Eli Lilly and Company Eli Lilly and Company Lilly Corporate Center Indianapolis, Indiana 46285 USA 2006 Annual Report, Notice of 2007 Annual Meeting, and Proxy Statement

www.lilly.com Year in Review Trademarks 1 Financial Highlights ® 2 Letter to Shareholders Actos (pioglitazone hydrochloride) ® 6 Innovation at Lilly: The Portfolio and the Pipeline Alimta (pemetrexed disodium) ™ 8 Lilly Takes Big Steps to Meet Urgent Medical Needs Arxxant (ruboxistaurin mesylate) Axid® (nizatidine) Byetta® (exenatide injection) Financials Ceclor® (cefaclor) Cialis® (tadalafi l) 10 Review of Operations Coban® (monensin sodium), Elanco 14 Consolidated Statements of Income Cymbalta® (duloxetine hydrochloride) 19 Consolidated Balance Sheets Evista® (raloxifene hydrochloride) 20 Consolidated Statements of Cash Flows Forteo® (teriparatide of recombinant DNA origin) 21 Consolidated Statements of Comprehensive Income Gemzar® (gemcitabine hydrochloride) 29 Segment Information Humalog® (insulin lispro of recombinant DNA origin) 30 Selected Quarterly Data Humatrope® (somatropin of recombinant DNA origin) 31 Selected Financial Data Humulin® (human insulin of recombinant DNA origin) 32 Notes to Consolidated Financial Statements Paylean® (ractopamine hydrochloride), Elanco 53 Management’s Reports Permax® (pergolide mesylate) 54 Report of Independent Registered Public Prozac® (fl uoxetine hydrochloride) Accounting Firm Prozac® Weekly™ (fl uoxetine hydrochloride)

ReoPro® (abciximab), Centocor Proxy Statement Rumensin® (monensin sodium), Elanco Sarafem® (fl uoxetine hydrochloride) 56 Notice of 2007 Annual Meeting and Proxy Strattera® (atomoxetine hydrochloride) Statement Surmax® (avilamycin), Elanco 58 General Information On the Cover Symbyax® (olanzapine/fl uoxetine hydrochloride) 62 Board of Directors Tylan® (tylosin), Elanco 66 Highlights of the Company’s Corporate Governance Jackie WiseSpirit, a member of the Cahuilla Band, is president of the Board of Vancocin® (vancomycin hydrochloride) Guidelines Indian Health, Inc., which offers programs for Native Americans suffering from Xigris® (drotrecogin alfa [activated]) 74 Directors and Corporate Governance Committee diabetes and other diseases in Riverside and San Bernardino counties, in Califor- Yentreve® (duloxetine hydrochloride) Matters nia. She can identify with those she’s working to help; Jackie was diagnosed with Zyprexa® (olanzapine) 75 Audit Committee Matters diabetes seven years ago—the sixth of nine family members to have the disease. Zyprexa® Zydis® (olanzapine) 77 Compensation Committee Matters ® 77 Executive Compensation In 2006, her doctor recommended Byetta . Originally reluctant to take shots, Actos® is a trademark of Takeda Chemical Industries, Ltd. 95 Ownership of Company Stock she is delighted with the choice she made. “Now, I have so much more energy; Axid® is a trademark of Reliant Pharmaceuticals, LLC. 96 Items of Business To Be Acted Upon at the Meeting my blood sugar is under control; I’ve lost weight; and I feel good. In fact, all my Byetta® is a trademark of Amylin Pharmaceuticals, Inc. 106 Other Matters friends say, ‘You look great!’” Cialis® is a trademark of Lilly ICOS LLC. EVA® is a trademark of Stern Stewart & Co. Byetta is a fi rst-in-class treatment for type 2 diabetes used in combination with ® Corporate Information Sarafem is a trademark of Galen (Chemicals) Limited commonly prescribed oral medications that is a product of a collaboration Zydis® is a trademark of Cardinal Health. 108 Board of Directors between Lilly and Amylin Pharmaceuticals. Its glycemic control and association 109 Senior Management with most patients losing weight rather than gaining weight replace the vicious All trademarks listed above are trademarks of Eli Lilly and Company unless otherwise noted. 110 Corporate Information cycle so common in type 2 diabetes with a virtuous cycle. 111 Annual Meeting Admission Ticket Because of its effect on people like Jackie, Byetta has become the fourth-most- prescribed branded pharmaceutical used to treat type 2 diabetes, measured by new prescriptions, in its fi rst full year on the market. For More Information

Lilly corporate responsibility ...... www.lilly.com/about/citizenship Lilly clinical trials registry ...... www.lillytrials.com Multi-drug resistant tuberculosis initiative ...... www.lillymdr-tb.com Medicare prescription drug coverage...... www.lillymedicareanswers.com Pharmaceutical industry patient assistance programs ...... www.pparx.org Lilly Cares...... www.lillycares.com or call toll-free 1-800-545-6962

© 2007 Eli Lilly and Company 2006AR 2006 Financial Highlights

ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Year Ended December 31 2006 2005 Change % Net sales ...... $15,691.0 $14,645.3 7

Research and development ...... 3,129.3 3,025.5 3

Research and development as a percent of net sales...... 19.9% 20.7%

Net income ...... $ 2,662.7 $ 1,979.6 35

Earnings per share—diluted ...... 2.45 1.81 35 Reconciling items:1 Product liability charge, primarily related to Zyprexa ...... 42 .90 Asset impairments, restructuring and other special charges...... 31 .14 Cumulative effect of a change in accounting principle...... — .02 Adjusted earnings per share—diluted ...... 3.18 2.87 11

Dividends paid per share ...... 1.60 1.52 5

Capital expenditures ...... 1,077.8 1,298.1 (17)

Employees...... 41,500 42,600

1For more information on these reconciling items, see the Financial Results section of the Executive Overview on page 10.

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1 Letter to Shareholders Sidney Taurel The science of drug discovery and development, the Chairman of the Board and Chief Executive Offi cer needs of our customers, and the systems in which health care is delivered and paid for around the world—all are John C. Lechleiter, Ph.D. changing in fundamental ways. Eli Lilly and Company President and Chief Operating Offi cer is transforming itself to succeed in the emerging busi- ness environment of tomorrow, even as we deliver solid fi nancial and operational results today. The division of responsibilities between the two of us

LETTER TO SHAREHOLDERSLETTER TO refl ects this dual challenge. As Chairman of the Board and Chief Executive Offi cer, Sidney Taurel devotes particular attention to the company’s transformation for long-term success. As President and Chief Operating Offi cer, John Lechleiter focuses on achieving the full commercial potential of our rich product portfolio and superior performance throughout the company. At Lilly, we talk about these agendas using the shorthand of “transform” and “achieve”—recognizing that they are highly comple- mentary. Indeed, they ultimately converge on the key test of our business: whether or not we can meet the rising expectations of our customers for valuable medicines— defi ned in both therapeutic and economic terms. We are

confi dent that Lilly will pass this test with high marks. &+!%%%Ä In reviewing Lilly’s performance in 2006, we begin C>C:EGD9J8IHA6JC8=:9H>C8:I=:'%%& J#H#EGDO68E6I:CI:ME>G6I>DC=6K:9G>K:C with our fi nancial and operational results. DJGH6A:H

