goodwill and net other intangibles are reviewed to assess recoverability at least annually and when certain certain when and annually least at recoverability toassess reviewed are intangibles other net and Goodwill Goodwill and other intangible assets at December 31 were as follows: as 31 were December at assets intangible other and Goodwill tofl exposed are operations our ofbusiness, course normal In the We enter into foreign currency forward and option contracts to reduce the effect offl effect the toreduce contracts option and forward currency intoforeign We enter ow hedges of those future transactions and the impact on earnings is included in cost of sales. We may enter enter We may ofsales. incost included is earnings on impact the and transactions future ofthose hedges ow ed into earnings in the same period the hedged transaction affects earnings. Hedge inef- Hedge earnings. affects transaction hedged the period same inthe intoearnings ed nancing, investing, and operating. We address a portion of these risks through a controlled acontrolled through risks ofthese aportion We address operating. and investing, nancing, nite lives and are amortized over their estimated useful lives, ranging from 5 to 20 years, years, 5to20 from ranging lives, useful estimated their over amortized are and lives nite Property and equipment is stated on the basis of cost. Provisions for depreciation of depreciation for Provisions ofcost. basis the on stated is equipment and Property oating rate are designated as fair value hedges of the underlying instruments. Interest Interest instruments. underlying ofthe hedges value fair as designated are rate oating

Goodwill is not amortized. All other intangibles arising from acquisitions and and acquisitions from arising intangibles other All amortized. not is Goodwill oating rate debt or investments toafi investments or debt rate oating uctuations in interest rates on earnings. Our primary interest rate risk exposure exposure risk rate interest primary Our earnings. on rates ininterest uctuations xed and fl and xed oating rate debt and investment positions and may enter enter may and positions investment and debt rate oating nancial instruments. The objective of controlling ofcontrolling objective The instruments. nancial 20 2006 2007 uctuations in interest rates. These fl These rates. ininterest uctuations xed rate are designated as cash fl cash as designated are rate xed ve succeeding years approximates $180 approximates years succeeding ve $2,455.4 $73.8 $ 745.7 1,604.9 1,767.5 (162.6) 104.8 142.8 (38.0) — — 89.2 56.2 $130.0 — (33.0) rm commitments. Forward Forward commitments. rm uctuating currency ex- currency uctuating uctuations uctuations ow hedg- ow hedg- xed- FINANCIALS 35 cant product cant ed, a loss is recorded (5,564.4) 13,716.7 4,852.8 1,976.7 6,718.5 $8,152.3 ed as a reduction of the litigation 1,662.7 7,454.9 5,543.7 (6,266.2) 14 $ 180.0 $ 168.7 $8 led to the extent we can formulate a rea-

2007 2007 2006 ,841.3 ,575.1

ted. Milestones paid prior to regulatory approval of the Litigation accruals and environmental liabilities and the related esti- ed. Once the product has obtained regulatory approval, we capitalize the We recognize We as incurred the cost of directly acquiring assets to be used in the We recognize We revenue from sales of products at the time title of goods passes to the buyer ows to begenerated by the asset to its carrying value. If an impairment is identifi ...... At December property 31, and equipment consisted of the following: We alsoWe generate income as a result of collaboration agreements. Revenue from copromotion services is Depreciation expense for 2007, 2006, and 2005 was $682.3 million, $627.4 million, and $577.2 million, respec- ...... equal to the excess of the asset’s net book value over its fair value, and the cost basis is adjusted.

...... Land Buildings ...... Equipment...... Construction in progress ...... assets for potential impairment on a periodic basis andwhenever events or changes circumstances in indicate the carrying value of an asset may not be recoverable. Impairment is determined by comparing projected undiscount- ed cash fl product are generally expensed when the event requiring payment of the milestone occurs. research and development process that have not yet received regulatory approval for marketing and for which no alternative future use has been identifi Research and development: Research and based upon net sales reported by our copromotion partners and,if applicable, the number of sales calls we per- form. Initial fees we receive from the partnering of our compounds under development are amortized through the expected product approval date. Initial fees received from out-licensing agreements that include both the sale of marketing rights to our commercialized products and a related commitment to supply the products are gener- ally recognized as net sales over the term of the supply agreement. immediately We recognize the full amount of milestone payments due to us upon the achievement of the milestone event if the event is substantive, objectively determinable, and represents an important point in the development life cycle of the pharmaceutical product. Milestone payments earned by us are generally recorded in other income—net. milestones paid and amortize them over the period benefi and the buyer assumes the risks and rewards of ownership. For more than 90 percent of our sales, this is at the time products are shipped typically to the customer, a wholesale distributor or a major retail chain. The remaining sales are recorded at the point of delivery. Provisions for discounts and rebates are established in the same period the related sales are recorded. Litigation and environmental and liabilities: Litigation Revenue recognition: tively. Approximately $95.3 million, million, $106.7 and million $140.5 interest of costs were capitalized as part of property and equipment 2006, in 2007, and 2005, respectively. rental Total expense for all leases, including contin- gent rentals (not material), amounted to approximately $294.2 million, $293.6 million, and $294.4 million for 2007, 2006, and 2005, respectively. Assets under capital leases included in property and equipment in the consolidated balance sheets, capital lease obligations entered into, and future minimum rental commitments are not material. mated insuranceected on a gross recoverables basis as liabilities are refl andassets, respectively, on our consoli- dated balance sheets. With respect to the product liability claims currently asserted against us, we have accrued for our estimated exposures to the extent they are both probable and estimable based on the information available to us. accrue We for certain product liability claims incurred but not fi sonable estimate of their costs. estimate We these expenses based primarily on historical claims experience and data regarding product usage. Legal defense costs expected to be incurred in connection with signifi liability loss contingencies are accrued when probable and reasonably estimable. portion A of the costs associated with defending and disposing of these suits is covered by insurance. record We receivables for insurance-related recoveries when it is probable they will be realized. These receivables are classifi charges on the statement of income. estimate We insurance recoverables based on existing deductibles, cover- age limits, our assessment of any defenses to coverage that might be raised by the carriers, and the existing and projected future level of insolvencies among the insurance carriers. Less allowances for depreciation ...... FINANCIALS co Ac- ofFinancial Statement issued and revised (FASB) Board Standards Accounting Financial 2007, the In December Note 2: of Implementation New Financial Accounting Pronouncements fi Reclassifi aspecifi on made is inadvance. grant scheduled date equity c grant annual ofour part as awarded is that compensation Stock-based ofgrant. date and award ofthe value the approves ofDirectors Board ofthe Committee Compensation The ofgrant. date tothe prior approved are awards based stock- all policy our Under period. vesting the equals generally which grantees, individual ofthe period service site Stock-based compensation: shares. incremental other and options stock ofdilutive effect the plus shares common ofoutstanding number weighted-average the on based share per earnings diluted We calculate shares. incremental and shares common ofoutstanding number weighted-average the on based share per earnings basic We calculate share: per Earnings resolution. ultimate upon realized ofbeing likelihood percent 50 fi the benefi tax The position. ofthe merits technical the on based authorities, taxing the by examination benefi tax the recognize must we 48, toFIN Pursuant Taxes inIncome 48). (FIN Uncertainty for Accounting 48, Interpretation taxable. be and States United tothe remitted tobe expected is that subsidiaries offoreign income the of portion the on provided are taxes income Federal rates. and laws tax enacted on based reporting tax income and Income taxes: discussion. further 3for Note See ofICOS. sition acqui- ofour aresult as 2007 inJanuary venture joint ofthe ownership outstanding the We acquired taxes. income 36 benefi tax deferred ofits amount inthe changes torecognize quirer ac- the torequire Statement this by amended also 109, Taxes, No. was Income for SFAS Accounting goodwill. from separately values, fair acquisition-date their at combination inabusiness acquired assets development and search ofre- capitalization the requires now and Method, Purchase the by for Accounted Combinations 2toBusiness No. Statement ofFASB Applicability 4, No. Interpretation FASB including guidance, authoritative and Statements other signifi Statement This Statements. ofFinancial Elements 6, No. Statement Concepts inFASB ability defi the meet they that not than likely more is it if only value, fair acquisition-date their at measured tobe are date acquisition ofthe 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, inthe interest noncontrolling the as well as liabilities, and assets able identifi the torecognize instages achieved combination inabusiness acquirer the requires also Statement This specifi exceptions limited with date, ofthat as values fair their at date, acquisition the at quiree ac- inthe interest noncontrolling any and assumed, liabilities acquired, assets tomeasure combination business ina acquirer an require Statement tothis revisions 141. SFAS with primary inaccordance The applied is method Other . . . income venture Joint income . Interest . expense Interest following: ofthe consisted income—net Other income—net: Other nancial statements and accompanying notes to conform with the December 31, 2007 presentation. presentation. 31, 2007 December the with toconform notes accompanying and statements nancial unting Standard (SFAS) No. 141, Business Combinations (SFAS 141(R)). (SFAS 141, No. (SFAS) 141(R) Combinations SFAS acquisition Standard unting the Business how changes Effective January 1, 2007, we adopted the provisions of the Financial Accounting Standards Board (FASB) (FASB) Board Standards Accounting Financial ofthe provisions the 1, adopted 2007, we January Effective of net ofoperations, results venture joint LLC ICOS Lilly ofthe share our represents income venture joint The nancial statements from such a position are measured based on the largest benefi largest the on based measured are aposition such from statements nancial . t from an uncertain tax position only if it is more likely than not that the tax position will be sustained on on sustained be will position tax the that not than likely more is it if only position tax uncertain an t from cations: Deferred taxes are recognized for the future tax effects of temporary differences between fi between differences oftemporary effects tax future the for recognized are taxes Deferred Certain reclassifi Certain We recognize the fair value of stock-based compensation as expense over the requi- the over expense as compensation ofstock-based value fair the We recognize cations have been made to the December 31, 2006 and 2005 consolidated consolidated 2005 and 31, 2006 December tothe made been have cations ts that are recognizable because of a business ofabusiness because recognizable are that ts

122.0) 20 20 2005 2006 2007 3. $105.2 $238.1 $ 228.3 $( (215.3) (124.0) (11.0) $(237.8)$(314.2) (117.7) (117.7) (196.2) (63 (11.1) (96.3) (261.9)(212.1) t that has a greater than than agreater has t that nition of an asset or ali- or asset ofan nition ed in the Statement. Statement. inthe ed ts recognized in recognized ts cantly amends nancial - FINANCIALS 37 nancial state- nancial nes fair value, es- nes collaborative arrangements nancial position or results of operations. es that transactions that result a change in in a nancial position or results of operations. nancial position or results operations. of ed the consensus reached by theEmerging Issues Force (EITF) Task on Issue nancial reporting by providingentities with the opportunity to mitigate volatility In December in conjunction 2007, the FASB issued with SFAS SFAS Accounting 141(R), No. 160, for Noncontrol- In September 2006, the FASB issued Value Fair Measurements. SFAS No. 157, SFAS defi 157 In 2005, the FASB Accounting issued for Conditional FIN 47, AssetRetirement Obligations, an interpretation of In June 2007, the FASB ratifi ed the consensus reachedIn June by the 2007, the FASB EITF ratifi on Issue No. (EITF 07-3 Accounting 07-3), In December the 2007, FASB ratifi In February 2007, the FASB issued The Value Fair Option SFAS for No. Financial 159, Assets and Financial Lia- adoptedWe the provisions of FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, nancial statements. Disclosure of the amounts of consolidated net income attributable to the parent and the nancial position or results of operations. ling Interests. This Statement amends Accounting Research Consolidated Bulletin No. 51, Financial Statements by(ARB requiring 51), companies to report a noncontrolling interest in a subsidiary as equity in its consolidated fi noncontrolling interest will be required. This Statement also clarifi parent’s ownership interest in a subsidiary that do not result in deconsolidation will be treated as equity transac- tions, while a gain or loss will be recognized by the parent when a subsidiary is deconsolidated. This Statement is effective for us January 2009, and we 1, do not anticipate the implementation be to material to our consolidated fi Accounting for Collaborative (EITF 07-1), No. 07-1 Arrangements. defi EITF 07-1 and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. This Issue is effective for us beginning January 2009 1, and will be applied retrospectively all to prior periods presented for all collaborative arrangements existing as of the effective date. While we have not yet completed our analysis, we do not anticipate the implementation of this Issue to be material to our consolidated fi combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. This Statementis effective for us for business combinations for which the acquisition date is on or after January 2009. 1, tablishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement is effective for us beginning January 2008, 1, and applies to interim periods. do We not anticipate the implementation of this Statement will be material to our consolidated fi FASB Statement No. 143. requires FIN 47 us to record the fair value of a liability for conditional asset retirement obligations in the period in whichit is incurred, which is adjusted to its present value each subsequent period. In addition, we are required to capitalize a corresponding amount by increasing the carrying amount of the related long-lived asset, which is depreciated over the useful life of the related long-lived asset. The adoption of FIN 47 on 2005 December 31, resulted in a cumulative effect of a change in accounting principle of $22.0 million, net of million. income taxes of $11.8 for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities. Pursuant to EITF 07-3, nonrefundableadvance payments for goods or services that will beused or ren- dered 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, orwhen the goods or services are no longer expected to be received. This Issue is effective for us beginning January 2008, 1, and is to be applied prospectively for contracts entered into on or after the effective date. do not We anticipate the implementa- tion of this Issue to be material to our consolidated fi bilities. SFASnancial permits instruments 159 entities to choose and certain to measure many other fi items at fair value. The objective is to improve fi in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is effective for us beginning January 2008, 1, if adopted; we however, do not anticipate adopting this Statement. on January FIN 2007. 48 1, prescribes a recognition threshold and measurement attribute for the fi ment recognition and measurement of a tax position taken or expected be to taken in a tax return. for See Note 11 further discussion of the impact of adopting this Interpretation. FINANCIALS ment are not material to our research and development expenses. The results of operations are included in our inour included are ofoperations results The expenses. development and research toour material not are ment indevelop- products companies’ tothese respect with activities ongoing The incash. million $445.0 for industry, health animal the on focused company development product pharmaceutical and research applied held a privately (Ivy), Inc. Health, Animal Ivy and disorders, sleep on focused company discovery drug neuroscience held privately a (Hypnion), Inc. Hypnion, ofboth stock outstanding ofthe all acquired we of2007, quarter second the During Other Acquisitions percent. 20 was projects IPR&D acquired the invaluing used we rate discount The independently. project each for performed is analysis fl cash net future estimated The trends. industry expected and products, ofsimilar pricing historical protection, patent size, market relevant as such factors on based are projections These costs. estimated and revenues sales projected from derived are fl cash net future estimated tothe weighting aprobability applies which method,” “income the utilized oa siae ucaepie $2,320.7 (275.6) . price. (583.5) purchase Total estimated (32.1) . 646.7 assumed debt Long-term taxes Deferred . . 303.5 . . liabilities—net and assets Other . Goodwill Tax benefi . development. and research in-process Acquired mates and assumptions. and mates signifi tomake management requires value fair ofestimated determination The ofacquisition. date the 38 1 $197.7 (Cialis) technology product Developed . investments. short-term and Cash 2007 29, January at Value Fair Estimated fi consolidated inour included are tions ofopera- ICOS’s results purposes. tax for deductible tobe expected is goodwill ofthis portion No million. $646.7 of amount inthe goodwill as recorded been has assets net acquired ofthe value fair the over price purchase fi consolidated inour date acquisition ofthe as values fair respective their at recorded are ICOS from assumed liabilities and acquired assets the ofaccounting, method purchase the Under fi was which borrowings. through nanced billion, $2.3 ofapproximately price purchase aggregate an for incash $34 for redeemed was stock common ICOS of share outstanding each agreement, ofthe terms the Under product. ofthis selling and marketing, development, effi operational torealize us enables and tous ofCialis value full the brings acquisition The dysfunction. oferectile treatment the for ofCialis sales and manufacture the for venture joint LLC ICOS Lilly the O Acquisition Corporation ICOS Note 3: Acquisitions to 2017. to each of these compounds under development is not material to our research and development expenses. development and research toour material not is development under compounds ofthese to each respect with activity ongoing The purposes. tax for deductible not is charge This use. future alternative any have not do compounds the because acquisition tothe subsequent immediately toincome acharge by off written been have million $303.5 totaling assets intangible IPR&D these Method, Purchase the by for Accounted Combinations Business asignifi comprising asset one no with indevelopment, products other several represents ofIPR&D value remaining The IPR&D. ofthe value fair estimated ofthe percent 48 approximately represented acquisition ofthe time the at testing inclinical compound Cialis ofthe formulations and for indications New marketing. for approval regulatory achieved yet not have that ment The intangible asset will be amortized over the remaining expected patent lives of Cialis in each country, which range from 2015 2015 from range which country, each in Cialis of lives patent expected remaining the over amortized be will asset intangible The n January 29, 2007, we acquired all of the outstanding common stock of ICOS Corporation (ICOS), our partner in partner our (ICOS), Corporation ofICOS stock common outstanding ofthe all 29, acquired we 2007, n January There are several methods that can be used to determine the estimated fair value of the acquired IPR&D. We IPR&D. acquired ofthe value fair estimated the todetermine used be can that methods several are There develop- under currently compounds (IPR&D) represents development and research in-process acquired The We have determined the following estimated fair values for the assets purchased and liabilities assumed as of as assumed liabilities and purchased assets the for values fair estimated following the determined We have The 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 The to e prtn oss 404.1 losses . operating t ofnet cant portion of this value. In accordance with FIN 4, Applicability of FASB Statement No. 2to No. Statement ofFASB Applicability 4, FIN with Inaccordance value. ofthis portion cant ows are then discounted to the present value using an appropriate discount rate. This This rate. discount appropriate an using value present tothe discounted then are ows 1 ...... 1,659.9 . nancial statements from the date of acquisition. ofacquisition. date the from statements nancial nancial statements. The excess of the ofthe excess The statements. nancial ciencies in the further further inthe ciencies ows ows that cant esti- FINANCIALS 39 able able cant asset. For this acquisi- rst quarter of 2007, and is deduct- able intangible assets, primarily related to marketed rst quarter of 2008. nancial statements from the respective datesacquisition. of In December 2007, we entered into an agreement with BioMS Medical Corp. to acquire the rights to its com- In connection with these arrangements, our partners are generally entitled to future milestones and royalties In January 2007, we entered into an agreement with OSI Pharmaceuticals, Inc. to acquire the rights to its In October 2007, we entered into a global strategic alliance with MacroGenics, Inc. (MacroGenics) to develop The acquisition of Ivy provides us with products that complement those of our animal health product line. This The acquisitionof Hypnion provides us with a broader and more substantive presence in the area of sleep ible for tax purposes. pound for the treatment of multiple sclerosis. This agreement was contingent upon clearance under the Hart- Scott-Rodino Improvements Anti-Trust Act and became effective after clearance was received in January 2008. This compound is in the development stage (Phase clinical III trials) and has no alternative future use. As with many development-phase compounds, launch of the product, if approved, was not expected in the near term. Our charge for acquired IPR&D related to this arrangement was million, $87.0 is deductible for tax purposes, and will be included as expense in the fi based on sales should these products be approved for commercialization. compound for the treatment of type 2 diabetes. At the inception of this agreement, this compound was in the development stage (Phase I clinical trials) and had no alternative future use. As with many development-phase compounds, launch of the product, if approved, was not expected in the near term. Our charge for acquired IPR&D related to this arrangement was $25.0 million, was included as expense in the fi and commercialize teplizumab, a humanized anti-CD3 monoclonal antibody, as well as other potential next-gen- eration anti-CD3 molecules for use in the treatment of autoimmune diseases. As part of the arrangement, we acquired the exclusive rights to the molecule, which was in the development stage (Phase II/III clinical trial for individuals with recent-onset type 1 diabetes) and had no alternative future use. As with many development-phase compounds, launch of theproduct, if approved, was not expected in the near term. Our charge for acquired IPR&D was $44.0 million, is deductible for tax purposes, and was included as expense in the fourth quarter 2007. of Product Acquisitions In October 2007, we entered into an agreement with Glenmark Pharmaceuticals Limited India whereby we ac- quired the rights to a portfolio of transient receptor potential vanilloid sub-family 1 (TRPV1) antagonist molecules, including a clinical-phase compound. The compound is currently in early clinical phase development as a potential next-generation treatment for various pain conditions, including osteoarthritic pain, and had no alternative future use. As with many development-phase compounds, launch of the product, if approved, was not expected in the near term. Our charge for acquired IPR&D was $45.0 million, is deductible for tax purposes, and was included as expense in the fourth quarter of 2007. tion, we recorded million, a charge representing of $291.1 the estimated fair value of the acquired compound, to acquired IPR&D in the second quarter of 2007 because the development-stage compound acquired did not have any alternative future use. This charge 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 combina- tion and, therefore, goodwill was not recorded. acquisition has been accounted for as a business combination under the purchase method of accounting. have We allocated $88.7million of the purchase price to other identifi products, million $37.0 to acquired IPR&D, and $25.0 million to goodwill. The IPR&D represents products in devel- opment that are not yet approved for marketing and have no alternative future use. Accordingly, mil- the $37.0 lion allocated to acquired IPR&D was expensed immediately subsequent to the acquisition. The other identifi intangible assets will be amortized over their estimated remaining useful lives to 20 years. of 10 Goodwill resulting from this acquisition has been fully allocated the to animal health business segment. Theamount allocated to each of the intangible assets acquired, including goodwill, is expected to be deductible for tax purposes. consolidated fi disorder research and ownership of HY10275, a novel Phase II compound with a dual mechanismaction of aimed at promoting better sleep onset and sleep maintenance. This was Hypnion’s only signifi FINANCIALS 40 discussion. 13 Note further for See claims. ofthe cost and number probable ofthe estimate areasonable formulate could we extent tothe claims future expected and claims, liability product known regarding costs defense and exposures liability product for reserves costs, defense related and settlements liability ofproduct costs the include recoveries, insurance ofanticipated net are which charges, These respectively. of$111.9 2005, and charges pretax 2006, in2007, $1.07 net and billion corded $494.9 million, million, re- we toZyprexa, related were ofwhich majority substantial the exposures, liability product ofour aresult As Charges Special Other and Liability Product value. tofair assets ofthe value carrying the toadjust necessary were charges impairment The equipment. development and research obsolete as well as requirements, capacity jected pro- tosupply needed longer no equipment and buildings manufacturing included use, future no had which assets, impaired The payments. termination tocontract related of$17.3 charges primarily other and million, assets, paired im- ofcertain write-down the for of$154.6 million charges innon-cash resulted that decisions structure, cost our 31, December at 2007. complete substantially were activities restructuring These value. tofair assets ofthe value carrying the toadjust necessary were charges impairment The payments. termination contract and toseverance of$141.5 related charges other primarily and use, million, future no have ofwhich all substantially assets, impaired ofcertain write-down the for million of$308.8 charges in non-cash resulted changes, strategic other as well as decisions, These capacity. manufacturing excess toreduce and tions opera- development and inresearch productivity toincrease effort inan U.S. inthe plant manufacturing insulin ofaplanned construction tostop decision the made also Management U.S. the outside facility production one and 31, December at 2007. complete substantially were activities restructuring These value. tofair assets ofthe value carrying the toadjust necessary was $67.6 and was million, impairment asset cash non- tothe related charge ofthis component The below. described as of2006 quarter fourth inthe taken actions management as well as action tothis related costs other and plants U.S. ofour one at program severance tary fi inthe of$123.0 million charges special other and 31, December at 2007. complete substantially were activities restructuring These value. tofair assets ofthe value carrying the toadjust necessary are charges impairment The decisions. strategic announced topreviously related charges cleanup environmental and severance toadditional ily related primar- of$25.1 million, charges other and use, future no have ofwhich all assets, ofimpaired write-down the for million of$42.5 charges non-cash include charge ofthis Components decisions. strategic announced ously previ- as well as quarter fourth inthe management by approved ofdecisions aresult were charges These 2007. of quarter of$67.6 fourth inthe charges million special other and restructuring, impairment, asset We incurred Charges Other and Restructuring Related and Impairments Asset co inour charges special other and restructuring, impairments, inasset included charges ofthe components The Charges Special Other and Restructuring, Impairments, Asset 4: Note nsolidated statements of income are described below. described are ofincome statements nsolidated In December 2005, management approved, as part of our ongoing efforts to increase productivity and reduce reduce and productivity toincrease efforts ongoing ofour part as approved, management 2005, In December facilities development and research two toclose plans approved management of2006, quarter fourth In the restructuring, impairment, asset recorded we decisions, strategic announced previously with In connection rst quarter of 2007. These charges primarily relate to avolun- relate primarily charges These of2007. quarter rst FINANCIALS 41 ve years. ve nancial in- nancial ow analyses analyses ow hedges, excluded ow oating rate debt from 1,001.9 1,001.9 ow hedges of anticipated nancial institution or corporate $(3,705.2) $(3,705.2) $(3,682.7) 63.5 25.6 63.5 $43.7 10.8 $2,848.4 $2,048.6 $2,848.4 9.0 7.1 9.0 834.1 834.1 834.1 19.7 19.7 88.4 NA 88.4 6.1 21.4 22.0 23.6 NA $43.5 408.3 $1,212.1 $ 1,610.7 781.7 $ $ 781.7 $(5,056.9) $ 70.0 $ 79.4 $ 79.4 2007 2007 2006 2005 2007 2007 2006

) 98.8 23.6 408.3 $ 5 $ 70.0 $(4,988.6 $ 1,610.7 $ 77.1

2007 2006 2007 Carrying Amount Fair Value Carrying Amount Fair Value nancial institutions, in U.S. government securities, or with top-rated nancial instruments and other investments at December follows: 31 ...... We determineWe fair values based on quoted market values where available or discounted cash fl The net adjustment to unrealized gains and losses of tax) (net on available-for-sale securities increased During the years ended December 2007, 2006, 31, and 2005, net losses related to ineffectiveness and net loss- expectWe to reclassify an estimated million $21.3 of pretax net losses on cash fl A summary the of unrealized gains and losses (pretax) of our available-for-sale securities in other compre- earing investments. Wholesale distributors of life-sciences products and managed care organizations account Risk-management instruments—assets ...... Proceeds from sales ...... Unrealized gross gains ...... Unrealized gross gains

Long-term debt, including current portion...... (principally long-term debt). The fair value of equity method and other investments is not readily available and dis- closure is notrequired. billion Approximately of our investments $1.9 in debt securities mature within fi Short-term investments Debt securities ...... Fair Value of Financial Instruments A summary of our outstanding fi corporate issuers. At December our 2007, investments 31, in debt securities were comprised of 40 percent asset- backed securities, 23 percent corporate securities, and 37 percent U.S. government securities. In accordance with documented corporate policies, we limit the amount of credit exposure to any one fi are We exposedissuer. to credit-related losses in the event of nonperformance by counterparties fi to struments but do not expect any counterparties to fail to meet their obligations given their high credit ratings. Noncurrent investments Marketable equity ...... Debt securities ...... Equity method ...... and other investments Unrealized ...... gross losses (decreased) other comprehensive income by $(5.4) million, $0.3 million, and $(4.6) million in 2007, 2006, and 2005, respectively. Activity related to our available-for-sale investment portfolio was as follows: Financial instruments that potentially subject us to credit risk consist principally of trade receivables andinterest- b Note 5: Financial Instruments and Investments for a substantial portion of trade receivables; collateral is generally not required. The risk associated with this concentration ismitigated by our ongoing credit review procedures and insurance. place We substantially all our interest-bearing investments with major fi Realized gross gains on sales ...... Realized gross losses on sales ...... es related to the portion of our risk-management hedging instruments, fair value and cash fl from the assessment of effectiveness were not material. foreign currency transactions and the variability in expected future interest payments on fl accumulated other comprehensive loss to earnings during 2008. hensive income at December follows: 31 FINANCIALS interest rates subsequent to the inception of the hedge. ofthe inception tothe subsequent rates interest inmarket tomovements attributable debt hedged ofthe value infair changes representing adjustment value fair is refl interest. ofcapitalized net respectively, million, $38.2 withdrawn. be may lines the which under ofoccurring probable are that conditions no are there and material, not are fees commitment and balances Compensating program. paper commercial our backs ofwhich $1.20 billion facilities, credit bank ted commit- ofunused 31, $1.24 paper. have billion we 2007, December At commercial and tobanks payable of notes portion current . Less lion at 5.50 percent due in 2027; and $800.0 million at 5.55 percent due in 2037). in2037). due percent 5.55 at million $800.0 and in2027; due percent 5.50 at lion ortizing feature of the ESOP debt, bondholders will receive both interest and principal payments each quarter. each payments principal and interest both receive will bondholders debt, ESOP ofthe feature ortizing am- 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 bonds. of the lion; 2009, $31.1 2009, $16.7 2010, lion; 2011, million; million; $11.2 2012, $510.9 and million; million. 42 . adjustment value fair 133 SFAS . 2008). (due notes percent 2.90 . to7.134.50 2012-2037) (due notes percent following: ofthe 31 consisted December at debt Long-term 6:Borrowings Note repaid $500.0 million of the notes in December 2006 and the remaining $1.00 billion of the notes in March 2007. inMarch notes ofthe $1.00 billion remaining the and 2006 inDecember notes ofthe million $500.0 repaid fl of 13-month fi same the with agreements swap rate intointerest entered we bonds, these with Inconjunction notes. of these bonds. the on interest accrued previously all paid and 2006 inNovember option this We exercised time. any at payments interest periodic to begin option an We had maturity. upon payable be and bonds ofthe life the over toaccumulate was interest The 31, 2007). December at percent of4.99 (total semiannually adjusted spread, credit six-month our plus LIBOR at rates interest and 5.89 percent, respectively. percent, 5.89 and percent 5.47 were obligations, debt hedged for swaps rate ofinterest effects the including 2006, and 31,ber 2007 Decem- at rates interest and obligations debt on based rates borrowing effective weighted-average The swaps. rate laigrt xedbents(u 08 1,000.0 leases . capitalized Other, including — 2017) (due debentures . ESOP percent 6.55 . 2037). (due bonds rate Floating 2008) (due notes . extendible rate Floating rvt lcmn od de20 n 08...... 2008). and 2007 (due bonds placement Private nancial institution, which converts the fi the converts which institution, nancial . . In accordance with the requirements of SFAS 133, the portion of our fi of our portion the 133, ofSFAS requirements the with In accordance and million, $159.2 totaled $305.7 million, borrowings on ofinterest payments cash 2005, and 2006, In 2007, fi ofall percent 40 approximately converted We have respectively, million, $8.6 and $18.6 million included borrowings short-term 2006, and 31, 2007 December At fi next the for debt long-term on of maturities amounts aggregate The In March 2007, we issued $2.50 billion offi billion $2.50 issued we 2007, In March In August 2005, Eli Lilly Services, Inc. (ELSI), our indirect wholly-owned fi wholly-owned indirect our (ELSI), Inc. Services, Lilly Eli 2005, In August 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 The $400.0 million offl million $400.0 The Principal and interest on the private placement bonds are due semiannually over the remaining terms of each ofeach terms remaining the over semiannually due are bonds placement private the on interest and Principal 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 oating rate extendible notes. These notes paid interest at essentially a rate equivalent to LIBOR. We toLIBOR. equivalent arate essentially at interest paid notes These notes. extendible rate oating oating rate bonds outstanding at December 31, 2007 are due in 2037 and have variable variable have and in2037 due are 31, 2007 December at outstanding bonds rate oating xed rate into a variable rate of interest at essentially LIBOR over the term term the over LIBOR essentially at ofinterest rate intoavariable rate xed xed-rate notes ($1.00 billion at 5.20 percent due in 2017; $700.0 mil- in2017; due percent $700.0 5.20 at ($1.00 billion notes xed-rate xed-rate debt tofl debt xed-rate 593.5 988.6 $ 2006 2007

ve years are as follows: 2008, $395.1 mil- $395.1 2008, follows: as are years ve oating rates through the use of interest ofinterest use the through rates oating xed-rate debt obligations that is hedged hedged is that obligations debt xed-rate $3,987.4 4, 4, (395.1) 400.0 300.0 nance $1.50 issued subsidiary, billion 72.1 90.6 79.2 59.3 266.3 $3,494.4 300.0 400.0 3,705.2 91.6 109.9 50.0 $1,487.4 (210.8) FINANCIALS 43 ows. ow the in consolidated statements of cash fl ts resulting from tax deductions in excess of the compensation cers and management at exercise prices equal to the fair market nancing cash fl cers and management and are payable in shares of our common stock. cers and management and are payable in shares of common stock at the end of a three- ts of $96.4 million, $115.9 million, million, and respectively.ts $122.9 of $96.4 million, $115.9 In 2007, our stock-based compen- We grantedWe approximately 970,000 SVA units in February 2007 as part of the annual total compensation award, At December additional 2007, 31, stock options, PAs, SVAs, or restricted stock grants may be granted under value of our stock price at the date of grant. No stock options were granted in 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. Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free Stock options were granted in 2006 and 2005 to offi Shareholder Value Award Program Value Shareholder In 2007, we implemented a shareholder value award (SVA) program, which replaced our stock option program. SVAs are granted to offi Stock Option Program year period. The number of shares actually issued varies depending on our stock price at the end of the three-year vesting period compared pre-established to target stock prices. measure We the fair value the of 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 satisfying of themarket condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded options on our stock, historical volatility of our stock price, and other factors. 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 curveeffect in at the time of grant. The weighted-average fair values of the SVA units granted during 2007 were determined $49.85 using the following assumptions: Expected dividend yield...... Risk-free interest rate...... Range of volatilities ...... 4.81%–5.16% 22.54%–23.90% 2.75% of which the majority remains outstanding at December None 2007. of the SVA units 31, are vested. The maximum number of shares that could ultimately be issued upon vesting of the SVA units outstanding at 2007, December 31, million.is 1.4 As the 2007, of December total remaining 31, unrecognized compensation cost related to nonvested SVAs amounted to $34.0 million, which will be amortized over the weighted-average remaining requisite service period of 25.5 months. Performance awards are granted offi to (PAs) cost recognized for exercised stock options as a fi The number shares of PA actually issued, varies if any, depending on the achievement of certain pre-established earnings-per-share targets over a one-year period. shares PA are accounted for at fair value based upon the closing stockscal price year on the date of the of grant grant. and The fully fair vest values at the end of the of perfor- fi mance awards granted in 2007, 2006, and 2005 were $54.23, and$55.65, $56.18, respectively. The number of shares ultimately issued for the performance award program is dependent upon the earnings achieved during the vesting period. Pursuant to this plan, approximately 2.3 million shares, million shares, 1.7 and 0.5 million shares were is- sued in 2007, 2006, and 2005, respectively. Approximately 2.4 million shares are expected to be issued in 2008. Note Stock 7: Plans recognizeWe the fair value of stock-based compensation in net income. Stock-based compensation cost in the amount of $282.0 million, $359.3million, and $403.5 million was recognized 2007, in 2006, and 2005, respectively, as well as related tax benefi sation expense consisted primarilyperformance of awards (PAs), shareholder value awards (SVAs), and stock options. In 2006 and 2005, our stock-based compensation expense consisted primarily of PAs and stock options. recognize We the stock-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. provide We newly issued shares and treasury stock to satisfy stock option exercises and for the issuance and SVA of PA shares. classify We tax benefi Performance Award Program the 2002 LillyStock Plan for not more than 46.6 million shares. FINANCIALS ended, is presented below: ended, is presented oth of avariety and receivable, interest recoverables, insurance receivable, tax income include receivables other Our Liabilities Other and Assets Other 8: Note of12 months. period service requisite remaining weighted-average the over amortized be will which million, to$23.8 amounted tions benefi tax related recognized and respectively, 2005, and 2006, 2007, during options ofstock exercises $105.9 from and million million, $66.2 of$15.2 cash million, We received respectively. million, $249.1 $265.5 million, and to$381.8 million, amounted 2005 and 2006, 2007, during vested ofoptions value fair date grant total The $131.9 and lion, respectively. million, attributable to a decrease in product litigation liabilities. litigation inproduct toadecrease attributable primarily is liabilities noncurrent inother decrease The items. ofother avariety and arrangements, licensing liabilities. litigation inproduct adecrease by primarily caused is liabilities current in other assets. tax indeferred adecrease and recoverables liability inproduct toadecrease attributable primarily is assets insundry decrease The items. (Note 11),ofother assets tax avariety and (Note 13), deferred litigation uct 19.08 26.03 9,049 (455) (14,668) . 31, 2007. December at Nonvested Forfeited . Vested . 53.83 72,100 81,149 (7,378) (283) . 31, 2007. December at Exercisable 31, 2007 December at . Outstanding . expired. or Forfeited . Exercised 7years 7years 2.5%–4.5% 4.6%–4.8% 27.6%–30.7% . life. expected Weighted-average 24.8%–27.0% . rate. interest Risk-free . . ofvolatilities Range . volatility Weighted-average 44 $22.32 24,172 Granted . . . 1, 2007. January at Nonvested $69.38 88,810 Granted . . 1, 2007 January . at Outstanding . yield Dividend assumptions: following the using $15.61 determined were 2005 $16.06, and respectively, 2006 during granted options individual ofthe values fair weighted-average The model. lattice ofthe output the from derived is grants 2005 and 2006 ofthe life expected The data. ofhistorical analysis an on based assumptions forfeiture post-vesting and cise exer- incorporates model The ofgrant. time the at ineffect curve yield Treasury U.S. the from derived is rate interest er items. The increase in other receivables is primarily attributable to an increase in income tax receivable. tax inincome increase toan attributable primarily is receivables inother increase The items. er A summary of the status of nonvested options as of December 31, 2007, and changes during the year then then year the during 31, changes and 2007, ofDecember as options ofnonvested status ofthe A summary As of December 31, 2007, the total remaining unrecognized compensation cost related to nonvested stock op- stock tononvested related cost compensation unrecognized 31, remaining total ofDecember 2007, the As mil- to$1.5 $40.8 amounted million, 2005 and 2006, 2007, during exercised ofoptions value intrinsic The Our other noncurrent liabilities include product litigation, deferred income from our collaboration and out- and collaboration our from income deferred litigation, product include liabilities noncurrent other Our decrease The items. ofother avariety and taxes, other litigation, product include liabilities current other Our prod- our from recoveries insurance estimated software, computer capitalized our include assets sundry Our below: summarized is 2007 during activity option Stock ts of $0.4 million, $11.3 million, and $36.8 million during those same years. same those during million $11.3 $36.8 and million, million, of$0.4 ts hrs GrantDate Value Fair Shares thousands) (in Weighted-Average Value Intrinsic years) (in Aggregate Term Contractual Options of Price Exercise thousands) (in Options to Attributable Common Shares Weighted-Average Stock Weighted-Average Remaining of — 20 2005 2006 11 37 8.4 3.73 71.15 95 41 $8.4 4.15 69.57 67.85 50 27.8% 25.0% 2.0% 2.0% — — 16.47

— 2.0% FINANCIALS 45 - 4 4 8 8 5 6) 0 0) 9) 9 1 ...... 1 3 5 8 (3 Amount 101 377 . 122 104 (130 (386 $ 100 $ 103

65 (76) 161 910 128 943 899 934 Shares Common Stock in Treasury 2,145

6,704 (6,874) (2,297) (in thousands)

3) 2) 5 6 6 7) 9) . .

. . . .

.

5 5 5 0 billion share repurchase . The funding had no net impact . (106 (100 Deferred . The ESOP used the proceeds of a $ (95 $(111 Costs—ESOP . Any dividend transactions between

2 2) 2 6 0) 6 0 6) 7 7 9) . The fair value of shares allocated each . .

. .

......

(8

. The cost basis of the shares held in the . The ESOP issued $200 million of third-party Retained Earnings 1,979 2,953 2,662 (1,677 . (1,763 (1,903 10,027 10,926 $ 9,724 $11,967

. The proceeds were used purchase to shares of our 4 4 3 2 2) 2 8 0 5 7 7) 7 9 9) 9 1) . As of December 2007 31, and 2006, no preferred stock ...... 9 6 (3 11 10 (55 359 . 172 Capital Paid-in 282 403 (129 (381 Additional 7 million shares in 2006 and 2005, respectively, under this . 3,571 3,323 $3,119 58 billion of our announced $3 $3,805 .

. . . . .

......

1 million and 6 63 54 . 75 . . . . Shares of common stock held by the ESOP willbe allocated participating to ......

. Stock held by the trust is not considered outstanding in the computation of earn ......

...... The assets of the trust were not used fund to any of our obligations under these employee benefit 64 billion and is shown as a reduction in shareholders’ equity, which offsets the resulting increases ......

hareholders’ Equity We acquired . We approximately 2 . No shares were repurchased in 2007 61 billion in additional61 paid-in capital and $25 million in common stock . We haveWe an ESOP as a funding vehicle for the existing employee savings plan As of December 2007, we have 31, purchased $2 haveWe 5 million authorized shares of preferred stock haveWe funded an employee benefit trust with 40 million shares of Lilly common stockto provide a source of plans—net plans—net employees annually through as part 2017 of our savings plan contribution period is recognized as compensation expense loan from us purchase to shares of common stock from the treasury debt, repayment of which was guaranteed by us (see Note 6) common stock on the open market us and the trust are eliminated ings per share plans in 2007, 2006, or 2005 on shareholders’ equity as we consolidate the employee benefit trust trust was $2 of $2 has been issued funds assist to us in meeting our obligations under various employee benefit plans program program Balance at December 2007 31, Stock-based compensation ESOP transactions FIN 48 implementation (Note 11) Retirement of treasury shares Issuance of stock under employee stock Balance at December 2006 31, Net income Cash dividends declared per share: $1 Stock-based compensation ESOP transactions Retirement of treasury shares Purchase for treasury Issuance of stock under employee stock Balance at December 2005 31, Net income Cash dividends declared per share: $1 Stock-based compensation ESOP transactions Retirement of treasury shares Purchase for treasury Issuance of stock under employee stock plans Balance at January 2005 1, Net income Cash dividends declared per share: $1

Note S 9: Changes in certain components of shareholders’ equity were as follows: FINANCIALS f ef- cumulative before share per earnings incomputing used denominators of the a reconciliation is following The Share Per 10: Earnings Note right. per Stock) ofPreferred ofashare sandth one-thou- (or one share common ofone ratio exchange an at Stock Preferred or stock common our for Person) Acquiring the by owned those than (other rights the exchange may ofdirectors board the stock, common standing price. exercise the times oftwo avalue have that company acquiring ofthe stock ofcommon ofshares number the price exercise the at topurchase right the have will Person) Acquiring the than (other ofaright holder each generally Date, aDistribution after power earning or assets ofour more or percent 50 sell or transaction nation price. exercise the times oftwo avalue have that stock common ofour ofshares number the price exercise the at topurchase right the have will Person) Acquiring the than (other ofaright holder each generally expired, has right redemption our and stock earlier. them redeem we unless 2008, 28, July on expire will rights The Date. Distribution the including uptoand right, per $.005 for rights the redeem We may stock. mon com- ofour more of15 or percent ownership acquired has Person) Acquiring (the aperson that announcement ofapublic date the after day 10thbusiness the generally is which Date, Distribution the after only exercisable are rights The of$325. aprice at Stock) Preferred (the Stock Preferred Participating BJunior ofSeries a share of one-thousandth one company the from topurchase them entitling right purchase stock apreferred owned, 46 . principle. inaccounting change ofa effect cumulative before share per earnings Diluted diluted . . outstanding— shares ofcommon number Weighted-average . shares. incremental other and options Stock outstanding shares ofcommon number . Weighted-average share per earnings Diluted . . principle. inaccounting change ofa effect cumulative before share per . earnings Basic shares. incremental including outstanding, shares ofcommon number Weighted-average share per earnings Basic . shareholders tocommon available principle inaccounting ofachange effect cumulative before Income ect of a change in accounting principle: inaccounting ofachange ect At any time after an Acquiring Person has acquired 15 percent or more but less than 50 percent of our out- ofour percent 50 than less but more 15 or percent acquired has Person Acquiring an after time any At combi- inabusiness acquired are we ofdirectors, board the by approved not if, inatransaction Alternatively, common outstanding ofour 15more or percent acquires Person Acquiring an if that, provides plan rights The share common each with along receive, shareholders all in1998, adopted Plan Rights aShareholder Under Sae ntosns 07 06 2005 2006 2007 (Shares in thousands) 1,090,430 1,088,929 1,090,750 $2,953.0 $2.71 $2.71 1,821 1,087,490 1,092,150 1,087,490 1,088,754 1,086,239 $2.45 $2.45 $1.83 $2.45 $1.84 $2,662.7 $2,001.6 2,153 4,035 1,088,115 1,085,337 FINANCIALS 47 — (465.0) (701.2) (493.7) — 192.2 (462.9) 192.2 0.4 (0.5) (1,424.0) (485.8) 113.5 (86.8) (237.0) 276.2 98.0 504.4 2,511.2 563.1 1,178.8 563.1 $755.3 $ 715.9 $ $755.3 713.4 83.2 2,017.5 $197.7 $ 517.4 $ $197.7 286.9 78.3 78.3 89.4 (25.2) 11.6 94.6 390.6 649.8 161.3 .3 .5) (5 69.1 27.7 95.4 62.9 53.0 83.6 (27.9) (30.6) 412.1 361.5 318.4 929 546.2 654.8 (511.2) (675.9) (662.2) (532.5) (285.1) $489.5 $923.8 2, 2,485.0 (2,155.7) $ 329.3 $ 593.5 $ 804.3 $ 293.2

996.2 2007 2007 2006 2005 2007 2006 . . . — ts ...... ts g principle:g cant components of our deferred tax assets and liabilities as of December are 31 as follows: At December 2007, we had net operating 31, losses and other carryforwards for international and U.S. income ...... Unremitted earnings to be repatriated due to change in tax law ...... Deferred tax assets—net ...... billion: milliontax $27.0 will purposes expire within of $1.15 years; billion 10 $1.09 will expire between and 20 10 years; and $36.9 million of the carryforwards will never expire. The primary components of the remaining portion of the deferred tax asset for tax loss carryforwards and carrybacks are related to net operating losses for state in- come tax purposes that are fully reserved and a capital loss of $433.6 million, which we expect to be carried back. alsoWe have tax credit carryforwards and carrybacks million of $361.5 available to reduce future income taxes; $80.7 million will be carried back; $34.1 million of the tax credit carryforwards will expire after years; 5 and million$13.3 of the tax credit carryforwards will never expire. The remaining portion of the tax credit carryfor- wards is related to state tax credits that are fully reserved. The increase in both the deferred tax asset for tax loss carryforwards and carrybacks and the deferred tax liability for intangibles resulted primarily from the acquisition Deferred tax liabilities Prepaid benefi employee deferred Total tax ...... liabilities Property and equipment ...... Intangibles ...... Other......

deferred Total tax assets...... Compensation and benefi Deferred tax assets loss Tax carryforwards and carrybacks ......

Current Federal ...... Foreign ...... credit Tax carryforwards and carrybacks...... Following is the composition of income taxes attributable to income before cumulative effect of a change in accountin Note 11: Income Taxes Note 11: ...... State ...... Asset purchases Financial instruments ...... Sale of intangibles...... Asset disposals ...... Other...... Valuation...... allowances Foreign ...... Income taxes...... Signifi ...... State Inventory ...... Deferred Federal ......

FINANCIALS udy . . Sundry 48 (2.3) $1,565.3 (15.1) 35.6 . 31, 2007. December at Balance 206.4 . Settlements . years. ofprior positions tax for Reductions $1,340.7 years . ofprior positions tax for Additions . year current tothe related positions tax on based Additions . 1, 2007. January at balance Beginning benefi tax unrecognized ofgross amount ending and beginning benefi tax unrecognized for liability inthe million of$8.6 increase an recognized We also liabilities. tonon-current current reclassifi we 48, ofFIN implementation ofthe aresult As return. fi the for . rate tax income Effective . credits business . General development and research in-process acquired Non-deductible . Rico Puerto including operations, International Add (deduct) rate tax . . statutory federal States United principle: inaccounting ofachange effect cumulative to2000. 1998 years the for examination IRS ofan resolution the and AJCA ofthe implementation the with ciated asso- liability tax tothe attributable primarily are in2005 taxes ofincome payments cash higher The respectively. rate. statutory U.S. the approximately at intaxes result would distributed, if that, and operations inforeign use continued for reinvested permanently tobe intended are or been have that subsidiaries offoreign earnings ofunremitted billion of$8.79 31, aggregate an had 2007,we December At 2005. ing defi as dividends, inincentive billion $8.00 repatriated subsequently and 31, 2004, December of as million of$465.0 liability tax arelated We recorded in2005. corporations foreign controlled from dividends certain for deduction received dividends percent 85 an providing by abroad earned income undistributed triate to2017. prior expire not will grant incentive tax current The grant. incentive atax under Rico inPuerto operating asubsidiary We have principle. in accounting ofachange effect cumulative and taxes income before income toconsolidated respectively, 2005, and 2007, 2006, discussion. further 3for Note See of ICOS. IRS in a prior audit cycle for which a prepayment of tax was made in 2005. We anticipate that any tax due upon such such upon due tax any that We anticipate in2005. made was oftax aprepayment which for cycle audit inaprior IRS benefi tax inunrecognized reduction ofthis ty majori- The benefi expense. could tax inincome ofoperations areduction results t upto$190through dated million benefi tax unrecognized ingross a reduction benefi tax unrecognized ingross reduction a for allowing audit, tospecifi inthe addressed certainty positions bring c tax would audit ofthe portion substantial ofa Resolution proceedings. legal and administrative formal for potential the including offactors, anumber upon dependent is period audit inthe issues ofall 12 resolution however, ultimate the months; next the within conclude will audit ofthis portion asubstantial that possible reasonably is it believes management and 2001-2004, years tax for (IRS) Service Revenue Internal the by audit under currently We are 2001. 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, 2007. December at $1.46 billion The total amount of unrecognized tax benefi tax ofunrecognized amount total The attribute measurement and threshold arecognition prescribes 1, 48 2007. FIN January on 48 FIN We adopted and taxes income before toincome applicable rate tax income effective ofthe areconciliation is Following 2005, and $1.78 and 2006, in2007, million, billion $1.01 $864.0 totaled billion, taxes ofincome payments Cash torepa- corporations U.S. for incentive atemporary created (AJCA) of2004 Act Creation Jobs American The in percent 43 and 18 percent, 7percent, approximately contributed companies Rican Puerto and Domestic We fi We 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 ts, and an offsetting reduction to the January 1, 2007 balance of retained earnings. A reconciliation of the ofthe Areconciliation earnings. ofretained balance 1, 2007 January tothe reduction offsetting an and ts, ts. If such resolution is reached within the next 12 months, we estimate estimate we 12 months, next the within reached is resolution such If ts. ts in the range of $600 million to $700 million. As a result, our consoli- our aresult, As million. to$700 million of$600 range inthe ts ts relates to intercompany pricing positions that were agreed with the the with agreed were that positions pricing tointercompany relates ts ts that, if recognized, would affect our effective tax rate was was rate tax effective our affect would recognized, if that, ts ts is as follows: follows: as is ts ed $921.4 million of income taxes payable from from payable taxes ofincome million $921.4 ed 20 20 2005 2006 2007 (11.6) 23.8% 35.0% (3.4) (1.6) 5.4 — — — (1.4) (1.5) (1.4) (6.7) (4.8) (6.7) (4.8) (2.4) (4.8) 35.0%35.0% 2.% 26.3% 22.1% ned in the AJCA, dur- AJCA, inthe ned FINANCIALS 49 t t Plans t ned benefi ned (583.4) (5.9) (82.5) (82.5) (577.5) — (85.7) 72.2 97.9 (25.0) 103.0 171.1 4.5 965.7 1,740.7 931.8 846.1 1,157.3 $1,673.6 3.2 (8.6) 16.4 70.4 (81.6) (81.6) 147.4 101.4 125.4 820.3 522.6 (227.7) (297.7) (274.3) (265.7) t Pension and Other 1,157.3 1,622.8 1,348.5 $ 262.7 $ 248.3 $ $ 262.7 $ 248.3 $ $1,740.7 ts in income tax expense. 3.4) ned Benefi ned t obligation, change in plan assets, t Pension Plans Retiree Health Benefi (1,009.4) (287.9) (287.9) (291.2) (291.2) (4 64.9 64.9 343.5 343.5 63.4 63.4 6,519.0 6,519.0 38.7 38.7 $5,628.4 $5,628.4 1,788.6 913.1 913.1 454.7 454.7 6,480.3 5,482.4 $1,091.5 $ — $ — 1,852.0 — $1,890.7 221.3 221.3 190.1 190.1 — — $1,890.7 280.0 280.0 ned Benefi ned 49.9 32.7 82.6 88.4 (47.9) 287.1 743.2 362.4 202.9 833.8 t postretirement plan as an asset or liability in its (311.0) (301.4) (879.4) (373.1) Defi 2007 2006 2007 2006 6,519.0 1,143.3 6,561.0 1,231.7 7,304.2 $1,974.9 $1,974.9 $1,670.5 $6,480.3 ned benefi ned t) ...... andscal the recognition year, of changes that in funded status through compre- t plans, which were as follows:

t ...... t ts t obligation t nancial position, the measurement assetsplan’s of a and its obligations that determine its funded sta- t obligation at beginning of year ...... ts paid ...... t obligation at end year of ts paid ...... ts paid We recognizeWe both accrued interest and penalties related unrecognized to tax benefi We useWe a measurement date of December to develop 31 the change benefi in Note Retirement 12: Benefi During the years ended December 2007, 2006, 31, and 2005, we recognized $66.6 million,million, $51.2 and $44.2 million in interest and penalties, respectively. At December 2007 31, and 2006,our accruals for the payment of interest and penalties totaled $238.4 million, million respectively. and $171.8 Substantially all of the expense and accruals relate to interest. Postretirement Plans—an amendment of FASB Statements 88, No. 106, and 87, SFAS132(R). required 158 the recog- nition of the overfunded or underfunded status of a defi statement fi of hensive income in the year in which the adopted changes We the provisions occur. of SFAS on December 158 2006. 31, tus as of theend of the employer’s fi Service cost ...... Interest cost Benefi Change in benefi

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defi resolution has been prepaid or taxcarryovers will be utilized, which will result in no additional cash payments. funded status, and amounts recognized in the consolidated balance sheets at December for 31 our defi pension and retiree health benefi benefi retirement Accrued Actuarial (gain) loss ...... Accumulated other comprehensive loss before ...... income taxes Net amount recognized ......

Foreign currency exchange rate changes and other adjustments ...... Plan amendments Benefi Benefi plan in assetsChange value Fair of plan assets at beginning of year ...... Foreign currency exchange rate changes and other adjustments value Fair ...... of plan assets at end of year ...... Actual return on plan assets...... Employer contribution Benefi ...... Funded status ...... Unrecognized prior service cost (benefi Unrecognized net actuarial loss ...... Net amount recognized ...... Amounts recognized in the consolidated balancesheet consisted of ...... Prepaid pension Other current liabilities ...... FINANCIALS tively, as of December 31, 2007, and $805.0 million and $37.7 million, respectively, as of December 31, 2006. ofDecember as respectively, $37.7 and million, million 31, $805.0 and 2007, ofDecember as tively, benefi accumulated with plans ber 31, 2006. The accumulated benefi accumulated The 31,ber 2006. ofDecem- as respectively, $1.22 and billion, billion 31, $2.23 and 2007, ofDecember as $160.9 respectively, million, 2014. by percent of5.5 rate ultimate toan year per percent 0.6 approximately by decreasing in2008, of9.3 rate percent annual an at toincrease assumed were rates trend 31,ber Health-care-cost 2007. benefi health retiree and plans as follows: the defi the benefi projected The respectively. 2006, and 31, 2007 December at defi U.S. our on ofreturn rates annualized 20-year 10-and our 2002, and in2001 ket conditions benefi worldwide ofour percent 83 approximately defi U.S. inour assets plan Our economists. and advisers fi ofleading views the and allocations, asset conditions, market of current analysis an results, actual with benefi net for assets plan on return Expected to be returned to us in2008. tous returned to be Net periodic benefi . loss actuarial Recognized (benefi cost service ofprior Amortization . assets plan on return Expected eiaerbts (.) 79 (.) 89 (.) (56.2) (9.8) (8.9) (8.5) (7.9) benefi accumulated total The (5.8) benefi health Retiree . . rebates Medicare benefi health Retiree benefi net for increase ofcompensation Rate benefi for increase ofcompensation Rate of unrecognized prior service benefi service prior of unrecognized defi toour related benefi 31, 2007. December at loss comprehensive other inaccumulated included are and costs pension periodic in net

50 cost Interest . . . cost Service benefi periodic ofnet Components Defi benefi net for rate Discount 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, In evaluating the expected return on plan assets, we have considered our historical assumptions compared compared assumptions historical our considered have we assets, plan on return expected the In evaluating The following represents our weighted-average assumptions as of December 31: ofDecember as assumptions weighted-average our represents following The In 2008, we expect to recognize from accumulated other comprehensive loss as components of net periodic periodic ofnet components as loss comprehensive other accumulated from torecognize expect we In 2008, (benefi cost service prior unrecognized and loss actuarial net unrecognized The t cost $71.5 million of unrecognized net actuarial loss and $9.5 million of unrecognized prior service cost cost service prior $9.5 and ofunrecognized loss million actuarial net ofunrecognized $71.5t cost million ned benefi tpninpas...... 342 375 325 378 341 $2,012.1 $374.1 $367.8 $362.5 $347.5 $324.2 plans . t pension t pension plans with projected benefi projected with plans t pension ned benefi tpasnt...... 02 80 06 28 26 $471.7 $92.6 $527.9 $92.8 $102.4 $101.7 $90.6 $99.1 $88.0 $80.2 $95.9 . t plans—net $86.0 . t plans—gross tcs ...... t cost . t obligation ...... t obligation t pension plans and $65.2 million of unrecognized net actuarial loss and $36.0 million million $36.0 and loss actuarial net ofunrecognized million $65.2 and plans t pension t obligation for our defi our for t obligation t costs ...... t costs t obligations in excess of plan assets were $825.8 million and $46.9 million, respec- million, $46.9 and million $825.8 were assets ofplan inexcess t obligations t plan were approximately 8.9 percent and 11.3 percent, respectively, as ofDecem- as 11.3 and respectively, 8.9 percent percent, approximately were t plan t cost t related to our retiree health benefi health retiree toour t related t obligation and fair value of the plan assets for the defi the for assets plan ofthe value fair and t obligation t expense included the following components: following the included t expense t . t) t obligation . . . . t obligation ect expected future service, as appropriate, are expected to be paid paid tobe expected are appropriate, as service, future expected ect t costs . . . . . t costs t costs t costs . 0820 21 21 2012 2011 2010 2013-2017 2008 2009 t plan assets. Including the investment losses due to overall mar- tooverall due losses investment the Including assets. t plan 07 06 05 07 06 2005 2006 2007 2005 2006 2007 eso ln Pension DefiPlans ned benefi t obligations in excess of plan assets were $1.04 billion and and $1.04 billion were assets ofplan inexcess t obligations $239.0 $287.1 (548.2) 362.4 130.0 ned benefi 7.7 $280.0 $280.0 $297.4 8.3 8.3 7.6 $286.6 $286.6 $262.0 149.6 106.7 343.5 343.5 296.2 (494.8) (445.9) t pension plans was $5.69 billion and $5.65 billion billion $5.65 and billion $5.69 was plans t pension ned Benefi Defi t obligation and fair value of the plan assets for for assets plan ofthe value fair and t obligation 0720 20 2006 2007 2007 2006 4.6 4.6 5.7 6.4 9.0 t pension and retiree health plans comprise comprise plans health retiree and t pension ned Benefi 5.8 9.0 9.0 47 — — 4.7 46 — — 4.6 5.7 t plans. We do not expect any plan assets assets plan any expect not We do t plans. t t t Pension Plans Retiree Health Benefi Health Retiree Plans t Pension t) have not yet been recognized recognized been yet not t) have $149.0 22 $61.5 $72.2 $ 70.4 (102.1) 101.4 (15.7) 95.0 $172.5 $172.5 $137.6 107.9 86.6 107.9 97.9 80.7 ned benefi (89.9) (75.6) (15.6) (15.6) (15.6) ned benefi 6.0 6.7 9.0 Retiree Health Retiree Benefi 9.0 6.0 6.0 t Plans t pension t pension t pension t pension nancial t Plans FINANCIALS 51 8.0 xed-income 100 80 10 10 11 11 t Plans t Total 78 100 ts and accrue for the t plans in 2007, 2006, and t Retiree Health t pension plans to satisfy mini- ned Benefi ned ned benefi ned 9 78 78 12 100 Defi Pension Plans Benefi 1 — — — 1 1 14 10 75 100 nancial security during retirement by providing em- t plan investment allocation strategy currently 2007 2006 Pension Plan Percentage Assets of 2007 2006 Retiree Health Plan Assets Percentage of t) ts primarily related to disability benefi cation, the plan asset strategy encompasses equity and equity- t plans. do We not expect to make any contributions to our post- t obligation would increase by $226.6 million percent) (14.0 andthe ag- cation is represented by other alternative growth investments. t) included in ned benefi ned ed and invested in U.S. and international small-to-large companies. The remaining t pension and retiree health benefi t plans during 2008. t pension plan and retiree health plan asset allocations as of December are 31 as follows: t obligation by $187.9 million (11.6 percent) and the aggregatemillion of the 2007 (11.6 t obligation service by $187.9 cost and inter- cant. ned contribution savings plans that cover our eligible employees worldwide. The purpose of these ned benefi ned ...... (7.7) 15.7 ned benefi ned We provideWe certain other postemployment benefi We haveWe defi In 2008, we expect to contribute approximately $70 million to our defi Our defi Our U.S. defi The following represents the amounts recognized in other comprehensive income in 2007: If the health-care-cost trendrates were be to increased by one percentage point each the future December year, ned contribution plans is generally provide to additional fi Debt securities ...... Real estate ...... Other est cost by $22.7 million percent). (13.2 gregate of the service cost and interest cost components the of 2007 annual expense would increase million by $27.8 percent). one-percentage-point A (16.2 decrease in theserates would decrease the December 2007, accumulated 31, benefi postretirement 31, 2007, accumulated31, postretirement benefi ployees with an incentive to save. Our contributions to the plan are based on employee contributions and the level of our match. Expenses under the million, plans million million, $106.5 totaled for $112.3 and the years $96.1 2007, 2006, and 2005, respectively. defi Actuarial gain arising ...... during period Amortization of net actuarial loss included in net income ...... Net change in unrecognized net actuarial loss not included (515.3) (130.0) in net income during...... period other comprehensive Total income during period ...... (16.5) (645.3) $(620.3) (95.0) (531.8) $(323.5) (225.0) (111.5) $(943.8) (756.8) Net change in unrecognized prior service cost (benefi not ...... recognized in net income during period 25.0 (212.0) (187.0) related cost over the service lives of employees. Expenses associated with these benefi 2005 were not signifi Asset Category Equity securities and equity-like instruments ......

(Percents) ...... Total Plan amendments during period ...... Amortization of prior service cost (benefi $ 32.7 $(227.7) $(195.0) income net retirement health benefi mum funding requirements In addition, for the year. we expect to contribute million of additional approximately $110 discretionary funding in 2008 to our defi comprises approximately 85 percent to 95 percent growth investments and 5 percent percent to 15 fi investments. Within the growth investment classifi like instruments that are expected to represent approximately 75 percentof 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 thegrowth investment classifi FINANCIALS • In Canada,several genericpharmaceutical manufacturers• have challenged thevalidity ofourZyprexa compound • Actavis ElizabethLLC (Actavis), Glenmark• Pharmaceuticals Inc.,USA(Glenmark), SunPharmaceutical Industries Sicor Pharmaceuticals, Inc.(Sicor), MaynePharma(USA)Inc.(Mayne), andSunPharmaceutical• Industries Inc. Barr Laboratories, Inc.(Barr),submitted anAbbreviated• New DrugApplication (ANDA) in2002seekingpermission of1984): Act Term Restoration Patent and Competition Price Drug (the Act Waxman Hatch- inthe out set toprocedures pursuant brought matters litigation patent following inthe engaged We are Litigation Patent period. accounting one inany of operations fi consolidated our on effect specifi as except that, believe 52 signi most The proceedings. environmental and investigations, government actions, legal tovarious aparty We are 13: Contingencies Note and method-of-use patent (expiring in2011).In April 2007,theCanadianFederal Court ruled against thefi adverse impacton our consolidated results ofoperations, liquidity, and fi and accordingly, we can provide noassurance thatwe willprevail. Anunfavorable outcome could have amaterial believe thattheseclaims are withoutmerit.However, itisnotpossible to determine the outcome ofthislitigation, and enforceability ofthepatent andagreed to apermanentinjunction.We expect to prevail inthislitigationand Jersey. InDecember 2007,Zydusagreed to entry ofaconsent judgmentinwhichZydusconceded thevalidity States District Courtfor theEastern District ofVirginia. Synthonhasfiled amotionto dismiss ourlawsuitinNew Teva, Apotex, Aurobindo, Synthon, andZydusasdefendants. We filed asecond actionagainst SynthonintheUnited September 2007,we amendedthecomplaint intheNew Jersey lawsuit to addGlenmark, Sun,Sandoz,Mylan, August 2007.Sandozfiled adeclaratory judgmentaction inthesamecourt, butitscase hasbeendismissed. In is invalid. We filed alawsuitagainst Actavis intheUnited States District Courtfor theDistrict ofNew Jersey in of Strattera priorto theexpiration ofourrelevant U.S.patent (expiring in2017),andalleging thatthispatent Pharmaceuticals, USA,Inc.(Zydus)eachsubmitted anANDA seekingpermission to market genericversions Apotex Inc.(Apotex), Aurobindo PharmaLtd. (Aurobindo), SynthonLaboratories, Inc.(Synthon),andZydus Limited (Sun),SandozInc.(Sandoz), MylanPharmaceuticals Inc.(Mylan),Teva Pharmaceuticals USA,Inc.(Teva), fi unfavorable outcome could have amaterial adverse impactonourconsolidated results ofoperations, liquidity,and to determine theoutcome ofthislitigation,andaccordingly, we can provide noassurance thatwe willprevail. An We expect to prevail inthislitigation and believe thattheseclaimsare withoutmerit.However, itisnotpossible fi we our compound patent, andthatpatent hasnow been addedto thedeclaratory judgmentaction.InJanuary 2008, not beinfringedbythesale ofSun’s genericproduct. Suninformed usinDecember 2007thatitisalsochallenging Eastern District ofMichigan,seekingarulingthatourmethod-of-usepatent isinvalid orunenforceable, orwould court. AlsoinNovember 2007,Sunfiled adeclaratory judgmentactionintheUnited States District Courtfor the are beinginfringed.InNovember 2007,thelawsuitagainst Maynewasstayed andadministratively closed bythe Indiana against Sicor (February 2006)andMayne(October 2006),seekingrulingsthatthesepatents are valid and alleging thatthesepatents are invalid. We filed lawsuitsinthe U.S.District Courtfor theSouthernDistrict of of ourrelevant U.S.patents (compound patent expiring in2010andmethod-of-usepatent expiring in2013),and (Sun) eachsubmitted ANDAs seekingpermission to market genericversions ofGemzarpriorto theexpiration consolidated results ofoperations, liquidity,andfi can provide noassurance thatwe willprevail. Anunfavorable outcome could have amaterial adverse impactonour and we expect to prevail. However, itisnotpossible to determine theoutcome ofthislitigation,andaccordingly, we no trialdate hasbeensetinthelawsuitagainst Barr. We believe thatBarr’s andTeva’s claimsare withoutmerit Southern District ofIndiana.Thelawsuitagainst Teva iscurrently scheduled for trialbeginningMarch 9,2009,while a genericversion ofEvista. InJune2006,we filed asimilarlawsuitagainst Teva intheU.S.District Courtfor the valid, enforceable, andbeinginfringedbyBarr. Teva hasalsosubmitted anANDA seekingpermission to market against BarrintheU.S.District Courtfor theSouthernDistrict ofIndiana,seekingarulingthatthesepatents are and alleging thatthesepatents are invalid, notenforceable, ornotinfringed.InNovember 2002,we filed alawsuit to market agenericversion ofEvista prior to theexpiration ofourrelevant U.S.patents (expiring in2012-2017) nancial position. 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 fi cant of these are described below. While it is not possible to determine the outcome of these matters, we we matters, ofthese outcome the todetermine possible not is it While below. described are ofthese cant led asecond lawsuitagainst Mayneinresponse to asecond ANDA filed byMaynefor anew dosagestrength. nancial position or liquidity, but could possibly be material to our consolidated results results consolidated toour material be possibly could but liquidity, or position nancial cally noted below, the resolution of all such matters will not have a material adverse adverse amaterial have not will matters such ofall resolution the below, noted cally nancial position. nancial position. rst rst FINANCIALS 53 led led seekingce production ce (USPTO) commenced nal judgment indicating nding damages in the amount $65 of million plus ce of the Attorney General of the State of Illinois, ce of the U.S. Attorney for the Eastern District of Pennsylvania (EDPA) advised us that it had t manager covering Axid, Evista, Humalog, Humulin, Prozac, and Zyprexa. The inquiry includes a In June 2005, we receivedce of the Attorney a subpoena General, from the Offi Medicaid Fraud Control Unit, of In September 2006, we received a subpoena from the California Attorney General’s Offi In June 2002, Ariad Pharmaceuticals, Inc., the Massachusetts Institute the Whitehead of Technology, Insti- In February 2007, we received a subpoena from the Offi We areWe vigorously contesting the various legal challenges to our Zyprexa patents on a country-by-country challenger, Apotex Inc. (Apotex), and Apotex has appealed that ruling. In June 2007, the Canadian Federal Court Federal June 2007, the Canadian that ruling. In has appealed and Apotex Inc. (Apotex), Apotex challenger, ed and denied justifi were Ltd. (Novopharm), Novopharm challenger, of a second allegations the invalidity held that Canada. olanzapine in generic for approval marketing receiving from be prohibited that Novopharm our request that appealed have We of 2007. quarter third in Canada in the generic olanzapine began selling Novopharm fi Apotex 2007, November In was dismissed. The appeal infringement. patent for sued Novopharm decision and several smaller European countries. In Spain, we have been successful at both the trial and appellate court court and appellate at both the trial been successful have In Spain, we countries. European smaller several generic from challenges further legal anticipate but we challenge, manufacturers’ the generic in defeating levels 2008. July been set for has tentatively U.K., a trial date In the manufacturers. of our Zyprexa compound and method-of-use patents (expiring in 2011). In June 2007, the German Federal 2007, the German Federal in 2011). In June (expiring method-of-use patents and compound of our Zyprexa olanzapine was launched by appealing the decision. Generic are We is invalid. held that our patent Court Patent 2007. of quarter in the fourth in Germany competitors an action seeking a declaration of the invalidity of our Zyprexa compound and method-of-use patents (expiring in (expiring and method-of-use patents compound Zyprexa of our of the invalidity declaration an action seeking a appeal. will likely 2007. Apotex February in in our favor ruled 2011). The trial court the State of Florida, seeking production of documents relating to sales of Zyprexa and our marketing and promo- tional practices with respect to Zyprexa. seeking production of documents and information relating to sales of Zyprexa and our marketing and promotional commenced an investigation related to our U.S. marketing and promotional practices, including our communica- tions with physicians and remuneration of physician consultants and advisors, with respect to Zyprexa, Prozac, and Prozac In November Weekly. 2007, we received a grand jury subpoena from the for EDPA a broad range of docu- ments related to Zyprexa. A number of State Medicaid Fraud Control Units are coordinating with the in its EDPA investigation of any Medicaid-related claims relating to our marketing and promotion of Zyprexa. In October 2005, the advised EDPA that it is also conducting an inquiry regarding certain rebate agreements we entered into with a pharmacy benefi review of our Medicaid best price reporting related to the product sales covered by the rebate agreements. Government Investigations Related and Litigation In March 2004, the Offi tute for Biomedical Research, and the President and Fellows of Harvard College in the U.S. District 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 deci- sion 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 the patent through the date of trial. In addition, a separate bench trial with the U.S. District Court of Massachusetts was held August in 2006, on our contentionthat the patent is unenforceable and impermis- sibly covers natural processes. In June 2005, the United States Patent and Trademark Offi a reexamination of the patent, and in August 2007 took the position that the Ariad claims at issue are unpatent- able, a position that Ariad continuescontest. to In September the 2007, Court entered a fi that Ariad’s claims are patentable, valid, and enforceable, and fi a 2.3 percent royalty on net U.S. sales of Xigris and Evista since the time of the jury decision. the Court However, deferred the requirement to pay any damages until after all rights to appeal have been exhausted. plan We to ap- peal this judment. believe We that these allegations are without legalmerit, that we will ultimately prevail on these issues, and therefore that the likelihood of any monetary damages is remote. of documents related to our efforts to obtain and maintain Zyprexa’s status on California’s formulary, marketing and promotional practices with respect to Zyprexa, and remuneration of health care providers. basis. cannot We determine the outcome of this litigation. The availability of generic olanzapine in Canada and Germany will have a material adverse impact on our consolidated results of operations. The availability of generic olanzapine in additional markets could have a material adverse impact on our consolidated results of operations. • We have received challenges in a number of other countries, including Spain, the United Kingdom (U.K.), and Kingdom (U.K.), Spain, the United including in a number of other countries, challenges • received have We • In Germany, generic pharmaceutical manufacturers Egis-Gyogyszergyar and Neolabs Ltd. challenged the validity validity the challenged and Neolabs Ltd. Egis-Gyogyszergyar • manufacturers In Germany, generic pharmaceutical FINANCIALS 54 U.S. inthe pending litigation inthe tothose similar are actions Canadian inthe allegations certifi certifi been has lawsuits four ofthese One Zyprexa. took who plaintiffs. U.S. of the several for York, ofNew District Eastern inthe 2008, 23, June for set been have Trial dates plaintiffs. 1,235 mately approxi- covering U.S. inthe lawsuits 325 approximately include agreements tothese subject not claims liability 2007.during follows: as were settlements primary fi ofpreviously number alarge including claimants, 31,200 mately ofapproxi- atotal cover agreements The claims. ofthe majority asubstantial tosettle litigation liability product York 1596). (MDL No. ofNew District Eastern the for Court District Federal inthe Weinstein Jack Honorable The before proceeding (MDL) Litigation a Multi-District of 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 (together notifi been have and States United inthe lawsuits liability product ofZyprexa number inalarge adefendant as named been We have Litigation Related and Liability Product regulations. and laws applicable with comply reporting price best Medicaid and arrangements, care managed professionals, care ofhealth remuneration communications, physician practices, promotional and marketing our that toensure designed activities compliance-related comprehensive includes that fi and liquidity, ofoperations, results consolidated our on impact adverse amaterial have could outcome adverse an fi ofany ofamounts range or amount the estimate reasonably or matters ofthese outcome the determine We cannot remedies. nonmonetary fi and charges criminal include could matters ofthese outcome the that and toinvestigation subject become could products Lilly other that possible is It investigations. tothe relating mation Act. Claims False California ofthe provision tam qui the under government, ofthe behalf on individual an by brought was suit This practices. promotional and marketing Zyprexa tocertain respect with Act Claims False California ofthe violations alleging court, tofederal removed was which Court, State inCalifornia suit inaprivate adefendant as named been have we Inaddition, providers. care ofhealth remuneration and practices, promotional and marketing tosales, relating documents including documents, ofZyprexa range abroad seeking are general attorneys These investigation. the join will states additional that possible is it and effort, joint inthis participating are states 30 approximately that aware We are general. ofattorneys committee executive an by coordinated being effort investigative of amultistate part now are requests ofthese Most laws. protection consumer state various under ofstates ofanumber general toZyprexa. respect with advisors, and consultants ofphysician remuneration and physicians with communications our including practices, ity of the disputed insurance claims, and a portion of the insurance proceeds were paid to us prior to the end of2007. end tothe prior tous paid were proceeds insurance ofthe aportion and claims, insurance disputed ofthe ity major- vast the resolving settlements reached of2007, we half second In the carriers. other against inBermuda tion inarbitra- and carriers ofthe certain against in Indianapolis court federal inthe of litigation subject the was dispute The policies. the torescind seeking are and policies the under liability totheir defenses raised have carriers ance nancial position. We have implemented and continue to review and enhance a broadly based compliance program program compliance based abroadly enhance and toreview continue and implemented We have position. nancial • In January2007,we reached agreements• withanumberofplaintiffs’ attorneys to settle more than18,000claims In June2005,we reached anagreement• inprinciple (andin September 2005afinal agreement) to settle more We have insurance coverage for a portion of our Zyprexa product liability claims exposure. The third-party insur- third-party The exposure. claims liability product Zyprexa ofour aportion for coverage insurance We have 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 infor- and ofdocuments range abroad providing including investigations, ofthese ineach cooperating We are attorneys the from subpoenas or demands investigative civil received have we 2006, inAugust Beginning for approximately $500million. than 8,000claimsfor $690.0millionplus$10.0to cover administration ofthesettlement. 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 nes or penalties that might result from an adverse outcome. It is possible, however, that possible, is It outcome. adverse an from result might that penalties or nes ed for residents of Quebec, and a second has been been has asecond and ofQuebec, residents for ed led lawsuits and other asserted claims. The two two The claims. asserted other and lawsuits led led suit. The lawsuits and unfi and lawsuits The suit. led nes, penalties, or other monetary or or monetary other or penalties, nes, led claims led claims FINANCIALS 55 t led in the Eastern District of New in 2006 York on similar led by the states of Alaska, Mississippi,Montana, New Mexico, nancial position. nancial led in the Eastern District of New purporting York to be nationwide class actions culties in obtaining product liability insurance due to a very restrictive insurance market. Therefore, for and expected future claims to the extent we could formulate a reasonable estimate of the probable number and number of the probable estimate reasonable a formulate could we extent the claims to future and expected of the claims. cost We cannotWe determine with certainty the additional number of lawsuits and claims that may be asserted. The In 2005, two lawsuits were fi 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- In December 2004, we were served with two lawsuits brought in state court in Louisiana on behalf of the Since the beginningof 2005, we have recorded aggregate net billion pretax for Zyprexa charges $1.61 of • The cost of the Zyprexa product liability settlements to date; and date; to liability settlements product • the Zyprexa of The cost liability claims product Zyprexa known the regarding costs defense and liability exposures • product for Reserves grounds. The In 2007, Pennsylvania Employees FundTrust 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 York cases. 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. ultimate resolution of Zyprexa product liability and related litigation could have a material adverse impact on our consolidated results of operations, liquidity, and fi Pennsylvania, South Carolina, Utah, and West Virginia in the courts of the respective states. The Mississippi, Montana, New Mexico, and West Virginia cases have been removed to federal court and are now part of the MDL proceedings in the Eastern District of New York. The Alaska caseis scheduled for trial beginning March 3, 2008. on behalf of all consumers and third-party payors, excluding governmental entities, which have made orwill make payments for their members or insured patients being prescribed Zyprexa. These actions havenow been consoli- dated into a single lawsuit, which is brought under certain state consumer protection statutes, thefederal civil RICO statute, and common law theories, seeking a refund of the cost of Zyprexa, treble damages, punitive dam- ages, and attorneys’ fees. additional Two lawsuits were 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 experi- enced diffi Environmental Matters Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Super- fund, 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 environ- mental liabilities. substantially all of our currently marketed products, we have been and expect that we will continue to be largely self-insured for future product liability losses. In addition, as noted above, there is no assurance that we will be able to fully collect from our insurance carriers on past claims. Louisiana Department of Health and Hospitals, alleging that Zyprexa caused or contributed to diabetes or high blood-glucose levels, and that we improperly promotedthe drug. These cases have been removed to federal court and are now part of theMDL proceedings in the Eastern District of New 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 programs, as well as the costs the department alleges it has incurred and will incur to treat Zyprexa-related ill- nesses. have We been served with similar lawsuits fi product liability matters. The net charges, which takeinto account our actual and expected insurance recoveries, covered the following: FINANCIALS