In 2006, Cymbalta became one of only a handful of In 2006, Cymbalta became one of only a Zyprexa, our largest product, 2006 marked For Outside the U.S., the impact of our wellness programs the impact of our wellness Outside the U.S., products in our industry ever to reach $1 billion in sales to reach products in our industry ever billion, to be on the market—$1.3 in its second full year benefi Cymbalta precise, nearly double its 2005 sales. signifi educated patients about a campaign, which advertising disease’s including the range of depression symptoms, Cymbalta symptoms. emotional and painful physical in terms of outperformed all branded antidepressants during 2006. And growth in the U.S. share-of-market experienced a series of ever- Cymbalta outside the U.S., how quickly as measured by more-successful launches, shares. grew our market we levels, stabilized prescribing We turning point in the U.S. One years. had been declining for the past several which in our success is a focus on treating schizo- element key phrenia and bipolar disorder in patients with the most proposition is value for whom Zyprexa’s urgent needs, seek to provide unmistakable. Our sales representatives practical assistance to doctors—helping them fi very to stabilize patients and then evaluate the tolerability, the tolerability, to stabilize patients and then evaluate and effi safety, have among psychiatrists and our leading share-of-voice or at least to hold its own, in Zyprexa to grow, allowed growth In terms of volume most of our major markets. Spain, and the United Kingdom stand Japan, this year, out with 14, 11, and 12 percent growth respectively—and in particular still has a lot of upside potential. Japan with mental illness, our Solutions for Wellness program our Solutions for Wellness with mental illness, helps doctors to use diet and exercise as part of an overall disease-management plan. extends from early-stage glycemic control to the manage- effi cacy of Arxxant in treating diabetic retinopathy—a deci- ment of complications. We also have an inhaled form of sion we are appealing as this document goes to press—and insulin in late-stage development, in collaboration with an independent data-monitoring committee concluded that Alkermes. Primary-care doctors who handle an ever-grow- Lilly’s Phase III trial of enzastaurin for recurrent glioblas- ing diabetes caseload have told us that they need deep toma, a form of brain cancer, would be unlikely to achieve knowledge of multiple products shared through a single its primary endpoint of improvement in progression-free point of contact—and we are responding. In the U.S., for survival over an existing chemotherapy. example, our Sales Force of the Future now delivers true Our development of enzastaurin for other forms of portfolio expertise, while allowing our sales representa- cancer is continuing. We also remain very excited about tives to be more productive than they were under the the prospects of prasugrel, initially for acute coronary older system of detailing individual medicines. syndrome in patients undergoing percutaneous coronary LETTER TO SHAREHOLDERSLETTER TO Finally, we are centering our diabetes business intervention (including coronary stenting), which we are squarely on the needs and preferences of patients. For co-developing with Daiichi Sankyo. Our key Phase III example, patients clearly are looking for less complicated study—a head-to-head superiority trial of prasugrel against and obtrusive ways of managing their medications. the current standard of care—will be completed in mid- We are responding by launching several new, pen-style 2007, and success would put us on track for submission devices for insulin users—based on culturally specifi c to the FDA by year’s end. We also plan to submit for an research about patient preferences. Meanwhile, research important new line extension in 2007—a long-acting, depot and advocacy organizations have called for partnerships formulation of Zyprexa for treatment of schizophrenia—as that serve to improve treatment options for patients. Our well as a new indication for Cymbalta in the treatment of global philanthropy responded with dual, $10 million fi bromyalgia. In addition to inhaled insulin, we are also commitments in 2006 to Indiana University’s research targeting arzoxifene, a potential next-generation treatment program on juvenile diabetes and to the International for osteoporosis, for submission to regulators in 2009. Diabetes Federation’s BRIDGES program, which translates clinical fi ndings into real-world treatment applications. Transformation: A Company-Wide Imperative Byetta, our newest therapy, refl ects all of these aspira- Transformation is a term we do not use lightly. At Lilly, tions. Developed and manufactured as a result of the transformation is motivated by profound changes in the Lilly-Amylin partnership, this biotechnology product is science of drug discovery and development; heightened meeting an important need among patients who are not demand for effective medicines brought on by the aging achieving adequate glucose control but are not ready for of populations worldwide; and intense pressures to control insulin. Three studies now demonstrate that Byetta’s abil- health-care costs. And so: transformation cannot consist of ity to lower blood-glucose levels is comparable to insulin, tinkering at the margins of our current business model but the gold standard. And unlike insulin, which often causes rather of fi nding wholly new ways to realize and deliver weight gain, Byetta is associated in every study with the full value of our products. Above all, we are convinced weight loss. You can see one of the thousands of satisfi ed that the Lilly of the future must be a patient-centered enter- Byetta patients on the cover of this report. prise, dedicated to improving individual patient outcomes. By the end of 2006, after less than 18 months on the Becoming a more patient-centered company will involve market, Byetta already ranked fourth in new prescriptions many changes—including greatly improved abilities to tailor among all branded products for type 2 diabetes in the U.S., medicines to specifi c patient groups; new connections to our and it will begin to launch globally in 2007. To further tailor customers and global partners to capture patient insights Byetta to the needs of specifi c patient groups, we are devel- and best practices; and major productivity improvements to oping a long-acting-release formulation of the drug as well. restrain costs and improve our overall effectiveness. No part of Lilly will be exempt from major change. Pipeline In R&D, transformation is gathering momentum, In 2006, Lilly Research Laboratories (LRL) submitted though the challenge is daunting. For decades, the cost Cymbalta for U.S. regulatory approval to treat general- and time required to bring a new drug to market have ized anxiety disorder, and Evista for a new indication increased inexorably—to upwards of $1 billion and at least in breast cancer risk reduction. In Japan, Alimta earned 12 years per molecule throughout the industry. Our goal is approval—for malignant pleural mesothelioma, in combi- not simply to stop but to reverse these trends—even as we nation with cisplatin—only six months after submission, produce new medicines more clearly tailored for effective- a nearly unprecedented accomplishment in the tough ness in specifi c patient groups. Japanese regulatory environment. Byetta was approved To those ends, LRL is mapping the critical path for in Europe and gained a new indication in the U.S. for use all phases of development and devising more effi cient with thiazolidinediones (TZDs). On the less positive side alternatives. In many cases, the result will be a more global in 2006, the U.S. Food and Drug Administration (FDA) approach. In China, for example, we have had particular asked for an additional Phase III trial to demonstrate the success with partnerships for chemical screening and other

4 LETTER TO SHAREHOLDERS 5 c cer ts of good le series of articles cer and other newspapers and other newspapers ts to millions of peo- The New York Times The New York John C. Lechleiter John President and Chief Operating Offi Unprecedented changes in our operating environ- Unprecedented changes Sidney Taurel Offi Chairman of the Board and Chief Executive As leaders of this company, we share an extra measure share an extra we of this company, As leaders may bring other setbacks ahead The months and years dent that Lilly will realize these bright prospects. ment—along with continued criticism of our industry in ment—along with continued criticism the perceptions the public square—sometimes may color or our But they do not diminish our resolve of investors. excitement about the scientifi or our optimism at Lilly, mation of our business took hold on a large scale even as even hold on a large scale our business took mation of strong current results. delivered we Our Environment and Our Future and retirees, employees, of Lilly’s many of the concern that felt about a high-profi other shareholders that appeared in The articles dealt with Zyprexa and near the end of 2006. in inappropri- Lilly had engaged that contained allegations forth- practices and failed to deal ate sales and marketing Based on documents events. adverse rightly with Zyprexa law- in the course of a product-liability leaked that were series order—the newspaper a judge’s suit—in violation of incomplete, and ultimately misleading painted a distorted, conduct and of Zyprexa, a drug assessment both of Lilly’s benefi that has brought life-changing and bipolar disorder. ple with schizophrenia to be realized. As populations age, waiting achievements and the benefi medical knowledge expands, are there around the world, health are more highly valued brighter submit) that have humbly few businesses (we innovation. prospects than the business of pharmaceutical to the needs of our By responding in new and better ways are outcomes for patients—we customers—to improve confi the Board of Directors, For in the news media or in the political arena. Ours is an in the news media or in the political arena. often poorly understood extraordinarily complex business, Precisely sophisticated opinion leaders. among many even legislative news story, that every believe for that reason, we its negative hearing, or other public discussion—however for us to bring initial assumptions—presents an opportunity of understanding. That is the spirit in about a new level with our detractors. can expect to see us engage you which cult decisions cult ts of earlier invest- to tailor nding ways ecting a 10-percent head- t from Six Sigma in 2006—and over improved is much ow picture also reap the benefi as we years ve In summary, we believe that 2006 at Eli Lilly and that 2006 at Eli Lilly believe we In summary, Finally, Lilly’s returns on assets and equity posted returns on assets and equity Lilly’s Finally, Thirdly, we have streamlined operations in both R&D have we Thirdly, Productivity per employee is another key indicator is another key Productivity per employee We believe that there are several leading indicators are several that there believe We Throughout our R&D pipeline and extending to prod- Throughout our R&D Company will be recalled as a year in which the transfor- in which will be recalled as a year Company count reduction since our peak in 2004 but also—and count reduction since our peak in 2004 more to work more importantly—concerted efforts throughout our business. effectively that is on track to double in 2007. that is on track more grown by have employee Our sales per of change. than 45 percent since 2002, refl for the extent and impact of our transformation efforts at for the extent and impact of our transformation One of them is Six Sigma. Through the end of 2006, Lilly. Belts” and 700 400 Six Sigma “Black deployed have we goal exceeded our We “Green Belts” across the company. of $250 million of benefi Leading Indicators Leading early-stage R&D. And in India, we started a number of started we And in India, R&D. early-stage clinical-data management 2006, including a alliances in for identify new treatments a collaboration to agreement; candidate molecules take abuse; and pacts to substance development. through early-stage another year of improvement in 2006, and our capital in 2006, and our capital of improvement another year their lowest expenditures as a percentage of sales reached in fi level to close research centers in Belgium and Germany that centers in Belgium and Germany to close research closed manufacturing And we duplicated other capabilities. due to excess and northern Virginia facilities in the U.K. These decisions are part of the broader transfor- capacity. has mation of our manufacturing base for a new era, which side. In 2006, for ex- included expansions on the biotech started up our biosynthetic insulin successfully ample, we plant in Puerto Rico; opened a pilot manufacturing facility medicines in Indianapolis; and announced for biotech as to plant in Ireland as well plans to build a new biotech expand our Indianapolis parenteral-products operations. and manufacturing. In 2006, we made diffi made and manufacturing. In 2006, we our therapies to patient groups so as to realize their value groups so as to realize their value our therapies to patient example, at our AME subsidiary, For to the greatest extent. a molecule that may help patients who designed have we is used to treat to Rituxan, which do not respond optimally rheumatoid arthritis. lymphoma and non-Hodgkin’s since 2001 for the market Xigris—on In the case of Lilly’s a partnership with established have sepsis—we severe diagnostic tool that may allow doc- Biosite to offer a bedside Xigris be helped by patients might tors to determine which as the appropriate dosing throughout treatment. as well ucts already on the market, we are fi we market, ucts already on the ments. Our cash fl ments. the earlier part of the decade—doubling to $3.975 billion in 2006—providing us the currency to pursue the in-licensing oppor- of new molecules and other business development ahead. tunities in the years PORTFOLIO AND PIPELINE forunstableanginaassociatedwithstentprocedure(1997) coronaryintervention, such asangioplasty forrecurrentovarian cancer(2004) formetastaticbreastcancer(2003) forbladdercancer(1999;approved andlaunched outside theU.S.) 6 forpancreaticcancer(1996) Rapid-actingIntraMuscularformulation(2004) forbipolarmaintenance(2003) ascombinationtherapywithlithiumorvalproate foracute bipolarmania(2002) forschizophrenia maintenance(2001) Humalog Humalog foracutebipolarmania(2000) 1995 Zyprexa fortreatmentofosteoporosisinpostmenopausalwomen (1999) Zyprexa highriskforafracture 1996 LillyICOSinNorthAmericaandEuropeby Lillyelsewhere) 1998 1999 2001 forsecond-linetreatmentofnon-small-celllungcancer(2004) 2002 Ingelheimelsewhereintheworld, exceptJapan) fordiabeticperipheralneuropathicpain(2004) intheU.S.) 2003 ( 2004 2005 Major Marketed Products Innovation atLilly:ThePortfolio andthePipeline ReoPro Gemzar Humalog Zyprexa Evista Actos Xigris Forteo Strattera Cialis Yentreve Symbyax Alimta Cymbalta Byetta ® ® ® ® ® ® ®