56 1,401.9 (1.0) fl ofcash portion effective The income. innet included ofsecurities sales on gains realized net for respectively, 2005, and $9.1 2006, in2007, and lion, oftax, net million, $13.2 651.7 $(166.8) $(1,388.7) translation. $(1,151.6) $(165.8) signifi not were income (5.4) ofcomprehensive ponents $14.6 com- other tothe related taxes $(1,803.3) income 2007.The for of$292.1 million (Note expense 12) an were costs service prior and losses unrecognized the with associated taxes income The taxes. of income net are above amounts The $20.0 $1,317.0 756.6 . 31, 2007. December at Balance $560.4 . (loss) income comprehensive Other . 1, 2007. January at balance Beginning follows: as were (loss) income comprehensive ofother component toeach related balances accumulated The (Loss) Income Comprehensive 14: Other Note for interest expense on interest rate swaps designated as cash fl cash as designated swaps rate interest on expense interest for respectively, 2005, $11.6and and options $17.1 2006, in2007, million, oftax, net currency $21.4 million, and million, foreign on losses realized for respectively, 2005, and 2006, in2007, oftax, net million, $3.8 and million, $2.3 lion, 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 The unrealized gains (losses) on securities is net of reclassifi cation adjustments of $5.8 million, $16.9 million, ofreclassifi of$5.8 mil- net is adjustments securities on cation (losses) gains unrealized 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 currency foreign for provided not were taxes income as cant, rnlto Giso RtreHat Cs lw Comprehensive Other Flow Cash Health Retiree of Portion on Gains and Pension Translation Unrealized Securities Gains Currency Foreign Benefi Defi ow hedges is net ofreclassifi net is hedges ow ow hedges. ned Benefi cation adjustments of $8.8 mil- of$8.8 adjustments cation t Plans Hedges Income (Loss) Income Hedges t Plans t fetv Accumulated Effective t ows; therefore, FINANCIALS 57 cer icts The Red nancial ac- nancial is reviewed on a nancial results. The inter- rm subject to shareholder nancial position, results of nancial reporting based on the The Red Book Derica Rice W. Senior Vice President and Chief Financial Offi rm to discuss audit activities, internal nancial code of ethics, which further nancial accounting and reporting that nancial information. A staff of internal auditors rm have full and free access to the committee. nancial reporting, our underlying system of internal nancial statements in accordance with generally accept- nancial information that is transparent, complete, timely, issued by the Committee of Sponsoring Organizations of the rm. The audit committee meets several times during the year with ned in Rules 13a-15(f) and 15d-15(f) under the Securities and 15d-15(f) ned in Rules Exchange 13a-15(f) dence in our fi nancial statements present fairly our fi dentiality of proprietary information. nancial management must signfi a nancial reporting was designed and operating effectively. John C. Lechleiter, Ph.D.John C. Lechleiter, to enable employees to report suspected violations anonymously. Employees nancial statements and other fi nancial reporting has been assessed by Ernst Their responsibility LLP. & Young is to nancial policies that govern critical areas, including internal controls, fi duciary accountability, and safeguardingcorporate of assets. Our internal accounting The Red Book ows. nancial reporting as defi duciaryresponsibilities. 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- nancial statements have been audited by an Ernst independent LLP, registered & Young public accounting ) that applies to all employees worldwide, requiring proper overall business conduct, avoidance of confl The internal control over fi The fi Our audit committee includes four nonemployee members of the board of directors, all of whom are indepen- We areWe dedicated to ensuring that we maintain the high standards of 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 nancial reporting were effective as because of December 2007. However, 31, of its inherent limitations, internal rm, and review the reports submitted by the fi rm. Their responsibility is to examine our consolidated fi reinforces their 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. management, the internal auditors, and the independent public accounting fi 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 Sidney Taurel who report suspected violations are protected from discrimination or retaliation by the company.addition In to The Red Book, the CEO, the COO, and all fi ed auditing standards of the Public Company Accounting Oversight Board (United States). opinion Ernst & Young’s with respect to the fairness of the presentation of the statements (see opinion on page 58) is included in our annual report. Ernst reports & Young directly to the audit committee of the board of directors. 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 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 adequate inte 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. regularly monitors, on a worldwide 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 control systems 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 periodic basis with employees worldwide, and all employees are required report to suspected violations. A hotline number is published in counting and reporting, fi Book February 2008 8, Chairman of the Board and Chief cer Executive Offi President and Chief Operatingcer Offi Act of 1934. have We global fi 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 of interest, compliance with laws, and confi 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 Management’s Reports Management’s FINANCIALS 8, 2008 February Indiana Indianapolis, taxes. income for pronouncement accounting anew adopted subsidiaries and Company and 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 expressed an unqualifi an expressed 2008 8, February dated report our and Commission Treadway ofthe Organizations ofSponsoring Committee the in established criteria on 31, based 2007, ofDecember as ing fi over control internal subsidiaries’ and Company and Lilly ofEli effectiveness the States), (United principles. accounting accepted generally U.S. with 2007, inconformity fl cash their and operations oftheir results dated fi dated efi defi for pronouncement accounting anew adopted subsidiaries and Company and Lilly Eli in2006 ments, 12 inNote fi tothe discussed As obligations. retirement asset for pronouncement accounting new 58 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 audits. our on based ments fi these on opinion an toexpress is responsibility Our management. company’s ofthe responsibility fi 31, 2007. These December ended period inthe years three ofthe each for income fl cash ofincome, statements consolidated related the and 2006, and 31, 2007 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 t pension and other postretirement plans. As discussed in Note 11 inNote fi tothe discussed As plans. postretirement other and t pension In our opinion, the fi the opinion, In our As discussed in Note 2 to the fi 2tothe inNote discussed As Board Oversight Accounting Company Public ofthe standards the with inaccordance audited, have We also 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 nancial position of Eli Lilly and Company and subsidiaries at December 31, 2007 and 2006, and the consoli- the and 2006, and 31, 2007 December at subsidiaries and Company and Lilly ofEli position nancial 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 ed opinion thereon. nancial statements referred to above present fairly, in all material respects, the consoli- the respects, material inall fairly, present toabove referred statements nancial nancial statements, in 2005 Eli Lilly and Company and subsidiaries adopted a adopted subsidiaries and Company and Lilly Eli in2005 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 ows for each of the three years in the period ended December 31, December ended period inthe years three of the each for ows nancial statements. An audit also includes assessing the the assessing includes also audit An statements. nancial Internal Control—Integrated Framework nancial statements, in 2007 Eli Lilly Lilly Eli in2007 statements, nancial nancial statements are the the are statements nancial ows, and comprehensive comprehensive and ows, nancial state- nancial report- nancial nancial state- issued by issued ned ben- nan- FINANCIALS 59 nancial reporting nancial statementsnancial accor- in issued by the Committee of Spon- nancial reporting as of December nancial reporting and for its assess- nancial statements for external purposes in nancial reporting may not prevent or detect mis- nancial reporting, assessing the risk that a material nancial statements. nancial ed opinion thereon. opinion ed nancial reporting included in the accompanying Management’s Internal Control-Integrated Framework Control-Integrated Internal nancial reporting was maintained in all material respects. Our audit nancial reporting is a process designed to provide reasonable assurance nancial statements of Eli Lilly and Company and subsidiaries and our re- 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 2007, based 31, on the COSO criteria. Because of its inherent limitations, internal control over fi 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 We conductedWe our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the 2007 consolidated fi accordance with generally accepted accounting principles. A company’s internal control over fi 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 dance withgenerally 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) rea- sonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the fi statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that con- trols may become inadequate because changes of in conditions, or that the degree of compliance with the policies deteriorate. may procedures or control over fi port dated February 8, 2008, expressed an unqualifi Indianapolis, Indiana February 2008 8, We haveWe audited Eli Lilly and Company and subsidiaries’ internal control over fi 2007, based31, on criteria established in weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the as- sessed risk, and performing such other procedures as we considered necessary in the circumstances. believe We that our audit provides a reasonable basis for our opinion. regarding the reliability of fi Board of Directors and Shareholders Eli Lilly and Company Report of Independent Registered Public Accounting Firm Firm Public Accounting Registered of Independent Report 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 soring Organizations of the 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 PROXY STATEMENT 6060 purposes: following 11:00 at the for EDT 21, a.m. 2008, April Monday, on Indiana, Center, Indianapolis, Corporate Lilly Auditorium, Center Lilly the at held be will Company and Lilly ofEli ofshareholders meeting annual The 21, 2008 April Notice ofAnnualMeetingShareholders http://www.lilly.com/investor/annual_report/lillyar2007.pdf at available are statement proxy and report annual The 21, 2008. April held tobe Meeting Shareholder the for Materials Proxy of Availability the Regarding Notice Important Offi Executive Chief and Board ofthe Chairman Sidney Taurel 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 21, 2008, April Monday, on ofshareholders meeting annual our toattend invited You cordially are Shareholder:Dear 10, 2008 March Notice of2008AnnualMeetingandProxy Statement Indianapolis, Indiana Indianapolis, 10, 2008 March Secretary B.Lootens James ofdirectors, board ofthe order By 10, 2008. March 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 ratify theappointmentbyauditcommittee ofErnst &Young• LLPasprincipalindependentauditors for the to elect four directors• ofthecompany to serve three-year terms • to consider andvote onashareholder• proposal requesting thatthecompany prepare asemiannualreport onits to consider andvote onashareholder• proposal requesting thattheboard ofdirectors adoptasimple majority to consider andvote onashareholder• proposal requesting thatthecompany amenditsarticles ofincorporation to consider andvote onashareholder• proposal regarding theinternational outsourcing ofanimalresearch to amendthecompany’s• 2002Lilly Stock Plan to approve• amendmentsto thearticles ofincorporation to provide for election ofdirectors bymajority vote I look forward to seeing you at the meeting. meeting. the at you toseeing forward I look 63. 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 year 2008 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 will 15, 2008, February on ofbusiness close the at ofrecord Shareholders political contributions. vote standard for certain matters otherthantheelection ofdirectors to allow shareholders to amendthecompany’s bylawsbymajorityvote to approve amendmentsto thearticles ofincorporation to provide for thedeclassification oftheboard ofdirectors 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 6161 If your shares are the held broker by will a broker, ask you how you want your shares to be voted. of principal independent auditors of the appointment cation majority vote majority vote law. by ed —the appointment of principal independent auditors by of directors election for provide to of incorporation amend the articles to —the management proposal plan stock amend the company’s to —the management proposal proposals. —the shareholder these proposals. or against either for will not be counted Abstentions The four nominees for director receiving the most votes will be elected. Abstentions and instructions to withhold to and instructions Abstentions will be elected. votes the most receiving director nominees for The four but will not votes fewer in those nominees receiving of the nominees will result one or more for vote authority to a nominee. against as votes count proposal: as a the same effect have nonvotes broker and abstentions this item, For shares. of the outstanding 80 percent the proposal. against vote election of directors of directors election • The following items of business will be approved if the votes cast for the proposal exceed those cast against the against those cast exceed the proposal for cast if the votes will be approved • of business items following The • The management proposal to amend the articles of incorporation to declassify the board requires the vote of the vote requires the board declassify to of incorporation • amend the articles to management proposal 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 the board cation declassifi for provide to of incorporation articles • amending the company’s by majority vote of directors election for provide to of incorporation articles • amending the company’s plan stock • amending the company’s research of animal outsourcing on international • proposal a shareholder bylaws amend the company’s to shareholders on allowing • proposal a shareholder of directors than election other matters for standard majority vote on adopting a simple • proposal a shareholder contributions. political on the company’s a semiannual report requesting • proposal a shareholder • g. As of the record date, 1,136,985,018 sharesg. As of company of the record common date, stock 1,136,985,018 were issued and outstanding. as already passed. Nonetheless, in case there is an unforeseen need, the accompanying proxy gives discretion- rs (the annual meeting) to be held on Monday, April 2008, 21, and at any adjournment of the annual meeting. When ou have one vote for each share of common stock you held on the record date, including shares: If you give the broker instructions, your shares will be voted as you direct. If you do not give instructions, one of two Broker nonvotes. Broker 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 2008 15, (the record date) may vote at the annual meeting. Y What constitutes quorum? a A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the annual meet- in 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 What will the shareholders vote on at the annual meeting? Nine items: Why did I receive this proxy statement? The board of directors of Eli Lilly and Companyis solicitingproxies to be voted at the annual meeting of sharehold- e the company asks for your proxy, we must provide you with a proxy statement that contains certain information specifi General Information General PROXY STATEMENT 6262 include: shares undirected These received. w vote your decline, you unless In addition, 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, 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 2008. 20, available EDT, be p.m. will April voting 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 Internet. the On 2008. 20, EDT, April 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 By telephone. 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, stock company’s the ing amend- and ofincorporation articles the amending on proposals management the for auditors, 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 nonvote.” a“broker called is it happens, that When all. at shares your vote not may broker the proposals, other all For discretion. inits shares your vote may broker the ratifi the and ofdirectors election the For ofproposal. type the on depending happen, can things hares by following instructions that the broker or nominee provides for you. Most brokers offer voting by mail, mail, by voting offer brokers Most you. for provides nominee or broker the that instructions following by hares y mail. 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 • 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 card. aproxy receive not did you electronically, materials these toreceive elected previously you if that Note number ofshares from apriorstock ownership plan,whichcan bevoted only onthedirections oftheparticipants shares credited to the accounts ofparticipants whodonotreturn their voting instructions (except for asmall 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 Shareholders in the United States, Puerto Rico, and Canada may vote by telephone by following the the following by telephone by vote may Canada and Rico, Puerto States, United inthe Shareholders You may vote online at www.proxyvote.com. Follow the instructions on the enclosed proxy card card proxy enclosed the on instructions the Follow www.proxyvote.com. at online You vote may 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 cer or agent of a corporation or partnership), please indicate your your indicate please partnership), or ofacorporation agent or cer cation of the appointment oftheappointment cation cation of auditors, ofauditors, cation ed ed you PROXY STATEMENT 6363 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 Cen- 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 to whose accounts the shares are credited) are the shares whose accounts to If you donot want to have your vote applied to the undirected shares, you should check the box marked “I de- 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 • shares held in the plan that are not yet credited to individual participants’ accounts. participants’ individual to credited yet not • that are held in the plan shares 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 vote to 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 2009 annual meeting? The company’s 2009 annual meeting is scheduled for April 20, 2009. If a shareholder wishes 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 cline.” Otherwise,cline.” the trustee will automatically apply your voting preferences to the undirected shares proportion- ally 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 when the materials are available, along with a web address for viewing the materials and instructions for voting by 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 November 2008. 10, Proposals should be addressed to the company’s corporate secretary, Lilly Cor- porate Indianapolis, Center, Indiana 46285. In addition, the company’s bylaws provide that any shareholder wishing to propose any other business at the annual meeting must give the company written notice by November 2008. 10, That notice must provide certain other information as described in the bylaws. Copies of the bylaws are available http://investor.lilly.com/bylaws.cfm. at online 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 Who tabulates the votes? The votes are tabulated by an independent inspector of election, IVS Associates, Inc. and voting instruction card you receive. ter 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 at the meeting. 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 2008 and report annual 2007 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 6464 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. ofproxy copies duplicate receiving toavoid way easy an is y toreceive you for way aconvenient also is It costs. mailing and printing company’s the reduces delivery Electronic benefi the are What broker. ofyour instructions the follow Please electronically. future. inthe electronically account. each notifi e-mail separate receive may you account, one than more have you If Internet. the on or telephone 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 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://proxyonline.lilly.com. 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 cations for cations PROXY STATEMENT 6565 cer of Motorola, cer, Motorola, cer, Inc. and Eastman cer of United ParcelService, Inc., from cer from 1993 to January 2000 and as cer from 1990 to October 1993, and presi- cer, United Parcel Service,cer, Inc. Age 67 Age 67 Director since 2000 Age 58 Director since 2008 cer from Fisher 1988 is to 1990. a senior Mr. advisor for Kohlberg

rmer Chairman of the Board and Chief Executive Offi rmer Chairman and Chief Executive Offi xecutive Vice President for Academic Affairs and Provost, The University South- of Texas January 2002 December until He continues 2007. to serve on the UPS board of directors. Mr. Eskew began his UPS career as in 1972 an industrial engineering manager and held various positionsincreasing of responsibility, including time with operations UPS’s in Germany and with UPS Airlines. Eskew was In 1993, Mr. named corporate vice president for industrial engineer- yearsing. 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 Eskew chairman. serves Mr. as a trustee of the UPS Foundation and 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. He has been servingunder interim election since February 2008. Fisher M.C. George Fo Mr. Eskew servedMr. as chairman and chief executive offi Kravis Roberts & Company, presiding director of General Motors Corporation, and a director of Visant Corporation. He is a former chairman of PanAmSat Corporation and was chairman of the National Academy of Engineering from 2000 to 2004. Alfred G. Gilman, M.D., Ph.D. E Age66 Director since 1995 dent and chief executive offi Kodak Company Fisher servedMr. as chairman of the board of Eastman Kodak Company from 1993 to De- cember2000. He also served as chief executive offi president from Prior 1993 to 1996. to joining Kodak, he was an executive offi Inc., serving as chairman and chief executive offi Fo Michael L. Eskew western Medical Center at Dallas; Dean, Southwestern Medical School; and Regental Professor of Pharmacology and Director of the Cecil and Ida Green Center for Molecular, Computational, and Systems Biology, The University Southwestern of Texas Medical Center Gilman has servedDr. as executive vice president for academic affairs and provost of The University Southwestern of Texas Medical Center at Dallas and dean of The University of SouthwesternTexas Medical School since 2005 and professor of pharmacology at The Uni- versity Southwestern of Texas Medical He Center holds since the 1981. Raymond and Ellen Willie Distinguished Chair of Molecular Neuropharmacology, Craddick the Nadine and Tom Distinguished Chair in Medical Science, and the Atticus James Gill, M.D., Chair in Medical Science at the university and was named a regental professor Gilman was in 1995. Dr. on the faculty of the University of Virginia School of Medicine and from was to 1981 1971 named a professor of pharmacology He is a director there in 1977. of Regeneron Pharmaceuticals, Gilman wasInc. Dr. a recipient of the Nobel Prize in Physiology or Medicine in 1994. he following fi ve directors’ terms willhe following expire at Fisher this annual fi year’s meeting. will Mr. retire from the board at Class of 2008 T Directors’ Biographies the end of his current term. Each of the other directors in this class has been nominated and is standing for elec- tion to serve a term that See will page expire of this 102 proxy in 2011. statement for more information. Board of Directors Board PROXY STATEMENT 66 31, 2008 December effective Mr for except 2009, until office in continue will directors four following The 2009 of Class Karen N. Horn, Ph.D. Horn, N. Karen dent of the American Economic Association Economic American the of dent Inc Studies, Inc Group, International American of tor adirec and Commission Trilateral the of committee executive the of amember is Feldstein Economics Business for Association National the of afellow and Society, Econometric adviser Reagan’s economic Ronald chief President and ers 1969in aprofessor 1968, in and 1967, in professor Harvard at associate an professor assistant an F George the and search Dr University Harvard Economics, of F. Professor Baker George and Research, Economic of Bureau National Officer, Executive Chief and President Ph.D. Feldstein, S. Martin directors of board Indiana Central of Way United the of amember and Institute, Fairbanks of committee executive and directors of board the of amember Indianapolis, of Children’s Museum to The advisor Ohio) (Cincinnati, University Xavier of trustees of Health Public of School Harvard the of Council tive Execu Management and Policy Health to the and School Business Harvard of Committee Society Chemical American the of ber 2004 in operations, pharmaceutical of president vice executive named was He 2001 in development corporate and products pharmaceutical of president vice executive and affairs tory 1994 in affairs regulatory of president vice and 1993 in development product pharmaceutical of president vice named U. the and England in positions management held has and chemist organic senior officer executive chief and president become will he 1, 2008, April Dr Officer Operating Chief and President Ph.D. Lechleiter, C. John 2004 since Group Capital Brock of director managing senior Inc Group, Property U The Funds; Mutual Price Boston of Bank National First of president vice and Pennsylvania; of Telephone Company Bell of treasurer Cleveland; of Bank Reserve Federal N Cleveland, One, Bank of officer executive chief and chair Company; Trust Bankers at banking private international of head and director managing senior was Inc Ms Inc. Marsh, Director, Managing and Services, Client Private President, Retired can Philosophical Society, a corresponding fellow of the British Academy, a fellow of the the of afellow Academy, British the of fellow acorresponding Society, Philosophical can Lechleiter was named president and chief operating officer of the company in 2005, and on and 2005, in company the of officer operating chief and president named was .Lechleiter Feldstein is president and chief executive officer of the National Bureau of Economic Re Economic of Bureau National the of officer executive chief and president is .Feldstein Horn served as president of Private Client Services and managing director of Marsh, Marsh, of director managing and Services Client Private of president as served .Horn . , a subsidiary of MMC, from 1999 until her retirement in 2003 in retirement her until 1999 from MMC, of , asubsidiary . From 1982 through 1984, he served as chairman of the Council of Economic Advis Economic of Council the of chairman as served he 1984, through 1982 .From .Dr He is a member of the American Academy of Arts and Sciences and past presi past and Sciences and Arts of Academy American the of amember is .He Lechleiter became senior vice president of pharmaceutical products in 1998, 1998, in products pharmaceutical of president vice senior became .Lechleiter He also serves on the board of Indianapolis Downtown, Inc Downtown, Indianapolis of board the on serves also .He . ; Norfolk Southern Corporation; and Fannie Mae Fannie and Corporation; Southern ; Norfolk

Baker Professor of Economics at Harvard University Harvard at Economics of Professor .Baker In 1996, he was named vice president for development and regula and development for president vice named 1996, .In was he

. S Russia Investment Fund, a presidential appointment; Simon Simon appointment; apresidential Fund, Investment .Russia In 2004, Dr 2004, .In . ; the Council on Foreign Relations; and Economic Economic and Relations; Foreign on Council ; the 54 Age 68 Age 64 Age . In addition, he serves as a distinguished adistinguished as serves he addition, .In Lechleiter was appointed to the Visiting Visiting to the appointed was .Lechleiter He also serves as a member of the board board the of amember as serves also .He .Ms Taurel, who will resign from the board board the from resign will .Taurel, who Horn serves as director of T of director as serves .Horn Director since 2005 since Director Director since 2002 since Director Director since 1987 since Director He is a member of the Ameri the of amember is .He . He joined Lilly in 1979 as a 1979as in Lilly joined .He Prior to joining Marsh, she she Marsh, to joining .Prior .Ms . A . ; president of the the of ; president Horn has been been has .Horn . He is amem- is .He He became became .He S He was was .He Rowe .Rowe .Dr - - . - - .

- - -

PROXY STATEMENT 6767 cer and of Tropicana the c region, a position he held rm that provides business advisory cer since July 1998, and will retire cer cer of the French Legion of Honor. Age 59 Director since 1991 Age 61 Age 61 Director since 2002 Age 48 Director since 2005 rm. Prior to joining North Castle, she served as the chief

cer of a start-up B2B exchange for the food and beverage industry. From 1993 roup Vice President, DuPont Agriculture Nutrition & resident, The Barnegat Group LLC hairman of the Board and Chief Executive Offi cer of the Nabisco Biscuit Company, the largest operating unit of Nabisco, Inc.; from 1987 executive offi through 1998, Ms. Marram was president and chief executive offi C Ms. Marram is president of The Barnegat Group LLC, a fi services. She was a managing directorat North Castle Partners, LLC from 2000 to 2005 and is currently an advisor to the fi Tropicana Beverage Group. From 1988 to 1993, she was president and chief executive of- fi 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, The New Times York Company, and Cadbury Schweppes plc as well as several private com- panies. She serves on the boards of The New York-Presbyterian Hospital, Lincoln Center FamiliesTheater, and Work Institute, and Citymeals-on-Wheels. Taurel Sidney Mr. FyrwaldMr. has been group vice president of DuPont Agriculture & Nutrition since 2003. He was previously vice president and general manager nutrition DuPont’s of and health busi- nesses, which included The Solae Company, DuPont Qualicon, and Liqui-Box. Fyrwald Mr. joined DuPont as a production in 1981 and held engineer, a variety of salesand management positions in a number of areas. In 1990, he became the leader of the DuPont Engineering Polymers and DuPont Butacite businesses for the Asia Pacifi He wasuntil 1994. named leader of the DuPont Nylon Plastics business for the Americas whenuntil 1996, he became head of global salesand marketing for Engineering Polymers. In 1998, he was appointed vice president of Corporate Plans and Business Development. FyrwaldMr. serves on the boards of CropLife International, the Des Moines Art and Center, United Way of Iowa. Ellen R. Marram P J. Erik Fyrwald G Mr. Taurel has beenTaurel the company’s chief executiveMr. offi effective 2008. March 31, He has served as chairman of the board since January and 1999, will retire as chairman and member of the board effective December 2008. 31, He served as cer frompresident February and chief operating through 1996 September offi 2005. He joined the company and has in 1971 held management positions in the company’s international operations based in São Paulo, Vienna, Paris, served and Taurel London. as Mr. president of Eli Lilly International Corporation executive from 1986 to 1991, vice president of the pharma- ceutical division from to 1993, 1991 and executive vice president of the company from 1993 He is a memberto 1996. of the boards of IBM Corporation and The McGraw-Hill Companies, Inc. He is also a member of the executive committee of the board of directors of Pharmaceu- tical Research and Manufacturers of America (PhRMA), a member of the board of overseers of the Columbia Business School, a trustee at the Indianapolis Museum of Art, a director of the Indianapolis Championships, Tennis and a member of TheBusiness Council and The Business Roundtable. 2007, In he was appointed to the President’s Advisory Committee for PolicyTrade and Negotiations. He is an offi PROXY STATEMENT 6868 inoffi continue will directors four following The 2010 of Class Cities Performing Arts Center. Arts Performing Cities Fox the and ThedaCare; UNICEF; for Fund U.S. the Inc.; Papers Appleton Inc.; International, Lexmark Corporation; Products Consumer Revlon Inc.; ofSupervalu boards the on serves Seifert Ms. LLC. Perspectives, ofPinnacle chairman is She Company. Paper Howard Fort and Foods, Beatrice &Gamble, Procter at positions management held Seifert Ms. ly-Clark, Kimber- tojoining Prior businesses. products consumer international and domestic the both with inconnection capacities inseveral served in1978 and Kimberly-Clark joined She 2004. untilJune Corporation Kimberly-Clark for president vice executive as served Seifert Ms. Corporation Kimberly-Clark President, Vice Executive Retired P.Kathi Seifert ofGovernors. Board Clinic Mayo the and Foundation Mayo ofthe oftrustees board the on serves Prendergast Dr. 1975. since School Medical Mayo the at positions teaching other several held has He Medicine. Individualized for Center ofthe director the and School Medical Mayo at peutics Thera- Experimental and Pharmacology ofMolecular Professor and Biology Molecular and ofBiochemistry Professor Guggenheim Marion and Edmond the is Dr. Prendergast Bischoff Winfried Sir Mayo Clinic CancerCenter Emeritus, Director and Medicine; Individualized for Center Clinic Mayo Director, School; Medical Mayo Therapeutics, Experimental and Pharmacology Molecular of Professor and Biology Molecular and Biochemistry of Professor Guggenheim Marion and Edmond Ph.D. M.D., G.Prendergast, Franklyn standing Directors. ofOut- Institute ofthe president in1999. ofFame Hall past is He Accounting ofthe member 62nd the named was and Governance Corporate on Panel Ribbon Blue Directors Corporate of Association National ofthe amember was He States. United ofthe General Comptroller 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 1989. Advisory ofthe through Mr. 1986 amember is from Cook executive chief and chairman as in1964 served and &Sells Haskins in1999. Deloitte, joined He retirement untilhis 1989 offi executive chief and chairman as Mr. served Cook Offi Executive Chief and Chairman Retired Cook J. Michael plc. Prudential and plc, Securities Land Inc.; Companies, Hill McGraw- ofThe director anon-executive is He plc. ofSchroders executive chief group and &Co. Schroder ofJ. Henry chairman including there, ofpositions anumber in 1966 held and Group Schroder the joined He plc. ofSchroders chairman was he 1995 to2000, From 2007. offi executive chief interim as and to2007 2000 from Europe ofCitigroup chairman as served He Inc. ofCitigroup chairman is Bischoff Winfried Sir Citigroup Inc. Chairman,

ce until2010. Age 62 Director since 1995 since Director 62 Age ; Age 58 Director since 1995 1995 since Director 58 Age Age 66 Director since 2000 since Director 66 Age Age 65 Director since 2005 2005 since Director 65 Age cer, Deloitte &Touchecer, LLP Deloitte cer of Deloitte & Touche LLP from from &Touche LLP ofDeloitte cer cer of Citigroup for a portion of aportion for ofCitigroup cer PROXY STATEMENT 6969 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 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 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 $100,000 per year more member receives family or whose immediate compensation, employee. as a non-executive service for other than Lilly from compensation board. of that company’s committee on the compensation serves cer offi executive any Lilly where company compensating other executive offi executive other compensating • a director who is an employee of Lilly, or whose immediate family member is an executive offi cer of Lilly. of Lilly. cer offi member is an executive family or whose immediate of Lilly, • who is an employee a director normal director other than the director’s 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 • ensuring that a succession plan is in place for all senior executives. for • plan is in place ensuring that a succession • providing general oversight of the business of the business • oversight general providing strategy • corporate approving • initiatives major management approving conduct and ethical of legal • oversight providing risks business cant management of signifi • the company’s 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: 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 77–78. that has a material relationship with the company. Material relationships can include commercial, industrial, bank- ing, 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 II. Composition of the Board Mix of Independent Directors and Offi I. Role of the Board The directors are elected by the shareholdersoversee to the actionsand results of the company’s management. T 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 http://investor.lilly.com/guidelines.cfm or in paper form upon request to the company’s corporate secretary. Highlights of the Company’s Corporate Governance Guidelines Guidelines Governance Corporate of the Company’s Highlights PROXY STATEMENT 7070 director tenure: for expectations following the establish guidelines governance the documents, charter company’s tothe Subject TenureDirector In an uncontested election, any nominee for director who receives a greater number of votes “withheld” from his or or his from “withheld” ofvotes number agreater receives who director for nominee any election, uncontested In an 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 plicable Ms. Seifert Dr. Prendergast Marram Ms. Horn Ms. Dr. Gilman Mr. Fyrwald Mr. Fisher Dr. Feldstein Yes Mr. Eskew Mr. Cook Bischoff Winfried Sir Name • A nonemployee director• who retires 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 A company offi• cer-director, includingthechiefexecutive officer, willresign from theboard atthetimeheor she • a director whoisan executive• officer ofanonprofi t organization thatreceives grants orcontributions from Lilly a director 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. continue hisservice ontheboard through theendof2008. retires orotherwiseceases to beanactive employee ofthecompany. Mr. Taurel willremain anemployee and In February 2008, the directors and corporate governance committee reviewed directors’ responses toa responses directors’ reviewed committee governance corporate and directors the 2008, In February ap- all meet must committees governance corporate and directors and compensation, audit, ofthe Members single fi in asingle fiscal year exceeding thegreater of$1millionor2percent ofthatorganization’s gross revenues ina that exceed thegreater of$1millionor2percent ofthatcompany’s gross revenues ina single fi executive officer ofacompany thatmakes paymentsto orreceives paymentsfrom Lilly for property orservices scal year. needn Transactions/Relationships/Arrangements Independent Yes Lilly’s purchase of shipping, courier, and post offi post and courier, shipping, of purchase Lilly’s Yes Yes Lilly grants and contributions to Mayo Clinic and Mayo Foundation—immaterial Mayo and Clinic Mayo to contributions and grants Lilly None Yes None Center—immaterial Medical Southwestern Texas of University the to contributions and Yes grants Lilly services—immaterial and products DuPont of Yes purchase Lilly’s Yes None Yes Yes Yes e None Yes 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 Commercial banking, capital markets, and indenture trustee relationships between Lilly and various Citigroup Citigroup various and Lilly between banks—immaterial relationships trustee indenture and markets, capital banking, Commercial Lilly grants and contributions to Harvard University and the National Bureau of Economic Research—immaterial Economic of Bureau National the and University Harvard to contributions and grants Lilly ce box services from UPS—immaterial from services box ce scal year. PROXY STATEMENT 7171 ll ll cant portion of nancial stewardship. nancial cer and considered by the compen- cer, believing cer, this generally provides ve years to reach this ownership level. cer develops and maintains a process for advising the board on cer; Succession Planning

cer and other leadership key positions. He or she reviews this plan cation the of shareholder vote. Board action on the matter will require cant corporate strategy decisions are brought to the board for approval. cer cer will be selected. cation of the shareholder vote. The directors and corporate governance committee will consider 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, chief operating offi cer, and all members of fi nancial management that recognizes the unique responsibilities the unique responsibilities nancial management that recognizes of fi and all members cer, offi chief operating cer, cer. The results cer. of this review are discussed with the chief executive offi the company’s Code of Ethical Conduct for Lilly Financial Management, a supplemental code for our chief executive our chief executive for code Financial Management, a supplemental Lilly Conduct for Code of Ethical the company’s offi fi and controls, internal nancial reporting, fi accounting, proper of those individuals in assuring Both documents are available online at http://investor.lilly.com/code_business_conduct.cfm or in paper form Directors should hold meaningful equity ownership positions in the company; accordingly, a signifi , a comprehensive code of ethical and legal business conduct applicable to all employees all employees to applicable conduct business and legal of ethical code The Red Book, a comprehensive of directors our board and to worldwide The independent directors are responsible for overseeing succession and management development pro- The company will disclose the board’s decision on a Form 8-K furnished to the Securities and Exchange Any director who tenders his or her resignation under this provision will not participate in the committee or See Item 4 for management’s proposal to provide for the election of directors by a true majority vote. • • or changes are made to the full board by the committee. 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 is- sues 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 Evaluation of Chief Executive Offi The board customarily combines the roles of chairman and chief executive offi succession planning for the chief executive offi with the independent directors at least annually. The presiding director leads the independent directors annually in assessing the performance of the chief execu- tive offi grams for senior leadership. The chief executive offi 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 her election than votes “for” such election “majority (a withheld shall vote”) promptly tender his or her resignation following certifi the resignation offer and recommend to the board whether to accept it. The board will act on the committee’s rec- ommendation within 90 days following certifi 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 resig- nation is accepted, the directors and corporate governance committee will recommend to the board whether to fi the approval of a majority of the independent directors. board deliberations regarding whether to accept the resignation If each member offer. of the directors and corpo- rate governance committee receives a majority withheld vote at the same election, then the independent directors who did notreceive a majority withheld vote will appoint a committee amongst themselves to consider the resigna- tion offers and recommend to the board whether to accept them. III. Director Compensation and Equity Ownership The directors and corporate governance committee annually reviews board compensation. Any recommendations f the vacancy or reduce the size of the board. 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 interest). material indirect or a direct 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 Procedures 7272 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 • The board orrelevant• committee willperiodically monitor thetransaction to ensure that there are nochanged Related-person transactions must beapproved• bythe board orbyacommittee oftheboard consisting solely • The chairmanandthepresiding director• shalljointly determine (or,ifeither isinvolved inthetransaction, the Management ortheaffected director• orexecutive officer willbringthematter to theattention ofthechairman, • has theauthorityto call meetingsoftheindependentdirectors.• approves meetingagendasandschedules• andgenerally approves information sentto theboard; and serves as a liaisonbetween thechairmanandindependent directors;• presides atallmeetingsoftheboard• 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 ofthetransaction to thecompany. for thetransaction to lead to anactualorapparent conflict ofinterest andanysafeguards imposed to 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 whether thematter shouldbeconsidered bytheboard orbyoneofits existing committees consisting only of other shalldetermine inconsultation with thechairofdirectors andcorporate governance committee) the presiding director, thechairofdirectors andcorporate governance committee, orthesecretary. To confl any avoid ofcompliance oversight board’s inthe assist committee compliance and policy public and committee audit The independent director shouldpreside; the independentdirectors unless thedirectors decidethat,dueto thesubject matter ofthesession, another 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. ict, board decisions on certain matters of corporate governance governance ofcorporate matters certain on decisions board ict, cer; icts, or appears appears or icts, cer. PROXY STATEMENT 7373 ed as ed ent and Independent Advisers Independent and ent cers are invited. also We afford directors the opportunity to attend external director education programs. independent directors. independent transaction. promptly as practicable. as practicable. promptly interests. best the company’s Currently the only related-person transaction is the time-share arrangement personal Taurel’s use for Mr. All six committee charters are available online at http://investor.lilly.com/board-committees.cfm or in paper Committee membership and selection of committee chairs are recommended to the board by the directors • If a director is involved in the transaction, he or she will be recused from all discussions and decisions about the and decisions all discussions from he or she will be recused the transaction, in • involved is If a director be ratifi must and if not practicable, practicable, whenever advance in • 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- Orientation Continuing Education and of the corporate aircraft, as described The compensation on pages 100–101. committee approved and continues to monitor this arrangement consistent with the above policy. form upon request to the company’s corporate secretary. Functioning of Committees of Functioning Each committee reviews and approves its own charter annually, and the directors and corporate governance com- mittee 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 asneeded. 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. 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 commit- tees, 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. Independent directors have direct accessto members of management whenever they deem it necessary. The inde- pendent 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 inde- pendent advisers to their respective committees. Director Managem Access to 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 ex- ecutive offi PROXY STATEMENT 7474 below. table inthe shown are in2007 committee each and board full ofthe ofmeetings number the and membership committee Current in2007. attended all and shareholders, of meeting annual the toattend expected are members board all Inaddition, serves. she or he which on mittees com- the and board ofthe ofmeetings number total ofthe percent 88 than more attended director In 2007, each Membership andMeetingsoftheBoardItsCommittees Committee Compliance and Policy Public 90–91. pages on shown is report committee compensation the and 80, page on described are committee compensation ofthe duties The Committee Compensation 77. page on described are committee governance corporate and directors ofthe duties The Committee Governance Corporate and Directors 78. page on found report committee audit inthe described are committee audit ofthe duties The Committee Audit Committees oftheBoardDirectors Finance Committee Science and Technology Committee Technology and Science i ifidBshf Member Mr. Cook Sir Bischoff Winfried Dr. Prendergast Ms. Marram Dr. Lechleiter Ms. Horn Dr. Gilman N Mr. Taurel Ms. Seifert Mr. Fyrwald Mr. Fisher Dr. Feldstein Mr. Eskew Name u • reviews andmakes• recommendations regarding policies,practices, andprocedures ofthecompany thatrelate oversees theprocesses• bywhichthecompany conducts itsbusiness sothatthecompany willdosoinamanner • reviews andmakes• recommendations regarding capital structure andstrategies, includingdividends,stock • reviews new developments,• technologies, andtrends inpharmaceutical research anddevelopment. reviews andmakes• recommendations regarding thecompany’s strategic research goalsandobjectives m b to publicpolicyandsocial,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 2 0 0 7 M e e t i n g s7864555 Member ebrMember Member ebrMember Member Member ebrChair Member Member Member Chair Chair ebrMember Member Member Board ebrMme Member Member Member Member Audit Chair ebrChair Member ebrMember Member Member Compensation ebrChair Member oenneFinance Governance Corporate and Directors Member ebrMember Member ebrChair Member Member ebrMember Member Compliance and Policy Public ebrChair Member Member Technology and Science Member PROXY STATEMENT 7575 5 ($) Total nan- $247,141 $249,185 $294,124 $247,629 $278,952 $275,276 $288,074 $281,448 $272,684 $324,074 ights, by his or her 4 $555 $1,185 $3,067 $4,202 ($) $29,124 $30,610 $29,000 $32,374 $75,000 $34,878 All Other Compensation 0 0 3 $4,074 $4,074 $4,074 $4,074 $4,074 $4,074 $4,074 $4,074 ($) Stock Option Awards Awards Option Stock 2 839 ($) 1,854 Shares $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 Stock Awards $27,000 $29,000 $31,500 $75,000 $30,000 $34,500 1 Amount of Matching Donation Matching Amount of ect the expenses related to options granted in 2004 recognized in our 2007 fi $46,500 $95,000 $95,000 $98,000 $93,000 $103,000 $110,000 $120,000 $122,000 $100,000 $100,000 $103,000 Fees Earned or Paid in Cash ($) 2007 Deferred Cash nancial statements on pages 43–44 of our annual report. Aggregate total numbers of stock option The foundation matched the following donations of more than $10,000 for outside directors in 2007 via pay- gram, which is generally available U.S. to employees as well as the outside directors. Under this program, Name Cook Mr. Feldstein Dr. Fisher Mr. GilmanDr. Ms. Marram Seifert Ms. ach nonemployee director received an award of stock with a grant date fairvalue of $145,000 (2,840 shares). pro amounts in this column refl ments made directly to the recipient charity: the foundation matches 100 percent of charitable donations over $25 made to eligible charities, up to a maximum of $90,000 per year for each individual. For all directors, the amounts in this column also include tax reimburse- ments for income imputed to him or her for use of the corporate aircraft, or for commercial fl spouse to attend board functions that included spouse participation. Fyrwald, For Mr. this amount includes tax re- imbursement for income imputed to him for child care during a board function that included spouse participation. This stock award and all prior stock awards are fully vested in that they are not subject to forfeiture; the however, shares are not issued until the director ends his or her service on the board, as further described below under “Lilly Directors’Deferral Plan.” The table shows the expense recognized by the company for each director’s stock award. cial statements. A discussion of the assumption used in calculating these values may be found in Note 7 to our 2007 audited fi awards outstanding are shown below in the Directors’ Outstanding Stock Options table. All outstanding options were vested as of February Stock 2007. option grants were 17, established using the same procedure for timing and price as is used for employees. Name Name Bischoff Winfried Sir Mr. Fisher Mr. Fyrwald Mr. Mr. Cook Mr. Dr. Feldstein Dr. Mr. Fisher Mr. Fyrwald Mr. Gilman Dr. Horn Ms. Marram Ms. Prendergast Dr. Ms. Seifert Ms. Directors do not participate in a Lilly pension plan or non-equity incentive plan. This column includes amounts donated by the Eli Lilly and Company Foundation, Inc. under its matching gift No stock options were granted in 2007, as the stock option program for directors was discontinued in 2005. The E The following directors deferred 2007 cash compensation into their deferred share account under the Lilly Direc- 5

4 3 2 1 Directors who are employees receive no additional compensation for serving on the board orits committees. In 2007, we provided the following annual compensation to directors who are not employees: Directors’ Compensation Directors’ tors’ Deferral Plan (further described below): PROXY STATEMENT 7676 of: consists directors for compensation Stock Stock Compensation compensation: cash following the directors provides company The Compensation Cash Options Stock Outstanding Directors’ on the board has ended. Each director can choose to invest the funds in either of two accounts: oftwo ineither funds the toinvest choose can director Each ended. has board the on service their untilafter fees meeting and retainer oftheir part or ofall receipt todefer directors allows plan This Plan Deferral Directors’ Lilly Dr. Prendergast Ms. Marram Ms. Horn Dr. Gilman Mr. Fyrwald Mr. Fisher Mr. Cook Ms. Seifert Ms. Dr. Feldstein Mr. Eskew Sir Winfried Bischoff Winfried Sir Name • shares ofLilly stock• equaling$145,000,deposited annually inadeferred share account intheLilly Directors’ • • • • • • Deferral Plan(asdescribedbelow), payable after service ontheboard hasended. transferred untilthe director endshisorherservice ontheboard. on thedate dividends are paid.Allshares inthe deferred share accounts are hypothetical andare notissued or been earned.Hypothetical dividends are “reinvested” in additionalshares basedonthe market price ofthestock shares ofLilly stock basedonthemarket price ofthestock at thetimecompensation would otherwise have in 2007)iscredited to thisaccount onapre-set annualdate. Funds inthisaccount are credited ashypothetical compensation inLilly stock. Inaddition,theannualaward ofshares to eachdirector noted above (2,840shares Deferred Share Account. reimbursement for customary andusualtravel expenses. retainer of$20,000peryear to the presiding director chairperson’s preparation time $2,000 to thecommittee chairpersons for eachcommittee meetingconducted ascompensation for the $1,000 for eachcommittee meetingattended retainer of$80,000peryear (payable monthly) Thisaccount allows thedirector, ineffect, to invest hisorherdeferred cash Grant Date Grant 4/20/2000 4/20/2000 4/20/2000 4/20/2000 2/20/2001 2/20/2001 2/20/2001 2/20/2001 2/20/2001 2/20/2001 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/19/2002 2/19/2002 2/19/2002 2/19/2002 2/19/2002 2/19/2002 2/19/2002 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/17/2004 — — — Expiration Date Expiration 2/ 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/18/2011 2/18/2011 2/18/2011 2/18/2011 2/18/2011 2/18/2011 4/19/2010 4/19/2010 4/19/2010 4/19/2010 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2012 18/2013 — — — Exercise Price Exercise $73.98 $73.98 $73.98 $73.98 $73.98 $73.98 $75.92 $75.92 $75.92 $75.92 $75.92 $75.92 $75.92 $57.85 $57.85 $57.85 $57.85 $57.85 $57.85 $57.85 $57.85 $75.94 $75.94 $75.94 $75.94 $73.11 $73.11 $73.11 $73.11 $73.11 $73.11 $73.11 $73.11 — — — Outstanding Stock Options (Exercisable) 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 2,800 2,800 2,800 2,800 0 0 0 PROXY STATEMENT 7777 ll ll elds. icts nal recom- nal cations to the chairman ed by recommendations from ned in the New Stock York Exchange listing requirements. cations, availability, probable level of interest, and any potential confl Funds in this account earn interest each year at a rate of 120 percent of the of of 120 percent at a rate year each earn interest in this account Funds ect diversity in its broadest sense, including persons diverse geography, in gen- health care environment health care technology. information The board delegates the screening process to the directors and corporate governance committee, which criteria. selection board’s The committee employs the same process for evaluating all candidates, including those submitted by share- Board membership should refl in those with experience particularly and senior executives, cers offi chief executive or retired active or sales or banking, and marketing nance fi operations, business international medicine and science policy and public government 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 is 5.5 percent. 2008 for The rate Code. Revenue of the Internal Section 1274(d) Department under Treasury of at a rate was $188,706, directors the participating in 2007 for that accrued amount of interest The aggregate 5.7 percent. Both accounts may be paid in a lump sum or in annual installments years. for up to 10 Amounts in the deferred Deferred Compensation Account. Account. Compensation Deferred All committee members are independent as defi • incumbent directors • incumbent • management • shareholders meeting the candidates in locating assist to by the committee rm retained fi • search executive an independent • • • • • • • oard committees. The committee also oversees matters of corporate governance, director independence, direc- receives direct input from other board members. Potential candidates are identifi holders. The committee initially evaluates the candidate based on publicly available information and any additional information supplied by the party recommending the candidate. If the candidate appears to satisfy the selection criteria and the committee’s initial evaluation is favorable, the committee, assisted by management, gathers ad- ditional data on qualifi the candidate’s Process for Submitting Recommendations and Nominations A shareholder who wishes to recommend a director candidate for evaluation by the committee pursuant to this process should forward the name candidate’s and information about the qualifi candidate’s several sources, including: including: sources, several of interest. If the committee’s subsequent evaluation continues to be favorable, the candidate is contacted by the chairman of the board and one or more of the independent directors for direct discussions to determine the mutual levels of interest in pursuing the candidacy. If these discussions are favorable, the committee makes a fi mendation to the board to nominate the candidate for election by the shareholders to select (or the candidate to fi a vacancy, as Eskew, applicable). who is standing Mr. for election, was referred to the committee Taurel. by Mr. share account are paid in shares of Lilly stock. 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 pub- licly traded national or multinational companies or shall have achievedhigh a level of distinction in their chosen fi tor compensation, and board performance. The committee’s charter is available online at http://investor.lilly. com/board-committees.cfm or in paper form upon request to the company’s corporate secretary. Overview The directors and corporate governance committee recommends candidates for membership on the board and b Directors and Corporate Governance Committee Matters Corporate Governance Directors and Director Process Nomination der, and ethnicity. Theder, board is particularly interested in maintaining a mix that includes the following backgrounds: PROXY STATEMENT mission. We have also appointed the company’s independent auditors, subject to shareholder ratifi to shareholder subject auditors, independent company’s the appointed also We have mission. 31, fi for 2007, December ended year the for 10-K Form on report annual fi audited the that recommendation) the approved subsequently 7878 P.Kathi Seifert Ph.D. M.D., G.Prendergast, Franklyn Ph.D. Feldstein, S. Martin Chair Cook, J. Michael Committee Audit 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 Management auditors. 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 fi committee Mr. audit that an is Cook J. determined Michael has ofdirectors board The members. committee toaudit applicable defi as independent are committee audit ofthe members All Membership Committee Audit Audit CommitteeMatters 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 independent auditors, such as prior committee approval of nonaudit services and required audit partner rotation. partner audit required and services ofnonaudit approval committee prior as such auditors, independent ofthe independence the compromising toavoid policies adopted have we of2002, Act Sarbanes-Oxley ofthe ments require- the with Consistent independence. their with compatible were below) described (as &Young LLP Ernst by ed provid- services nonaudit the that things, other among determined, we independent, are auditors the that concluding In management. its and company the from independence auditors’ the auditors independent the with discussed have and Committees) Audit with Discussions 1(Independence No. Standard Board Standards Independence the by quired re- auditors independent the from letter the and disclosures written the received have we Inaddition, statements. ofsignifi reasonableness the principles, counting ac- ofthe acceptability, the just not quality, the including Committees), Audit 61 with No. (Communication Standards secretary. corporate tothe request upon charge without mail by provided be also will bylaws The com/bylaws.cfm. http://investor.lilly. 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 10, 2008. November by notice written company the give must above) described process recommendation the through board the by nominated otherwise not is who election for acandidate topropose (i.e., meeting annual 2009 the at company’s fi company’s ofthe quality overall the and controls, internal company’s ofthe evaluations their examinations, oftheir results the fi chief the as (such management ofsenior members with sessions inprivate and present, management without and with auditors, independent and internal the with meet We periodically Act. Sarbanes-Oxley ofthe 404 Section under testing control internal including audits respective auditors. independent ofthe engagement the toterminate and In reliance on the reviews and discussions referred to above, we recommended to the board (and the board board the (and board tothe recommended we toabove, referred discussions and reviews the on In reliance their for plans and scope overall the auditors independent and internal company’s the with We discussed Auditing on Statement by discussed tobe required matters auditors independent the with discussed We have ratifi toshareholder (subject toappoint authority sole We have to us. report auditors independent The candidate adirector nominate todirectly wishes who ashareholder 1.9 bylaws, company’s ofthe Section Under nancial reporting. We also periodically meet in executive session. inexecutive meet periodically We also reporting. nancial nancial expert as defi as expert nancial nancial statements and related disclosures with management and the independent auditors, auditors, independent the and management with disclosures related and statements nancial cant management judgments underlying the fi the underlying judgments management cant ned in the rules of the Securities and Exchange Commission. Commission. Exchange and Securities ofthe rules inthe ned cant judgments, and the clarity of the disclosures in the fi inthe disclosures ofthe clarity the and judgments, cant nancial nancial offi 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 nancial statements be included in the company’s company’s inthe included be statements nancial cer and the chief accounting offi accounting chief the and cer ling with the Securities and Exchange Com- Exchange and Securities the with ling nancial statements and disclosures. and statements nancial cation, for 2008. for cation, cer) to discuss todiscuss cer) nancial cation) nancial PROXY STATEMENT 7979 $7.0 $5.8 $1.4 $1.5 $0.1 $0.1 $8.9 $7.8 $0.4 $0.4 2007 2007 2006 (millions) (millions) (millions) nancial statements nancial lings nancial statements nancial possible acquisition in 2007 in possible acquisition —2007 and 2006: primarily related to employeet plan and benefi other ancillary audits, and due diligence services on After the end managementof the audit year, provides the committee with a summary of the actual fees in- conditions, and fees resulting from changes in audit scope, company structure, or other matters. The committee The committee or other matters. structure, company scope, changes in audit from resulting and fees conditions, reasonably auditor the independent that only those services which are other audit services, may also preapprove under Section 404 of the work attestation controls included internal have 2004, audit services Since provide. can Act. Sarbanes-Oxley of the the performance to related reasonably that are services and related assurance are services Audit-related that the provision believes The committee by the independent auditor. performed traditionally audit, and that are of the auditor. independence does not impair the of these services tax provide can auditor the independent cases, that, in appropriate believes The committee services. Tax independence. the auditor’s without impairing advice planning, and tax tax services, compliance the believes (ii) the committee rules, Board Oversight Company Accounting under SEC and Public permissible that and (iii) management believes of the auditor, independence not impair the would of the services provision services. the provide to choice is the best the auditor of the annual approval prior committee management requests At the beginning of each audit year, Process. as any other engagements as well audit year the upcoming for reviews audits, and quarterly audit, statutory audit the upcoming for of all fees at that time an estimate 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 preapproval meetings, 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- • 2007 and 2006: primarily related to compliance services outside the U.S. • 2007 and 2006: primarily related to compliance services outside the U.S. • Annual audit of consolidated and subsidiarynancial statements, fi including Sarbanes-Oxley• Reviews of quarterly 404 fi attestation • Other services normally provided by the auditor in connection with statutory and regulatory fi • Assurance and related services reasonably related to the performance of the audit or reviews of the fi • • are the services if (i) independent auditor by the be provided to other services • may approve The committee • engagement and, if necessary, any changes in terms, terms, any changes in and, if necessary, engagement annual audit services the • approves The committee All Other Fees Total Tax Fees Audit-Related Fees Audit-Related Audit Fees Audit ciently detailed to allow the committee to make an informed judgment about the nature and scope the of services Independent Auditor Fees Auditor Independent The following table shows the fees incurred for services rendered on a worldwide basis by the Ernst LLP, & Young company’s independent in 2007 auditor, and 2006. All such services were preapproved by the committee in accor- dance with the preapproval policy. curred for the completed audit year. and the potential for the services to impair the independence of the auditor. fi

Services Performed Auditor Independent the by The audit committee preapproves all services performed by the independent in part auditor, to assess whether the pro- vision of such servicesmight impair the auditor’s independence. The committee’s policy and procedures are as follows: PROXY STATEMENT 8080 C 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 Additional processesand procedures include: None of the compensation committee members: members: committee compensation ofthe None and Insider Participation Interlocks Committee Compensation ensation of executive offi ofexecutive ensation ompensation Discussion and Analysis section under “The Committee’s Processes and Analyses” on pages 81–82. 81–82. pages on Analyses” and Processes Committee’s “The under section Analysis and Discussion ompensation • is anexecutive offi• cer ofanotherentity,atwhichoneourexecutive officers serves onthe board ofdirectors. is orwasaparticipantinrelated-person transaction• in2007(seepage72for adescriptionofourpolicyon • • • • related-person transactions) has ever beenanofficer oremployee ofthecompany prior knowledge of the recommendations that the consultant makes to the committee. committee. tothe makes consultant the that recommendations of the knowledge prior committee’s consultant attend executive sessions.) the executive sessions orfor any discussion oftheirown compensation. (Only nonemployee directors andthe president ofhumanresources, and,less frequently, theCOOattend committee meetingsbutare notpresent for then considered bythe committee withtheassistance ofitscompensation consultant. TheCEO,theseniorvice compensation recommendation for eachoftheother namedexecutive officers. Thoserecommendations are officers (otherthantheCEOasnoted below). TheCEOgives thecommittee aperformance assessment and matters ofcompensation philosophy, plandesign,andthespecific compensation recommendations for executive vice president ofhumanresources, thecompany’s global compensation group formulates recommendations on Role ofExecutive Officers andManagement. chairperson. committee ofthe permission and knowledge the with and oversight committee’s the under matters on only management ofLilly members with directly interacts consultant The 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 Role ofIndependentConsultant. committee meetsinexecutive session after eachmeeting. in consultation withthecommittee chairandthecommittee’s independentcompensation consultant. The Meetings. Thecommittee meetsseveral timeseachyear (sixtimesin2007).Committee agendasare established —Undertake specialprojects attherequest ofthecommittee chair. —Proactively advisecommittee onbest practices ideasfor board governance ofexecutive 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, peer group, 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 The CEO does not participate in the formulation or discussion of his pay recommendations and has no no has and recommendations pay ofhis discussion or formulation inthe participate not does CEO The 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 oftheCEO,chiefoperating officer, andthesenior cers for day-to-day plan administration and interpre- and administration plan day-to-day for cers cers. cers. PROXY STATEMENT 8181 Our employee Our employee t programs are We delivered a balance of salary, a balance delivered We In 2007, Lilly performed in the top tier of its in the top performed In 2007, Lilly We link all employees’ pay to individual and pay to link all employees’ We We seek internal pay relativity, meaning that pay pay relativity, seek internal We We aim to remain competitive with the pay of other competitive remain aim to We We lowered the overall cost of our equity program in of our equity program cost the overall lowered We A long-term focus is critical to success in our industry. As in our industry. success to is critical focus A long-term To deliver superior long-term shareholder returns, we must deliver value to to value deliver must we returns, shareholder superior long-term deliver To cient. for talent. ect the marketplace While compensation will always refl ect differences in ect differences refl will always compensation should be egalitarian. While t programs t programs should attract employees who are interested in a career at Lilly. at Lilly. in a career interested who are should attract employees t programs shareholder returns. shareholder lags performance and/or company short of expectations falls individual performance where compensation the industry. their pay. affect high-achieving engage successful, and motivate to should continue the programs performance, company employees. —As employees assume greater responsibilities, more of their pay is linked to company performance and performance company to of their pay is linked more responsibilities, greater assume —As employees but lower-tier performance, individual and company top-tier given compensation top-tier deliver seek to —We their efforts how understand easily can so that employees and clear, be simple to design our programs —We in during downturns Even retention. and employee of pay-for-performance the objectives balance —We Compensation should refl performance. ect individual and company Compensation should refl company performance. performance. company peer group in sales growth and adjusted earnings per share growth; this strong top- and bottom-line growth led led growth and bottom-line top- this strong growth; earnings per share and adjusted growth in sales peer group target. above substantially payouts compensation incentive and equity cash to cost-effectiveness. improve Equity design changes Strong operating results yield strong incentive compensation payouts. payouts. compensation incentive yield strong operating results Strong 2007—while maintaining its competitiveness and motivational impact—by eliminating stock options in favor of options in favor impact—by eliminating stock and motivational its competitiveness maintaining 2007—while positions. most for values grant equity total and by lowering awards value shareholder and engagement. achievement, retention, fosters employee program A balanced performance-based cash and equity incentives, and a strong employee benefi t program. Together, these Together, t program. benefi employee a strong and incentives, and equity cash performance-based engagement. and retention employee and encouraged incentives pay-for-performance reinforced elements For more detail, please see the remainder of this Compensation Discussion and Analysis section and the com- employees progress to higher levels of the organization, a greater portion of compensation is tied to our longer- is tied to portion of compensation a greater of the organization, higher levels to progress employees performance. term of job responsibility. Compensation should be based on the level Compensation should foster a long-term focus. Compensation should foster a long-term and impact of of responsibility in the levels with differences should be commensurate among jobs differences the jobs. Compensation should refl employees in a cost-effective manner. in a cost-effective employees Compensation and benefi and of compensation structure the overall considerations, and marketplace geographies, job responsibilities, the organization. similar across should be broadly t programs benefi premier employers with which we compete for talent. for compete with which we employers premier Compensation and benefi benefi t programs provide a competitive advantage by helping us attract and retain highly talented employees employees talented highly and retain by helping us attract advantage a competitive provide t programs benefi build careers. the opportunity to for looking who are Compensation should be effi • • • • • • • • • • xecutive compensation for 2007 aligned well with the objectives of our compensation philosophy and with our Our success depends on our ability develop, to discover, and market a stream innovative of medicines that ad- dress important medical needs. In addition, we must continually improve productivity achieve in all that we do. To these goals, we seek to attract, engage, and retain highly talented individuals who are committed to the com- corepany’s values of excellence, integrity, and respect for people. Our compensation and benefi based on these objectives: Compensation Discussion Analysis and 2007 Summary E performance, driven by these factors: Executive Compensation Executive Executive Compensation Philosophy pensation tables. The Committee’s Processes and Analyses The compensation committee uses several tools help to it structure compensation programs that meet company PROXY STATEMENT as discussed above, and also considered expected competitive trends in executive pay. That review showed: review pay. That inexecutive trends competitive expected considered also and above, discussed as data group peer and data performance company 2006 reviewed committee the 2007, for decisions pay its In making Pay Overall of Overview—Establishment 2007 for Compensation Executive 8282 are: those Among objectives. • • • • • • no partintherecommendations, committee discussions, ordecisions. based ontheCEO’s individual performance. TheCEOhasno priorknowledge oftherecommendations andtakes pay actionsfor allkey employees ofthecompany. Therange allows for thecommittee to exercise its discretion analysis and,importantly, thepositionofCEOinrelation to otherseniorcompany executives andproposed value andmix.Mr. Cook’s recommendations for target CEOpaytake into account thepeercompetitive pay range ofrecommendations for anychangeintheCEO’s basesalary,annualincentive target, andequitygrant incentive award, most recent equitygrant value, andresulting total direct compensation. Mr. Cookdevelops a analyses showing medianCEOcompensation amongthepeergroup interms ofbasesalary,target annual without theinputorknowledge oftheCEOandwithlimited supportfrom company staff. TheCookfi the CEOisdeveloped bytheindependentconsultant (Frederic W. Cookandhisfirm, Frederic W. Cook&Co.) Schering-Plough Corporation; andWyeth Laboratories. Thecommittee usesthepeergroup data intwo ways: Amgen; Bristol-Myers SquibbCompany;GlaxoSmithKline; Johnson &Johnson;Merck &Co.;Pfi unique to theindustry andassuch,Lilly must compete withthesecompanies for talent: AbbottLaboratories; pharmaceutical companies. Pharmaceutical companies’ needsfor scientific andsales/marketing talent are Peer Group Analysis. accomplishments. leadership other and performance, company’s tothe executive’s contribution the supervisor, her or his and executive the between established ofobjectives achievement executive’s the offi executive the with interactions board’s the on based judgment its exercises also and CEO the from recommendation compensation compensation committee for itsconsideration insettingtheCEO’s compensation. accomplishments. Thisevaluation isshared withtheCEObypresiding director andisprovided to the achievement oftheagreed-upon objectives, contribution to thecompany’s performance, and otherleadership 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 Assessment ofIndividualPerformance. Pay relative topeergroup. shareholder return. growth, return onassets, andreturn onequity;inthemiddle tierinsales growth; andinthelower tierintotal Company performance. Assessment ofCompanyPerformance. was inthebroad middle range. CEO Compensation. —Individual competitiveness. competitiveness. Thecommittee—Overall usesaggregated data asareference pointto ensure thatthe —The committee establishes specific company performance measures thatdetermine payouts underthe —In establishing total compensation ranges, thecommittee compares theperformance ofLilly anditspeer The committee doesnottarget aspecific positionwithintherange. comparative payofthepeergroup companies whenthecompany achieves thetargeted performance levels. executive compensation program asawhole iscompetitive, meaningwithinthebroad middle range of 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 Again, thecommittee doesnottarget aspecific positionwithintherange. as a“market check”to ensure thatindividualpayremains withinthebroad middle range ofpeer group pay. and company performance andinternal relativity rather thanthepeergroup data; thepeergroup data isused sufficiently similarto make thecomparison meaningful.Theindividual’s payisdriven primarily byindividual For the other named executive offi executive named other the For To provide furtherassurance ofindependence, thecompensation recommendation for The committee compares thecompany’s programs withapeergroup ofglobal In 2006,Lilly performed intheupper tierofthepeergroup in adjusted earningspershare For theone-andthree-year periodsended2006,Lilly’s total payto executive offi The committee compares theoverall payofindividualexecutives, ifthejobsare cer. As with the CEO, the executive’s performance evaluation is based on on based is evaluation performance executive’s the CEO, the cer. with As The committee usescompany performance measures intwo ways: Individual performance hasastrong impactoncompensation. The cers, the committee receives a performance assessment and and assessment aperformance receives committee the cers, zer, Inc.; rm prepares cers cers PROXY STATEMENT 8383 To manage the overall costs of the program while remaining competitive competitive remaining while of the program costs manage the overall To the company’s overall budget for base salary increases. The corporate merit The corporate base salary increases. budget for overall the company’s As described above under “The Committee’s Processes and Analyses,” base salary and Analyses,” Processes under “The Committee’s As described above The 2007 program consisted of base salary, a cash incentive bonus award, and two forms forms and two award, bonus incentive a cash of base salary, consisted program The 2007 at a lower cost to shareholders to cost at a lower program SVA new and the component program incentive that of our peers. to comparable performance Mr. Taurel’s accomplishment of objectives that had been established at the beginning of the year and its of the year at the beginning that had been established of objectives accomplishment Taurel’s Mr. in 2006 the leadership, Taurel’s that under Mr. noted They of his performance. assessment subjective own progress drove improvements, productivity and growth sales through its earnings targets exceeded company its Six Sigma goals, strengthened met aggressive strategy, the long-term ning and implementing in refi strong of his continued In recognition image and reputation. its brand and enhanced programs, diversity which was within the annual salary by 4 percent, Taurel’s Mr. increased in 2006, the committee leadership consultant. by the committee’s recommended range employee in increasing his leadership considered the committee performance, Lechleiter’s Dr. to regard annual Lechleiter’s Dr. increased The committee initiatives. of strategic and implementation productivity salary by 4 percent. phases of in several productivity improved Laboratories Research noting that Lilly efforts, and development trials, and in clinical currently of pipeline molecules the percentage increased and development, discovery increased The committee organizations. and marketing and the sales research links between stronger forged annual salary by 5 percent. Paul’s Dr. and the legal uence infl to efforts the company’s leading strategies, litigation successful in implementing within the law division. productivity and improving support innovation, to environment regulatory —eliminating stock options in favor of SVAs, which provide greater retention and motivation value to employees employees to value and motivation retention greater provide which SVAs, of options in favor —eliminating stock 15 percent by up to positions most for equity awards for values the target —reducing merit budget with the corporate consistent base salaries modestly, —increasing at 2006 levels. bonus targets cash —maintaining the company to costs overall —reduces cash competitive a engagement by delivering and employee retention for the incentives —strengthens 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 —The independent directors assessed Mr. Taurel’s 2006 performance. They considered the company’s and the company’s considered They 2006 performance. Taurel’s Mr. assessed —The independent directors In addition, with the other named executives. each of for similar considerations reviewed —The committee research of the company’s his leadership to particular weight gave the committee Paul, Dr. to —With regard his leadership noted the committee increase), annual salary (a 5 percent Armitage’s Mr. —In establishing and an improved controls internal of strong in recognition 6 percent was increased annual salary Rice’s —Mr. of performance-based equity grants—performance awards and shareholder value awards (SVAs). Executives Executives (SVAs). awards value and shareholder awards equity grants—performance of performance-based and equity mix of cash the balances program t package. This benefi employee company the also received in a ts benefi of foundational and the security compensation, longer-term and current the mix of compensation, above. discussed objectives the compensation way that furthers ranges elements. and mix of pay Pay with expected peer group compensation, 2007 target pay ranges were reduced in the aggregate across the across in the aggregate reduced were ranges pay 2007 target compensation, peer group with expected by: This was accomplished and the mix of pay was shifted. ranks, management and executive increases were driven largely by individual performance assessments. assessments. by individual performance largely driven were increases The corporate “merit budget,” The corporate 2007, and a for 2006, planned performance for performance on company based budget was established salary increases allow of the merit budget is to The objective trends. merit external general to reference within the company’s affordability maintaining while performers successful and reward motivate, retain, to depending on individual than the budget amount or less be more can pay increases plan. Individual business all executive for increases within the budget. The aggregate stay must increases but aggregate performance, merit budget. within the corporate were cers offi The committee believes that these changes resulted in a more cost-effective program that: • Program elements. • Program Individual performance. performance. • Individual • The committee determined the following: Base SalaryBase In setting base salaries for the 2007, committee considered the following: PROXY STATEMENT cretion to adjust an award payout downward, but not upward, from the amount yielded by the formula. formula. the by yielded amount the from upward, not but downward, payout award an toadjust cretion dis- has committee the period, performance ofthe end the At measures. performance topredetermined relative 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 Bonuses Incentive Cash 8484 • • • • Internal relativity, group. Payouts were determined by this formula: this by determined were Payouts group. peer the lags performance Lilly if payouts below-target and group peer the outperforms Lilly if payouts target inabove- result they because objectives compensation our with consistent are targets These group. peer our for rates growth expected median the approximately represented EPS adjusted for 8percent and sales for of5percent rates growth target The estimates. analyst investment published on based group, peer of our effective motivators because they are easyfor employees to track andunderstand. emphasis onearningsinorder to tierewards directly to productivity improvements. Themeasures are also focuses employees appropriately onimproving bothtop-line sales andbottom-line earnings,withspecial share adjusted asdescribedbelow under“Adjustments for Certain Items”). Thismixofperformance measures percent weighting on sales growth and a75percent weighting ongrowth inadjusted EPS(reported earningsper Company performance measures. adjustments were necessary. The2007targets for thenamedexecutives were asfollows: compensation withinthebroad middle range ofexpected competitive paygiven median peerperformance, sono refl maintained thesamebonustargets asin2006.Thecommittee determined thatthesetargets appropriately greater responsibilities, more oftheirpayislinked to company performance. For 2007,thecommittee internal relativity, andpeergroup data. Consistent withourcompensation objectives, asexecutives assume Target bonussizes. Bonustargets (expressed asapercentage ofbasesalary)were based onjobresponsibilities, awards: 2007 the establishing when following the considered committee The 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 Peer group data —Mr. Rice –75percent. —Mr. Armitage –75percent —Dr. Paul –85percent —Dr. Lechleiter –100percent —Mr. Taurel –125percent ected internal relativity. Inaddition,thepeergroup data suggested thatthe2006targets would maintain cash component andhisoutstanding contributions to themanagementofcompany. financial planningprocess, aswell ashisstrong leadership of,anddevelopment oftalent within,thefi In establishing the 2007 target growth rates, the committee considered the expected 2007 performance performance 2007 expected the considered committee the rates, growth target 2007 the In establishing specific to certain positionsinwhichthejobswere viewed ascomparable incontent and meaning therelative paydifferences for different joblevels. (0.25 x sales multiple) + (0.75 x adjusted EPS multiple) = bonus multiple =bonus multiple) EPS +(0.75 xadjusted multiple) xsales (0.25 Bonus multiple X target bonus X base salary earnings =payout earnings salary Xbase bonus Xtarget multiple Bonus Thecommittee established 2007company performance measures witha25 nancial results nancial PROXY STATEMENT 8585 ( ( '$. '$. &+ &- '$, '$, && &( &* '$* '$* . 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6Y_jhiZY:EHBjai^eaZ HVaZhBjai^eaZ Target values for 2007 equity grants for the named executives were as follows: were the named executives for 2007 equity grants for values Target Mr. Taurel Mr. Lechleiter Dr. Name Mr. Armitage Mr. Dr. Paul Dr. Rice Mr. See page 87 for a reconciliation of 2007 reported and pro forma sales and reported and pro forma adjusted EPS. 2007 pro forma adjusted EPS growth percent of 16.8 resulted in an adjusted EPS multiple of 1.883. the sales multiple and theTogether, adjusted EPS multiple yielded a bonus multiple of 1.88: 2007 pro forma sales growthpercent of 13.6 resulted in a sales multiple of 1.861. 2007 sales and adjusted EPS multiples are illustrated by these charts: split for executives between performance awards and shareholder value awards appropriately balances balances appropriately awards value and shareholder awards performance between executives split for with the 2006 grants, This is consistent programs. of the two incentives and longer-term the shorter- options. and stock awards performance split 50/50 between which were Target grant values. Target by the equity reductions up” for did not “make The committee costs. compensation manage overall to in order were job levels at different c reductions The specifi of compensation. other elements increasing cantly signifi individuals at higher objectives, compensation with the company’s Consistent relativity. by internal determined of proportion a greater received levels • Equity Incentives—Total Equity Program Equity Incentives—Total In 2007, we employed two forms of equity incentives granted under the 2002 Lilly Stock Plan: performance awards and shareholder value awards. These incentives ensure that our leaders are properly focused on long-termshare- value. holder PROXY STATEMENT 8686 following: the intoconsideration took committee the grants, 2007 the For formula. the by yielded amount the from upward, not but downward, payout award an toadjust discretion has committee the period, performance ofthe end the At period. performance the during awards the on paid are dends divi- No period. the over growth EPS adjusted on depending amount, target ofthe percent to200 zero from range specifi over levels EPS) (adjusted share per earnings justed 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 holder return. For the 2007 grants, the committee considered the following: the considered committee the grants, 2007 the For return. holder share- long-term with interests employee inaligning effective more or equally is that incentive equity an company, tothe cost alower at delivers, program SVA the because replaces it program option stock the than cost-effective more is It returns. shareholder tolonger-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 Payouts period. performance the during awards the on paid are dividends No period. athree-year over ny’s stock compa- ofthe performance the on based stock ofLilly shares out pays SVA The program. option stock our placed re- which (SVA), award value shareholder the program, equity anew implemented company in2007,the Beginning Awards Value Incentives—Shareholder Equity • •

• • would result inbelow-target payouts. Payouts were determined according to thisschedule: peer group medianwould result inabove-target payouts while Lilly performance lagging thepeergroup median for ourpeergroup; accordingly, consistent withourcompensation objectives, Lilly performance exceeding the published investment analyst estimates. Eightpercent represented approximately themedianexpected growth considered theexpected earningsperformance ofcompanies inourpeergroup over aone-year period,basedon and iseasily understood byemployees. Insettingthetarget growth percentage of8percent, thecommittee effective motivator because itisclosely linked to shareholder value, isbroadly communicated to thepublic, a one-year holdingperiod,thuscreating atwo-year award. Thecommittee believes adjusted EPSgrowth isan (reported EPSadjusted asdescribedbelow under“Adjustments for Certain Items”) over aone-year period,with Company performance measure. established a50/50splitfor executives between performance awards andSVAs. Target values. grant target. Seepage87for areconciliation of2007reported andpro forma adjusted EPS. Pro forma adjusted EPSgrowth of16.8percent resulted ina2007performance award payout at200percent of importance ofthechief scientifi remained thesameasin2006to preserve competitiveness withinpeercompany payandto recognize thestrategic Two namedexecutive officers didnotreceive reductions intheirtarget equityvalues. Dr. Paul’s 2007value the average oftheclosing prices ofLilly stock for alltrading daysinNovember andDecember 2009. Lilly stock for alltrading daysinNovember and December 2006.Theendingprice to determine payouts willbe period iszero ornegative. grow over thethree-year performance period—in otherwords, iftotal shareholder return for thethree-year Executive officers receive nopayout ifthestock price (less three years ofdividendsat thecurrent rate) doesnot large-cap U.S.company, basedoninput from external money managers, less Lilly’s current dividendyield. considering total return thatareasonable investor would consider appropriate for investing inthestock ofa underperforms thatrate ofreturn. The expected rate ofreturn usedin thiscalculation wasdetermined an expected compounded annual rate ofreturn for large-cap companies andbelow target ifLilly stock Company performance measure. established a50/50splitbetween performance awards andSVAs. Target size. grant 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 of Target Up to 2.99% Adjusted Growth EPS 2007 The starting price for the2007 SVAs was$54.01pershare, representing theaverage ofthe closing prices of As describedabove, thecommittee reduced target grant sizesfor most joblevels and As describedabove, thecommittee reduced target grant values for most joblevels and c offi The committee established theperformance measure asadjusted EPSgrowth The SVA isdesignedto payabove target ifLilly’s stock price outperforms cer role. Mr. Rice’s 2007value increased dueto hispromotion inMay2006. ed time periods of one or more years. Possible payouts payouts Possible years. more or ofone periods time ed c ad- PROXY STATEMENT 8787 7% N/A 11% % Growth 2006 vs. 2005 vs. 2006 140% 2 — 0 . N/A N/A N/A N/A N/A $ $1.81 35% $1.04 $2.87 $14,645.3 120% 14% 17% % Growth 2007 vs. 2006 vs. 2007 2005 100% — $.73 $3.18 $(.15) $2.45 11% $3.03 2006 80% —— $.21 $.63 $2.71 $72.7 $755.2 $(.01) $3.55 $3.54 2007 $18,706.2 $16,446.2 $18,633.5 $15,691.0 19% IWb[i=hemj^ ;FI=hemj^ 60% 40% ation or defl ation of awards due to the unusual items either in the award year or the year either in the award the unusual items due to of awards ation ation or defl 0 cial infl cial EZgXZci

pro forma ICOS adjustment EPS—pro forma adjusted Sales—pro forma adjusted reported as EPS pro forma ICOS adjustment EPS—adjusted Sales as reported ($ millions) bers were used for calculating growth percentages for the compensation programs.