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(developed by Centocorandpromotedby Lilly, except inJapan) for prevention ofcardiacischemic complicationsinpatients undergoing for non-small-celllungcancer for treatmentoftype1and2diabetes for schizophrenia for prevention ofosteoporosisinpostmenopausalwomen (developed by Takeda ChemicalIndustries, Ltd.,andcopromotedwithTakeda) for type2diabetes for adultsevere sepsispatientsathighriskofdeath for treatmentofmenandpostmenopausalwomen withosteoporosiswho areat for attention-defi (developed by LillyICOSinajointventure withICOSCorp.; copromotedby for erectiledysfunction for stressurinaryincontinence(approved andlaunched outsidetheU.S.) for bipolardepression for malignantpleuralmesothelioma (copromoted withQuintilesTransnational Corp. intheU.S., andwithBoehringer for majordepressive disorder for type2diabetes fi of year the indicate (Dates codeveloped withAmylin Pharmaceuticals, Inc.,andcopromotedwithAmylin ® ® ® ® granules(2004;launched inJapan only) Zydis Mix50/50(1999) mixtures(1999) ® cit hyperactivity disorderinchildren, adolescents, andadults tablet(2000) rst global launch) global rst PORTFOLIO AND PIPELINE 7 c and c maining scientifi ciency ciency (1995) ciency (recently in-licensed from OSI Pharmaceuticals, Inc.) (recently in-licensed from OSI Pharmaceuticals, for solid tumors for migraine for depression (phase II); for ADHD (phase I) for schizophrenia for rheumatoid arthritis for solid tumors for type 2 diabetes for type 2 diabetes for insomnia for reducing the progression of atherosclerosis for solid tumors disease for Alzheimer’s disease for Alzheimer’s for acute coronary syndromes Ltd.) Company, Sankyo with Daiichi (codeveloping for type 1 and type 2 diabetes Inc.) with Alkermes, (codeveloping of osteoporosis and for reducing the risk of breast and treatment for prevention colorectal lymphoma (phase III); for metastatic breast cancer, for non-Hodgkin’s for schizophrenia for intramuscular delivery for growth failure caused by pediatric growth hormone defi pediatric by for growth failure caused 2 diabetes for type 1 and type for diabetic retinopathy

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regulatory hurdles may cause pipeline compounds to be delayed or even to fail to reach the market. to fail to reach or even regulatory hurdles may cause pipeline compounds to be delayed Glucokinase activator Glucokinase Re and uncertain, and there are no guarantees. for new drugs is risky 18, 2007. The search Information is current as of January Gemcitabine prodrug GLP-1 analog mGlu2/3 prodrug IL-1 beta antibody mGluR3 antagonist NERI IV ASAP A-beta lowering A-beta lowering inhibitor) (Gamma secretase A-beta antibody for replacement therapy for adult growth hormone defi syndrome (1997) Turner for short stature caused by for idiopathic short stature (2003) alpha agonist PPAR (LY518674) Survivin ASO Select Drug Candidates in Mid-Stage Investigation Pruvanserin (5-HT2A antagonist) Olanzapine pamoate Enzastaurin Enzastaurin insulin Inhaled Arzoxifene women all in postmenopausal cancer, cancer (phase II) and ovarian non-small-cell lung cancer, cancer, Prasugrel Prasugrel Arxxant Select Drug Candidates in Late-Stage Investigation New Drug Application SubmittedFor Review to the U.S. Food and Drug Administration 1983 1987 Lilly Takes Big Steps to Meet Urgent Medical Needs

We know the best medicines can’t help people and Zyprexa for patients who were previously unless they have access to them. In the United enrolled in the program and signed up for a

CORPORATE RESPONSIBILITYCORPORATE States and globally, we are breaking ground Medicare Part D Plan. in our innovative approaches to partnerships, working with governments and non-govern- This was one way Lilly offered seniors and ment organizations to ensure that patients have low-income patients affordable access to drugs. access to the medicines they need. Additionally, the company donated products through six patient assistance programs that In September 2006, Lilly received a favor- last year aided nearly 400,000 people in the able opinion from the U.S. government for United States. LillyCares, which offers free an innovative “Outside Part D” Medicare Part medicines to patients who cannot pay for them, D patient assistance program, LillyMedicare- helped more than 158,000 participants, while Answers, which will provide Zyprexa, Forteo LillyAnswers provided low-cost prescriptions to and Humatrope to low-income seniors who nearly 235,000 Medicare-enrolled individuals. experience gaps in prescription coverage. Other assistance programs helped patients gain reimbursement or access to drugs that battle The program was designed to provide assis- cancer, severe sepsis, osteoporosis, and diabetes. tance to low-income Medicare Part D-enrolled patients most vulnerable to continuity-of-care Setting the Pace for MDR-TB Partnerships issues. LillyMedicareAnswers meshes with Medicare Part D to provide more sophisticated To halt the spread of one of the most pervasive medicines to the low-income patients who and deadly diseases facing the world today, need them. Lilly continued to partner with the World Health Organization and other groups to share Patients enrolled in LillyMedicareAnswers pay expertise, transfer technology, improve treat- only a $25 administrative fee for each 30-day ment—and save lives. Tuberculosis— supply of medicines shipped directly to their specifi cally, multi-drug-resistant (MDR) TB, home. Enrollment began in December 2006, is a growing global concern, with more than with full operations beginning in January 2 million people dying of the disease each 2007. year. Even the United States saw a 13 percent increase in the number of reported cases from Lilly undertook several measures in 2006 to 2004 to 2005. Recently, a new deadly strain help Medicare patients while awaiting the was identifi ed in South Africa, called XDR-TB government opinion on this new program, (extensively drug-resistant TB). In response to including extending its long-standing Lilly- the South African government’s request, Lilly Answers® program until Dec. 31, 2006. sent 3,000 vials of the antibiotic capreomycin Additionally, Lilly extended access to Forteo to help to contain the outbreak, and provided

8 CORPORATE RESPONSIBILITY

funds to train doctors and nurses on proper patient assistance programs and international treatment protocols. humanitarian causes. Lilly and its philanthropic foundation also gave more than $57 million Lilly’s government and non-government-or- in cash donations for several urgent or special ganization partners formally recognized our causes, and more than $13 million in other in- company’s approach to getting various groups kind contributions. to work together against this deadly scourge during a November 2006 MDR-TB Summit in In the U.S., Lilly employees also donated gener- Paris. Our plans are moving forward to share ously to United Way charities; their contribu- technology so others can, independently, make tions, combined with matches from the founda- our TB medicines: Our South African partner, tion, totaled $9.7 million. Aspen, is producing one of our two antibiotics used to treat TB, while Hisun, our partner in “Whether patients are seeking medicine, medi- China, expects to produce capreomycin by the cal expertise, or both, we do our best to ensure end of 2007. that people in need are not forgotten,” said Chairman Sidney Taurel. “Our founders estab- Thanks to a Lilly grant, the World Health lished these values nearly 130 years ago, and we Organization has provided extensive technical live by them today.” assistance to many countries. In China alone, several hundred doctors and nurses have been Earning Society’s Trust trained and more than 20,000 MDR-TB patients have been enrolled. Further, teams from The The depth and breadth of Lilly’s corporate good Harvard Kennedy School, INSEAD in Paris, and works might surprise you. For a full report on Indiana University have spent time with Lilly these initiatives, as well as challenges that lie and its partners to understand the success of ahead, visit www.lilly.com/about/citizenship. our model partnerships. There, you can learn more about how Lilly is A History of Giving earning society’s trust by establishing the fi rst online clinical trial registry (www.lillytrials. These and other initiatives in 2006 follow the com); working to improve the industry’s good Lilly commitment to providing Answers that promotional practices and code of ethics; Matter, as we maintain an honored tradition of respecting the environment; partnering with giving back to the communities where we live world health leaders to combat MDR-TB with and work. The company’s global philanthropy the goal of treating 20,000 patients annually by in 2006 totaled about $420 million. Contribu- 2010 (www.lillymdr-tb.com); and implementing tions included nearly $350 million (net whole- a broad range of other programs that improve sale value) worth of product donations for the lives of patients every day.