charges for the acquisition of in-process research and development and in both (IPR&D), 2006 and 2007 of major product liability charges, major asset impairments, restructuring, and other special charges. In addition, to elimi- nate the distorting effect of the acquisition of ICOS Corporation (which was completed in January 2007) on year- over-year growth rates, the committee adjusted sales and EPS for both 2006 and 2007 on a pro forma basis as if the acquisition had been completed at the beginning of 2006. and eliminate volatile swings or down) (up caused by the unusual items. This is demonstrated by the 2006 and 2007 adjustments: Adjustments for Certain Items To assure the integrityTo of the adjustments, the committee establishes adjustment guidelines at the beginning of the Theseyear. 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. Consistent with past practice, the committee adjusted the results on which 2007 bonuses and performance awards were determined to eliminate the effect of certain unusual income or expense items. The adjustments are intended to: PROXY STATEMENT Deferred Compensation Program Deferred Compensation fl personal for aircraft corporate the use not Dr. did Lechleiter aircraft. the ofproviding cost incremental company’s ofthe part offsets amount This meetings. board outside attending for than other use, personal for fee alease company the pays he which under aircraft corporate the for arrangement benefi clear provides meetings, toboard traveling while business Lilly toconduct ability his and boards, Mr. these on Taurel’s service that believes committee director. The independent an as serves he which at companies public two the for meetings and effi and security the ofMr. use believes Taurel Dr. personal committee and the the for Lechleiter, where available made business. There is no incremental cost to the company for these trips. trips. these for company tothe cost incremental no is There business. offi ofexecutive members family availability, seat on depending Inaddition, meetings. offi board executive to other tooutside travel for cers signifi provide not does company The Perquisites offi executive benefi calculated the between difference anonqualifi offers also Lilly plan, aqualifi through paid be benefi can that retirement employee’s any amounts that for extent limits IRS t exceeds refl insurance. life and insurance, 8888 97. page on table 2007 Nonqualifi the following detail inmore described as rate, long-term federal applicable ofthe of120 percent rate interest an at credited are executive the by deferred amounts program, unfunded this Under company. tothe cost minimal at way inatax-effective retirement for tosave executives allows program The program. compensation deferred company’s the under compensation cash oftheir all or ofpart receipt defer may Executives 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 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 The company offers core employee benefi employee core offers company The Benefi Post-Employment and Employee • the samevaluation methodology thecompany uses to determine• theaccounting expense ofthegrants under the closing price ofLilly stock• onthegrant date • It coincides withthecompany’s• calendar-year-based performance managementcycle, allowing supervisors to • enhance productivity andjobsatisfaction• through programs thatfocus onwork/life balance. provide ourglobal• workforce with areasonable level offinancial supportintheevent ofillness orinjury ecting employees’ careers with the company. U.S. employees are eligible to participate in these plans. To the plans. inthese toparticipate eligible are employees U.S. company. the with careers employees’ ecting Mr. Taurel’s primary use of the corporate aircraft for personal fl personal for aircraft corporate ofthe Mr. use Taurel’s primary benefi post-employment and employee ofboth cost The income ofretirement level areasonable provide Plan Retirement Lilly the and 401(k) Plan Lilly the In addition, 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 The benefi The fi the on effective are grants off-cycle other and hires tonew Grants reasonably beexpected to fairly represent themarket’s collective view ofourthen-current results andprospects. It follows theannualearningsrelease byapproximately two weeks, sothatthestock price atthattimecan ciency ciency benefi cer. ts available are the same for all U.S. employees and include medical and dental coverage, disability disability coverage, dental and medical include and employees U.S. all for same the are available ts ts to the company clearly outweigh the expense. The company aircraft is also made available available made also is aircraft company The expense. the outweigh clearly company tothe ts ts to the company. As described on pages 100–101, pages on Mr. intoatime-share described Taurel entered has As company. tothe ts cers may travel on the company aircraft to accompany executives who are traveling on on traveling are who executives toaccompany aircraft company the on travel may cers ed retirement plan and anonqualifi and plan retirement ed cant perquisites to executive offi toexecutive perquisites cant ts ts and the IRS limits, and the formula is the same for all U.S. employees. employees. U.S. all for same the is formula the and limits, IRS the and ts ts coverage in order to: inorder coverage ts ts is partially borne by the employee, including each each including employee, the by borne partially is ts ed savings plan. These plans provide only the the only provide plans These plan. savings ed ights in 2007 was to attend outside board board outside toattend was in2007 ights cers, except that the company aircraft is is aircraft company the that except cers, ights during 2007. 2007. during ights rst trading day of the following month. following ofthe day trading rst ed Deferred Compensation in ed PROXY STATEMENT 8989 t cers, cers, are are cers, ve years is provided for t pension plan. nancial security. security. nancial ve times his or her annual base salary, and other ned benefi ned t levels depending on the employee’s job level and seniority, the Any unvested equity awards at the time of termination of employment would would of employment at the time of termination equity awards Any unvested cers. Lilly executives have a long history of maintaining extensive holdings in t continuation. continuation. t cers.The program is intended to preserve employee morale and productivity and cers already meet or exceed the guideline, or in the case of new executive offi Under the portion of the program covering executives, a terminated employee would be would employee a terminated executives, covering Under the portion of the program Eligible terminated employees would receive a severance payment ranging from six from payment ranging a severance receive would employees terminated Eligible Basic employee benefi ts such as health and life insurance would be continued for up for be continued would insurance as health and life ts such benefi Basic employee Employees who suffer a covered termination receive up to two years of pay and benefi years two up to receive termination covered a who suffer Employees Employees are eligible for payments if, within two years of the change in control, their of the change in control, years payments if, within two for eligible are Employees ts t continuation. t cers to own at least three times their annualbase salary. A phase-in of up to fi entitled to two years’ benefi years’ two to entitled to two years following termination of employment. All executives, including named executive offi including named executive All executives, of employment. termination following years two to months’ to two years’ base salary. Executives are all eligible for two years’ base salary plus cash bonus (with base salary plus cash years’ two for all eligible are Executives base salary. years’ two to months’ the bonus paid prior to bonus or the last target year’s of the then-current as the higher bonus established change in control). entitled to a supplement of two years of age credit and two years of service credit for purposes of calculating purposes of calculating for credit of service years and two of age credit years of two a supplement to entitled defi under the company’s t levels eligibility and benefi —Benefi Pension supplement. supplement. —Pension —Severance payment. protection. The purpose of these provisions is to assure employees a reasonable period of protection of their of protection period a reasonable employees assure is to The purpose of these provisions protection. fi depend for ts upon which they benefi employee and core income Accelerated vesting of equity awards. Accelerated vested. become with in connection by the employee ts received the payments or other benefi tax. In some circumstances, Excise Code. Revenue under Section 280G of the Internal limits established certain may exceed a change in control of the way Because tax. income of normal federal on top tax an excise then be subject to would The employee compensated similarly while on some employees burden impose a large it can is calculated, tax the excise tax—would income the regular not tax—but of this excise The costs the tax. will not be subject to employees otherwise be due under the payments that would tax, triggering the excise avoid To be borne by the company. the IRS limit. the IRS limit will be cut back to over 3 percent up to that are program Although there are some differences in benefi program the Lilly in control, upon a change pay out immediately trigger” plans that “single Unlike trigger. Double 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 performance is made for A partial exception of employment. upon loss nancial protection of fi level guaranteed the change in up to based on time worked be paid out upon a change in control, portion of which would a awards, this believes The committee at the time of the change in control. level payout or forecasted and the target control based an award into EPS targets the Lilly culties in converting of the diffi because partial payment is appropriate value is not the surviving entity, a portion of the shareholder if Lilly EPS. Likewise, on the surviving company’s stock. Lilly for price and the merger the change in control up to paid out, based on time worked are awards terminations. Covered each as by the employee, good reason or (ii) for by the company (i) without cause is terminated employment of what including a discussion discussion, detailed a more for See pages 98–100 ned in the program. is defi a change in control. constitutes protections. Two-year The company has adopteda change-in-control severance pay program fornearly all employees of the com- • • • • • are on track to meet or exceed the guideline within the phase-in Lechleiter period. and Dr. Taurel Currently Mr. newly hired or promoted executive offi Lilly stock, and all executive offi executive offi Share Ownership and Retention Guidelines; Hedging Prohibition Share ownership and retention guidelines help to foster a focus on long-term growth. The committee has adopted a guideline requiring the CEO to own Lilly stock valued atleast fi 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 to align executive and shareholder interests by enabling execu- tives to consider 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- 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. basic elements of the program are comparable for all employees: pany, includingpany, the executive offi Severance Benefi Except in the case of a change control in of the company, the company is not obligated pay to severance named to cers upon termination their of employment.executive offi PROXY STATEMENT fi of- executive for compensation establishes and evaluates committee”) “the or (“we” committee compensation The Report Committee Compensation sation Table. Compen- Summary inthe of Mr. shown as $1,000,000 exceeded Taurel’s that Dr. and salary Lechleiter’s base 9090 Mr. for tion roles. Taurel new Dr. intheir and Lechleiter compensa- cash revised approved has committee The 1, 2008. April effective CEO elected been has Dr. Lechleiter 31, 2008. December effective board ofthe chairman as and 31, March 2008 Mr. effective CEO as retire Taurel will Transition Decisions—CEO Compensation 2008 to specifi movements price diffi tothe due covered not are SVAs awards. performance and bonuses tocash related income covers policy This compensation. incentive or ofbonus amount the toincrease was wrongdoing ofthe fect offi offi achievement on based was offi to executive applicable policy recovery compensation executive an adopted has committee the Inaddition, reasons. disciplinary or ofemployment termination for topayment prior toforfeiture subject are SVAs, including awards, incentive Any Policy Recovery Compensation Executive law this under compensation non-deductible 2007, the For interests. holder share- toprotect and objectives compensation company’s the toachieve necessary are payments such judgment, if, inits deductible fully not are that payments make may committee The compensation.” “performance-based as objectives. pensation com- overall our with consistent and feasible extent to the 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 salaries. annual respective 10 their and times 35 at valued shares hold

cers and oversees the deferred compensation plan, the company’s management stock plans, and other manage- other and plans, stock management company’s the plan, compensation deferred the oversees and cers cer engaged in intentional misconduct that caused or partially caused the need for the restatement and the ef- the and restatement the for need the caused partially or caused that misconduct inintentional engaged cer • • We have taken steps to qualify cash bonus compensation, performance awards, and SVAs for full deductibility deductibility full for SVAs and awards, performance compensation, bonus cash toqualify steps taken We have short through own they that stock Lilly tothe exposures economic their tohedge permitted not are Employees offi Executive actually bepaidfor only theninemonthsfrom Aprilthrough December 2008): non-equity incentive plancompensation (bothfigures are shown asifthey were paidfor a fullyear, butwill Dr. Lechleiter. be paidfor only theninemonthsfrom Aprilthrough December 2008): equity incentive plancompensation (both figures are shown asifthey were paidfor a fullyear, butwillactually by half. Thus,effective April1,2008,Mr. Taurel willreceive thefollowing annualizedbasesalaryandtarget non- earnings, andtherefore hisincentive award for theperiodofAprilthrough December 2008willalsobereduced Company BonusPlan,hisnon-equityincentive award opportunityiscalculated asapercentage ofbasesalary 31, 2008.Effective April1,2008,hisbasesalarywillbereduced byhalf. Undertheterms oftheEliLilly and Mr. Taurel. Aschairman,Mr. Taurel willremain an employee ofthecompany untilhisretirement onDecember Theseamountsrepresent the target bonusundertheEliLilly andCompanyBonusPlan,assuming the * —Annualized target non-equityincentive plancompensation—$1,960,000* —Annualized basesalary—$1,400,000 —Annualized target non-equityincentive plancompensation—$1,209,950* —Annualized basesalary—$864,250 company performance in2008.Seepages84–85for adescriptionoftheBonusPlan. year willbecalculated onactualbasesalaryearningsfor theyear, andmayvary from target dependingon annualized basesalarywas paid for theentire calendar year. Actualbonusespaidfor agiven calendar cers. Under this policy, the company may recover incentive compensation (cash or equity) that that equity) or (cash compensation incentive recover may company the policy, this Under cers. cers are required to retain all shares received from the company equity programs, net ofacqui- net programs, equity company the from received shares all toretain required are cers Effective April1,2008,Dr. Lechleiter willreceive thefollowing annualizedbasesalaryandtarget c causes. nancial results that were subsequently the subject of a restatement if an executive executive an if ofarestatement subject the subsequently were that results nancial cers. However, performance-based compensation is fully deductible deductible fully is compensation However, performance-based cers. was essentially equal to the portion portion tothe equal essentially was culty in attributing stock stock inattributing culty PROXY STATEMENT 9191 ($) Total $2,667,743 $9,332,515 $5,957,804 $5,727,393 $4,777,065 $4,415,339 $4,543,607 $13,011,390 $15,229,817 $11,305,093 Compensation Compensation $70,761 $37,722 $13,500

$78,787 $42,691 $55,789 $68,790 $45,551 cer received cer 5 $192,409 $215,044 Total “All Other Compensation” ($) $70,761 $37,722 $13,500 $78,787 $42,691 $55,789 $68,790 $45,551 $192,409 $215,044 All Other Compensation 5

4 0 0 0 0 0 0 0 0 0 0 Other $18,902 ($) $194,469 $921,394 $168,627 $231,862 $232,697 $607,463 $396,687 $1,156,247 $1,417,434 Change in in Change Pension Value

3 4 4 0 0 0 0 0 0 0 0 ($) $705,165 $92,007 $580,466 $1,534,613 $1,043,514 $2,160,277 $109,268 $1,490,080 $1,045,750 $1,054,093 $2,764,308 $4,035,929 Non-Equity Incentive Plan Compensation

2 ($) 2 2 2 2 2 1 1 2 2,3 $473,675 $716,400 $590,928 $200,000 $390,000 $600,000 0 $3,967,976 $1,339,911 $1,240,000 $3,805,333 ed that the Compensation Discussion and Analysis fairly and Option Awards Option $819 $592 $822

$1,051 $1,816 $2,731 $1,382 2 $2,070 $15,030 ($) cer except as part of a non-equity incentive plan. $675,000 $1,995,000 $1,995,000 $1,394,053 $2,852,671 $3,510,000 $4,641,000 $1,864,460 $5,400,000 $6,443,000 Stock Awards nancial statements on pages 43–44 of our annual report. 1 ($) $99,020 $13,500 $68,945 $68,945 $66,720 $54,970 $36,900 $42,099 $916,167 $741,667 $747,583 Salary Salary $615,000 $701,657 $44,855 $44,500 $960,333 $103,045 $1,717,417 $1,149,083 $1,112,000 $1,650,333 2007 2007 2007 2007 2007 2006 2006 2006 2006 2006 t, and perquisite programs. Management has the primary responsibility for the company’s ling with the Securities and Exchange Commission. Year Savings Plan Match Reimbursements Tax Perquisites 2007 2007 2007 2007 2007 2006 2006 2006 2006 2006 cer cer cer cer board meetings and for travel by his wife on the corporate aircraft to attend certain company functions in- participation. spouse volving Tax reimbursementsTax for his use Taurel on income of the corporate imputed to Mr. aircraft to attend outside Mr. Taurel Mr. Mr. Armitage Mr. Dr. Paul Dr. Name Mr. Rice Mr. Dr. Lechleiter Dr. 1 Steven M. Paul, M.D. Executive Vice President, Science and Technology Robert A. Armitage Senior Vice President and General Counsel John C. Lechleiter, Ph.D. President and Chief Operating Offi Derica Rice W. Senior Vice President and Chief Financial Offi Sidney Taurel Sidney Chairman of the Board and Chief Executive Offi Name and Principal Position Year found in Note 7 to our 2007 auditedfi preferential or above-market earnings on deferred compensation. ual’s savings plan contributions, tax reimbursements, and perquisites. Payment for 2007 performance made in March 2008 under the Eli Lilly and Company Bonus Plan. The amounts in this column are the change in pension value for each individual. No named executive offi No bonus was paid to a named executive offi No stock options were granted in 2007. A discussionthe of assumptions used in calculating these values may be The table below shows the components of this column for which 2007, include the company match for each individ- nancial statements and reporting process, including the disclosure of executive compensation. With this in mind, 5 3 4 1 2 Summary Compensation Table fi we have reviewed and discussed with management the Compensation Discussion and Analysis found on pages 81–90 of this proxy statement. The committee is satisfi ment incentive, benefi completely represents thephilosophy, intent, and actions of the committee with regard to executive compensa- tion. recommended We to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement for fi Compensation Committee Karen N. Horn, Ph.D., Chair Fisher M.C. George ErikJ. Fyrwald Ellen R. Marram PROXY STATEMENT 9292 2 1 Grants of Plan-Based Awards During 2007 of Plan-Based Grants units. stock and grants, stock restricted options, stock awards, value holder share- awards, performance for provides which Plan, Stock Lilly 2002 the and plan, incentive anon-equity Plan, Bonus Company and Lilly Eli the 81, include page on and beginning Analysis, and Discussion Compensation the offi executive named tocertain credited be may that ofservice years ditional aeGrant Date Name Dr. Paul — Dr. Lechleiter r riae— Mr. Armitage Mr. Rice Mr. Rice Mr. Taurel These columns show the range of payouts targeted for 2007 performance under the 2002 Lilly Stock Plan as as Plan Stock Lilly 2002 the under performance 2007 for targeted ofpayouts range the show columns These Bonus Company and Lilly Eli the under performance 2007 for targeted ofpayouts range the show columns These described in the sections titled “Equity Incentives—Performance Awards” and “Equity Incentives—Shareholder Incentives—Shareholder “Equity and Awards” Incentives—Performance “Equity titled sections inthe described pensation.” Com- Plan Incentive “Non-Equity Table titled column inthe Compensation Summary inthe shown is and target, of percent 188 at described, metrics the on based made been has performance 2007 for payment bonus 2008 The Analysis. and Discussion Compensation inthe Bonuses” Incentive “Cash titled section inthe described as Plan 5 4 3 2 The compensation plans under which the grants in the following table were made are generally described in described generally are made were table following inthe grants the which under plans compensation The offi executive named our with agreements employment no We have Reimbursement for an over-withholding of taxes by the company in a prior year when Mr. an on when was year Rice inaprior company the by oftaxes over-withholding an for Reimbursement T 5 infootnote described payment the for $13,051 reimbursements Mr.For includes intax amount this Rice, company certain toattend aircraft corporate the on spouses executives’ the by travel for Tax reimbursements salaries, the purchase costs of the company-owned aircraft and the cost of maintenance not related to trips. totrips. related not ofmaintenance cost the and aircraft company-owned ofthe costs purchase the salaries, fi the include not do we travel, business ily for primar- used are aircraft company-owned the Since executive. the by payments lease time-share any by offset costs, variable smaller and costs, parking and hangar trip-related fees, landing catering, on-board expenses, travel crew maintenance, trip-related offuel, cost the on based aircraft corporate ofthe use personal of any company to the cost incremental the We calculate company. tothe cost incremental no at trips, business on him accompanied occasionally Mr. have Inaddition, Taurel’s members family participation. spouse included that functions board toattend Taurel’s Mrs. expenses include also column inthis amounts The in 2006. $107,105 was $91,069 and aircraft ofMr. cost in2007 Taurel’s corporate ofthe incremental use The agreement. Mr. time-share the by under Taurel’s in2007, offset trip reimbursement personal one and meetings board overseas assignment. below. participation. spouse involving functions hese amounts include the incremental cost to the company of use of the corporate aircraft to attend outside outside toattend aircraft corporate ofthe ofuse company tothe cost incremental the include amounts hese 2/9/2007 2/9/2007 2/9/2007 2/9/2007 2/9/2007 2/9/2007 2/9/2007 2/9/2007 2/9/2007 2/9/2007 — — — 5 4 5 4 5 4 5 4 5 4 Compensation Action Date Committee 12/18/2006 12/18/2006 12/18/2006 12/18/2006 12/18/2006 12/18/2006 12/18/2006 12/18/2006 12/18/2006 12/18/2006 — — — — — Threshold ($) 0$816,283$1,632,5660$1,149,083$2,298,1660$2,146,771$4,293,542 5068$1,121,376 $560,688 0 0$556,250$1,112,500 Estimated Possible Payouts Payouts Possible Estimated Incentive Plan Awards Incentive Plan Under Non-Equity Non-Equity Under Target Target ($) xed costs that do not change based on usage, such as pilots’ pilots’ as such usage, on based change not do that costs xed Maximum 1 ($) Threshold (# shares) Estimated Possible and Future Future and Possible Estimated 0 0 0 0 0 0 0 0 0 0 Incentive Plan Awards Incentive Plan cers. See, however, the description ofad- however, description the See, cers. Payouts Under Equity Equity Under Payouts cers upon retirement (pages 96–97). 96–97). (pages retirement upon cers (# shares) Target Target 26,834 68,426 44,477 56,426 36,677 22,128 15,766 15,766 19,119 19,119 (# shares) Maximum 100,000 44,256 73,354 62,268 31,532 31,532 37,568 95,796 2 26,767 26,767 Underlying Number of Securities All Other Other All Options Awards: Awards: Option 0 0 0 0 0 3 $3,060,000 $3,060,000 Grant Date Date Grant $1,200,000 $1,200,000 Fair Value Value Fair $1,989,000 $1,989,000 of Equity Awards $855,000 $855,000 $855,000 $855,000 PROXY STATEMENT 9393 cers received cers cer at the time of grant and at ed above, and the shares will remain cers in 2007. Value on $3,916,370 $3,916,370 $1,683,493 $1,683,493 $1,683,493 $2,362,828 $5,339,000 December 2007 31, Awards 31,532 31,532 73,354 44,256 100,000 Our performance awards granted in 2007 paid out in January 2008, and the named executive offi Our shareholder value awards granted in 2007 will pay out at the end of the three-year performance period For 2007 performance, payouts were 200 percent of target.In order to receive a performance award payout, mined in January 2010. mance awards is shown in the Summary Compensation in the column titled Table “StockAwards” and their valu- ation assumptions are referenced in footnote 2 to that table. The 2007 performance award payout was made in January 2008 and is shown in more detail below. Value Awards” in the Compensation Discussion and Analysis. Mr. Taurel Mr. Lechleiter Dr. Dr. PaulDr. Armitage Mr. Name Performance Name Mr. Rice Mr. These rows show shareholder value award grants. The payout for the 2007 shareholder value award will be deter- No stock options were granted to named executive offi These rows show performance award grants. The dollar amount recognized by the company for these perfor- according to the grid as shown on page 87 of the Compensation Discussion and Analysis. At the end the of 2007, award was on track to pay out at 40 percent of target. the time of payout received payment in shares of restricted stock. Non-preferential dividends are paid during the one-year restriction period. Each executive was awarded the shares identifi restricted (and subject to forfeiture if the executive resigns) until theearlier of February 2009 or the executive’s shares will Taurel’s retirement. vest Mr. upon his retirement from the company on 2008. December 31, a participant must have remained employed with the company through 2007 December 31, (except in the case of death, disability, or retirement). In addition, an executive who was an executive offi 5 3 4 the following shares: PROXY STATEMENT 9494 31, 2007 December at Awards Equity Outstanding Mr. Taurel Mr. Rice Name Dr. Lechleiter Mr. Armitage Dr. Paul Unexercised Exercisable Options (#) Underlying Number of Securities 400,000 200,000 240,000 350,000 350,000 350,000 100,000 350,000 120,000 120,000 175,000 120,000 23,800 46,000 46,000 23,000 80,000 80,000 80,000 50,000 50,000 50,000 60,000 25,000 25,000 14,000 25,000 10,000 10,000 10,000 75,900 12,000 23,100 11,200 5,000 5,700 7,000 1

9 7 6 Unexercisable Unexercised Options (#) Underlying Number of Securities Option Awards 255,621 140,964 216,867 127,811 53,254 30,000 85,207 72,289 23,077 50,000 25,000 54,217 27,108 1

9 9 Exercise Option Price $52.54 $56.18 $56.18 $56.18 $56.18 ($) 66.38 66.38 66.38 66.38 66.38 55.65 55.65 55.65 55.65 55.65 74.28 74.28 74.28 74.28 73.98 73.98 73.98 75.92 75.92 75.92 75.92 88.41 88.41 88.41 75.92 88.41 88.41 88.41 79.28 79.28 79.28 79.28 79.28 57.85 57.85 57.85 57.85 57.85 61.22 56.18 73.11 73.11 73.11 73.11 73.11

10/16/2009 10/16/2009 10/16/2009 10/16/2009 10/16/2009 10/04/2011 10/04/2011 10/04/2011 10/04/2011 10/04/2011 10/17/2008 10/17/2008 10/17/2008 10/17/2008 12/17/2010 12/17/2010 12/17/2010 12/17/2010 12/17/2010 12/17/2010 Expiration 5/30/2008 2/14/2014 2/14/2014 2/14/2014 2/14/2014 2/14/2014 2/09/2016 2/09/2016 2/09/2016 2/09/2016 2/09/2016 4/29/2016 2/15/2013 2/15/2013 2/15/2013 2/15/2013 2/10/2015 2/10/2015 2/15/2013 2/10/2015 2/10/2015 2/10/2015 2/18/2011 2/18/2011 2/18/2011 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2012 Option Date Number of or Units of of Units or StockThat StockThat Have Not Not Have Vested Shares 100,000 44,256 73,354 24,030 32,040 (#) 62,478 31,532 31,532 96,120 5,000 2

4 5 4 4 5 4 5 8 4 5 Have Not Vested Not Have Market Value Value Market of Stock That That Stock of of Shares or or Shares of Units $3,335,700 $2,362,828 $5,339,000 $1,683.493 $1,683,493 $3,916,370 $5,131,846 $1,282,962 $1,710,616 ($) $266,950 Stock Awards 2

Shares, Units Plan Awards:Plan Rights That Number of Unearned Incentive Have Not Not Have or Other Other or Vested Equity Equity (#) 26,834 68,426 44,477 19,119 19,119 3 3 3 3 3 Shares, Units Plan Awards:Plan Payout Value Value Payout of Unearned Rights That Market or Incentive Have Not Not Have or Other Other or $3,653,264 $2,374,627 $1,432,667 Vested $1,020,763 $1,020,763 Equity Equity ($) PROXY STATEMENT 9595 cers: cers. on Vesting ($) Value Realized 2 Stock Awards Stock t of Mr. Taurel’s children, Taurel’s and t of Mr. t of Dr. Lechleiter’s children,t of Dr. t of his children, and these shares t of his children, and these shares on Vesting (#) 10/19/2001 10/18/2002 12/18/2003 10/03/2003 06/04/2001 02/20/2004 Vesting Date Vesting Number of Shares Acquired 1 12/17/2010 10/17/2008 10/04/2011 10/16/2009 05/30/2008 02/18/2011 Expiration Date Expiration Value Realized on Exercise ($) Option Awards Option ects the target payout amount, which will be made if the average stock price in 02/17/2006 02/11/2008 02/19/2007 05/01/2009 02/10/2009 02/18/2005 Vesting Date Vesting on Exercise (#) Number of Shares Acquired ts ect the difference between the exercise price of the option and the market price at the time of exer- ectthe market value of the stock on the day the stock vested. These shares represent performance 02/17/2012 02/10/2015 02/15/2013 02/09/2016 02/14/2014 04/29/2016 Expiration Date Expiration Internal Revenue Code. Eligible employees may elect to contribute a portion of their salary to the plan, and a portion of their salary to contribute to may elect employees Code. Eligible Revenue Internal of base salary. 6 percent up to contributions on the employees’ contributions matching provides the company contributions, company contributions, The employee stock. of Lilly in the form are contributions The matching the Summary made by the participant. See with elections paid out in accordance are and earnings thereon offi the named executive to contributions about company information on page 91 for Compensation Table • The Lilly Employee 401(k) Plan, a defi ned contribution plan qualifi ed under sections 401(a) and 401(k) of the plan qualifi ned contribution 401(k) Plan, a defi • Employee Lilly The cise. awards issued in January 2006 for company performance in 2005, which were subject to forfeiture for one year following issuance. Paul, these For Dr. columns include 3,000 shares of restricted stock, which vested on June 1, 2007. vested on April 30, 2002. 50,734 shares this of option are held in trust for the benefi and the remainder have been transferred Lechleiter. back to Dr. cent on December 19, 2005;cent on December 25 percent 19, on December 2008; 18, and 50 percent on November 2, 2009. November and December 2009 is between $63.00 and Actual $66.99. payouts may vary from zero to 140 percent of target. Had the performance period ended at year end, the payout would have been 40 percent of target. of shares reported in the table refl The restricted stock shares pay dividends during the restriction period, but the dividends are not preferential. vested shares on April of this option are 30, held 2002. in trust for the 149,172 benefi the remainder have been transferred Taurel. back to Mr. Amounts refl Amounts refl These shares will vest December 20, 2010. These options were granted outside the of normal annual cycle and vest in three installments, as follows: 25 per- Dr. Lechleiter transferredDr. shares 118,683 of this option to a trust for the benefi Shares paid out in January 2007 for 2006 performance. These shares vested in February 2008. transferredTaurel Mr. 348,683 shares of this option to a trust for the benefi Shares paid out in January 2008 for 2007 performance. These shares vest in February 2009. Shares granted under the company’s Shareholder Value Award plan that will vest December 2009. The number31, These two columns show performance award shares paid in restricted shares withholding a period of one year. The vesting date of each option is listed in the table below by expiration date: r ie0 0 Rice000 TaurelMr. LechleiterDr. PaulDr. ArmitageMr. Mr. 0 0 100,000 0 $480,020 0 0 0 24,564 64,690 32,345 13,478 $1,342,904 $3,501,023 $1,750,511 $729,429 Name Retirement Benefi Options Exercised and Stock Vested in 2007 We maintainWe two programs to provide retirement income to all eligible U.S. employees, including executive offi 1 2 8 9 7 5 6 4 3 2 1 PROXY STATEMENT Employees may elect early retirement with reduced benefi reduced with retirement early elect may Employees benefi unreduced an receive points more or 90 (iii) or with points, 80 least at with 62 (ii) age at ofservice, years fi least at with 65 (i) age at retire who Employees ofservice. years plus age her or ofhis sum the equaling points Benefi ofretirement. time the at ofservice years and age benefi ofthe amount The payouts. award performance includes calculation the 2003, to prior years for Inaddition, credited). or earned than (rather paid are earnings inwhich year the for and credited) than (rather paid ofbonus amount the for calculated years) relevant the for statements proxy company’s in the disclosed (amounts bonus and ofsalary consist plan retirement the by covered earnings Annual earnings). annual fi highest the for earnings annual ofthe average the using calculated benefi annual The retiree. ofthe life the for annuity amonthly as paid generally are they sum; 6 5 4 3 2 1 9696 to calculate a pension benefi apension to calculate atax-qualifi from paid be Pension Benefi Pension ofbankruptcy. event inthe toforfeiture subject and unfunded qualifi the without received have would they amount the and plan tax-qualifi the under payable amount the between difference the employees eligible pays that plan retirement Mr. Armitage will be credited with approximately one year of service when he reaches age 60, making him eligible eligible him making 60, age reaches he when ofservice year one approximately with credited be will Mr. Armitage This 60. age past company the by employed is he if ofservice, 10 years additional an for eligible be Dr. will Paul of 10 than years more has and old years 55 over is he because retirement early for eligible Dr. currently is Paul qualifi He retirement. early for eligible currently Dr. is Lechleiter benefi retirement full Mr. for eligible Taurel currently is RP mortality benefi percent, of6.75 rate ofaccumulated adiscount value t assumes ofpresent calculation The Dr. Lechleiter Name Dr. Paul Mr. Armitage Mr. Rice Mr. Taurel applies toward his eligibility for a benefi t, it does not change the present value of his nonqualifi ofhis abenefi value for present the eligibility change his not does it t, toward applies benefi retirement areduced to receive $1,174,879. nonqualifi ofhis value present the increased credit service additional potential below. described further are service. He qualifi retirement benefi benefi survivor and joint and only), decrement (post-retirement 2000CH • Employees withbetween 80and90points mayretire• withabenefit thatisreduced bythree percent for eachyear • The Lilly Retirement Plan(theretirement• plan),atax-qualifi that theemployee hasleft to reach 90points orage62. Section 415 of the Internal Revenue Code generally places a limit on the amount of annual pension that can can that pension ofannual amount the on alimit places generally 415 Code Revenue Section Internal ofthe information aboutthevalue ofthesepensionbenefi retirement benefits to eligible employees. SeetheSummaryCompensationTable onpage91for additional The retirement plan benefi plan retirement The The following table shows benefi shows table following The 4 2 3

ts in 2007 t. Early retirement benefi retirement Early t. es for approximately 27 percent less than his full retirement benefi retirement full his than less percent 27 approximately for es ed plan ($180,000 in 2007) as well as on the amount of annual earnings that can be used used be can that earnings ofannual amount the on as well as in2007) ($180,000 plan ed tax-qualifi tax-qualifi tax-qualifi tax-qualifi tax-qualifi t ($225,000). However, since 1975 the company has maintained anon-tax-qualifi maintained has company However,1975 the since t ($225,000). nonqualifi nonqualifi nonqualifi nonqualifi nonqualifi ts shown in the table are net present values. The benefi The values. present net are table inthe shown ts Plan ed plan ed plan ed plan ed plan ed plan ed plan ed plan ed plan ed plan ed plan ts that named executive offi executive named that ts total total total total total t under the company’s retirement program. Since this arrangement only only arrangement this Since program. retirement company’s the t under ts are further described below. described further are ts Number of Years of of Years of Number Credited Service ts. ts. t calculations are based on “points,” with an employee’s employee’s an “points,” on with based are t calculations 28 28 35 35 18 18 15 ts under either of the following two options: two following ofthe either under ts 15 9 9 6 5 ed defi ned benefi ed plan’s limit. The nonqualifi The plan’sed limit. cers are entitled to under the retirement plan. retirement the tounder entitled are cers es for approximately 11 percent less than his full full his than 11 less percent approximately for es ve out of the last 10 years of service (average (average ofservice 10 years last ofthe out ve Accumulated Benefi Accumulated t of 25 percent. t of25 Present Value of of Value Present $30,406,909 $29,237,439 $6,563,736 $3,289,662 $3,037,525 $7,297,645 ed pension benefi $1,169,470 t planthatprovides monthly $803,385 $795,456 $733,909 $979,487 $231,424 $184,031 $252,137 $571,961 t also depends on the retiree’s the on depends t also t. Early retirement benefi retirement Early t. ts are not payable as a lump alump as payable not are ts t ($) 1 t under the plan is is plan the t under ed retirement plan is ed pension benefi t shown above by by above t shown Last Fiscal year ($) year Fiscal Last Payments During 0 0 0 0 0 ed ed t. ts ve t. PROXY STATEMENT 9797 — — 3 ($) $185,495 $185,495 $689,318 $689,318 $866,467 $370,254 $2,767,917 $2,917,168 $2,924,791 $8,551,063 $2,397,663 $3,783,635 $11,475,854 Aggregate Aggregate Fiscal Year End Balance at Last ts at either 0 0 ($) Aggregate Aggregate Distributions in Last Fiscal Year ed savings plan is designed t will result in a lower annuity t based on his actual years of — — $7,670 $7,670 0 $18,646 $42,801 $38,821 $38,821 0 ($) ($) $197,416 $154,615 $149,079 $141,865 0 $123,219 $613,265 $464,186 Aggregate Aggregate Earnings in Last Fiscal Year 1 1 7 , 8 1 2 0 — — — — — — $110,110 Total ($) $3,520,965 $2,620,075 $2,666,297 2 $31,355 $31,355 $31,000 $31,000 $89,545 $89,545 $55,445 $55,445 ($) Registrant Last Fiscal Year Contributions in 1$ 0 1 — — — — 7 , t. Election of the higher survivor benefi 8 1 1 2 $47,400 $31,355 $31,355 $31,000 $89,545 $89,545 $55,445 ($) $427,965 $721,703 $690,703 $372,520 $1,867,372 $2,182,887 $3,341,875 Executive Executive Previous Years ($) ts in 2007 table on page A grant 96). of additional years of service credit to Last Fiscal Year Contributions in total total total total total ed savings ed ed savings ed ed savings ed ed savings ed ed savings ed Plan $62,710 $179,090 $483,410 $752,703 2007 ($) ed savings plan and a deferred compensation plan. The nonqualifi ed Deferred Compensation in 2007 table above shows information about two company pro- nonqualifi ed savings) or the “Non-Equity Incentive Plan Compensation” column (deferred compensation). deferred compensation deferred compensation deferred compensation deferred compensation deferred compensation

l 0$ u a ts (shown in the Pension Benefi The Nonqualifi retire with a benefi t that is reduced as described above and is further reduced by six percent for each year that that each year for by six percent reduced and is further as described above is reduced t that a benefi with retire or age 65. 80 points reach to has left the employee All U.S. retirees are entitled to medical insurance under the company’s plans. Retirees with spouses or un- Dr. Paul joined theDr. company Paul will in 1993. receive Dr. years 10 of additional service credit if he remains P . r • Employees who have less than 80 points, but who have reached age 55 and have at least 10 years of service, may may of service, 10 years at least 55 and have age reached but who have than 80 points, • less who have Employees Mr. Taurel Mr. Dr. Lechleiter Dr. D Name Mr. RiceMr. Mr. Armitage Mr. Table for this yearTable and for previous years: umn (nonqualifi Compensation” column as a portion of the savings plan match. Dr. PaulDr. nonqualifi Mr. ArmitageMr. nonqualifi Mr. RiceMr. nonqualifi Name TaurelMr. Dr. LechleiterDr. nonqualifi Of the totals in this column, the following amounts have previously been reported in the Summary Compensation The amounts in this column are also included in the Summary Compensation in the “Salary” on page 91, Table col- The amounts in this column are also included in the Summary Compensation Other in the on “All page 91, Table married dependents may elect that, upon death, the retiree’s the plan will pay survivor annuity benefi employed by the company past age 60, or is involuntarily terminated before he turns 60. Armitage When Mr. joined thethe company company agreed in 1999, to provide him withretirement a benefi 25 or 50 percent annuity of the retiree’s benefi payment during life. the retiree’s service and earnings at age 60. Armitage When Mr. reaches age years 60 with of service, 9.75 he will be treated as though he has, for eligibility purposes 20 only, years of service. The additional service credits will make him ts nine months but earlier, willeligible not change to begin reduced the timing or amount benefi of his unreduced benefi Nonqualifi any employee must be approved by the compensation committee of the board of directors. 3 1 2 2007 Compensation in Deferred ed grams: a nonqualifi to allow each executive to contribute up to 6 percent of his or her base salary, and receive a company match, beyond the contribution limitsprescribed 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 employ- PROXY STATEMENT 9898 3 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 ofbankruptcy. event in the toforfeiture subject and unfunded are plans Both irrevocable. are schedules distribution associated and elections deferral All committee. compensation the by approved as ofhardship event inthe except employment, their during withdrawals make not may but retirement, following inupto10 installments or sum annual inalump funds the toreceive elect may Participants 2008. for percent 5.5 is and 2007 for 5.7 percent was which compounding, monthly with Code 1274(d) Revenue Internal ofthe Section under Department Treasury U.S. the by December preceding the for established as rate long-term federal applicable ofthe 120 at percent interest with credited are program this under executives by deferred Amounts plan. compensation deferred company’s the under compensation cash offi Executive toparticipate. eligible are ees 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 benefi pension Program—Incremental Pay Severance “Change-in-Control See • Involuntary or good reason reason good or • Involuntary termination • Involuntary retirement • Voluntary Mr. Taurel • Involuntary termination • Involuntary retirement • Voluntary Dr. Paul reason good or • Involuntary termination • Involuntary retirement • Voluntary Dr. Lechleiter • Involuntary or good reason reason good or • Involuntary termination • Involuntary termination • Voluntary Mr. Rice reason good or • Involuntary termination • Involuntary termination • Voluntary Mr. Armitage • Involuntary or good reason reason good or • Involuntary information about Dr. Paul’s retirement benefi Dr. about retirement Paul’s information more for 96–97 pages (see 60 age reaches he before occur it should cause, for than other termination, untary tion of medical and welfare benefi welfare and ofmedical tion (CIC) control in change after termination termination after CIC after termination termination after CIC after termination CIC after termination termination after CIC after termination 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 ect an additional 10 years of service credit that would be credited toDr. invol- an upon credited Paul be would that credit ofservice 10 years additional an ect Cash Severance Severance Cash ts” on pages 99–100. pages on ts” Payment $11,580,950 36342$2,3 2202$,0,5 21125$9,839,484 $2,171,275 $3,102,557 $242,082 $720,138 $3,603,432 36764$104,298 $3,637,654 66140$1,347,065 $6,661,440 50978$4,108,206 $5,029,728 cers and other executives may also defer receipt of all or part of their oftheir part or ofall receipt defer also may executives other and cers 00 000 0 00 000 0 0$3,141,25800 000 0 00 000 0 00 000 0 00 000 0 00 000 0 00 000 0 00 000 0 Pension Benefi Pension (present value) (present ts). Incremental ts” and “Change-in-Control Severance Pay Program—Continua- Pay Severance “Change-in-Control and ts” cers to severance, perquisites, or other enhanced benefi enhanced other or perquisites, toseverance, cers 0 t cers would be entitled upon termination of employment. ofemployment. termination upon entitled be would cers 3 3 1 Medical / Welfare /Welfare Medical Benefi Continuation of ts under the company’s compensation and benefi and compensation company’s the under ts value) ts (present $113,577 $89,577 $24,000 2,0 3667$3,301,506 $316,617 $24,000 2,0 18505$,9,4 $7,308,194 $1,697,147 $1,845,095 $24,000 3 3 2 Acceleration and and Acceleration Continuation of Equity Awards Equity expense as of (unamortized (unamortized 12/31/07) t” on page 100. 100. page on t” ts” above, there are no agreements, agreements, no are there above, ts” 4792$,8,4 $13,598,328 $3,888,845 $457,972 $487,102 00$ ts to a terminating execu- toaterminating ts Excise Tax Excise Gross-Up $12,092,052 0 Termination Termination Benefi $11,650,628 Total Total 3 , 2 3 ts 0 ts t , 8 3 5 PROXY STATEMENT 9999 nes a change in ed Deferred Compensation in 2007 cers (the “CIC Program”). The CIC Program defi The amounts shown the in previous table do not include payments ts. ts. ts that are not available to salaried employees generally. The table assumes a termination of employment that is eligible for severance under the severance for that is eligible 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 provided to all U.S. retirees, including retiree medical and dental insurance. The amounts insurance. dental and medical retiree including U.S. retirees, all to ts provided ts” on the page company 89, maintains a change-in-control severance pay program for nearly ts to the extent they are provided on a non-discriminatory basis to salaried employees generally upon 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 willful and continued employee’s misconduct or gross dishonesty, (ii) any act of fraud, the company; harm to economic in demonstrable of the company; reputation the business harm to cant harm or other signifi economic cant in signifi resulting a felony. to contendere of guilty or nolo of a plea of or the entering or (iii) conviction or authority, responsibilities duties, relationship, reporting title, position, of the executive’s or status 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 —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 if it is for cause is for by the company cer offi of an executive —A termination diminution in the (i) a material from it results if good reason is for cer offi by the executive —A termination The value of option continuation upon retirement. When an employee terminates prior to retirement, his or her retirement, prior to terminates When an employee upon retirement. of option continuation The value his or terminates, employee when a retirement-eligible However, 30 days thereafter. terminated options are stock date. expiration normal or the option’s retirement after years ve the earlier of fi until in force her options remain shown in the table above as “Continuation of Medical / Welfare Benefi ts” are explained below. explained ts” are Benefi / Welfare of Medical as “Continuation above in the table shown about the 401(k) information 97–98 for on pages Compensation in 2007 table ed Deferred the Nonqualifi following ed savings plan. and the nonqualifi plan, compensation plan, the deferred of unvested vesting accelerated receive retirement-eligible while employment who terminate plans, employees outstanding forfeited), which are retirement, in the 12 months before options granted for (except options stock during time worked basis for 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, plan, based on the named executive’s of the current terms or a other than cause, reasons for termination include an involuntary terminations 31, 2007. Eligible December the change in control. following years within two good reason, for by the executive termination voluntary Covered terminations. Covered Benefi ts” on pages 95–97. The amounts shown in the table above as “Incremental Pension Benefi t” are explained explained t” are Benefi Pension as “Incremental above in the table 95–97. The amounts shown ts” on pages Benefi below. • pay. and vacation salary Accrued • Distributions of plan balances under the Lilly 401(k) Plan and the nonqualifi plan. See the narrative ed savings • 401(k) Plan and the nonqualifi the Lilly under balances of plan Distributions stock Under the company’s upon retirement. equity grants unvested of certain vesting • of accelerated The value • • Welfare benefi • Welfare • Regular pension benefi ts under the Lilly Retirement Plan and the nonqualifi ed retirement plan. See “Retirement See “Retirement plan. ed retirement the nonqualifi Plan and Retirement ts under the Lilly • Regular pension benefi • cers any to payments or benefi and benefi terminationof employment. These include: control very specifi the following: acquisition (a) percent or of 15 more of the company’s stock; replacement (b) by the shareholders of one third or more of the board of directors; consummation (c) share of a merger, 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 fol- lowing 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 97. Change-in-Control Severance Pay Program. As described in the Compensation Discussion and Analysis under “Severance Benefi all employees, including the named executive offi Accrued Pay and Regular Retirement Benefi PROXY STATEMENT 100100 including Mr. aircraft, company the agreement, Taurel leases time-share the Under aircraft. ofcompany use sonal a toMr. Taurel available for made is aircraft company the reasons security for policy, board under above, noted As Transaction Related-Person three-year period elapsed. performance ofthe portion the for prorated and price stock change-in-control the on based out pay will SVA the entity, surviving fi then-current company’s the on based calculated award, performance ofthe value ofthe one-half receive would employee the 30, June on occurred incontrol achange if example, For incontrol. change tothe prior worked year ofthe portion torefl reduced made, be would awards performance ofoutstanding payment a partial incontrol change ofa consummation upon that except alone, incontrol achange upon payments receive not do Employees control. in change the following years two within ofemployment termination acovered suffers employee the if only made Alone. Control in Change Upon Payments ll travel. The company has entered into a time-share arrangement with Mr. Taurel in connection with his per- Mr. his with with Taurel inconnection arrangement into atime-share entered has company The travel. ll • • • • • standard actuarialassumptions were usedto calculate eachindividual’s incremental pensionbenefi two years ofagecredit andtwo years ofservice credit thatisprovided undertheCICProgram. Thefollowing rate of$12,000peryear. welfare benefits aswere usedto calculate incremental pensionbenefits, withtheadditionofanassumed COBRA described onpages96–97.Thesameactuarialassumptions were usedto calculate continuation ofmedical and reason for termination. For Dr. Paul, theamountsintable reflect the10years ofadditionalservice credit would beentitled to equivalent medical anddental coverage intheordinary course asretirees regardless ofthe employees, Mr. Taurel andDr. Lechleiter, there islimited incremental benefit undertheCICPlanbecause they employee medical, dental, life, andlong-term disabilityinsurance. For two ofthethree retirement-eligible two years following acovered termination ofcontinued coverage equivalent to thecompany’s current active Incremental pensionbenefi times cash bonusfor 2007undertheEliLilly andCompanyBonusPlan. Cash severancepayment. local income tax rate. The amountsinthetable are basedona280Gexcise tax rate of20percent anda40percent federal, state, and excise taxes aswell asanyincome andexcise taxes payable bytheexecutive asaresult ofthereimbursement. 280G oftheInternal Revenue Code.Thecompany hasagreed to reimburse theaffected employees for those Excise taxgross-up. Uponachangeincontrol, employees maybesubjectto certain excise taxes underSection company for thiscontinuation because theoptionwould already have beenfully expensed. options for upto three years following termination ofemployment. There would benoincremental expense to the Armitage andRice, would receive thebenefit undertheCICPlanofcontinuation oftheiroutstanding stock unvested equitygrants. Inaddition,thetwo namedexecutive officers whoare notretirement-eligible, Messrs. represent thepreviously unamortizedexpense thatwould berecognized inconnection withtheacceleration of the exception oftheSVA) automatically vest uponretirement regardless ofreason. Theamountsinthiscolumn the CICPlanwould be5,000shares ofrestricted stock heldbyDr. Paul; allotherunvested equityawards (with Lechleiter andPaul, theonly otherequityaward receiving accelerated vesting andterm extension because of control inwhichLilly isnotthesurvivingentity. For thethree retirement-eligible employees, Mr. Taurel andDrs. years following termination. Payment oftheShareholder Value Award isaccelerated inthecase ofachangein options, restricted stock, orotherequityawards would vest, andoptionswould beexercisable for upto three Acceleration andcontinuation ofequityawards. Continuation ofmedical andwelfare benefi described onpages96–97. increase hisbenefit. For Dr. Paul, theamountsintable above reflect the10years ofadditionalservice credit Because Mr. Taurel already qualifies for afullpensionbenefi t, theadditionalagecredit andservice credit donot otlt ps-eieetol) RP 2000CH benefit: &survivor Joint (post-retirementMortality only): rate: Discount the changeincontrol; or(vi)relocation oftheexecutive bymore thanfifty (50)miles. nancial forecast for the year. Likewise, in the case of a change in control in which Lilly is not the the not is Lilly in which incontrol ofachange case inthe year. the for Likewise, forecast nancial Represents theCICProgram benefit oftwo timesthe2007annualbasesalaryplustwo t.Represents thepresent value ofanincremental nonqualified pensionbenefi 25% of pension of 25% percent 6.75 The CIC Program is a “double trigger” program, meaning payments are are payments meaning program, trigger” a“double is Program CIC The ts. Represents thepresent value oftheCICPlan’s guarantee for Under theCICPlan,uponacovered termination, anyunvested stock t: ect only the the only ect t of PROXY STATEMENT 101101 — — — ight ight 5,600 8,400 11,200 11,200 14,000 14,000 14,000 14,000 867,811 496,107 281,154 101,977 2,520,621 60 Days of Stock Options Options Stock February 4, 2008 Exercisable Within ight commercially (if 2 cially owned by each 3 4 0 cially ownedby the directors,

cially 9,368 17,159 29,944 10,596 10,596 69,207 73,317 12,502 13,232 22,370 28,536 22,804 58,435 236,445 1,108,586 Benefi Total Shares Owned 1 0 — — — — — cers as a group, as of February 4, 2008. 9,596 9,596 9,268 17,159 29,944 11,232 10,702 18,837 18,536 22,804 cers Plan Shares Directors’ Deferral Directors’ rst-class airfare for the relevant fl — — — — — — — — — — — 47 1,383 4,850 16,981 13,040 ights. He pays a time-share fee based on the company’s cost of the fl 401(k) Plan Shares 401(k) ts. cers, and all directors and executive offi cers as a group (22 people): 2,074,960 ight services, for personal fl The table shows shares held by named executives in the Lilly Employee Plan, 401(k) shares credited to the cers percent as a group of the outstanding own0.18 common stock Cook’s of the company. shares 1,800 of Mr. Martin Ph.D. Feldstein, S. Derica Rice W. Alfred G. Gilman, M.D., Ph.D. Karen N. Horn, Ph.D. John C. Lechleiter, Ph.D. George M.C. Fisher M.C. George J. Erik Fyrwald Michael L. Eskew Steven M. Paul, M.D. Franklyn G. Prendergast, M.D., Ph.D. Kathi Seifert P. Sidney Taurel Sidney J. Michael Cook Robert A. Armitage Bischoff Winfried Sir All directors and executive offi Name Ellen R. Marram R. Ellen director. Mr. Taurel has shared Taurel voting power Mr. anddirector. 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 percent owns of the outstanding more than 0.10 common stock of the company. All directors and executive offi were on deposit in a margin account as of February 4, 2008. rector. Dr. Lechleiter has Dr. rector. shared voting power and shared investment power over the shares held by the foundation. The shares shown Lechleiter for include Dr. shares 13,470 that are owned by a family foundation for which he is a di- The shares include 18,545 Taurel shown shares for Mr. that are owned by a family foundation for which he is a Unless otherwise indicated in a footnote, each person listed in the table possesses sole voting and sole invest- See description of the Lilly Directors’ Deferral Plan, pages 76–77. 3 4 1 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 4, 2008. accounts of outside directors in the Lilly Directors’ Deferral Plan, and total shares benefi Ownership of Company Stock Company Ownership of Common Stock Ownershipby Directors and Executive Offi The following table sets forth the number of shares of company common stock benefi the named executive offi crew and fl but capped at the greater an amount of (i) equivalent to fi available) the and Standard (ii) Industry Fare Levels as established by the Internal Revenue Service for purposes of determining taxable fringe benefi PROXY STATEMENT 102102 so. todo wish they if astatement tomake opportunity the have will representatives Those toquestions. torespond available be will and meeting annual the at present tobe &Young expected are of Ernst ratifi for shareholders tothe submitted being is appointment this bylaws, the with Inaccordance 2008. year the for pany fi the appointed has committee audit The Appo the Ratify to Proposal 2. Item 115. page on found be may matters legal certain about Information statement. proxy ofthis 65–66 pages on found be may nominees these about information Biographical nominees: following the of each FOR vote you that recommends board The director. asubstitute for voted be may proxies by represented shares event, latter Inthe asubstitute. designate or ofdirectors number alesser for provide resolution, may, by board the election, for tostand unable is director any If term. that toserve agreed has below listed in2011. held nominees ofthe Each ofshareholders meeting of th one-third approximately with classes intothree divided is board the ofincorporation, articles company’s the Under Directors of 1.Item Election Items ofBusinesstoBeActedUponattheMeeting shares. ofits toall respect with power investment shared and outstanding) 1.9 ofshares to21,625,613 (approximately percent shares respect with power shares. ofits toall respect with power investment sole and outstanding) ofshares percent 0.38 (approximately shares to4,350,000 respect with company. ofthe ashareholder indirectly, or directly either is, directors ofthe Each Director). (Emeritus F. Eugene and II, Ratliff Lilly Eli 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 ofthe ofdirectors board The shares. toits respect with power investment sole and voting sole has Endowment The 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 Address and Name 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 • John C.Lechleiter, Ph.D. • Karen N.Horn,Ph.D. • Alfred G.Gilman,M.D.,Ph.D. • Michael L.Eskew • cation. Ernst & Young served as the principal independent auditors for the company in 2007. Representatives in2007. Representatives company the for auditors independent principal the as &Young served Ernst cation. e directors standing for election each year. The term for directors elected this year will expire at the annual annual the at expire will year this elected directors for year. term each The election for standing e directors Wellington Management Company, LLP acts as investment advisor to various clients. It has shared voting 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 intment

rm of Ernst & Young LLP as principal independent auditors for the com- the for auditors independent principal as &Young LLP ofErnst rm ofIndependent Auditors Principal Benefi Number of Shares (as of12/31/07) (as (as of12/31/07) (as cially Owned cially Owned (as of 2/4/08) of2/4/08) (as

cial owners of more than 5 percent of the outstanding outstanding ofthe 5percent than ofmore owners cial 137,505,804 137,505,804 80,085,190 80,085,190 67,709,168

Percent of Class 12.1% 6.0% 7.1% PROXY STATEMENT 103103 ts, ts, ll ll ed ed ed boards limit ed. This proposal would not change lled by interim election of the board, with ed board structure, which has a long historyin ling of Amended and Restated Articles of Incor- ed boards may enhance shareholder value by forcing an entity ed board, the company has other means to compel a takeover bidder to uence corporate governance policies. The board gave considerable weight ed structure believe it provides continuity and stability in the management ts of retaining the classifi ed board structure. The board considered the view of some shareholders who believe that classifi 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 The board also considered benefi The directors and corporate governance committee and the board heard advice from outside governance and lasses, with each class elected every three years. In December 2006, on the recommendation of the directors and Background of Proposal The proposal is a result of ongoing review corporate of governance matters by the board. The board, assisted by the directors and corporate governance committee, considered the advantages and disadvantages of maintaining the classifi this proposal is adopted. This article, set forth in Appendix A to this proxy 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, to be effective immediately upon the effectiveness of the amend- ments to the Amended Articles of Incorporation. The company’s Amended Articles of Incorporation currently provide that the board of directors is divided into three c corporate governance committee, the board unanimously adopted resolutions approving, and recommending to the shareholders for approval, amendments to provide for the annual election of directors. This proposal was brought before shareholders at the company’s annual meeting of shareholders in April and 2007, received the voteof over 75 percent of the outstanding shares; the proposal however, required the vote 80 of percent of the outstanding shares to pass. In December the 2007, board again unanimously adopted resolutions recommending these amend- ments to shareholders for approval. any vacancies or newly created directorships. boards have the effect of reducing the accountability of directors to shareholders because classifi the ability of shareholders to evaluate and elect all directors on an annual basis. The election of directors is the primary means for shareholders to infl to the approval at the 2006 annual meeting of a shareholder proposal requesting that the board take all necessary steps to elect the directors annually, and to the 75 percent favorable vote for management’s proposal in 2007. Item 3. Proposal to Amend the Company’s Articles of Incorporation to Provide for Annual Election of Directors The board recommends that you vote FOR ratifying the appointment of Ernst LLP & Young as principal indepen- dent auditors for2008. 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 at the2009 and annual 2010 meetings of shareholders would be elected for one-year terms,and beginning annual with meeting, the 2011 all directors would be elected for one-year terms at each annual meeting. In addition, in the case of any vacancy on the board occurring after the 2008 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. Atall 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 corporate law. Proponents of a classifi of the business and affairs of a company because a majority of directors always have prior experience as directors of the company. Proponents also assert that classifi seeking control of a target company to initiate arms-length discussions with the board of that company, because the entity cannot replace the entire board in a single election. While the board recognizes those potential benefi legal experts on the annual election of directors. On the recommendation of the committee, the board approved the amendments, and determined to recommend that shareholders approve the amendments to the company’s Amended Articles Incorporation of to provide for the annual election of directors. Although this proposal did not pass the in 2007, board continues to support this change and believes that by taking this action, it can provide it also notes that even without a classifi negotiate with the board, including certain “supermajority” vote requirements in its Amended Articles of Incor- poration (as described other provisions in the company’s of its response articles to Item 8 on pages and 112–113), bylaws, and certain provisions of Indiana law. In addition, the company has a shareholder rights plan. the However, plan will expire in July 2008, and the board does not intend renew to it. PROXY STATEMENT 104104 adopted shareholders the and board the In2002, ownership. stock employee increased through value shareholder sustaining and creating on employees focus and talent top retain and toattract company the enable plans These years. 50 than more for programs compensation company’s ofthe part integral an been have plans incentive Stock Plan Stock Lilly 2002 the of Amendment 5. Item vote. majority by directors of tion elec- for provide to incorporation of articles company’s the amending FOR vote you that recommends board The amendment. the against cast votes the exceed amendment the for cast votes the if adopted be will amendments The Vote Requirement obtained. is approval shareholder after promptly todo intends company the which ana, fi upon effective be will ofIncorporation Articles Restated and Amended the approved, If Time Effective toapply. continue will standard plurality elected—the tobe ofdirectors number the ofdirectors. number the tofi decide may decrease or board the accepted, is vacancy resulting resignation any ll ofcertifi days 90 within toshareholders rationale, underlying its and decision, its communicate and action responsive appropriate the determine would committee, governance corporate and directors ofthe advice the with board, The immediately. toresign tooffer required be would director unelected the 4, Item ofthis approval toshareholder subject adopted has board the which Bylaws company’s tothe amendments director.However, under a“holdover” as toserve continue would but elected, be not would cast ofvotes majority qualifi and elected been elections. uncontested for standard vote majority toa moving by directors inelecting voice aclear have shareholders that inassuring step next the totake time right the is now that believes board The resignation. the toaccept whether board the by toadetermination subject tion, resigna- her or his totender votes offavorable amajority toreceive fails who director any for calls which policy, resignation adirector adopting by concern this addressed companies leading other several and Lilly In2005, ful. meaning- more elections director tomake standards election director inthe changes for called have shareholders election. her or his oppose voted ofshares amajority though even elected be can adirector Thus, nominee. adirector against withheld ofvotes number the notwithstanding board, to the elected are favor intheir cast votes most the with nominees director standard, this Under aplurality. by elected are directors therefore, otherwise; specify not do of Incorporation Articles Amended Lilly’s cast. ofvotes plurality specifi otherwise unless that, provides law Indiana Background of Proposal 15. Article new proposed ofthe text the for statement proxy Atothis Appendix see Please cast. ofvotes toamajority ofdirectors elections inuncontested ofelection standard the tochange of Incorporation r adopted unanimously has board the committee, governance corporate and directors ofthe recommendation the On it Major- by Directors of Election for Provide to Incorporation of Articles Company’s the Amend to Proposal 4. Item ofnual directors. election an- for provide to incorporation of articles company’s the amending FOR vote you that recommends board The affi The Required Vote bids. takeover toinadequate torespond defenses appropriate maintaining while toshareholders accountable are directors the that assurance further shareholders esolutions approving, and recommending to the shareholders for approval, amendments to the Amended Articles Articles Amended tothe amendments approval, for shareholders tothe recommending and approving, esolutions y Vote The amendments provide that in a contested election—an election in which the number of nominees exceeds exceeds ofnominees number the inwhich election election—an inacontested that provide amendments The have successors untiltheir and terms respective their for toserve elected are directors law, Indiana Under Recently, however, many years. many for corporations U.S. for norm the been has standard plurality The 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 ed. Thus, under a majority vote standard, an incumbent director who fails to receive a toreceive fails who director incumbent an standard, vote amajority under Thus, ed. ed by the Articles of Incorporation, directors are elected by a by elected are directors ofIncorporation, Articles the by ed cation oftheelecti cation ling with the State ofIndi- State the with ling on results. If the the If results. on PROXY STATEMENT 105105 cations, cations, cant changes are ed options, incentive stock cers, are eligible to participate. cers, and all members of the board are eligible to par- cers and employees at its discretion. The Plan authorizes the grant of up Plan language. to cations this will provide suffi cient shares for several years of grants. of grants. years several for cient shares suffi this will provide is not expected be added back under this provision that would of shares The number of other grants. vesting be material. to • Increase the maximum number of shares to 119,000,000, an increase of 39,000,000 shares. We anticipate that anticipate • We of 39,000,000 shares. an increase 119,000,000, to the maximum number of shares Increase options or the of stock • upon the exercise taxes for withheld by the company of shares the add-back Allow time that plan terminated in April 2002; time that plan terminated and of the grant; lapse, or forfeiture termination, due to or transferred not issued Plans) that are Stock plans. stock approved Plan or prior shareholder The maximum number is subject to adjustment for stock splits, stock dividends, spin offs, reclassifi the Plan for future grants future the Plan for All proposed changes to the Plan are shown in Appendix to this B proxy statement, with new language indi- The Committee may grant stock options, stock appreciation rights, performance awards, includingsharehold- Proposed Amendments: Amendments: Proposed Stock Options and Stock Appreciation Rights. The Committee may grant nonqualifi • 80,000,000 shares; • 80,000,000 Plan) at the Stock plan (the 1998 Lilly shareholder-approved under the previous • available that were 5,243,448 shares and 1998 Lilly plans (the 1989, 1994, stock • under the Plan or prior shareholder-approved grants subject to any shares under the options granted of stock price of the exercise • the company as payment to by grantees exchanged any shares • eliminate or decrease share limits on certain types of grants that may be made under the Plan in the aggregate types of grants limits on certain • share or decrease eliminate individuals that may be made to types of grants • limits on certain share raise • awards performance dollar-denominated eliminate • allow stock units to be paid in cash clarifi • miscellaneous • extend the term of the Plan by eight years (from 2012 to 2020) 2012 to • (from by eight years of the Plan the term extend of the Plan by 39,000,000 during the life that may be granted • of shares the number increase may be added back to grants or terminated expired from under which unused shares • clarify the circumstances Shares Subject Plan to The maximum number of shares of Lilly stock that may be issued or transferred for grants under the Plan is the sum of: described in more detail below. detail more described in cated by underlining and deleted language indicated by strike-outs. In addition, the most signifi the 2002 Lilly Stock Plan (“Plan”). The board now recommends that the shareholders approve certain amendments to the Plan, primarily to extendits termination date and add additional shares that may be granted under the Plan. Plan of Overview Under the Plan all employees of the company are eligible to participate. The Compensation Committee of the board (the “Committee”) may make grants to offi Overview Amendments of The board has approved, and recommends that the shareholders approve, the following changes to the Plan: er value awards, restricted stock grants and stock units to employees. The Board may grant stock options under the Plan to nonemployee directors. The Plan is designed maximize to the deductibility of stock options and perfor- mance awards under section of the Internal 162(m) Revenue Code of 1986, as amended (the “Code”). to 80,000,000 shares plus unused shares under prior shareholder-approved stock plans. or other relevant changes affecting Lilly stock. There are currently approximately shares 46,577,743 available for transfer. issue or options, or other tax favored stock options under the Code. The Committee establishes the option price, which may Grants Under the Plan Under the Plan all employees of the company, including offi ticipate. Currently approximately 40,500 employees, including executive all 10 offi The number of eligible employees and grantees will vary from There year to year. are currently nonemployee 11 directors. PROXY STATEMENT 106106 specifi goals mance perfor- more or one on based period award ofthe beginning the at goals performance the establishes Committee The period. award an during goals performance certain meets Committee the by selected company ofthe unit fi the if both or cash, stock, of Lilly years. calendar consecutive ofthree period inany Plan the under shares 2,500,000 than together, more for considered SARs, and options receive may grantee price. exercise ofthe payment requiring without stock) ofLilly ofshares form (in the options stock related the benefi the holder the give awards these Effectively, exercised. are options related the extent tothe terminate automatically SARs the and option, stock related ofthe those mirror SARs ofthe term and price The exercised. ofshares number the by multiplied ofexercise date inthe price exercise the over stock ofLilly value market fair the ofthe excess tothe equal stock, ofLilly form inthe payment, receive and options related the surrender cise, exer- may, upon ofSARs holder the option, astock with inconnection granted If date. grant the after years eleven than more be not may which date, exercise or settlement the and ofgrant, date the on stock ofthe value market fair ofthe percent 100 than less be not may which SARs, ofthe price base the establishes committee the option, stock arelated without granted If price. abase over stock ofLilly ofshares value market fair inthe appreciation option. ofthe term the and date vesting the establishes also Committee The repriced. be not may Options ofgrant. date the on stock ofthe value market fair ofthe percent 100 than less be not the 100,000-share limit for Stock Performance Awards. Performance Stock for limit 100,000-share the with compliance ofdetermining purposes for date) payment the on stock ofLilly value market the on (based shares of apayment as counted is payment cash such and Award, Performance aStock under payable stock ofLilly shares ofthe all or ofpart inlieu cash topay elect can Committee The $8,000,000. is year calendar inany individual to an payment maximum the Awards, Performance toDollar As 100,000. is year calendar inany Awards Performance ofStock inpayment individual an by received be may that ofshares number maximum The Awards”). Performance (“Dollar amounts in dollar or Awards”) Performance (“Stock stock ofLilly inshares either denominated be may 162(m) Code. ofthe toSection subject are who toindividuals payable be otherwise would that amount the increase not may unfair. However, Committee the goals performance ofthe application make otherwise would and goals performance the on effect a substantial award. aperformance under payment toreceive grantee’s entitlement a on conditions additional impose may Committee The period. award ofthe end tothe company the by employed remain generally must agrantee payment, toreceive Inorder maximum. tothe threshold the from levels mance perfor- various at payable amounts dollar or ofshares number the and levels, performance maximum and target • other Lilly stock price goals. • total shareholder return• any oftheforegoing goals before• theeffect ofacquisitions,divestitures, accounting changes,andrestructuring Market Value Added(thedifference• between acompany’s fair market value, asreflected primarily initsstock • EVA corporate ordivisionalnetsales • • divisional income • net income earnings pershare • Performance Awards. Performance Proposed Amendments: No options. stock ofincentive form inthe Plan the under issued be may shares of60,000,000 A maximum on based amount an toreceive right (“SARs”)—the rights appreciation stock grant also may Committee The A maximum of 18,000,000 shares may be issued under the Plan in the form of performance awards. Awards Awards awards. ofperformance form inthe Plan the under issued be may shares of18,000,000 A maximum have that events ofunforeseen effect the for awards adjust can Committee the topayment, prior time any At fi consecutive more or (four period award the establishes also Committee The and specialcharges price, andtheeconomic bookvalue ofcapital employed) individual limit will increase fl increase will limit individual Increase theindividuallimitto 3,500,000shares inanyperiodofthree consecutive calendar• years. Decrease theincentive stock optionlimitto 30,000,000shares. • ® (after-tax operating profit less theannualtotal cost of capital) The incentive stock option limit is being reduced in light of expected grant patterns. The increase in the inthe increase The patterns. grant ofexpected inlight reduced being is limit option stock incentive The ed in the Plan. The material terms of those performance goals are: goals performance of those terms material The Plan. inthe ed The Committee may grant performance awards under which payment is made in shares inshares made is payment which under awards performance grant may Committee The nancial performance of the company or a subsidiary, division, or other business business other or division, asubsidiary, or company ofthe performance nancial exibility of plan administration. ofplan exibility scal quarters), the threshold, threshold, the quarters), scal t of PROXY STATEMENT 107107 The Committee may also issue or transfer shares under a restricted ned in Article of the Plan), 12 in order to preserve all of the rights: grantee’s Extend termination date of the Plan to April 20, 2020. April of the Plan to date termination Extend a greater accounting expense to the company than stock options. With changes in accounting rules, the rules, in accounting With changes options. than stock company the to expense accounting a greater its intended serves no longer the limit and therefore is comparable, grants types of the different of expense of the Plan. cost minimizing the accounting purpose of design. program under the current and SVAs awards performance of both traditional grant them in the future. granting do not contemplate greater accounting expense to the company than stock options. With changes in accounting rules, the rules, options. With changes in accounting than stock the company to expense accounting greater intended its serves the limit no longer and therefore is comparable, kinds of grants of the different expense of the Plan. cost purpose of minimizing the accounting • created awards at a time when performance adopted limit. This limit was the 18,000,000-share Eliminate the allow to This change is also necessary • annually. 600,000 shares 100,000 to limit from Raise the individual and years many for Awards • Dollar Performance not granted have We Awards. Performance Dollar Eliminate Amendment: Proposed • a created grants a time when stock at This limit was adopted maximum. the 3,000,000-share Eliminate countries. foreign • in certain grants making stock facilitate to be paid in cash to grants stock Allow The future amounts that will be received by grantees under the Plan are not determinable. For the 2007 award Proposed Amendments: Amendments: Proposed Restricted Grants Stock or Units. Stock The Committee may provide in the grant agreement, or by subsequent action, that the following shall occur in The Committee may grant stock unit awards subject to vesting and transfer restrictions and conditions of A maximum of 3,000,000 shares of Lilly stock may be issued or transferred under the Plan in the form of re- Amendments: Proposed year, no stock optionsyear, were granted to employees or directors, and employees received the following performance awards, shareholder value awards (which were granted under the Plan as a form of performance award), restrict- (i) any outstanding(i) stock option not already vested shall become immediately exercisable; any restriction (ii) pe- riods on restricted stock grants shall immediately lapse; outstanding and (iii) performance awards will be vested and paid out on a prorated basis, based on the maximum award opportunity and the number of months elapsed compared to the total number of months in the award period. the event of a change in control (as defi payment determined by the Committee. Thevalue of each stock unit equals the fair market value of Lilly stock and may include the right to receive the equivalent of dividends on the shares granted. Payment is made in the form of stock. Lilly stricted stock grants or stock unit awards,considered together. Other Information The Plan remains effective until April unless 2012, 14, earlier terminated by the board. The board may amend the Plan as it deems advisable, except that shareholder approval is required for any amendment that would allow (i) the repricing of stock options below the original option price, allow (ii) the grant of stock options at an option price below fair market value of Lilly stock on the date of grant, increase (iii) the number of shares authorized for issu- ance or transfer, or (iv)increase any of the various maximum limits established for stock options, performance awards, and restricted stock. stock grant. The grant will set forth a restriction period during which the shares may not be transferred. If the employmentgrantee’s terminates during the restriction period, the grant terminates and the shares are returned to the company. the Committee However, can provide complete or partial exceptions to that requirement as it deems equitable. If the grantee remains employed beyond the end of the restriction period, the restrictions lapse shares the becomeand freely transferable. Authority Committee of The Plan is administered and interpreted by the Committee, each member of which must be a “nonemployee direc- tor” within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 and an “outside director” within the meaning of Section of the Code. 162(m) As to grants to employees, the Committee selects persons to receive grants from among the eligible employees, determines the type of grants and number of shares to be awarded, and sets the terms and conditions of the grants. The Committee may establish rules for administration of the Plan and may delegate authority to others for plan administration, subject to limitations imposed by SEC and IRSrules and state law. PROXY STATEMENT shares of Lilly common stock have been authorized for issuance. for authorized been have stock common ofLilly shares which under plans compensation our 31, ofDecember 2007, regarding as information presents table following The Plans for Compensation Issuance Authorized Under Equity Securities 108108 http://www.lilly.com/about/citizenship/key_issues/research/rd_animal.html. at 1 statement Policy systems.” test ofalternative development the topursue and involved, ofanimals number the tominimize inresearch, used ofanimals treatment sponsible Statement: Supporting countries. inforeign facilities at standards welfare animal toU.S. adherence requires Company the to which extent the on information include report the that request shareholders Further, the enforcement. no or little and regulations welfare animal substandard or nonexistent either have which tocountries experimentation Resolved, proposal: following the submitted 1 2 1 units: stock restricted and grants stock ed poor animal welfare standards and negligible oversight. negligible and standards welfare animal poor A Treatment of Ethical the for ofPeople behalf on 38104, Tennessee Memphis, Ave., Court 2231 Page, Meredith Research Animal of Outsourcing International Regarding Proposal Shareholder 6. Item Plan. Stock Lilly 2002 the of amendment FOR vote you that recommends board The Represents shares in the Lilly GlobalShares Stock Plan, which permits the company to grant stock options tonon- options stock togrant company the permits which Plan, Stock GlobalShares Lilly inthe shares Represents table. 2007 During Awards ofPlan-Based Grants following narrative 93, page See for oftarget percent to140 zero from vary may paid ofshares number actual The period. award 2007-2009 For 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 l te mlye ,7,9 hrs7614sae 379,176 shares shares 726,194 shares 3,577,896 employees other All employees) (10 Offi agroup as cers Executive All Offi Executive Named approved by security holders security by approved not plans compensation Equity holders security by approved plans compensation Equity category Plan Group Total executive offi executive nimals (PeTA), 501 Front Street, Norfolk, Virginia 23510, and benefi and 23510, Virginia (PeTA), Norfolk, Street, nimals Front 501 However, the Company is currently relocating animal research and testing to countries known for having no or or no having for known tocountries testing and research animal relocating currently is However, Company the that the Board report to shareholders on the rationale for increasingly exporting the Company’s animal animal Company’s the exporting increasingly for rationale the on toshareholders report Board the that cers and from 40 to 140 percent of target for all other employees. other all for oftarget percent to140 40 from and cers cr otoe2Font None Footnote 2 Footnote 2 cers 1 Eli Lilly has publicly committed to an “ethical and scientifi and “ethical toan re- the committed toensure publicly has Lilly c obligation Eli Performance Awards (Payout) Performance 9,1 hrs2374sae None 243,754 shares 391,218 shares and rights warrants, options, outstanding of exercise upon issued be to securities of Number (a) 71,953,815 $68.78 81,149,045 9,195,230 1 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 warrants, and rights warrants, options, outstanding of price exercise Weighted-average (b) (Target) Awards Value Shareholder $69.57 $75.77 1 cial owner of approximately 105 shares, has has 105 shares, ofapproximately owner cial securities refl (excluding plans compensation equity under issuance future for available remaining securities of Number (c) Restricted Stock Grants /Units Grants Stock Restricted 46,577,743 46,898,298 320,555 ected in column (a)) column in ected PROXY STATEMENT 109109 The Wall The Wall cant propor- cant accreditation. 2 AAALAC ning, and replacing animal use. Then, the August 2007 21, issue of c interest in ensuring that standards are in 1 Our Company now conducts a signifi 3 cials. Lilly actively encourages animal research and ani- accreditation is a voluntary process that includesdetailed, a ning, and replacing animal use. Regardless of local variations, Lilly AAALAC ). magazine, the rationale for outsourcing animal testing to China is that “scientists ict with Lilly’s stated commitment to reducing, refi AAALAC Forbes ect requirement. this cacious medicines become available to patients. Furthermore, it is a requirement dictated c forums and to government offi ; Forbes, Vol. p. 76 178 No. (Nov. 10 13, 2006) ; Business Week (Jan. 30, 2006) Purposely re-locating research to regions with lower animal costs, easy animal availability, and lower 4 Lilly maintains high standards of animal care and use in all our facilities. While efforts to minimize the use In an increasingly competitive and global economy, Lilly regularly evaluates and develops relationships with Lilly has been adding provisions to our contracts with third parties who do research on our behalf or supply Lilly believes that international research efforts may facilitate the harmonization of global animal welfare As previously reported in As recent media reports of safety scandals and product recalls have made standards abundantly clear, for Accordingly, we urge shareholders to support this socially and ethically responsible resolution. In January 2006,Business Week reported that “[i]ncreasingly, Lilly is moving its research and development, nd believes that Lilly’s current initiatives address the shareholder concerns and that additional reporting is an place at company and third-party facilities to ensure both appropriate animal care and valid study results. Accord- allingly, of the company’s sites are accredited by the Association for the Assessment and Accreditation of Labora- tory Animal Care International ( of animal testing have been underway for some time, theappropriate use of animals in research is essential to ensure that safe and effi unnecessary use of company resources. Lilly’s current report on our use of animals can be found in our Corporate Citizenship Report on our website at www.lilly.com. by regulatory agencies around the world. Lilly fully recognizes the fundamental ethical obligation to treat animals used in research responsibly. have We both an ethical and a scientifi Street Journal reportedStreet that Eli Lilly had entered into a partnership with a Shanghai Company known as Chi-Med by which “Lilly will hand over preclinical research and development on several compounds to the Chinese company,” and new agreements with Chi-Med’s Hutchison MediPharma were reported in October 2007. entities that can assist in meeting our productivity and core mission objectives; this includes select laboratory ani- mal research and animal supply companies. Relocating research to regions with lower animal costs does not af- fect Lilly’s stated commitment to reducing, refi laboratory animals to our facilities, requiring these parties to comply with the principles of Lilly’s Animal Care and Use Policy, and we will periodically assess their adherence to these expectations. recently We revised our Animal Care and Use policy to refl standards. this end, Lilly To actively shares its views on the importance of animal welfare in the research context with international regulatory bodies and research scientists in other countries around the world, including China. Leading Lilly research scientists seek opportunities to present data on the care and use of laboratory animals at international scientifi comprehensive review of research animal programs such as animal care and use policies and procedures, animal environment, housing and management, veterinary medical care, and physical plant operations. seeks to do business only with those companies that share our commitment to animal welfare. also We require the companies that we work with to comply with applicable locallaws and treat animals in a humane manner. mal supply companies, both inside and outside the United States, to obtain and maintain products exported from China to the U.S. are lacking. Shareholders deserve to understand why animal testing is being moved to foreign countries, such as China. our Moreover, Company should report on the steps that are being taken to assure shareholders that animal testing conducted in other countries is held to at least the same animal welfare standards as animal testing conducted in the U.S. Statement inOpposition to the Proposal Regarding the International Outsourcing of Animal Research The public policy and compliance committee of the board has reviewed behalf the proposal submitted on PeTA’s a including clinical trials, to China, India, and the former Soviet bloc.” are cheap, lab animals plentiful and pesky protesters held at bay.” welfare standards is in direct confl 1 “Lilly’s Labs Go Global” 2 http://www.drugresearcher.com/news/ng.asp?n=80470&m=1DRGO10&c=iubqfdmlvoteibj, Advantage” 3 “Comparative 4 See footnote 3. tion of its research in foreign laboratories, with 20% it of based in China (its largest non-U.S.-based Research & Devel- team). opment The board recommends that you vote AGAINST this proposal. Throughactive engagement, Lilly is helping to raise the standards of animal care and use in countries that have not had such standards or enforced them. PROXY STATEMENT 110110 shareholders. all for value long-term maximize and toprotect designed are and prudent are amendments bylaw any that toensure positioned better is and provisions, bylaw considering when shareholders of all interests the fi has hand, balance other and the on toconsider board, duties The duciary ests. inter- special own their tofurther amendments bylaw adopt could shares outstanding ofthe half than less cantly signifi holding shareholders meeting), the at voted ofshares amajority only (requiring proponent the by endorsed standard vote majority the Under shareholders. tominority detrimental be could that principles operating these in changes adopt shareholders—could other tothe duties no have who interests—and special own their advance to wish who shareholders large afew that risk tothe shareholders the expose would vote shareholder a majority by amended tobe bylaws the allowing that believes board The investors. individual and institutions, small tutions, r and shareholders ofthe interests long-term best in the not is proposal this that believes ofdirectors board The Bylaws Company’s the Amending Regarding 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 4.7 million of approximately owner the as and participants, 1.4 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 tion, Corpora- 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 toprotect ability the corporations toprovide is requirements ofsupermajority purpose the that corporations by stated often is it While proposal. ofthe infavor were cast of votes percent 90 approximately though even standing fi ofdirectors board the classify tode- aproposal example, For nonvotes. broker and ofabstentions inlight toobtain impossible almost be can vote 03/2005). revised 491 No. (09/2004, Paper Discussion School, Law Harvard Ferrell, &Allen Cohen Alma Bebchuk, Lucian Governance?” inCorporate Matters “What See mance. perfor- company with correlated negatively are that mechanisms entrenching ofsix one tobe found been has laws by- 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 Company The bylaws. the toamend shareowners allow 1000 Russell the and 500 S&P inthe ofcompanies 95% proximately Ap- bylaws. acompany’s toamend tovote able are shareowners directors, toelect tovote power the to having Statement: Supporting bylaws. Company’s the toamend shareowners allow not does Company the Currently, vote. amajority 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 Regarding Proposal 7.Item Shareholder the bylaws may be amended only by the directors. directors. the by only amended be may bylaws the otherwise, provide ofincorporation articles the unless that states which law, Indiana under provision default the adopted has Lilly corporations, Indiana other many Like issuance. stock for procedures and transactions, approve offi and ofdirectors duties and election shareholders, and ofdirectors meetings for rules ing ecommends that you vote against it. against vote you that ecommends nefi Please vote FOR this proposal. this FOR vote Please Company the make would implemented, and passed if that, proposal this sponsoring is CalPERS why is This asupermajority since Company ofthe bylaws the toamend standard vote amajority for asks proposal This the e.g., toshareowners, importance utmost ofthe provisions governance corporate contain typically Bylaws The board of directors has fi has ofdirectors board The includ- principles, operating governance corporate offundamental anumber establish bylaws company’s The cial owner of approximately 4.7 million shares, has submitted the following proposal: following the submitted has shares, 4.7 million 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 The most important shareowner power is the power to vote. In most cases, in addition inaddition cases, Inmost tovote. power the is power shareowner important most The led at Goodyear Tire & Rubber Company failed to pass by a majority of shares out- ofshares amajority by topass failed Company &Rubber Tire Goodyear at led duciary obligations to the company and all its shareholders, including large insti- large including shareholders, its all and company tothe obligations duciary nancial performance. cers, authority to authority cers, - PROXY STATEMENT 111111 ling in order to Institutional Shareholder Services Shareholder Institutional cial owner of approximately shares, 1,700