In the background throughout this report are scenes from the Pechanga Indian Reservation, home of cover subject Jackie WiseSpirit. 9 FINANCIALS • We adopted FinancialAccounting• Standards We recognized• asset impairmentsandotherspecial We incurred• acharge related to product liability 2005 10 In thefourth quarter, we incurred• acharge related to We recognized• asset impairments,restructuring and 2006 Cymbalta primarily ofkey products, insupport es expens- inmarketing investment our We increased ucts. prod- newer ofour growth ofstrong aresult as marily pri- of7percent, growth sales worldwide We achieved Financial Results industry. pharmaceutical the and company our affecting matters governmental and legal and developments, pipeline late-stage and signifi sults, fi ofour overview an provides section This EXECUTIVE OVERVIEW Review ofOperations refl signifi following ofthe impact the by affected are 2005 and 2006 between comparisons come in- Net percent. of35 share per earnings and income net in increase an representing in2005, $1.81or share, per $1.98 with billion, compared as in2006 share, per $2.45 or billion, $2.66 was income Net initiatives. productivity and cost-containment as well as venture joint ICOS Lilly benefi also results Our 2006. during sales ofour percent 20 approximately investing development, and to research commitment our continued and products, care diabetes information): fi consolidated to the decreased earnings pershare by$.02 (Note 2). accounting principle of$22.0million(after-tax), which adjustment for the cumulative effect ofachangein quarter of2005. TheadoptionofFIN47resulted inan interpretation ofFASB Statement No.143,inthefourth for Conditional Asset Retirement Obligations,an Board (FASB) Interpretation (FIN)47,Accounting which decreased earningspershare by$.14(Note 4). charges of$171.9million(pretax) inthefourth quarter, $.90 inthesecond quarter of2005(Notes 4and13). billion (pretax), whichdecreased earningspershare by litigation matters, primarily related to Zyprexa, of$1.07 million (pretax), or$.42pershare (Notes 4and13). Zyprexa $.31 (Note 4). fourth quarter, whichdecreased earningspershare by other specialcharges of$450.3million(pretax) inthe ected in our fi inour ected ted from continued growth inprofi growth continued from ted ® product liabilitylitigationmatters of$494.9 cant business development, recent product product recent development, business cant nancial results (see Notes 2, 4, and 13 and 4, 2, Notes (see results nancial nancial statements for additional additional for statements nancial cant items that are are that items cant tability of the ofthe tability nancial re- ® and and pharmaceutical products and acquire or collaborate on on collaborate or acquire and products pharmaceutical innovative develop and todiscover tocontinue ability our on extent, toagreat depends, success long-term Our Developments Pipeline Stage Late- and Product Recent and Development, Business • We initiated aPhaseIIIclinical trialto• study On January29,2007,we completed theacquisition • including: developments, pipeline late-stage and launches product recent with ofsuccesses a number achieved We have companies. pharmaceutical or nology biotech- other by indevelopment currently compounds • In November 2006,we received• European Commission • its primaryeffi committee determined thestudy would likely notmeet glioblastoma after anexternal data monitoring study ofenzastaurin for thetreatment ofrecurrent Additionally, we closed theenrollment ofaPhaseIII relapse inpatientswithnon-Hodgkin’s lymphoma. enzastaurin asamaintenance therapy to prevent cash. Theacquisitionbringsthefullvalue ofCialis of ICOSCorporation for approximately $2.3billionin for Evista We submitted aNew DrugApplication (NDA) to theFDA authorization to market Byetta $300 million(notax benefi research anddevelopment (IPR&D)willapproximate one-time charge to earningsfor acquired in-process yet beencompleted; however, we anticipate thatthe product. Theallocation ofthepurchase price hasnot the furtherdevelopment, marketing andselling ofthis us andenables usto realize operational effi thiazolidinedione (TZD). diabetes whohave notachieved adequate control ona to improve blood sugar control inpeople withtype2 Administration (FDA) for Byetta asanadd-ontherapy received approval from theU.S.Food andDrug Inc. (Amylin).Inaddition,inDecember 2006,we 2 diabetes withourpartner,AmylinPharmaceuticals, postmenopausal women athighriskfor breast cancer. cancer inpostmenopausal women withosteoporosis and its secondfullyearonthemarket. reached “blockbuster”statusinonly $1.3 billioninsales2006,Cymbalta sales of$971million.Atmorethan and ICOSgeneratedworldwideCialis addition, thecombinedeffortsofLilly exceeded $1billionin2006.In Cymbalta, Humalog,andEvista— products—Zyprexa, Gemzar, in netsalesduring2006.Fiveofthese Nine productsexceeded$500million ($ millions) $1 BILLIONINNETSALES FIVE PRODUCTSEXCEEDED ® for thereduction inriskofinvasive breast cacy endpoint. t) (Note 3). ® asatreatment for type

Zyprexa $4,364 Gemzar $1,408 Cymbalta $1,316 Humalog $1,300 Evista

ciencies in $1,045 Humulin $925 Alimta $612 Forteo $594 ® Strattera to to $579 FINANCIALS t 11 cit ciaries t as a as t exibility to impose ed by the U.S.Attor- ce for the Eastern District of Pennsylvania that The successful implementation of the MMA may re- In the United States, implementation of the Medicare We haveWe reached agreements with claimants’ at- In March 2004, we were notifi

lieve some state budget pressures but is unlikely to result in reduced pricing pressures at the state level. A majority of states have implemented supplemental rebates and restricted formularies in their Medicaid programs, and these programs are expected to continue in the post-MMA environment. under Moreover, the 2005 federal Defi Reduction Act, states will have greater fl new cost-sharing requirements on Medicaid benefi for non-preferred prescription drugs that will result in prohibits the Secretary of Health and Human Services from(HHS) directly negotiating prescription drug prices with manufacturers, legislation was passed in early 2007 by the U.S. House of Representatives that would require HHS to negotiate directly with pharmaceutical manufac- turers. This legislation will be considered by the U.S. Sen- ate. MMA retains the authority of the Secretary of HHS to prohibit the importation of prescription drugs. Legislation to allow for broad-scale importation has been presented to both the House of Representatives and the Senate. The proposed legislation could remove that authority and al- low for theimportation of products into the U.S. If adopted, such legislation would likely havenegative a effect on our U.S. sales. Current importation language allows for medi- cation to be carried in person from Canada to the U.S. and does not authorize mail or Internet importation. Further, the language disallows certain medications including injectibles. believe We the expanded prescriptiondrug coverage for seniors under the MMA has further allevi- ated the perceived need for a federal importation scheme. notwithstandingHowever, the federal law that continues to prohibit all but the very narrow drug importation de- tailed above, several states have implemented importation schemes for their citizens, usually involving a website that links patients to selected Canadian pharmacies. Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), which provides a prescription drug benefi under the Medicare program, took effect January 2006. 1, In 2006, we experienced a one-time sales benefi result of MMA; in the however, long term there is addi- tional risk of increased pricing pressures. While the MMA Zyprexa until 2011. Zyprexa until 2011. torneys involved in U.S. Zyprexa product liability litigation to settle a total of approximately 28,500 claims against us relating to the medication. Approximately 1,300 claims remain. As a result of our product liability exposures, the substantial majority of which were related to Zyprexa, we recorded net pretax charges billion of $1.07 in the second quarter of 2005 and million $494.9 in the fourth quarter of 2006. ney’s offiney’s it had commenced a civil investigation relating to our U.S. marketing and promotional practices. $378,000

®

$344,000

$311,000 $280,000

) in $258,000 ® 02 03 04 05 06 bromyalgia, a chronic, a chronic, bromyalgia, for the treatment of diabetic the treatment for ™ rmed a district court ruling up- cacy data from an additional Phase III study before before Phase III study an additional from data cacy dent we will maintain our U.S. patent protection on led by an expanding team of Six Sigma black led by an expanding team increased 10 belts. Net sales per employee our net sales percent to $378,000, exceeding growth in 2006 of 7 percent. GROWTH RATE IN NET SALES PER GROWTH RATE RATE AT A FASTER EMPLOYEE INCREASES GROWTH THAN SALES ($ dollars) focus on productivity, In 2006, we continued our will be successful. anxiety of generalized the treatment for Cymbalta on Phase III studies conducting also are We disorder. of fi the treatment for Cymbalta pain disorder. debilitating often retinopathy. The FDA has indicated that it will require that it will require has indicated The FDA retinopathy. effi decided to We the molecule. approving it will consider with and began discussions decision appeal the FDA’s that our appeal be no assurance can There the agency. patients with acute coronary syndrome undergoing undergoing syndrome coronary patients with acute (PCI). intervention coronary percutaneous In January 2007, we licensed from OSI Pharmaceuticals, OSI Pharmaceuticals, from licensed In January 2007, we for (GKA) program activator Inc. (OSI), its glucokinase including the lead 2 diabetes, of type the treatment to license an exclusive received PSN010. We compound the from derived any compounds and market develop we of the agreement, Under the terms GKA program. 3). (Note of $25.0 million (pretax) fee paid an upfront Sankyo, we announced that we completed enrollment enrollment completed that we announced we Sankyo, study a Phase III head-to-head study, in the TRITON (Plavix clopidogrel to prasugrel comparing from the FDA for Arxxant for the FDA from combination with carboplatin. Additionally, the United the United Additionally, with carboplatin. combination Clinical Health and for Institute National Kingdom’s Gemzar coverage has recommended Excellence the use of for National Health Service under the UK’s within a limited with paclitaxel, Gemzar, in combination patients. cancer population of breast for the treatment of recurrent ovarian cancer in cancer ovarian of recurrent the treatment for • • We submitted a supplemental NDA to the FDA for for the FDA to NDA • a supplemental submitted We confi In December 2006, the U.S. Court of Appeals for the Federal Circuit affi holding the validity of our Zyprexa patent. are We very Legal and Governmental Matters • with our partner, Daiichi In January 2007, along • In July 2006, we received FDA approval for Gemzar for approval FDA • received 2006, we In July • In September 2006, we received an approvable letter letter an approvable • received 2006, we In September FINANCIALS loeiepout ...... 5. 123 1. 434 (31) 0 453.4 414.4 315.1 415.6 162.3 213.3 152.8 202.3 ReoPro Fluoxetine products . Humatrope . vsa...... 6. 313 ,4. 1061 1 1,036.1 1,045.3 381.3 664.0 Humulin . Evista te hraetclpout .. 0. 266 1. 365 (22) 396.5 7 $14,645.3 311.0 $15,691.0 206.6 $7,091.8 $8,599.2 104.4 . Total net sales. Other pharmaceutical products . millions) in (Dollars yta 290 290 96 NM (38) 39.6 443.9 219.0 274.6 — 249.5 219.0 25.1 Cialis . . Byetta. . Anti-infectives. erEdd erEdd Percent Ended Year Change December 31, 2005 12 2 1 NM—Not meaningful 94 6 679.7 Ended Year December 31, 2006 1,334.5 4 1,316.4 1,408.1 $4,202.3 157.7 798.3 $4,363.6 1,158.7 $2,257.4 609.8 Humalog . Cymbalta $2,106.2 Gemzar . Zyprexa . Product U.S. The following table summarizesournetsales activity in2006compared with2005: of growth sales by primarily to $15.69 driven billion, 7percent, increased 2006 for sales worldwide Our Sales OPERATING RESULTS—2006 tocontinue. pricing pharmaceutical on pressures expect we aresult, As patients. tonon-Medicaid prices Medicaid discounted toextend attempting are also states benefi certain Actos Xigris Forteo Zyprexa, include program the via available Medications prescription. per fee administrative a$25 for cations medi- ofselect month’s-supply toaone access patients Denrolled Part Medicare eligible certain provides that program assistance patient anew is MedicareAnswers Lilly- program. LillyMedicareAnswers the implemented oto 462 7. 543 8. 53 32 1 389.3 463.2 863.7 594.3 611.8 875.5 178.1 261.7 469.6 416.2 350.1 Strattera 405.9 Forteo . Alimta . . Animal healthproducts . value of our intellectual property 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 consolidated statements ofincome. excluding Puerto Rico, and Europe). Ourshare ofthejoint-venture territory sales, netofexpenses andincome taxes, isreport results only intheterritories in whichwe market Cialis exclusively. The remaining sales relate to thejoint-venture territor Cialis hadworldwide 2006sales of$971.0million, representing anincrease of 30 percent compared with2005. Thesales shown i U.S. sales includesales inPuerto Rico. As it relates to the Medicare program, Lilly has has Lilly program, Medicare tothe relates it As International operations also are generally subject subject generally are also operations International ® 2 ® ...... 221 1. 199 27 169.9 215.8 212.1 3.7 . 291 6. 485 9. (9) 493.0 448.5 169.4 279.1 . . ® 134 88 9. 246 (10) 214.6 192.2 88.8 103.4 . . ® , and Humatrope , and ® 104 7. 204 9. (5) 296.7 280.4 170.0 110.4 . ® ® 379 5. 953 ,0. (8) 1,004.7 925.3 557.4 367.9 . 592 98 7. 521 5 552.1 579.0 69.8 509.2 . 810 8. 1295 ,9. 9 1,197.7 1,299.5 488.5 811.0 . ciaries bearing more of the cost. Several Several cost. ofthe more bearing ciaries ® . 1 Outside U.S. Total Total from 2005 from Total Total U.S. Outside Cymbalta, Forteo, Byetta, Zyprexa, and Alimta and Zyprexa, Byetta, Forteo, Cymbalta, in 2006, driven by higher prices, offset in part by lower lower by inpart offset prices, higher by driven in 2006, 4percent increased U.S. inthe sales Zyprexa nance. mainte- bipolar and mania, bipolar schizophrenia, for Zyprexa. and Alimta, ofCymbalta, growth by driven to$7.09 billion, 4percent, increased U.S. the outside Sales of9percent. prices sales effective net inU.S. increases ofthe part contributed This in 2006. ofMMA implementation the following program swers LillyAn- our under covered previously patients certain by coverage tomedical access increased and Medicare to Medicaid from patients low-income ofcertain a shift benefi sales aone-time experienced we fi inthe wholesalers U.S. our with arrangements our ofrestructuring result a as in2005 occurred had that destocking wholesaler parisons benefi com- growth U.S. Zyprexa. and Forteo, products, care diabetes ofCymbalta, sales increased by primarily driven billion, to$8.60 10 percent, increased U.S. the in Sales growth. sales overall our impact not did rates exchange Foreign 4percent. by sales increased prices selling and 3percent increased volume sales wide Zyprexa, our top-selling product, is a treatment atreatment is product, top-selling our Zyprexa, ted from an estimated $170 million of $170 million estimated an from ted rst quarter of 2005. Additionally, Additionally, of2005. quarter rst ies ofLilly ICOSLLC (NorthAmerica, ed inotherincome—net inour n thetable above represent t resulting from from t resulting ® . World- FINANCIALS 13 - ects ght various ght ted from patients’ cantly benefi cantly ecting a strong demand. . Sales outside the U.S. decreased ® and Tylan ® as a result of the European growth Union’s pro- ® Animal health product sales in the U.S. increased Sales of Forteo, a treatment for severe osteoporosis, Sales of Strattera, a treatment for attention-defi productTotal sales of Cialis, an erectile dysfunction Sales a productGemzar, of approved to fi Sales of Cymbalta, a product for the treatment Sales of Evista, a product for the prevention and treat- Sales of Alimta, a treatment for malignant pleural ect international launches. Worldwide sales exceeded were $430.2 million for 2006. We report as revenue our as revenue report We 2006. million for $430.2 were and our sales margin gross of Byetta’s share 50 percent Amylin. to devices pen delivery of Byetta

access to medical coverage through the Medicare Part D program and from decreased utilization of our U.S. patient assistance program, LillyAnswers. Sales outside the U.S. increased 43 percent, refl mesothelioma and second-line treatment for non-small- cell lung cancer (NSCLC), increased percent 18 and 57 percent in the U.S. and outside the U.S., respectively, due primarily to increased demand. increased 57 percent in the U.S. In addition to increased demand, U.S. sales signifi of major depressive disorder and diabetic peripheral neuropathic pain, increased 82 percent in the U.S., due to strong demand. Sales of Cymbalta outside the U.S. refl billion$1 in 2006, the product’s second full year on the market. motion use ban on the product, effective January 2006. 1, net. All sales of Cialis subsequent to the ICOS acquisition in 2007 will be included in our revenue. treatment, increased 38 percent in the U.S. and 24 percent outside the U.S. Worldwide Cialis sales growth refl the impact of market share gains, market growth, and price increases during 2006. Cialis sales in our territories are reported in net sales, while our 50 percent share of the joint-venture net income is reported in other income— ment of osteoporosis, increased 2 percent in the U.S. due 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.

10 percent,10 due primarily to increased demand led by Rumensin cit hyperactivity disorder in children, adolescents, and adults, increased 2 percent in the U.S. due to higher prices as well as the reductions in U.S. wholesaler inven- tory levels in 2005, offset by a decline in demand. Sales outside the U.S. increased percent 31 due primarily to in- creased demand in addition to a modest favorable impact of foreign exchange rates, offset partially by lower prices. cancers, increased 4 percent in the U.S., due primarily to higher prices as well as the reductions in U.S. wholesaler inventory levels in 2005. Gemzar sales increased 7 percent outside the U.S., driven by strong volume. 5 percent, driven primarily by the decrease in the sales of Surmax

+32% $149 Alimta

+4% $161 Zyprexa

NM $179 Byetta

+53% $205 Forteo

$637 +94% Cymbalta rst in a new class of Diabetes care products, composed primarily of Zyprexa, and Alimta—generated $7.1 billion Zyprexa, and Alimta—generated increase of in net sales during 2006, an global sales $1.3 billion over 2005. In addition, partner ICOS, of Cialis, promoted with our million (a increased $224 million to $971 30 percent increase from 2005). KEY CONTRIBUTORS TO 2006 SALES GROWTH TO 2006 SALES KEY CONTRIBUTORS represent growth in product ($ in millions from represent changes sales; percentages 2005) Forteo, Byetta, Five products—Cymbalta, Actos will decline each year through September 2009. 2009. September through will decline each year Actos Sales outside the U.S. continues. Our arrangement to due primarily 23 percent, outside the U.S. increased impact of a favorable in addition to volume increased prices. offset in part by lower rates, exchange foreign North America (Takeda), decreased 22 percent in 22 percent decreased (Takeda), North America Chemical by Takeda is manufactured 2006. Actos Our Ltd., and sold in the U.S. by Takeda. Industries, in expired Actos to rights with respect U.S. marketing receiving will continue we 2006; however, September from our revenues As a result, Takeda. from royalties primarily to decreased volume, offset partially by offset partially volume, decreased to primarily Outside the U.S., Humulin selling prices. increased in demand decreases due to 6 percent decreased sales and selling prices. a copromotion from revenues service represent Pharmaceuticals with Takeda in the U.S. agreement primarily to higher prices and increased 7 percent 7 percent and increased higher prices to primarily volume, increased to outside the U.S., due primarily prices. lower by offset partially to $1.73 billion.to $1.73 Diabetes care revenues outside the U.S. increased 2 percent,billion. to $1.23 Results from our primary diabetes care products are as follows: that we market with Amylin, had aggregate worldwide revenues billion of $2.96 in 2006, an increase of 6 percent. Diabetes care revenues in the U.S. increased 8 percent, human insulin; Actos, an oral agent for the treatment of type 2 diabetes; and Byetta, the fi medicines known as incretin mimetics for type 2 diabetes Humalog, our insulin analog; Humulin, a biosynthetic • launched in the U.S. in June 2005, of Byetta, Sales • Actos revenues in the U.S., the majority of which in the U.S., the majority of which • revenues Actos • Humulin sales in the U.S. decreased 10 percent due • 10 percent U.S. decreased in the Humulin sales • Humalog sales increased 10 percent in the U.S., due 10 percent • increased sales Humalog demand, offset in part by declining prices. demand. The increase net in effective selling prices was partially due to the transition of certain low-income patients from Medicaid to Medicare. Sales outside the U.S. increased 4 percent, driven primarily by increased FINANCIALS 14 — (0.02) — — See notes to consolidated fi . Netincome (0.02) Cumulative effect ofachangeinaccounting . principle. . principle. Income before cumulative effect ofachangeinaccounting — — Earnings pershare—diluted (Note 11) . Netincome (22.0) Cumulative effect ofachangeinaccounting . principle. . principle. Income before cumulative effect ofachangeinaccounting Earnings pershare—basic (Note 11) — Net income . . . netoftax (Note 2) 2004 Cumulative effect ofachangeinaccounting principle, principle . 392.2 Income before cumulative effect of achangeinaccounting 2005 Income taxes . . (Note 10). — ofachangeinaccounting principle . Income before income taxes andcumulative effect 2006 — Other income—net charges . (Note 4). 31 December Ended Year Asset impairments,restructuring, andotherspecial Acquired in-process research . anddevelopment (Note 3). Marketing andadministrative . . Research anddevelopment Cost ofsales . . Net sales data) per-share except millions, in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Consolidated StatementsofIncome ...... nancial statements. $15,691.0 $ 2,662.7 12,273.0 2,662.7 3,418.0 4,889.8 3,129.3 3,546.5 (237.8) 755.3 945.2 $2.45 $2.45 $2.45 $2.45 2,001.6 1,810.1 2,001.6 2,941.9 2,717.5 4,284.2 4,497.0 2,691.1 3,025.5 3,223.9 3,474.2 11,927.8 10,916.0 11,927.8 $13,857.9 $14,645.3 1996 $1,810.1 $1,979.6 715.9 1,131.8 603.0 1,245.3 (314.2) (278.4) (314.2) $1.81 $1.66 $1.81 $1.66 $1.83 $1.67 $1.82 $1.67 $1.84 FINANCIALS 15 ected in our tability of the the of tability cant items for 2005 ve new products as well nancial statements for ad- ted from an increase in other We incurredWe tax expense of $755.3 million in 2006, to $238.1 million. This increase is a result of higher is a result million. This increase $238.1 to due to interest capitalized and less rates interest manufacturing certain 2005 of in late the completion facilities. rates. interest higher short-term to $261.9 million, due The increase $11.1 million in 2005. to 2006 as compared selling decreased and Cialis sales increased was due to expenses. and marketing of less as a result $117.7 million, primarily million to products of legacy the outlicensing to related income in development. compounds and partnered