8—Adopt Simple Majority8—Adopt Simple Vote found that companies that permit shareholders to amend the bylaws performed 1 t shareholders,but we do not believe thatthis particular proposal will improve the company’s , Shareowners urge our company to take all steps necessary, in compliance with applicable law, to fully rst majority vote. “D” in governance. Risk Assessment.” “High Governance Defenses. in Takeover High Concern” “Very This shareholder proposal topic won our 62%-support at our 2007 annual meeting. Simple majority vote also Hopefully our management is not headed for the same category as FirstEnergy (FE), a serial ignorer of major- Currently a 1%-minority can frustrate the will of our 79%-shareholder majority under our 80% supermajor- Furthermore, our management said in its 2007 annual proxy that a supermajority provision is by no means Chairman Fisher, of our GovernanceMr. Committee did not authorize a special solicitation fi The proponent also suggests that adopting this proposal will enhance company performance because compa- The board has determined that it will not renew the company’s shareholder rights plan when it expires in July 2008. in July rights plan when it expires shareholder the company’s that it will not renew has determined The board The meritsof adopting this proposal should also be considered in the context of our company’s overall corpo- company: The proponent suggests this proposal is necessary to foster good governance principles at the company and 4). (see Item elections • The Corporate Library http://www.thecorporatelibrary.com, an independent investment research fi our rm, rated fi research investment an independent http://www.thecorporatelibrary.com, Library • The Corporate • In this proxy statement, the board is seeking shareholder approval to eliminate the classifi ed board (see Item 3). (see Item ed board the classifi eliminate to approval is seeking shareholder the board • statement, In this proxy director uncontested for standard adopt a majority voting to approval • is also seeking shareholder The board • ity shareholder votes. As a result each FirstEnergy director candidate received 27% to 39% in opposing votesat the 2007 FirstEnergy annual meeting. ity provision. Also our supermajority vote requirements can be almost impossible obtain to when one considers abstentions and broker nonvotes. For example, a Goodyear (GT) proposal failed to pass even though 90% of votes cast were yes-votes. insurmountable. Then our management promptly failed to obtain the 80% supermajority vote required to pass its own proposal for annual election of each director. nies with good corporate governance are more highly valued. certainly We agree that strong corporate governance practices benefi corporate governance or lead to better performance. In fact, 2004 a study by Lawrence Brown D. and Marcus L. Caylor of Georgia State University rate governance structure and individual director performance. For instance in 2007 the following structure and performance issues were reported (and certain concerns are noted): make a goodmake effort to obtain the 80% vote. Because of this management failure, shareholders are now encouraged to submit an annual election shareholder proposal so that it will be adopted by our company. make the directors more accountable to the shareholders. On the contrary, the board has been for many years, and intends to remain, a leader in corporate governance. The company hasadopted comprehensive corporate gover- nance principles, consistent with best practices, thatensure the company remains fully transparent and account- able to shareholders. the Further, board is taking three major steps to demonstrate its continuing commitment to good corporate governance and accountability shareholders: to White Paper. White 1 Brown, L.D. and1 M.L. Caylor. 2004. The Correlation between Corporate Governance and Company Performance. has submitted the following proposal: RESOLVED adopt simple majority vote requirements in our Charter and Bylaws. This includes special solicitations. William Steiner, 112 AbbottsfordWilliam 112 Steiner, Gate, Piermont, New 10968, York benefi Item 8. Shareholder Proposal Regarding Adopting a Simple Majority Vote Standard The board recommends that you vote AGAINST this proposal. no better or worse than those who reserve that power to the directors. This is consistent with our view that adopt- ing this proposal would not enhance our already strong corporate governance practices and instead would expose minority shareholders to actions detrimental to their best interests. won an impressive 72% yes-vote average at 24 major companies in 2007. The Council of Institutional Investors www.cii.org recommends adoption of simple majority vote and the adoption shareholder of proposals upon receiv- ing their fi PROXY STATEMENT 112112 direc- of election annual establish would that provisions tors. these to amendments approve shareholders the that recommending is 1 board the 3, Item Under to: relate tovote, entitled ofstock shares outstanding ofthe percent 80 least ofat approval the require which actions, These actions. corporate fundamental afew for requirement approval the toincrease voted shareholders company’s However, the in1985 vote. jority it. against vote you that recommends and shareholders ofthe interest long-term best inthe be not would this that believes ofdirectors board The proved. co inthe ofprovisions elimination the for calls ofdirectors, election tothe pertain not does which proposal, This Standard Vote Majority aSimple Adopting Regarding Proposal the to Opposition in Statement Additionally: now to encourage our board to respond positively to our 62%-support for this topic: this for 62%-support toour positively torespond board our toencourage now the board on behalf of all shareholders. In addition, they allow the board time and bargaining leverage to consider toconsider leverage bargaining and time board the allow they Inaddition, shareholders. ofall behalf on board the with tonegotiate bidders encourage provisions voting supermajority these company, the restructure or over to take shareholders large afew or one from bid unsolicited or unfriendly ofan event Inthe shareholders. its and company company. ofthe interests best in the and prudent is change such that ofstockholders majority ofasubstantial consensus clear the without changed not are rules governance corporate important that ensure help provisions These shareholders. large afew or one by actions self-interested short-term, against protecting by shareholders all for stock ofLilly value the maximize and mpany’s articles of incorporation that require more than a simple majority vote for certain actions to be ap- tobe actions certain for vote majority asimple than more require that of incorporation articles mpany’s • the amendmentofarticles ofincorporation’s• provisions relating to theterms ofoffice andremoval of removal ofdirectors• • Plusourlead director, Ms.Hornhad20-year tenure—Independence concern. • We hadnoindependentChairman—Independentoversight concern. • Poison pillwitha15%trigger. • Three directors were designated “Accelerated Vesting” directors byTheCorporate Library—due to adirector’s • Five ofourdirectors were potentially confl • Noshareholder rightto: • the amendmentofarticles ofincorporation’s• provisions relating to suchmergers andotherbusiness merger, consolidation, recapitalization,• orcertain otherbusiness combinations involving thecompany that are Most proposals submitted to a vote of the company’s shareholders can already be adopted by a simple ma- asimple by adopted be already can shareholders company’s ofthe toavote submitted proposals Most The above concerns shows there is room for improvement and reinforces the reason to take one step forward forward step one totake reason the reinforces and improvement for room is there shows concerns above The expense: involvement withaboard thataccelerated stock optionvesting inorder to avoid recognizing thecorresponding The board has afi has board The topreserve intended shareholders provisions, voting supermajority these inadopting that believes board The combinations. not approved bytheboard ofdirectors directors Ms. Marram Mr. Feldstein Mr. Cook Mr. Gilman Mr. Fyrwald Mr. Feldstein Mr. Prendergast Mr. Bischoff 3) To call aspecialmeeting. 2) To actbywritten consent. 1) Cumulative voting. “High Concern” inExecutive Pay. 1 duciary duty under the law to act in a manner it believes to be in the best interests of the ofthe interests best inthe tobe believes it inamanner toact law the under duty duciary Adopt Simple Majority Vote— Adopt Simple Majority icted: Yes 8 on PROXY STATEMENT 113113 ict with our Company’s positions on cial owner of approximately 700 shares, has submitted the following proposal: As long-term shareholders, we support policies that apply transparency and accountabil- cation of the person or persons in the Company who participated in making the decisions to make make in making the decisions to Company who participated in the or persons of the person cation The internal guidelines or policies, if any, governing the Company’s political contributions and expenditures. contributions political the Company’s guidelines or policies, if any, governing The internal the political contribution or expenditure; and or expenditure; contribution the political described above; described above; that the shareholders of Eli Lilly and Company (the “Company”) hereby request that the Company pro- c. b. Identifi a. An accounting of the Company’s funds that are used for political contributions or expenditures as a. or expenditures contributions political used for funds that are of the Company’s accounting An corporate funds. corporate on behalf of political or expenditures to contributions to Code, including but not limited Revenue of the Internal under and operating entities organized other political and committees parties, political political candidates, any of any dues or similar payments made to Code and any portion Revenue 26 USC Sec. 527 of the Internal by the corporation if made directly or contribution an expenditure that is used for organization exempt tax shall include the Code. The report Revenue under Section 162 (e)(1)(B) of the Internal not be deductible would following: The recently enacted Honest Leadership and Open Government Act requires greater disclosure of trade as- Trade associationsTrade engage in political activity that may support or confl Data from the Federal Election Commission and the Internal Revenue Service provides an incomplete picture of The report shall be presented to the board of directors’ audit committee or other relevant oversight commit- The board believes that these supermajority voting provisions protect all shareholders by making it more cult forone or a few large shareholders to replace important corporate governance rulesthe of company to 2. under Section 162 (e)(1)(B) not deductible and expenditures contributions political non-monetary and Monetary 1. Policies and procedures for political contributions and expenditures (both direct and indirect) made with and indirect) 1. (both direct and expenditures contributions political for and procedures Policies ashington, 20006, D.C. benefi gainst it as we currently publish most of the information requested by the shareholder. The additional reporting Statement in Opposition to the Proposal Regarding Reports on the Company’s Political Contributions The public policy and compliance committee of the board has reviewed this proposal and recommends a vote a sociation political and lobbying activity including the reporting of all contributions bundled by a trade association’s political action committee and the listing of all companies who contribute more than $5,000 in any quarterly period in support of a trade association’s lobbying activity. Company disclosure will help assure that trade associations are meeting their legal obligation in reporting political and lobbying activity and that those activities are consistent with the interests of our Company as a member of a trade association. important issues like universal access to healthcare, biomedical research health and choices. women’s Supporting Statement: ity to corporate spending on politicalactivities. Absent a system of accountability, we believe that company assets can be used for political objectives that are not shared by and may be inimical to the interests of the Company and its shareholders. are We concerned that there is currently no single source of information that provides all of the information sought by this resolution. tee andposted on the Company’s website to reduce costs to shareholders. requirements are unnecessary, as the information requested is publicly available and this reporting would place The American Federation of Labor and Congress of Industrial Organizations Sixteenth 815 (AFL-CIO), Street, N.W., W Item 9. ShareholderItem 9. Proposal Regarding Reporting on the Company’s Political Contributions The board recommends that you vote AGAINST this proposal. vide a report, updated semi-annually, disclosing the Company’s: further a special interest, or to take control of the company, without negotiating with the board to assure that the best results are achieved for all shareholders. Resolved, diffi alternativeproposals that maximize the value of the company for all shareholders, includinglarge institutional investors as well as smaller institutions and individual shareholders. our Company’s political donations. Although corporate contributions to political parties are prohibited at the federal level, companies can contribute to independent political committees, or 527s. In addition, payments can be made to trade associations, and the portion of those payments used for political activities do not have to be disclosed. PROXY STATEMENT The board recommends that you vote AGAINST this proposal. this AGAINST vote you that recommends board The activities. political Lilly's about most the reveals that expenditure, lobbying total association’s trade the and association, trade the for support and membership ofcompany fact the is it lobbying, on spent is budget organization’s ofthe portion what control (http://www.senate.gov/pagelayout/legislative/g_three_sec Senate States United tothe expenditures lobbying their report of1995; they Act Lobbying the under expenditures lobbying their todisclose required all are organizations tax-exempt These seat. aboard have we where note also will we $50,000; exceed dues membership annual our where belongs, Lilly towhich associations trade U.S. major ofthe names the report will we 2008, April by published tobe Support, Financial ofPolitical Report 2007 In our Roundtable. Business and Conference, Leadership Healthcare Association), (Biotechnology BIO Association), ers Manufactur- and Research (Pharmaceutical PhRMA as such interests, industry pharmaceutical and to business cies. agen- states’ individual through and (http://www.fec.gov/disclosure.shtml) website Commission Election Federal the on public tothe available are expenses lobbying direct company’s the and data, PAC contribution contributions, to support candidates for political offi political for candidates to support (PAC) contributions committee action political employee and contributions company direct both for (www.lilly.com) 114114 company. the on burden administrative undue an • contributions to political organizations• andSection527organizations reported bystate. contributions to candidates, including information• aboutthecandidate's office (for example, state, local, or policies andprocedures• for company andPAC contributions federal; HouseorSenate), partyaffiliation, state, anddistrict fi inthe Beginning One way we participate in the political process is by maintaining memberships in trade associations specifi associations intrade memberships maintaining by is process political inthe participate we way One corporate detailed website, our on available information tothe Inaddition annually. updated is information This rst quarter of 2005, the company has published the following information on our website website our on information following the published has company the of2005, quarter rst ce, political parties, offi parties, ce, political tions_with_teasers/lobbyingdisc.htm). As we do not not do we As tions_with_teasers/lobbyingdisc.htm). cials, or committees in the United States: United inthe committees or cials, c PROXY STATEMENT 115115 led led - le with the ducia cers are required to fi

cial ownership of company stock. led except that, due to administrativeRice fi Mr. error, led a derivative suit in the United States District Court for ciently promptly. Each of the current directors, Eskew, is other than Mr. cial Ownership Reporting Compliance cers. The suit alleges that the board of directors constructively denied the shareholders’ prior demands by cers, and other employees of the company may also solicit in person or by telephone, fax, or electronic mail. We March 2008 10, James B. Lootens Secretary By order of the board of directors, ries, or other custodians their reasonable expenses for sending proxy material to and obtaining instructions from persons for whom they hold stock of the company. expect We to solicit proxies primarily by mail, but directors, offi have retained Georgeson Shareholder Communications Inc. to assist in the distribution and solicitationof proxies. Georgeson may solicit proxies by personal interview, telephone, fax, mail, and electronic mail. expect We that the fee for those services plus will reimbursement not exceed $17,500 of customary out-of-pocket expenses. Other Information Regarding the Company’s Proxy Solicitation willWe pay all expenses in connection withour solicitation of proxies. will We pay brokers, nominees, fi the Southern District of Indiana, nominally on behalf of the company, against various current and former directors and offi failing to take action on the demands suffi named in the suit. believe We this suit is without merit and are prepared to defend against it vigorously. In April the 2007, company received demands from two shareholders that the board of directors cause the company to take legal action against current and former directorsand others for allegedly causing damage to the company with respectthe to allegedly improper marketing of Evista, Prozac, andZyprexa. received We similar a demand in September related only Zyprexa. to In accordance with procedures established under the Indiana Business Corporation Law (Ind. Code the §23-1-32), board has appointed a committee of independent persons to consider the demands and determine what action, the company if any, should take in response. In January 2008, two of the three shareholders who had submitted the demands fi Under Securities and Exchange Commission rules, our directors and executive offi Section Benefi 16(a) Other Matters Other Securities and Exchange Commission reports of holdings and changes in benefi haveWe reviewed copies of reports provided to the company, as well as other records and information. Based on that review, we concluded that all reports were timely fi Certain Legal Matters one late report in connection with the receipt of performance award shares by his wife, a former Lilly employee. Upon discovery, this matter was promptly reported. PROXY STATEMENT votes cast “for” a director’s election exceeds the number of votes cast “against” that director’s election. election. director’s that “against” cast ofvotes number the exceeds election adirector’s “for” cast votes of number the that mean shall cast” ofvotes 15, a“majority Article ofthis purposes For present. is aquorum vided pro- tovote, entitled ofshares holders the by cast votes ofthe ofaplurality vote the by elected be shall directors then elected, tobe ofdirectors number the exceeds ofnominees number the however, if that provided, present; is aquorum provided meeting, the at election inthe tovote entitled ofshares holders the by cast votes ofthe majority the by chosen be shall meeting the at elected tobe directors the ofshareholders, meeting annual each at series, or aclass as separately voting directors any toelect stock ofpreferred holders ofthe rights tothe 15. Subject 116116 statute: by conferred powers ofthe exclusion or inlimitation not and infurtherance tobe intended are same the that provided expressly is it and Corporation, the of affairs ofthe conduct the for and business ofthe management the for inserted are provisions 9. following The strike-outs. by indicated are deletions and underlining by indicated are Additions 4. toItem 15 relates Article Meeting atthe Upon Acted to Be Business 4, 3and toItems related below shown are ofincorporation articles company’s tothe changes Proposed Incorporation of Articles Company’s the to Amendments Proposed Appendix A together as a single class, shall be required to alter, amend or repeal this Article 9. Article this toalter, repeal or amend required be shall class, asingle as together voting ofVoting Stock, shares outstanding the ofall holders by cast to be entitled votes ofthe 80% least at affi the ofIncorporation, Articles Amended these or law by required ofVoting Stock class lar affi toany inaddition but vote, no or vote alesser permit otherwise might which oflaw or ofIncorporation Articles Amended ofthese provision other any (d) Notwithstanding class. defi (as asingle as ofVoting Stock together shares voting 13 hereof), outstanding the all inArticle ned affi the by only and cause for only but offi from removed be may Directors) Stock ofPreferred (exclusive directors or director (c) Any provide. so By-laws the unless ballot written by be not need ofdirectors director. Election incumbent ofany term the shortening mencing with the annual meeting of shareholders in 1985, fi in1985, ofshareholders meeting annual the with mencing be shall Directors) annual meeting. Commencing with the annual meeting of shareholders in 1986, each class of directors whose whose ofdirectors class each in1986, ofshareholders meeting annual the with Commencing meeting. annual 1986 the at offi tohold expiring elected term be shall aone-year expire ce for thereafter or then shall term whose classes as nearly equal in number as possible. as innumber equal nearly as classes inoffi then tomakeall as directors aquorum, ofthe than less ce, though amajority by classes the among assigned so be shall indirectorships decrease any or directorships created newly any changed, is of directors assigned. been has director the to which class ofthe term ofthe remainder the director, for or, additional ofan case inthe replaced being director the fi ofDirectors Board offi tohold elected be shall expire then shall term at expiring offi tohold elected be shall class third of the directors six and meeting, 1987annual the at ing (b) The inoffi then directors ofthe amajority than less not by acting fi tobe number exact the nine, than less be not shall Directors”), Stock “Preferred (the 7(b) toArticle pursuant Stock ofPreferred series more or one ofany holders the by elected be may who ofdirectors exclusive Corporation, ofthe ofdirectors number (a) The continue inoffi continue lled by election of the Board of Directors with the director so elected to serve for the remainder of the term of term ofthe remainder the for toserve elected so director the with ofDirectors Board ofthe election by lled next annual meeting of, fi meeting annual next Prior to the 2009 annual meeting of shareholders, the Board of Directors (exclusive of Preferred Stock Stock ofPreferred (exclusive ofDirectors Board the ofshareholders, meeting annual 2009 tothe Prior shareholders. In the case of any vacancy on the Board of Directors occurring after the 1988 the after occurring ofDirectors Board the on vacancy ofany case Inthe shareholders. ce until the election and qualifi cation of their respective successors inoffi qualifi and successors election ce untilthe respective oftheir cation is divided into three classes, with the term ofoffi term the with classes, intothree divided is , including a vacancy created by an increase in the number of directors, the vacancy shall be be shall vacancy the ofdirectors, number inthe increase an by created avacancy , including ve directors of the second class shall be elected to hold offi tohold elected be shall class second ofthe directors ve . The proposed changes to Article 9 relate to Item 3. The addition of a new ofanew addition The 3. toItem 9relate toArticle changes proposed . The rmative vote of at least 80% of the votes entitled to be cast by holders of holders by cast tobe entitled votes ofthe 80% least ofat vote rmative xed from time to time solely by resolution of the Board of Directors, ofDirectors, Board ofthe resolution by solely totime time from xed until the next annual meeting of shareholders. All directors shall shall directors All ofshareholders. meeting annual next untilthe No decrease in the number of directors shall have the effect of effect the have shall ofdirectors number inthe decrease No ce for a three year term. In the case of any vacancy on the the on vacancy ofany case Inthe term. year athree ce for . . ve ce. 2009, each class of directors of the fi ofthe ofdirectors class each 2009, rmative vote of the holders of any particu- ofany holders ofthe vote rmative ce of one class expiring each year. each At expiring class ce ofone ce. When the number number the ce. When ce for a term expir- aterm ce for rmative vote of vote rmative ce for a term aterm ce for ce at any time, time, any ce at rst class rst Items of Items 2008 Com-

PROXY STATEMENT 117117 ed under ed ned in ned ed stock options Items of Business to (ii) satisfi es the requirements of es the requirements (ii) satisfi cers and other employees of Eli Lilly and April 2008 21, may be made to any member of the Board who is not any member of the Board may be made to 2002 Grant. LILLY STOCK PLAN STOCK LILLY Subject to adjustment as provided in Section 4(b), the aggregate number in Section 4(b), the aggregate as provided adjustment Subject to With respect to Stock Option Grants made to Nonemployee Directors pursuant pursuant Directors Nonemployee made to Option Grants Stock to With respect Grants of Stock Options of Stock Grants t the Company’s shareholders by allowing the Companyto attract, motivate, With respect to Grants to Eligible Employees (as those terms are defi are (as those terms Employees Eligible to Grants to With respect Grants may be made to any employee of the Company, including a person who is of the Company, including a person any employee may be made to Grants As amended through October 2004 18, Additions are indicated by underlining and deletions are indicated by strike-outs. ed stock options, performance awards, stock appreciation rights, stock unit awards, 119,000,000 shares; 119,000,000 Grants (“Grantees”) from among the Nonemployee Directors and determine the number of and determine Directors among the Nonemployee from (“Grantees”) Grants (i) 80,000,000 (i) Sections 2 and 3(a), respectively), the 2002 Plan shall be administered and interpreted by the Compensation and interpreted be administered the 2002 Plan shall Sections 2 and 3(a), respectively), from by the Board appointed directors independent two than of not less consisting of the Board Committee and purposes of administration for on the Compensation Committee serve may A person among its members. 16b-3 purposes of Rule for Director” if he or she (i) is a “Non-employee of the 2002 Plan only interpretation of 1934, as amended (the “1934 Act”), and Act under the Securities Exchange an “outside director” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the Revenue of Section 162(m) of the Internal purposes for an “outside director” The Compensation Committee independence. for rules Exchange Stock York es the New “Code”), and (iii) satisfi and and regulations such rules time establish time to of the 2002 Plan, from the provisions may, subject to of administration the proper for the 2002 Plan as it deems appropriate administer such authority to delegate be qualifi to intended of awards shall be made in the case that no such delegation the Plan, except or its The decisions of the Compensation Committee 16b-3 of the 1934 Act or Section 162(m) of the Code. Rule and nal, conclusive, and shall be fi discretion shall be made in its sole authorized designees (the “Committee”) it. made under 2002 Plan and any Grant of the and administration the interpretation to binding with respect and all the 2002 Plan and any such Grants, and interpret administer to shall serve Section 8, the Board to in the 2002 Plan in or elsewhere in subsection (a) above the Committee to and authority given duties, powers in discretion in its sole the Board to be given shall be deemed to Employees Eligible to Grants with connection Directors. Nonemployee to Option Grants Stock with connection of shares of Lilly Stock that may be issued or transferred under the 2002 Plan shall be the sum of the following under the 2002 Plan shall be the sum of the following or transferred that may be issued Stock of Lilly of shares amounts: also a member of the Board of Directors (“Eligible Employee”). The Committee shall select the persons to receive receive to the persons shall select The Committee Employee”). (“Eligible of Directors also a member of the Board any subject to the number of shares and determine Employees among the Eligible from (“Grantees”) Grants particular Grant. an employee of the Company (a “Nonemployee Director”). The Board shall select the persons who will receive who will receive the persons shall select The Board Director”). of the Company (a “Nonemployee an employee Options Stock shares subject to any particular Stock Option any particular Stock subject to shares Grants to Eligible Employees. (a) Grants Eligible to Grants to Nonemployee Directors. Directors. (b) Grants Nonemployee to Shares Subject to Issuance or Transfer. or Transfer. Subject to Issuance (a) Shares Grants to Nonemployee Directors. (b) Grants to Nonemployee Grants to Eligible Employees. Employees. (a) Grants to Eligible 3. Eligibility for Grants. 2. Grants. 2. Incentives under the 2002 Plan shall consist of incentive stock options or other forms of tax-qualifi and restricted stock grants (collectively, “Grants”). The Committee shall approve the form and provisions of each Grant to Eligible Employees and the Board shall approve the form and provisions of each Stock Option Grant to Nonemployee Directors. All Grants shall be subject to the terms and conditions set out herein and to such other terms and conditions consistent with the 2002 Plan as the Committee or Board, as applicable, deems appropriate. Grants under a particular section of the 2002 Plan need not be uniform and Grants under two or more sections may be combined in one instrument. The Committee shall determine the fair market value of Lilly Stock for pur- poses of the 2002 Plan. under the Code, nonqualifi 1. Administration. The 2002 Lilly Stock Plan (“2002 Plan”) authorizes the Board of Directors of Eli Lilly and Company (“Board”) and the Compensation Committee of the Board, as applicable, to provide offi Company and its subsidiaries and nonemployee directors of Eli Lilly and Company (“Nonemployee Directors”) with certain rights to acquire shares of Eli Lilly and Company common stock (“Lilly Stock”). The Company believes that this incentive program will benefi and retain employees and directors and by providing those employees and directors stock-based incentives to strengthen the alignment of interests between those persons and the shareholders. For purposes of the 2002 Plan, the term “Company” shall mean Eli Lilly and Company and its subsidiaries, unless the context requires otherwise. Be Acted Upon at the Meeting. Appendix B Appendix Proposed Amendments to the 2002 Lilly Stock Plan Proposed changes to the company’s 2002 Lilly Stock Plan are shown below related to Item 5, 4. Shares Available for Grant. PROXY STATEMENT 118118 granted to Eligible Employees consistent with the following: the with consistent Employees toEligible granted Options toStock applicable conditions and terms the determine shall Committee The Options”). “Stock (collectively, nonqualifi and Code, the under options stock oftax-favored forms other Options”), Stock centive (“In- Code the under options stock incentive as qualifying options Employees toEligible grant may Committee The Employees. Eligible to Grants Option Stock 5. Limits on Individual Grants. (f) LimitsonIndividualGrants. (e) Share Withholding.Withrespect to anyStock Option, theCommittee may,initsdiscretion andsubjectto such (g) LimitsonIncentive StockOptions. (b) AdjustmentProvisions. Ifanysubdivisionorcombination ofshares ofLilly Stock oranystock dividend, (d) (c) Exercise ofOption. (b) OptionExercise Period. TheCommittee shalldetermine theoptionexercise periodofeachStock Option.The (a) OptionPrice. Satisfaction ofOptionPrice. AStockSatisfaction Optionmayrequire payment oftheOptionPrice uponexercise ormayspecify considered together, under the2002Planfor more than2,500,000 withhold shares ofLilly Stock havingafair market value equalto theamountofwithholdingtax. tax obligationwhichmayarise inconnection withtheexercise ofthenonqualified optionbyhavingtheCompany rules astheCommittee mayadopt,permitorrequire theGrantee to satisfy, in whole orinpart,anywithholding Stock uponexercise ofaStock OptionuntilthePrice andanyrequired withholding tax are fully paid. of theStock Optionfor whichpaymentwasnottimely received. TheCompanyshallnotdeliver shares ofLilly the rightto take whatever actionitdeemsappropriate, includingvoiding theoptionexercise orvoiding thatpart such shares. IftheGrantee fails to paytheOptionPrice within thePayment Period, theCommittee shallhave and havingafair market value onthedate ofexercise equalto theOptionPrice, oracombination ofcash and delivering (orproviding adequate evidence ofownership of)shares ofLilly Stock already owned bytheGrantee The Grantee shallpayorcause to bepaidtheOptionPrice incash, orwiththeCommittee’s permission, by a periodnotto exceed 30daysfollowing exercise withinwhichpaymentmust bemade(“Payment Period”). or baseprice asapplicable inoutstanding Grants madebefore theevent. voting power ofallclasses ofstock oftheCompanyoranysubsidiary orparent oftheCompany. Notmore than Eligible Employee who,ontheGrant Date, owns stock possessing more than 10percent ofthetotal combined for thispurposewillbe determined attheGrant Date. AnIncentive Stock Optionshallnotbegranted to any not exceed $100,000 (orsuchotherlimitasmaybeestablished bytheCode).Theaggregate fair market value parent oftheCompanythatbecome exercisable for thefirst timebyanyemployee inanycalendar year shall Options granted underthe2002Planoranyotherstock optionplanoftheCompany oranysubsidiary of three consecutive calendar years. and 10(c) of Lilly Stock thatmaybeissued ortransferred inthefuture underSections4(a),5(f)and(g), 6(f),7(e), distribution, theCommittee shallmake suchadjustments asitdetermines appropriate inthenumberofshares other issuer are distributed withrespect to theshares ofLilly Stock through aspin-offorotherextraordinary corporation occurs, orifadditionalshares ornew ordifferent shares orothersecuritiesoftheCompanyany reorganization, recapitalization, orconsolidation ormerger withEliLilly andCompanyasthesurviving The shares maybeauthorizedbutunissued shares ortreasury shares. delivered, shallbeirrevocable. Option Price iftheStock Optionrequires suchpaymentatthetimeofexercise. Thenotice ofexercise, once to theCompanyoritsrepresentative asdesignated bytheCommittee, and(ii)accompanying paymentofthe in thecase ofany otherStock Option. period shallnotexceed ten years from theGrant Date inthecase ofanIncentive Stock Option,andeleven years case ofadjustments underSection4(b). any later date specified bytheCommittee. Once established, theOptionPrice maynotbereduced except inthe Stock Optionmaybeestablished asthedate onwhichCommittee actionapproving theStock Optionistaken or on thedate theStock Optionisgranted (the“Grant Date”). IntheCommittee’s discretion, theGrant Date ofa Grantee underaStock Option(“OptionPrice”) whichshallbenotless thanthefair market value ofLilly Stock (iv) The number of shares of Lilly Stock exchanged by a Grantee as full or partial payment to the Company Company tothe payment partial or full as aGrantee by exchanged Stock ofLilly ofshares number The (iv) remained that Stock ofLilly shares any Plan, Stock Lilly 1998 ofthe expiration or termination the Upon (iii) (ii) Any shares of Lilly Stock subject to an award hereunder or under the 1989, the under Stock or 1994 Lilly 1998 or hereunder award toan subject Stock ofLilly shares Any (ii) proved Plan or withheld for taxes under Sections 5(e), 7(c), 9(e) 10(c). 5(e), 7(c), or Sections under taxes for withheld or Plan proved Shareholder-Ap- aPrior under or hereunder granted was that Option ofaStock price exercise of the and expiration; or oftermination time the at plan that under grant for available Plans (the “Prior Shareholder-Approved Plans”) which, after the effective date of the 2002 Plan, 2002 ofthe date effective the after which, Plans”) Shareholder-Approved “Prior (the Plans c. are forfeited under a Restricted Stock Grant. Stock aRestricted under forfeited are c. toter- due Award ofaPerformance payment the with inconnection transferred or issued not are b. a. are not purchased or awarded under a Stock Option or Performance Award due to termination, totermination, due Award Performance or Option aStock under awarded or purchased not are a. . TheCommittee shallalsoadjust asitdetermines appropriate thenumberofshares and OptionPrice lieu of shares pursuant to Section 6(c); or toSection pursuant ofshares lieu in incash payment or Goals, Performance toachieve failure forfeiture, surrender, lapse, mination, forfeiture; or surrender lapse, termination, to due Award Unit Stock or Right Appreciation Stock Option, aStock with inconnection transferred lapse, or forfeiture, or which are forfeited under a Restricted Stock Grant; Grant; Stock aRestricted under forfeited are which or forfeiture, or lapse, TheCommittee shalldetermine theprice orprices atwhichLilly Stock maybepurchased bythe A Stock Optionwillbedeemedexercised byaGrantee upondelivery of(i)anotice ofexercise No individualGrantee may begranted Stock OptionsorStock Appreciation Rights, The aggregate fair market value ofthestock covered byIncentive Stock 3,500,000shares ofLilly Stock inanyperiod are not issued or or issued not are ed stock options options stock ed and9(d), : PROXY STATEMENT c 119119 Performance Performance shall be made, at the dis- Performance Award will be deemed an Award Performance . For purposes of determining the maximum purposes of determining . For goalsestablished by the Committee for the performance of the Business Unit during the of the Business performance that no such revision shall be however, that no such revision provided, nancial in writing as to the performance achieved against against achieved the performance in writing as to nancial to be made under a Performance Award if the Performance Performance if the Award be made under a Performance to restructuring and special charges, and other unusual gains or losses and other unusual gains or losses and special charges, restructuring At any time before payment is made, the Committee may revise the Performance the Performance may revise payment is made, the Committee At any time before Performance Award Dollar a or Performance Award To be entitled to receive payment under a Performance Award, a Grantee must must a Grantee Award, payment under a Performance receive to be entitled To If the Grantee’s employment terminates during the period designated in the Grant in the Grant during the period designated terminates employment If the Grantee’s After an Award Period, the fi Period, an Award After 600,000 shares of Lilly Stock in any calendar year or payments in respect of Dollar or payments in respect year in any calendar Stock of Lilly 600,000 shares No individual may receive Performance Award payments in respect of Stock payments in respect Award Performance No individual may receive (i) cant Events. cant in shares of Lilly Stock (“Stock Performance Awards”) or in dollar amounts (“Dollar Performance . Payment under a Stock form of Performance Awards. of Performance form (ii) Not more than 18,000,000 shares of Lilly Stock may be issued or transferred under the 2002 Plan in the or transferred may be issued Stock of Lilly than 18,000,000 shares (ii) Not more 0,000,000 shares of Lilly Stock may be issued or transferred under the 2002 Plan in the form of Incentive of Incentive in the form under the 2002 Plan or transferred issued may be Stock Lilly of shares 0,000,000 Prior to payment the Committee shall certify that fact shall certify payment the Committee Prior to nancial or market performance of the Company or any subsidiary,division, or other unit of the Company as the “Restriction Period,” the Restricted Stock Grant terminates and the shares immediately revert to the to revert immediately and the shares terminates Grant Stock the Restricted Period,” as the “Restriction or more consecutive fi scal quarters) for which a Performance Award is made (“Award Period”). Grants of Grants Period”). is made (“Award Award which a Performance for quarters) scal fi consecutive or more for Periods Award Period. of the Award the length to with respect need not be uniform Awards Performance one after Period Award a given for may not be granted Award A Performance overlap. may Grants different Section ed under be qualifi to intended of an Award has elapsed, or in the case of such period half (1/2) or more has elapsed. of such period 90 days or more after 162(m) of the Code, to as a condition Period the Award Unit during be met by the Business Goals”) that must (“Performance be set out in the Goals, which must The Performance Award. payment being made under the Performance divisional sales; equity; sales; on return net income; divisional income; per share; earnings to limited are Grant, of acquisitions, the effect before any of the foregoing added (MVA); value market added (EVA); value economic changes, and accounting divestitures, Goals are met or exceeded, including the fi Section 6(f)). xing of a maximum payment (subject to including the fi met or exceeded, Goals are the Performance Goals and certify the number of Performance Shares, if any, or the amount of payment, if if any, or Shares, the number of Performance Goals and certify the Performance The Committee, each Grantee. for with the grant accordance in Award be made under a Performance any, to or issuing in lieu of in cash Award pay part or all of the Performance to elect may discretion, in its sole on Stock of Lilly value market payment shall be based on the fair The cash Shares. Performance transferring of the number of each Grantee notify Section 6(f)). The Company shall promptly of payment (subject to the date receive. is to if any, he or she and the amount of cash, Shares Performance payment under this subsection, payment in cash of all or part of a Stock of all or part of a Stock payment under this subsection, payment in cash (determined according to criteria established by the Committee at or within 90 days after the time of grant); grant); the time of 90 days after at or within by the Committee established criteria to according (determined the number of in the Grant shall also set forth goals. The Committee price or stock return; shareholder total or the amount of payment Shares Performance issuance of the number of shares with respect to which such cash payment is made. No individual may receive payment is made. No individual may receive which such cash to with respect of the number of shares issuance Performance Awards in excess of $8,000,000 in any calendar year of $8,000,000 in any calendar in excess Awards Performance Period. the same Award for Award and a Dollar Performance Award Performance both a Stock payment shall be made under a Performance Award. If the minimum Performance Goals are met or exceeded, met or exceeded, Goals are If the minimum Performance Award. payment shall be made under a Performance p 36 Stock Options. Stock period shall be measured against the Performance Goals. If the minimum Performance Goals are not met, no not met, no Goals are If the minimum Performance Goals. the Performance against period shall be measured Awards in excess of 100 in excess Awards Goals and the computation of payment if unusual events occur during an Award Period which have a substantial a substantial which have Period during an Award occur events of payment if unusual Goals and the computation of the application make in the judgment of the Committee Goals and which on the Performance effect is made; a revision unless Goals unfair the Performance under Section 162(m) of the exemption qualify for to intended Award a Performance to with respect permissible to that revisions Award of any such Performance in the terms (i) may provide that the Committee Code, except specifi more of one or basis upon the occurrence Goals shall be made on a non-discretionary the Performance remain in the employment of the Company to the end of the Award Period, except that the Committee may may that the Committee except Period, the end of the Award of the Company to in the employment remain discretion, in its sole as it deems equitable this requirement to exceptions partial or complete for provide may impose 162(m) of the Code. The Committee under Section the exemption with maintaining consistent Award. payment under a Performance receive to entitlement on the Grantee’s additional conditions objective events, the occurrence of which are substantially uncertain at the time of grant, and (ii) may in its at the time of grant, uncertain substantially of which are the occurrence events, objective payment than would in a lesser that results Award such Performance to with respect a revision make discretion or in no payment at all. without the revision occurred have Requirement of Employment. (a) Requirement The Committee shall determine and include in the Grant the period of time (which shall be four (which shall be four the period of time in the Grant and include shall determine The Committee Period. (a) Award objectives shall establish the Committee is made, a Grant Before Goals and Payment. (b) Performance (c) Computation of Payment. Revisions for Signifi (d) Revisions Maximum Payments. (f) Maximum Payments. Requirement of Employment. (e) Requirement 6. Performance Awards to Eligible Employees. The Committee may grant to Eligible Employees Performance Awards, which shall be denominated at the time of grant either 7. Restricted7. Stock Grants to Eligible Employees. The Committee may issue or transfer shares of Lilly Stock to an Eligible Employee under a Restricted Stock Grant. Upon the issuance or transfer, the Grantee shall be entitled to vote the shares and to receive any dividends paid. The following provisions are applicable to Restricted Stock Grants: (“Business Unit”) selected by the Committee meets certain fi cretion the of Committee, in shares of Lilly Stock (“Performance Shares”), or in cash or in any combination thereof, if the fi Awards”) Award Period. The following provisions are applicable to Performance Awards: PROXY STATEMENT Appreciation Right at any time. The following provisions are applicable to Stock Appreciation Rights: Appreciation toStock applicable are provisions following The time. any at Right Appreciation ofaStock exercisability or settlement the accelerate may Committee the that provided Committee, the by proved ap- be may as conditions upon and times or time such at exercisable or settled be shall Rights Appreciation Stock Award. the for established price abase over Stock ofLilly ofshares value market fair inthe appreciation on based amount an payment, other without but right ofthe settlement or exercise upon toreceive, ofaright form in the award an is Right Appreciation AStock Employees. toEligible Rights Appreciation Stock grant may Committee The Employees. Eligible to Rights 9. Appreciation Stock 120120 provisions: following the with consistent Options Stock tosuch plicable ap- conditions and terms the determine may and Directors toNonemployee Options Stock grant may Board The Directors Nonemployee to Grants Option Stock 8. (d) LapseofRestrictions. (c) WithholdingTax. Before delivering thecertificate for shares ofLilly Stock to theGrantee, Lilly mayrequire the (b) RestrictionsonTransfer. DuringtheRestriction Period, aGrantee maynotsell,assign, transfer, pledge, (d) (b) Tandem StockAppreciation Rights. (a) Freestanding StockAppreciation Rights. (c) Exercise ofOption. (b) OptionExercise Period. TheBoard shalldetermine theoptionexercise periodofeachStock Option.Theperiod (a) OptionPrice. (e) Total NumberofShares Granted. Satisfaction ofOptionPrice. AStockSatisfaction Optionmayrequire payment oftheOptionPrice uponexercise ormayspecify Stock OptionuntilthePrice andanyrequired withholdingtax are fully paid. Option for whichpaymentwasnottimely received. Lilly shallnotdeliver shares ofLilly Stock uponexercise ofa whatever actionitdeems appropriate, includingvoiding theoptionexercise orvoiding thatpartof theStock If theGrantee fails to paytheOptionPrice withinthePayment Period, theBoard shallhave therightto take fair market value onthedate ofexercise equalto theOptionPrice, oracombination ofcash andsuchshares. providing adequate evidence ofownership of)shares ofLilly Stock already owned bytheGrantee andhavinga Grantee shallpayorcause to bepaidtheOptionPrice incash, orwiththeBoard’s permission, bydelivering (or a periodnotto exceed 30daysfollowing exercise withinwhichpaymentmust bemade(“Payment Period”). The under the2002Planinform ofRestricted Stock Grants andStock UnitAwards, considered together. provided underSection12(a)(ii).TheGrantee shallthenbeentitled to delivery ofthecertifi expiration oftheRestriction Period ifallconditions stated inSections7(a),(b)and(c)have beenmetor(ii)as fees to theGrantee. including withholdingorsellingsufficient shares from theGrant to paythetax andassessing interest orlate tax withinthetimeperiodspecified intheGrant, theCommittee maytake whatever actionitdeemsappropriate, market value equalto theamountofwithholdingtax. Intheevent theGrantee fails to paythewithholding withholding tax requirement byhavingtheCompanywithholdshares ofLilly Stock from theGrant havingafair to suchrules astheCommittee mayadopt,permitorrequire theGrantee to satisfy,inwhole orinpart,any Grantee to payto theCompanyanyrequired withholdingtax. The Committee may,initsdiscretion andsubject Company untiltheexpiration oftheRestriction Period. certificate for shares issued ortransferred underaRestricted Stock Grant shallbeheldinescrow bythe or otherwisedisposeoftheshares ofLilly Stock except to aSuccessor Grantee underSection13(a).Each deems equitable. Company. However, theCommittee mayprovide for partialorcomplete exceptions to thisrequirement asit delivered, shallbeirrevocable. the OptionPrice iftheStock Optionrequires suchpaymentatthetimeofexercise. Thenotice ofexercise, once notice ofexercise to Lilly oritsrepresentative asdesignated bytheBoard, and(ii)accompanying paymentof Stock Appreciation Rightisexercised, and to receive payment ofanamountcomputed asdescribedinSection Option oranyportion thereof to theextent unexercised, withrespect to thenumber ofshares asto whichsuch Right granted inconnection with a Stock Optionwillentitle theholder,uponexercise, to surrender theStock either atthetimeofgrant oratanytimethereafter duringtheterm oftheStock Option. AStock Appreciation not beless thanthefair market value ofLilly Stock ontheGrant Date. Appreciation Rightgranted withoutanyrelated Option,provided, however, thatsuchbaseprice pershare shall but innoevent after eleven years from theGrant Date. TheCommittee shalldetermine thebaseprice ofaStock Option, andinsuchcase, willbesettled orexercisable atsuchtimeortimesasdetermined bytheCommittee, Nonemployee Director shallterminate immediately. in accordance withapplicable state lawandtheArticles ofIncorporation ofLilly), anyStockOptionheldbythat period, ifearlier).Intheevent aNonemployee Director isremoved from theBoard for “cause” (asdetermined Grantee shallremain exercisable for five years after such termination (oruntiltheendofoptionexercise Option agreement, intheevent aGrantee’s service ontheBoard isterminated, anyStock Optionheldbysuch shall notexceed ten years from theGrant Date. Unless theBoard shallotherwiseexpressly provide inaStock the case ofadjustments underSection4(b). taken oranylater date specified bytheBoard. Once established, theOptionPrice maynotbereduced except in Date ofaStock Optionmaybeestablished asthedate onwhichBoard actionapproving theStock Optionis of Lilly Stock onthedate theStock Optionisgranted (the“Grant Date”). IntheBoard’s discretion, theGrant Nonemployee Director underaStock Option(“OptionPrice”) whichshallbenotless thanthefair market value The Board shalldetermine theprice orprices atwhichLilly Stock maybepurchased bythe A Stock Optionwillbedeemedexercised byaNonemployee Director upondelivery of(i)a Allrestrictions imposedundertheRestricted Stock Grant shalllapse(i)uponthe Not more than3,000,000shares ofLilly Stock maybeissued ortransferred A Stock Appreciation Rightmay begranted inconnection withaStock Option, AStock Appreciation Rightmaybegranted withoutanyrelated Stock cate. PROXY STATEMENT 121121 20, , or 9(d), unless in , or 9(d), unless ; or (iv) increase the maximum ; or (iv) increase 3,500,000 shares of Lilly Stock in any period Stock of Lilly 3,500,000 shares 2013 if the Plan has not been terminated at that 2013 if the Plan has not been terminated 4(a), 6(f)(ii), 7(e), or 10(c) The 2002 Plan shall remain in effect until April 14 in effect The 2002 Plan shall remain A termination or amendment of the 2002 Plan that occurs or amendment of the 2002 Plan that occurs A termination A Stock Appreciation Right will entitle the holder, upon settlement or the holder, upon settlement Right will entitle Appreciation A Stock Not more than 3,000,000 shares of Lilly Stock may be issued or transferred or transferred may be issued Stock of Lilly than 3,000,000 shares Not more A Stock Unit Award shall become payable to a Grantee at the time or times a Grantee to payable shall become Unit Award A Stock On the Grant Date, the Committee shall determine any vesting requirements with requirements any vesting shall determine the Committee Date, On the Grant No individual Grantee may be granted Stock Options or Stock Appreciation Rights, Appreciation Options or Stock Stock may be granted No individual Grantee . or until earlier terminated by the Board. To the extent required under Section 162(m) of the Code, the required the extent To by the Board. or until earlier terminated of Stock Options or Stock Appreciation Rights at a price below the original Option Price or base price as or base price the original Option Price below Rights at a price Appreciation Options or Stock of Stock (or base price Rights at an Option Price Appreciation Options or Stock of Stock the grant (ii) allow applicable; the number of shares (iii) increase Date; on the Grant Stock of Lilly value market the fair below as applicable) Sections to pursuant or transfer issuance authorized for respect to a Stock Unit Award, which shall be set forth in the award agreement, provided that the Committee that the Committee provided agreement, in the award be set forth which shall Unit Award, a Stock to respect may be based on the requirements at any time. Vesting Unit Award of a Stock the vesting may accelerate ed time period or periods. Vesting a specifi the Company for with of the Grantee employment continued by established goals or measures ed performance of specifi may also be based on the attainment requirements payment date. basis, with a deferred vested on a fully may also be granted Unit Award A Stock the Committee. determined by the Committee and set forth in the award agreement, which may be upon or following the vesting the vesting which may be upon or following agreement, in the award and set forth by the Committee determined shall be determined Unit Award under a Stock unit each share to The payment with respect of the award. will be made Payment payment date. on each applicable Stock of Lilly value market the fair to by reference withholding tax applicable subject to of the Committee, at the discretion or cash Stock of Lilly in shares to such rules as the Committee may adopt, permit or require the Grantee to satisfy, in whole or in part, any satisfy, in whole to the Grantee may adopt, permit or require as the Committee such rules to by having the Company with the payment of the award obligation which may arise in connection withholding tax the amount of the withholding tax. equal to value market having a fair Stock of Lilly withhold shares time. the Grantee unless or amendment of the Grant in the termination is made shall not result a Grant after of the 2002 Plan shall not impair acts under Section 13(e). The termination the Committee or unless consents the 2002 Plan has Whether or not Grants. outstanding to with respect and authority of the Committee the power any case such amendment receives approval of the shareholders of the Company. of the shareholders approval such amendment receives any case under the 2002 Plan in the form of Restricted Stock Grants and Stock Unit Awards, considered together. considered Unit Awards, and Stock Grants Stock of Restricted under the 2002 Plan in the form requirements exercise, as applicable, to receive payment of an amount determined by multiplying: (i) the excess of the fair of the fair (i) the excess by multiplying: an amount determined payment of receive to as applicable, exercise, Right over Appreciation of the Stock exercise or settlement of on the date Stock of Lilly a share of value market Appreciation which the Stock as to Right, by (ii) the number of shares Appreciation of the Stock the base price made in shares will be under the foregoing of the amount determined Payment or exercised. Right is settled subject to as applicable, or exercise, of settlement on the date value market at their fair valued Stock of Lilly withholding requirements. tax applicable 9(c). The Stock Option will, to the extent and when surrendered, cease to be exercisable. A Stock Appreciation Appreciation Stock A be exercisable. to cease when surrendered, and the extent will, to Option 9(c). The Stock the per to equal per share price a base will have hereunder Option Stock with a in connection Right granted the extent, to times, and only at such time or will be exercisable Option, Stock of the price exercise share If a expires. Option Stock than the related no later and will expire Option is exercisable, Stock that the related terminates purchased the shares to SAR related in part, then the or in whole is exercised Option Stock related of such exercise. as of the date considered together, under the 2002 Plan for more than 2,500,000 more Plan for under the 2002 together, considered material terms of the 2002 Plan will be submitted to the shareholders of the Company for reapproval not later not later reapproval of the Company for the shareholders to of the 2002 Plan will be submitted terms material in 2007 that occurs than the annual meeting of shareholders of three consecutive calendar years. years. calendar consecutive of three or in in whole satisfy, to Grantee the or require may adopt, permit Committee as the such rules subject to of the right or settlement with the exercise obligation which may arise in connection part, any withholding tax of the the amount equal to value market having a fair Stock of Lilly by having the Company withhold shares withholding tax. limitations on the number of shares subject to Grants imposed under Sections 5(f), 5(g), 6(f)(i) Grants subject to on the number of shares limitations 20202012 With respect to any Stock Unit Award, the Committee may, in its discretion and subject and may, in its discretion the Committee Unit Award, any Stock to Withholding. With respect (c) Share Total Number of Shares Granted. Number of Shares Total The Board may amend or terminate the 2002 Plan, but no amendment shall (i) allow the repricing the repricing the 2002 Plan, but no amendment shall (i) allow may amend or terminate (a) Amendment. The Board Vesting of Stock Unit Awards. of Stock Unit Awards. (a) Vesting Payment of Stock Unit Awards. Unit Awards. of Stock (b) Payment (c) (d) Termination and Amendment of Outstanding Grants. (c) Termination Termination of 2002 Plan; Resubmission to Shareholders. to Shareholders. of 2002 Plan; Resubmission (b) Termination Limits on Individual Grants.(d) Limits on Individual Payment of Stock Appreciation Rights. of Stock Appreciation (c) Payment With respect to any Stock Appreciation Right, the Committee may, in its discretion and may, in its discretion Right, the Committee Appreciation Stock any to With respect Withholding. (e) Share 11. Amendment11. and Termination of the 2002 Plan. 10. Stock10. Unit Awards to Eligible Employees. The Committee may grant Stock Unit Awards to Eligible Employees. A Stock Unit Award is an award of a number of hypothetical share units with respect to shares of Lilly Stock that are granted subject to such vesting and transfer restrictions and conditions of payment as the Committee shall determine and set forth in an award agreement. The value of each unit under a Stock Unit Award is equal to the fair market value of the Lilly Stock on any applicable date of determination. Stock A Unit Award shall be subject to such restrictions and conditions as the Committee shall determine. A Stock Unit Award may be granted, at the discretion of the Committee, together with a dividend equivalent right with respect to the same number of shares of LillyStock. The following provisions are applicable to Stock Unit Awards: PROXY STATEMENT 122122 12. Change in Control. in 12. Change 13. General Provisions. 13. General Effect on Grants. onGrants. (a) Effect (b) ChangeinControl. (a) Prohibitions AgainstTransfer. rights oftheGrantee undertheGrant. provided thattheamendmentisconsistent withthe2002Planandisfound bytheCommittee notto impairthe by agreement oftheCompanyandGrantee consistent withthe2002Planor(ii)byactionofCommittee terminated, anoutstanding Grant maybeterminated oramendedunderSection13(e)maybe(i) the occurrence of aChangeinControl (asdefined below) thefollowing shalloccur: following events: descent anddistribution. to theCompanyofhisorherright to receive theGrant undertheGrantee’s willorundertheapplicable lawsof Grantee (“Successor Grantee”) mayexercise therights.ASuccessor Grantee must furnishproof satisfactory representative orotherperson entitled underaGrant underthe2002Planto succeed to therightsof any suchattempted dispositionshallbevoid; provided, however, thatwhenaGrantee dies,the personal encumbrance, assignment, oranyothermeans, whether voluntary, involuntary, orbyoperation oflaw,and may nottransfer thoserights.The rightsunderaGrant maynotbedisposedofbytransfer, alienation,pledge, only theGrantee orhisherauthorizedlegal representative mayexercise rightsunderaGrant. Suchpersons v Eachoutstanding Stock UnitAward shallfully andimmediately vest andbecome(v) payable. (iv) Eachoutstanding Stock Appreciation Rightthatisnotthenfully exercisable shallautomatically become Each Grantee ofaPerformance Award(iii) for anAward Period thathasnotbeencompleted atthetimeof TheRestriction Period onalloutstanding Restricted Stock Grants shallautomatically expire andall (ii) Inthecase ofStock Options,eachoutstanding Stock Optionthatisnotthenfully exercisable shall (i) i) Acomplete liquidationof the Companyorasale ordispositionofall substantially alltheassets ofthe (iv) Consummation ofamerger, share exchange,(iii) orconsolidation oftheCompany (a “Transaction”), other (ii) The fi Theacquisitionbyany“person,” asthatterm isused inSections13(d)and14(d)ofthe1934Act(other (i) (ii) Notwithstanding theforegoing, theCommittee may,initsdiscretion andsubjectto suchlimitations(ii) and fully exercisable andshallremain sofor theperiodpermitted intheagreement relating to theGrant; and to theterms oftheAward orunderanyotherplanoftheCompany; prejudice therightofGrantee to receive alarger paymentundersuchPerformance Award pursuant the total numberofmonthsinsuchAward Period; provided, thatnothinginthissubsectionshall however, such Award Period to thedate onwhichtheChangeinControl occurs, andthedenominator ofwhichis numerator ofwhichisthenumberfullandpartialmonthsthathave elapsed since thebeginningof of (y)suchGrantee’s maximumaward opportunityfor suchPerformance Award, and(z)afraction, the Change inControl shallbedeemedto have earnedaminimumPerformance Award equalto theproduct restrictions imposedundersuchRestricted Stock Grants shallimmediately lapse; relating to theGrant; automatically become fully exercisable andshallremain sofor theperiodpermitted intheagreement Company, otherthanasale ordispositionofassets to anysubsidiaryoftheCompany. surviving entityimmediately after suchTransaction; or securities ofthesurvivingentity)more than50percent oftheVoting Stock oftheCompanyorsuch prior thereto continuing to represent (eitherbyremaining outstanding orbybeingconverted into voting than aTransaction whichwould result intheVoting Stock oftheCompanyoutstanding immediately of Incorporation); Company shallbeContinuingDirectors (asthatterm isdefined inArticle 13(f)oftheCompany’s Articles acquisition ofVoting Stock directly from theCompanyshallnotconstitute aChangeinControl; but for theapplication oftheIndianaControl Share Statute) (“Voting Stock”); provided, however, thatan elect atleast amajorityoftheBoard ofDirectors oftheCompany(orwhichwould have suchvoting power Company’s capital stock theholders ofwhichhave general voting power underordinary circumstances to defined inRule 13d-3underthe1934Act,directly orindirectly, of15percent ormore oftheshares ofthe any suchplanwhenactinginthatcapacity, or(z)Lilly Endowment, Inc.,)of“beneficial ownership,” as stock planoftheCompanyorasubsidiaryanytrustee orfiduciary withrespect to than (w)theCompany,(x)anysubsidiaryof(y)employee benefit planoremployee transfers to aSuccessor Grantee uponthedeathoftransferee. Subsequent transfers ofastock option transferred underthispart(ii)shall beprohibited except for her immediate family. Nosuchstock optionoranyotherGrant shallbetransferable incidentto divorce. equity interests ofwhichare owned exclusively bytheGrantee and/oroneormore members ofhisor immediate family members, orapartnership, corporation, limited liability company orsimilarentitythe the Grantee’s immediate family (asdefined bythe Committee), atrust for theexclusive benefit ofsuch estate ortax planningpurposesorfor donative purposes,andwithoutconsideration, to amemberof granted options)onterms which permittheGrantee to transfer allorpartofthestock option,for conditions astheCommittee deemsappropriate, grant nonqualified stock options(oramendpreviously- rst dayonwhichless thantwo-thirds ofthetotal membership oftheBoard ofDirectors ofthe The Committee mayprovide intheagreement relating to aGrant oratanylater date, that upon For purposesofthe2002Plan,aChangeinControl shallmeanthehappeningofany (i) Except asprovided inpart(ii)ofthissubparagraph, duringaGrantee’s lifetime, PROXY STATEMENT 123123 , or any adjournment of 21, 20082 * * * The 2002 Plan and the Grants under it shall not confer under it shall not confer The 2002 Plan and the Grants The amended 2002 Plan is effective upon its approval by the upon its approval The amended 2002 Plan is effective ict-of-laws principles. principles. ict-of-laws upon any Eligible Employee or Grantee the right to continue in the employment of the Company or as a in the employment continue the right to or Grantee Employee upon any Eligible of an the employment terminate in any way (i) the right of the Company to or affect member of the Board or (ii) any right of the Company or cause, time, with or without notice at any or Grantee Employee Eligible of an individual Neither the status on the Board. service the Grantee’s terminate to or its shareholders upon the Eligible shall confer by a Grantee Grants of one or more nor the receipt Employee as an Eligible Grants. future any rights to or Grantee Employee and make such arrangements may adopt, amend, and terminate Jurisdictions. The Committee Foreign to or desirable deem necessary of the 2002 Plan, as it may with the intent not inconsistent such Grants, subject to who are Grantees jurisdictions to ts of the laws of foreign or other benefi tax available make that and conditions the terms from may vary Grants foreign of such and conditions such laws. The terms by the 2002 Plan. otherwise be required would in interpreted by and made under it shall be governed The 2002 Plan and all Grants Governing Law. of the laws that might otherwise govern of Indiana, regardless of the State with the laws accordance confl Indiana under applicable 15 be held on April meeting to at the annual shareholders Company’s Effective Date of the Amended 2002 Plan. In the event of a business combination in which another corporation is combined is combined another corporation in which combination of a business Substitute Grants. In the event or property, of stock acquisition consolidation, merger, of a corporate by reason with the Company make may entity, the Committee is the surviving in which the Company or liquidation reorganization in corporation such other to or consultants directors, employees, or were who are individuals to Grants rights, or appreciation stock grant, stock restricted awards, performance options, stock for substitution at the time outstanding that are by such other corporation such individuals to granted awards unit stock of the substitute and conditions The terms Incentives”). Stock (“Substituted combination of the business by the 2002 Plan and otherwise be required that would and conditions terms the from may vary Grants of provisions the exact shall prescribe The Committee Incentives. Stock those of the Substituted from Incentives. Stock of the Substituted the provisions practical where preserving Grants, the substitute under account into taken be to Stock of Lilly number of shares the shall also determine The Committee Section 4. of or similar form company liability limited means a corporation, Subsidiaries. “subsidiary” The term power. of the voting or more 50 percent or indirectly directly Company owns and entity of which Eli Lilly but the Committee under a Grant, or transferred not be issued shall shares Fractional Shares. Fractional the fraction. or round fraction in lieu of a may pay cash issue obligations of the Company to and the of Grants, exercise The 2002 Plan, the Law. with Compliance and laws and regulations all applicable to shall be subject under Grants Stock Lilly of shares or transfer may revoke The Committee be required. agency as may or regulatory by any governmental approvals to and mandatory with any valid compliance bring it into to a Grant law or modify to if it is contrary any Grant on the withholding of taxes regarding may also adopt rules The Committee regulation. law or government Grantees. payment to of the Company no rights as a shareholder shall have Grantee or Successor Ownership of Stock. A Grantee to or transferred issued are until the shares by a Grant covered Stock of Lilly any shares to with respect books. on the Company’s Grantee or Successor the Grantee Grants. or to Future No Right to Employment the meeting. (h) (i) (j) (b) (c) (d) (e) (f) (g) SENIOR MANAGEMENT 124 Americas DrugProducts Vice President, Manufacturing, Crowe Maria Japan President andGeneralManager, Lilly F.Newton Crenshaw President, U.S. Operations P.Deirdre Connelly and ClinicalInvestigation Vice President,Discovery Research W. M.D. Chin, William Development President, GlobalProduct D. Carmine Bryce Molecular Evolution Research andPresident,Applied Vice President,Biotech Discovery F. Ph.D. Thomas Bumol, Medical Offi Vice President,Medical,andChief Breier, M.D. Alan Affairs andCommunications Senior Vice President,Corporate II Azar M. Alex Research andDevelopment Vice President,GlobalExternal Ph.D. W. Armstrong, Robert Counsel Senior Vice PresidentandGeneral Armitage A. Robert Manufacturing Vice President,GlobalAPI Ph.D. Ahern, Paul E. President andChiefOperatingOffi C.Lechleiter, Ph.D. John Executive Offi Chairman oftheBoardandChief Sidney Taurel Senior Management cer 2 cer

1 .

. cer 1 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 President, EuropeanOperations Hussain S. Abbas Offi Vice PresidentandChiefInformation C.Heim Michael Research andDevelopment Executive Director, Bioproduct F. Ph.D. Heath, William Vice PresidentandController Harford R. N. Simon Vice PresidentandTreasurer W. Grein Thomas Affairs Vice President,GlobalRegulatory M.D. Franson, R. Timothy Vice President,ProjectManagement Egan, Ph.D. J. Carmel Lilly USA 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 .

3 Gino Santini Santini Gino Financial Offi Senior Vice PresidentandChief W. Rice Derica Marketing Offi Group Vice PresidentandChief D. Pilnik Richard Research Laboratories and Technology, andPresident,Lilly Executive Vice President,Science M.D. Paul, M. Steven Enterprise RiskManagement Vice President,Complianceand Anne Nobles European and Asian DrugProduct Vice President, Manufacturing, F. Andreas Witzel Offi Vice President andChiefProcurement Ward A. James Vice President,Quality Ph.D. Walsh, Fionnuala Development Vice President,ProductResearch and Ph.D. Verhoeven, R. Thomas Solutions Vice President,GlobalCustomer Bergh den J. van Albertus President, IntercontinentalOperations Tapiero Jacques President, InternationalOperations M.D. Tallarigo, Lorenzo Global CompensationandHRServices Vice President,HumanResources, Sullivan Sharon L. President, ElancoAnimalHealth Simmons N. Jeffrey Strategy andBusinessDevelopment Senior Vice President,Corporate cer 5 cer 6 . cer .

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4 BOARD OF DIRECTORS 125 8 7 cer. cer, Motorola, Inc. and Eastman Kodak Company Company Motorola, Inc. and Eastman Kodak cer, 1 cer cer, United Parcel Service, Inc. United Parcel cer, 1 cer cer effective March 31, 2008, and as chairman of the board effective December 31, 2008. of the board effective 31, 2008, and as chairman March cer effective Eskew was elected to the board February 18, 2008. elected to the board February was Eskew 2008. April 21, will retire from the board effective Fisher Effective April 1, 2008, Heath will assume the role of vice president, product research and development. April 1, 2008, Heath will assume the role of vice president, product research Effective will retire from the company. 31, 2008, Tallarigo March Effective den Bergh will retire from the company. 31, 2008, van March Effective will assume the role of president, global product development. April 1, 2008, Verhoeven Effective Taurel will retire as chief executive offi executive will retire as chief Taurel and sales. vice president, global marketing April 1, 2008, Carmine will assume the role of executive Effective Effective April 1, 2008, Lechleiter will assume the role of president and chief executive offi executive the role of president and chief will assume April 1, 2008, Lechleiter Effective 8 4 5 6 7 Notes 1 2 3 Retired Executive Vice President, Kimberly-Clark Corporation Vice Retired Executive Kathi P. SeifertKathi P. 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, Ellen R. Marram Group LLC President, The Barnegat Karen N. Horn, Ph.D. Marsh, Inc. and Managing Director, Client Services, Retired President, Private Executive Vice President for Academic Affairs and Provost, The University of Texas Southwestern 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, Group Vice President, DuPont Agriculture & Nutrition President, DuPont Group Vice Alfred G. Gilman, M.D., Ph.D. Former Chairman of the Board and Chief Executive Offi Chairman of the Board and Chief Executive Former ErikJ. Fyrwald President and Chief Executive Offi cer, National Bureau of Economic Research, and George F. Baker Professor of Baker and George F. Bureau of Economic Research, National cer, Offi President and Chief Executive University Harvard Economics, Fisher M.C. George Former Chairman and Chief Executive Offi Chairman and Chief Executive Former Martin S. Feldstein, Ph.D. Retired Chairman and Chief Executive Offi cer, Deloitte & Touche LLP Deloitte & Touche cer, Offi Chief Executive Retired Chairman and Michael L. Eskew Chairman, Citigroup Inc. Chairman, Citigroup MichaelJ. Cook President and Chief Operating Offi President and Chief Sir Winfried Bischoff Sidney Taurel Sidney Taurel Offi Executive of the Board and Chief Chairman John Ph.D. C. Lechleiter, Board of Directors Board CORPORATE INFORMATION 126 The company’s chief executive offi certifi CFO and CEO and Co.” symbol: LLY. Mostnewspaperslistthestock as“Lilly(Eli) York, London,andSwiss stock exchanges. NYSE ticker Eli LillyandCompany commonstock islistedonthe New listings Stock cfm our SECfilings onlineat:http://investor.lilly.com/edgar. To accessthesereportsmorequickly, you canfind allof request to: quarterly reportsonForm 10-Qareavailable upon written Securities andExchange CommissiononForm 10-Kand Paper copiesofthecompany’s annualreporttothe reports 10-Q and 10-K tion ofthisreport,beginningonpage60. EDT. For moreinformation,seetheproxy statementsec- napolis, Indiana,onMonday, April21,2008,at11:00a.m. Lilly CenterAuditorium, LillyCorporateCenter, India- The annualmeetingofshareholderswillbeheldatthe meeting Annual Corporate Information In addition,thecompany’s chief executive offi the company’s Form 10-Kand10-Qreports. this report.Thecertifi respect tothefi Securities andExchange Commissionregulationswith offi dards oftheExchange. in compliancewithallcorporategovernance listingstan- effect that,tothebestofhisknowledge,company is with theNewYork Stock Exchange acertification tothe cer have providedallcertifi Indianapolis, Indiana46208-0665 P.O. Box 88665 Eli LillyandCompany nancial informationanddisclosuresin cations cations areavailable asexhibitsto cations requiredunder cer andchief fi cer hasfi nancial led ing theShareownerServicePlusPlanto: calendar year is$150,000.Pleasedirectinquiriesconcern- at least$50.Themaximumcashinvestment duringany new investors is$1,000.Subsequentinvestments mustbe savings accounts. Theminimuminitialinvestment for by check orby automatic deductionsfromchecking or investors topurchase shareswithcashpayments, either The planalsoallowsregisteredshareholdersandnew stock throughtheautomaticinvestment ofdividends. holders topurchase additionalsharesofLillycommon owner ServicePlusPlan,which allowsregisteredshare- Wells Fargo Shareowner ServicesadministerstheShare- plan purchase stock and reinvestment Dividend Internet: http://www.wellsfargo.com/com/shareowner E-mail: [email protected] Overnight address: Mailing address: Wells Fargo ShareownerServices registrar and agent Transfer and followthedirectionsprovided. mailing costs. To enroll,goto http://proxyonline.lilly.com shareholder’s homeandsaves thecompany printingand proxy materialsonline.Thisreducespapermailedtothe Shareholders mayelecttoreceive annualreportsand materials proxy of delivery Online Telephone: 1-800-833-8699 St. Paul, Minnesota55164-0854 P.O. Box 64854 Shareowner RelationsDepartment Wells Fargo Shareowner Services services Telephone: 1-800-833-8699 South St.Paul, Minnesota55075 161 NorthConcordExchange St. Paul, Minnesota55164-0854 P.O. Box 64854 Shareowner RelationsDepartment _ Annual Meeting Admission Ticket

Eli Lilly and Company 2008 Annual Meeting of Shareholders Monday, April 21, 2008 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 21, 2008 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) Arxxant® (ruboxistaurin mesylate) Axid® (nizatidine) Byetta® (exenatide injection) Ceclor® (cefaclor) Cialis® (tadalafi l) Coban® (monensin sodium), Elanco Cymbalta® (duloxetine hydrochloride) Effi ent™ (prasugrel) Evista® (raloxifene hydrochloride) Forteo® (teriparatide of recombinant DNA origin) Gemzar® (gemcitabine hydrochloride) Humalog® (insulin lispro of recombinant DNA origin) Humatrope® (somatropin of recombinant DNA origin) Humulin® (human insulin of recombinant DNA origin) On the Cover Year in Review Permax® (pergolide mesylate) Prozac® (fl uoxetine hydrochloride) 1 Financial Highlights ® ™ Candy Edwards is a wife, mother, grandmother and self-taught artist Prozac Weekly (fl uoxetine hydrochloride) 2 Letter to Shareholders ® with a passion for helping others. She also is a Cymbalta® patient. ReoPro (abciximab), Centocor 6 Innovation at Lilly: The Portfolio and the Pipeline Rumensin® (monensin sodium), Elanco Just two years ago, Candy developed a staph infection that kept her 9 Beyond Medicine: Providing Answers That Matter Strattera® (atomoxetine hydrochloride) hospitalized and bedridden for several months. The infection was so Surmax® (avilamycin), Elanco severe that it nearly killed her. Although Candy survived, she found Symbyax® (olanzapine/fl uoxetine hydrochloride) herself in a world of intense pain, fear, anger and despair. The spirited Financials Tylan® (tylosin), Elanco woman her family, friends and community knew so well soon became 10 Review of Operations Vancocin® (vancomycin hydrochloride) someone they hardly recognized. Candy lost interest in everything she 14 Consolidated Statements of Income Xigris® (drotrecogin alfa [activated]) cared about—even her family and her art. 19 Consolidated Balance Sheets Yentreve® (duloxetine hydrochloride) ® “I cried all the time and I had terrible mood swings,” said Candy. “I felt 20 Consolidated Statements of Cash Flows Zyprexa (olanzapine) ® ® like I was in this deep hole—it was like I was pinned down. Suicide 21 Consolidated Statements of Comprehensive Income Zyprexa Zydis (olanzapine) seemed to be the only way out.” 30 Segment Information 31 Selected Quarterly Data Actos® is a trademark of Takeda Chemical Industries, Ltd. Fortunately, Candy’s husband of 30 years, Freddie, recognized that 32 Selected Financial Data AIR® is trademark of Alkermes, Inc. something was seriously wrong with the woman he loved, and he 33 Notes to Consolidated Financial Statements Axid® is a trademark of Reliant Pharmaceuticals, LLC. pleaded with her to talk to her doctor. Although she was reluctant 57 Management’s Reports Byetta® is a trademark of Amylin Pharmaceuticals, Inc. at fi rst to accept her diagnosis of depression and initially refused to 58 Report of Independent Registered Public Accounting Firm Cialis® is a trademark of Lilly ICOS LLC. take the medicine her doctor gave her, Candy eventually decided to EVA® is a trademark of Stern Stewart & Co. give it a try. Sarafem® is a trademark of Galen (Chemicals) Limited Proxy Statement Vancocin® is a trademark of ViroPharma Incorporated Candy’s doctor had prescribed Cymbalta, and she recalls that within a Zydis® is a trademark of Cardinal Health. week, she could tell a difference. 60 Notice of 2008 Annual Meeting and Proxy Statement 61 General Information All trademarks listed above are trademarks of Eli Lilly and Company unless otherwise noted. “Cymbalta works for me,” she said. The turning point was the day she 65 Board of Directors woke up and decided to put on her make-up—something she hadn’t 69 Highlights of the Company’s Corporate Governance Guidelines done for nearly 6 months. “I fi nally started to feel like I was back.” 77 Directors and Corporate Governance Committee Matters Today, Candy is using her love of art to help raise awareness about 78 Audit Committee Matters For More Information highway safety in her home state of Georgia. She has created 80 Compensation Committee Matters characters such as “Boostie,” who promotes the importance of booster 81 Executive Compensation seats for young children, and “Buckley,” a character who encourages 101 Ownership of Company Stock Lilly corporate responsibility and report of political fi nancial support . . www.lilly.com/about/citizenship/index.html motorists to wear seatbelts. 102 Items of Business To Be Acted Upon at the Meeting 115 Other Matters Lilly clinical trials registry ...... www.lillytrials.com Candy isn’t shy about telling her story to others, and by doing so she Lilly Grant Offi ce ...... www.lillygrantoffi ce.com has become a source of hope and inspiration for others suffering from depression in her community. Corporate Information Multi-drug resistant tuberculosis initiative ...... www.lillymdr-tb.com “I always tell them to talk to their physician,” Candy said. “If I hadn’t 124 Senior Management and Board of Directors Medicare prescription drug coverage...... www.lillymedicareanswers.com sought help, I might have lost everything. I have my family and my life 126 Corporate Information Pharmaceutical industry patient assistance programs ...... www.pparx.org back. It was a blessing.” 127 Annual Meeting Admission Ticket Lilly Cares...... www.lillycares.com or call toll-free 1-800-545-6962

© 2008 Eli Lilly and Company 2007AR Eli Lilly and Company

2007 Annual Report

Notice of 2008 Annual Meeting

Proxy Statement

Eli Lilly and Company Lilly Corporate Center Indianapolis, Indiana 46285 USA www.lilly.com