less than our effective tax rate, as the tax expense was calculated based upon existing tax laws in the countries in which we reasonablyexpect to deduct the charge. See to the consolidatedNote 10 fi information.ditional • Interest expense for 2006 increased $132.9 million, $132.9 2006 increased for • expense Interest $49.8 million, to 2006 increased for • income Interest was $96.3 million in income • ICOS joint-venture The Lilly $78.5 • decreased items income Net other miscellaneous resulting in an effective tax rate percent, of 22.1 com- pared with 26.3 percent for 2005. The effective tax rates for 2006 and 2005 were affected primarily by the prod- uct liability charges million of $494.9 billion, and $1.07 respectively. The tax expense of these charges was income—net, due primarily to increased profi Lilly ICOS joint venture, and a decrease in the tax rate in 2005. billion, Net per income share, was or in $1.81 $1.98 2005 as compared billion, with per $1.81 share, or $1.66 in 2004, representing an increase in net income and earn- ings per share of 9 percent. Certain items, refl operating results for 2005 and 2004, should be considered in comparing the two years. The signifi are summarized in the Executive Overview. The 2004 OPERATING RESULTS—2005 OPERATING Financial Results achievedWe worldwide sales growth of 6 percent, due in part to the launch in 2004 of fi as six new indications or formulations for expanded use of new and existing products markets. in key In addition, we launched one new product in the U.S. and several new products, new indications, or new formulations in key markets in 2005. continued We our substantial invest- ments in our manufacturing operations and research and development activities, resulting in cost of products sold and research and development costs increasing at rates greater than sales. Despite product launch expenditures, our cost-containment and productivity measures contrib- uted to marketing and administrative expenses increasing at a rate less than sales. During 2005, we began to ex- pense stock options, which had the effect of increasing our research and development and marketing and administra- tive expenses. also We benefi

77.4% 19.9% $3,129

76.3% 20.7% 20.7% $3,026 $3,026

76.7% 19.4% 19.4% $2,691 $2,691

78.7% 18.7% 18.7% $2,350 $2,350

80.4% 19.4% 19.4% $2,149 $2,149 02 03 04 05 06 02 03 02 03 04 05 06

Other income—net decreased million, $76.4 to Operating expenses (the aggregate of research and increased production volume, partially offset by higher increased production volume, expect our 2007 gross manufacturing expenses. We sales to improve slightly margin as a percent of net from 2006. GROSS MARGIN IMPROVES IN 2006 GROSS MARGIN of total net sales) (as a percent by as a percent of net sales increased Gross margin increase points to 77.4 percent. This 1.1 percentage product prices and was primarily due to increased percent, to $3.1 billion, in 2006 due to increases in best-in-class and first-in-class medicines to provide answers for the unmet medical needs of our customers. Research and development expenditures increased by 3 discovery research and clinical trial costs. We continued to be a leader in our industry peer group by investing approximately 20 percent of our sales into research and development during 2006. This significant financial investment in our pipeline of products supports our commitment to develop RESEARCH AND DEVELOPMENT INVESTMENT INCREASING ($ millions, percent of net sales) and expense items. $237.8 million,$237.8 and consists of interest expense, inter- est income, the after-tax operating results of the Lilly ICOS joint venture, and all other miscellaneous income attributable to increased marketing expenses in support of key products, primarily Cymbalta and the diabetes care franchise, increase an litigation-related and in costs. our sales into research and development during 2006. Marketing and administrative expenses increased 9 per- cent in 2006, to $4.89 billion. This increase was largely marily due to increases in discovery research and clinical trial costs. continued We to be a leader in our industry peer group by investing approximately 20 percent of development and marketing and administrative expenses) increased 7 percent in 2006. Investment in research and development increased 3 percent, billion, to $3.13 pri- and increased production volume, partially offset by higher manufacturing expenses. Gross Margin, Costs, and Expenses The 2006 gross margin increased percent to 77.4 of sales compared with percent 76.3 for 2005. This in- crease was primarily due to increased product prices FINANCIALS (Dollars in millions) in (Dollars irs 189 57 1. 218 6 (18) 63 201.8 (4) 362.8 (7) Percent 238.6 (19) 430.3 Ended Year NM 478.0 9 Change 214.6 559.0 (17) NM December 31,16 2004 142.6 296.7 8 452.9 389.3 666.7 93.9 1 414.4 95.7 443.9 2 2 798.7 176.9 1 453.4 NM—Not meaningful 9 124.6 463.2 997.7 229.9 493.0 10 1,012.7 552.1 310.6 118.9 679.7 Ended Year 119.8 1,101.6 December 31,Symbyax 2005 204.3 264.7 166.9 Cialis 1,214.4 863.7 184.5 Xigris 137.3 . 1,004.7 53.4 (5) 133.3 . ReoPro. 43.5 1,036.1 Forteo . 249.1 1,197.7 296.3 Humatrope . 493.4 $4,419.8 594.0 1,334.5 . 355.7 Anti-infectives. 383.2 498.7 Fluoxetine products . 636.2 Alimta 458.1 . . Actos 370.3 . 748.4 $4,202.3 410.7 Strattera . . 652.9 . Cymbalta 739.6 Animal healthproducts . $2,167.4 . Humulin. 586.1 . Evista Humalog $2,034.9 . Gemzar . Zyprexa . Product U.S. 2004: with compared in2005 activity sales net our summarizes table following The • We recognized• asset impairmentcharges, streamlined In 2005,we beganto expense stock optionsin • information): fi 10 consolidated tothe 1, 7, 4, Notes 3, (see and follows as summarized are items te hraetclpout .. 15 9. 322 8. (21) 485.6 382.2 290.7 91.5 Other pharmaceutical products . oa e ae...... 7781 6872 1,4. $3879 6 $13,857.9 $14,645.3 $6,847.2 $7,798.1 . Total net sales. consolidated statements ofincome. excluding Puerto Rico, and Europe). Ourshare ofthejoint-venture territory sales, netofexpenses andincome taxes, isreport results only intheterritories in whichwe market Cialis exclusively. The remaining sales relate to thejoint-venture territor Cialis hadworldwide 2005sales of$746.6million,representing anincrease of 35 percent compared with2004. Thesales shown i U.S. sales includesales inPuerto Rico. marketing andpromotional practices, resulting in resolution ofthegovernment investigation ofEvista our infrastructure, andprovided for theanticipated earnings pershare by$.24pershare (Notes 1and7). lower by$266.4 million,whichwould have decreased options in2004,our2004netincome would have been accordance withSFAS 123(R).Hadwe expensed stock share by$.08and$.30,respectively (Note 4). fourth quarter of2004, whichdecreased earningsper quarter of2004and$494.1million(pretax) inthe charges of$108.9million(pretax) inthesecond development asapotential treatment for insomnia, related to ouracquisitionofaPhaseIcompound under and $29.9million(pretax) inthefourth quarter of2004 acquisition ofAppliedMolecular Evolution, Inc. (AME), benefi and development (IPR&D)of$362.3million(notax We incurred charges for acquired in-process research 2 23 6. 199 3. 30 130.6 169.9 167.6 2.3 . t) inthefi ® 5. 13 39 02 (23) 70.2 53.9 1.3 52.6 . . rst quarter of2004related to the nancial statements for additional nancial statements 1 Outside U.S. Total Total from 2004 from Total Total U.S. Outside 2005 was also affected by decreased U.S. demand for for demand U.S. decreased by affected also was 2005 in growth Sales $170 million. approximately by sales destocking and decreased demand, sales in the U.S. U.S. inthe sales demand, decreased and destocking wholesaler this Despite Prozac. and Strattera, Zyprexa, Strattera, Prozac Strattera, (primarily products certain for levels inventory saler inwhole- occurred reductions 2005, inearly salers our U.S. with whole- our arrangements restructuring of aresult Gemzar. and As Forteo, Alimta, Cymbalta, of growth sales by primarily driven to $14.65 billion, 6percent, increased 2005 for sales worldwide Our Sales We recognized• tax expenses of$465.0millioninthe that quarter (Note 10). tax expense decreased earningspershare by$.43in of theAmerican JobsCreation This Actof2004(AJCA). reinvested outsidetheU.S.,asaresult ofthepassage repatriation in2005of$8.00billionourearnings fourth quarter of2004 associated withtheanticipated (Note 3). quarter of2004and$.02inthefourth quarter of2004 which decreased earningspershare by$.33inthefi ® , and Gemzar) that reduced our our reduced that Gemzar) , and ies ofLilly ICOSLLC (NorthAmerica, ed inotherincome—net inour n thetable above represent rst rst FINANCIALS 17 ted rst half of the . ® ecting launches launches ecting ts expenses. We ts expenses. This comparison also benefi rst half of 2005 related to our revised arrange- forat 2005, if 2004 had been restated as if stock Other income—net increased $35.8 million in 2005, Operating expenses increased 8 percent in 2005. Alimta was launched in the U.S. in February 2004 Forteo increased 34 percent in the U.S.in 2005, Cialis worldwide sales of $746.6 million in 2005 re- Animal health product sales in the U.S. increased ected an increase of 35 percent compared to 2004, and options had been expensed. been had options to $314.2 million, due to the following: from a charitable contribution to the Lilly Foundation during the fourth quarter of 2004. Research and devel- opment expenses would have increased by 8 percent, and marketing and administrative expenses would have fl been Investment in research and development increased 12 percent, to $3.03 billion, in 2005, due to the adoption of stock option expensing in 2005, decreased reimburse- ments from collaboration partners, and increased incentive compensation and benefi continued to be a leader in our industry peer group by investing approximately 21 percent of our sales into research and development during 2005. Marketing and administrative expenses increased 5 percent in 2005, to $4.50 billion, due to the adoption of stock option ex- pensing in 2005, and increased incentive compensation and benefi Gross Margin, Costs, and Expenses and Costs, Margin, Gross The 2005 gross margin decreased percent to 76.3 of sales compared percent with for 76.7 2004. The de- crease was primarily due to higher manufacturing expenses, partially offset by favorable productmix and lower factory inventory losses. and a decline in underlying demand. Sales outside the U.S. were $53.4 million in 2005, compared with million$10.3 in 2004,primarily refl in Australia, Canada, Germany, Mexico, and Spain. for the treatment of malignant pleural mesothelioma and in Augustfor second-line treatment of non-small- celllung cancer (NSCLC). Alimta waslaunched in several European countries in the second half of 2004 and throughout 2005. Alimta generated sales of $463.2 million in 2005. driven by strong growth in underlying demand. Sales growth was offset, in part, by wholesaler destocking in the fi ments with U.S. wholesalers. fl million sales of comprises in our territories, $169.9 and million$576.7 of sales in the joint-venture territories. Within the joint-venture territories, U.S. sales of Cialis were $272.9 million for 2005, an increase of 32 percent, despite wholesaler destocking in the fi year as a result our of restructured arrangements with wholesalers. U.S. our 9 percent, while sales outside the U.S. increased 7 per- cent, led by Rumensin and Paylean rst quarter of 2005. Cymbalta generated Sales of Evista decreased 2 percent in the U.S. due Cymbalta was launched in the U.S. in late August Sales of Strattera declined 24percent in the U.S. Sales of Gemzar increased 4 percent in the U.S. Zyprexa sales in the U.S. decreased percent 16 in Diabetes care products had aggregate worldwide ected a volume increase of 3 percent, with global to declines in U.S. underlying demand resulting from continued competitive pressures and to reductions in wholesaler inventory levels. This decline was partially offset by price increases. Outside the U.S., sales of Evista increased percent, driven 11 by volume growth in several markets and the early 2004 launch of the prod- uct in Japan. 2004 for the treatment of major depressive disorder and in September 2004 for the treatment of diabetic pe- ripheral neuropathic pain. Cymbalta launches began in Europe for the treatment of major depressive disorder during the fi million in sales$679.7 in 2005. in 2005 due to wholesaler destocking resulting from restructured arrangements with our U.S. wholesalers 2005, resulting from a decline in underlying demand due to continuing competitive pressures. Sales outside the U.S. in 2005 increased 9 percent, driven by volume growth in a number of major markets and the favor- able impact of exchange rates. Excluding the impact of exchange rates, sales of Zyprexa outside the U.S. increased by 6 percent. revenues of $2.80 billion in 2005, an increase 7 of percent. Diabetes care revenues in the U.S. increased billion,7 percent, to $1.59 primarily driven by higher prices, offset partially by a decline in underlying de- mand due to continued competitive pressures in the insulins market and reductions in wholesaler inven- tory levels of insulins. Diabetes care revenues outside the U.S. increased 8 percent, billion. to $1.20 Humalog sales increased 8 percent in the U.S. percent and 10 outside the U.S. Humulin sales in the U.S. decreased 3 percent, while Humulin sales outside the U.S. increased 3 percent. Actos revenues increased percent 9 in 2005. Sales of Byetta were million $74.6 following its June 2005 launch. Our reported net sales of Byetta totaled $39.6 million in 2005. increased 2 percent, billion, to $7.80 driven primarily by increased sales Cymbalta of and Alimta. Sales outside the U.S. increased percent, to $6.85 11 billion, driven by growth of Zyprexa, Alimta, Worldwide and Gemzar. sales refl selling prices contributing 1 percent and an increase due to favorable changes in exchange rates contributing 1 percent. (Numbers do not add due to rounding.) in 2005 and were negatively affected by reductions in wholesaler inventory levels as a result of our restruc- tured arrangements with our U.S. wholesalers. Gemzar sales increased percent 15 outside the U.S., driven by strong volume growth in a number of cancer indications. FINANCIALS 18 of$1.08 billion. ditures expen- of$1.74 capital paid and billion, dividends billion, of$2.78 debt oflong-term repayments by offset than fl cash Strong 31, 2005. atDecember billion $5.04 with compared billion $3.89 totaled investments short-term and equivalents, cash cash, 31, 2006, ofDecember As FINANCIAL CONDITION fi dated 10 Note consoli- tothe See purposes. tax for deductible not is which acquisition, AME tothe related IPR&D acquired for charge the and AJCA tothe pursuant U.S. the outside reinvested ofearnings billion of$8.00 tion repatria- expected tothe related provision tax the by affected was 2004 for rate tax effective The charge. the todeduct expect reasonably we inwhich countries inthe laws tax existing upon based calculated was benefi tax the as rate, tax effective our than less was benefi tax The of$1.07 billion. charge liability product the by affected was 2005 for rate tax effective The 2004. for percent 38.5 with compared Net othermiscellaneous income items decreased• Our netincome from theLilly• ICOSjointventure was Interest income• for 2005increased $55.4million,to • the long-term growth of our diabetes care products. care diabetes ofour growth long-term the in invest and systems, quality and productivity enhance to facilities manufacturing our toupgrade continue tives, initia- development and research and biotech inour invest we while levels 2006 as same the approximately remain to expenditures capital near-term We expect projects. ofkey completion and spending ofcapital management tothe primarily due in 2005, than less million $220.3 were of 2006, effective for the fi the for effective of 2006, quarter fourth In the 2005. from of5percent increase respectively. Aa3, and atAA remain Moody’s and &Poor’s Standard from ratings debt current Our refi and stock ofICOS acquisition tofi of debt billion $2.5 approximately issued we 2007, Inearly 2006. refl lion, ow from operations in 2006 of $3.98 billion was more more was billion of$3.98 in2006 operations from ow of less income related to theoutlicense oflegacy $56.1 millionto $196.2million,primarily asaresult profi of $79.0millionin2004.Thejointventure became $11.1 millionfor 2005,compared withanetloss and interest rates. $212.1 million,dueto increased investment balances products andpartnered products indevelopment. $105.2 million,primarily dueto increased interest rates. Interest expense for 2005increased $53.6million,to The effective tax rate for 2005 was 26.3 percent, percent, 26.3 was 2005 for rate tax effective The Dividends of $1.60 per share were paid in 2006, an an in2006, paid were of$1.60 share per Dividends bil- $3.71 was 31, 2006 Total ofDecember as debt 2006 during of$1.08 billion expenditures Capital table for thefi nancial statements for additional information. nancial statements ecting a net repayment of $2.78 billion during during billion of$2.78 repayment anet ecting nance our acquisition of ICOS, including the the including ofICOS, acquisition our nance rst timeinthethird quarter of2005. rst-quarter dividend in 2007, in2007, dividend rst-quarter nancing debt. of ICOS t of this charge charge t ofthis t ments and the 39th consecutive year in which dividends dividends inwhich year consecutive 39th the and ments pay- dividend made we inwhich year consecutive 122nd the was 2006 year of$1.70 The share. per 2007 for rate annual indicated inan resulting increase), (a 6percent share per to$.425 increased was dividend quarterly the operating results and cash generated from operations. operations. from generated cash and results operating our affect may section, 2007 for Expectations Financial inthe discussed those including uncertainties, and risks Various of2007. end the by U.S. the outside debt of $1 billion approximately torepay cash available use to plan we acquisition, ICOS the for issued debt term long- the Excluding program. paper commercial our backs ofwhich $1.20 billion facilities, credit bank ted commit- ofunused $1.21 have billion We currently sary. neces- if borrowings, ofshort-term maturities to fund adequate be should program paper commercial existing our through available amounts that We believe 2007. in taxes and dividends, litigation, liability product with associated costs expenditures, capital service, debt ing suffi be will equivalents, cash and cash available with along have been increased. to deliveringoutstandingshareholdervalue. This recordclearlyreflectsourcontinuedcommitment share, a6percentincreaseoverfirst-quarter2006. declaring afirst-quarter2007dividendof$.425per dividends. Wecontinuedthistraditioninto2007by This constitutesthe39thconsecutiveincreaseinannual Dividends paidduring2006increasedto$1.60pershare. (dollars) DIVIDENDS PAIDPERSHARECONTINUETOGROW our diabetescareproducts. quality systems,andinvestinthelong-termgrowthof manufacturing facilitiestoenhanceproductivityand development initiatives,continuetoupgradeour while weinvestinourbiotechandresearch same as2006levelsbymanagingourcapitalspending capital expenditurestoremainapproximatelythe from apeakof$1.9billionin2004.Weexpect2007 Our capitalexpenditureshavecontinuedtodecline Capital expendituresdecreasedto$1.1billionin2006. ($ millions) REQUIREMENTS CONTRIBUTETOCASHFLOW DECREASING CAPITALEXPENDITURE cient to fund our normal operating needs, includ- needs, operating normal our tofund cient We believe that cash generated from operations, operations, from generated cash that We believe 0 0 0 0 06 05 04 03 02 0 0 0 0 06 05 04 03 02 $1.24 $1,130.9 $1.34 $1,706.6 $1.42 $1,898.1 $1.52 $1,298.1 $1.60 $1,077.8 FINANCIALS 19 (2,635.0) (106.3) (420.6) 10,795.8 $24,580.8 5,763.5 $24,580.8 781.3 $ 734.7 104.1 695.1 8,072.6 756.4 2,156.3 7,912.5 1,878.0 $ 3,006.7 436.5 491.2 1,838.9 448.4 2,419.6 362.0 5,716.3 2,313.3 884.9 10,027.2 826.1 5,872.5 10,791.9 2,031.0 548.8 3,323.8 706.9 1,296.6 787.9 10,896.0 62.2 519.2 319.5 101.4 707.9 607.7 781.7 789.4 745.7 395.8 508.3 640.6 463.3 (100.7) 9,694.4 8,152.3 1,091.5 1,001.9 4,108.7 3,571.9 2,015.3 5,889.2 3,494.4 1,856.8 1,586.9 5,085.5 2,270.3 2,298.6 (1,388.7) (2,635.0) 11,082.1 10,926.7 10,980.7 $ 219.4 $ 3,109.3 $21,955.4 $21,955.4

. . December 31 31 December 2006 2005 ...... nancial statements. nancial t (Note 12) ...... 12) t (Note (Notes 7 and 9) t trust ...... t trust Retained earnings ...... Retained earnings benefi Employee Additional paid-in ...... capital Other noncurrent...... liabilities 8) (Note Commitments and contingencies 13) (Note Equity Shareholders’ Common stock—no par value 3,200,000,000 shares: Authorized Issued shares: 1,132,578,231 (2006) (2005). and 1,131,070,629 ...... Sundry 8). (Note ...... Deferred income taxes 10) (Note Property and Equipment, net Investments (Note 5) ...... Investments 5) (Note Prepaid expenses...... current Total assets AssetsOther Prepaid pension 12). (Note ...... Equity Shareholders’ and Liabilities Current Liabilities Short-term borrowings and current maturities of long-term debt 6). (Note . . . . . current Total liabilities ...... Other Liabilities ...... Long-term debt 6) (Note benefi retirement Accrued Deferred income taxes (Note 10) ...... Deferred income taxes 10) (Note See notes to consolidated fi

Short-term investments ...... Accounts receivable, net allowances of of $82.5 (2006) and $66.3 ...... (2005) Accountspayable ...... Employee compensation...... Income taxes payable 10) (Note Assets Assets Current Cash and cash equivalents...... Consolidated Balance Sheets Balance Consolidated ELI LILLY AND COMPANY AND SUBSIDIARIES millions) in (Dollars Other receivables...... Inventories Sales rebates and discounts...... Dividends...... payable Other current liabilities...... 8) (Note

Deferred costs—ESOP ...... Accumulated other comprehensive loss ...... 14) (Note shares Less cost of common stock in treasury 2006—909,573 2005—933,584 ...... shares FINANCIALS 20 fi toconsolidated notes See 2004 381.7 2005 . decrease. Inventories—(increase) — . 2006 decrease Receivables—(increase) and liabilities assets in Changes operating 31 December Ended Year — Other, net . oftax net . charges, special other and restructuring, impairments, Asset oftax net . development, and research in-process Acquired . expense compensation Stock-based . . taxes indeferred Change . amortization and Depreciation From Activities Operating To Flows Income Net Cash To Reconcile Adjustments income Net . . Flows FromCash Activities Operating millions) in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Consolidated StatementsofCashFlows . equipment and ofproperty Disposals Activities Operating by Provided Cash Net . liabilities—decrease other and payable Accounts . assets—increase Other rcesfo ae n auiiso ocretivsmns . investments ofnoncurrent maturities and sales from Proceeds . . investments inshort-term changes Net ucae fpoet n qimn ...... equipment and . . ofproperty Purchases Activities Investing From Flows Cash e fcs curd — (71.7) (29.9) — — paid . Dividends — Activities Financing From Flows Cash Activities Investing for) (Used by Provided Cash Net — Other, . . net acquired ofcash net . Evolution, Molecular ofApplied acquisition for paid Cash development and research . ofin-process Purchases investments . ofnoncurrent Purchases rcesfo suneo ogtr et 3000 1,000.0 Year of End at Equivalents Cash and Cash . ofyear atbeginning equivalents cash and Cash . 3,000.0 equivalents cash and incash (decrease) increase Net cash on changes rate ofexchange . Effect — Other, . net . debt oflong-term Repayments debt oflong-term . issuance from Proceeds . . borrowings. inshort-term changes Net plans stock under stock ofcommon . Issuances . . stock ofcommon Purchases Net Cash Provided by (Used for) Financing Activities Financing for) (Used by Provided Cash Net nancial nancial statements. $ ...... $ 2,662.7 (4,578.8) (2,781.5) (1,736.3) (1,313.2) (1,077.8) 3,109.3 3,006.7 3,975.9 4,771.2 1,507.7 1,247.5 (795.3) (936.0) (122.1) (196.8) 243.9 346.8 608.4 102.6 801.8 797.4 359.3 179.0 (43.0) (60.2) 65.2 97.1 59.6 (8.4) 9.9 (175.8) 220.6 (286.4) (286.4) (240.8) 1,913.6 2,869.5 39.8 (13.4) $ 1,979.6 $ 1,810.1 545.1 14,849.3 5,365.3 2,756.3 5,365.3 (353.6) (353.6) (468.2) 62.7 (1,119.0) (2,358.6) 2,609.0 (2,358.6) 117.9 105.9 (347.5) 772.4 597.5 726.4 435 53.0 403.5 ,0. $5,365.3 $3,006.7 3807 4,160.5 3,860.7 11.1 20.5 11.1 1187 374.3 1,128.7 (,1.) (684.8) (2,215.9) (7.) — (377.9) (269.4) (765.2) (,6.) (173.4) (1,463.4) (,0.) (839.2) (1,004.7) (30.0) (30.0) 171.5 (,9.) (1,898.1) (1,298.1) (,8.) 203.7 (1,880.5) (1,947.1) (1,291.0) (1,947.1) (,5.) (1,539.8) (1,654.9) (,8.) 1,478.2 (1,988.7) 72.1 (111.6) 72.1 (1,183.1) (1,183.1) (11,967.7) FINANCIALS 21 ows, ows, nancial condition, condition, nancial nancial instruments outstanding — — (25.9) 0.3 (87.8) (87.8) (4.4) (702.6) 357.7 (639.2) 378.7 (533.4) 441.7 63.4 63.4 21.0 (81.7) (53.7) (81.7) $1,340.4 $2,188.8 $1,979.6$1,810.1 uctuations on the existing assets, (3.2) (18.8) 143.3 734.4 542.4 (968.1) (1,702.5) (2,366.2) $1,694.6 $2,662.7 nancial condition, revenues or expenses, ect the impact of the exchange gains or losses from the beginning of the period. use We forward con- tracts and purchased options to manage our foreign cur- rency exposures. Our policy outlines the minimum and maximum hedge coverage of such exposures. Gains and losses on these derivative positions offset, in part, the impact of currency fl liabilities, commitments, and anticipated revenues. Con- sidering derivative our fi at December 2006 31, and 2005, a hypothetical per- 10 cent change in exchange rates (primarily against the U.S. dollar) as of December 2006 31, and 2005, 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. changes in fi results of operations, liquidity,capital expenditures, or capital resources. acquire We assets still in develop- ment and enter into research and development arrange- ments with third parties that often require milestone 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 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 xed uctuated uctuations ow hedges...... nancial statements. nancial uctuations can vary the costs ows, or fair values of interest rate risk- uctuations in interest rates and cur- oating rate debt positions and may enter into Our foreign currency risk exposure results from In the normal course of business, our operations Our primary interest rate risk exposure results nancing, investing, and operating. address We a nancial instruments. The objective of controlling these uctuating currency exchange rates, primarily the U.S. and fl interest rate derivatives to help maintain that balance. Based on our overall interest rateexposure at Decem- 2006ber 31, and 2005, 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 2006 31, and 2005, respectively, would have no material impact on earnings, cash fl sensitive instruments over a one-year period. are exposed to fl rency values. These fl of fi 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 Comprehensive income...... See notes to consolidated fi Other comprehensive (loss) income Adoption of SFAS and 14) (Notes 158 12 ...... Foreign currency translation ...... gains (losses) Net unrealized gains (losses) on securities...... Minimum pension liabilityadjustment ...... Net income ...... Consolidated Statements of Comprehensive Income of Comprehensive Statements Consolidated ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions) Year Ended December 31 2006 2005 2004 Effective portionof cash fl Other comprehensive income (loss) before...... income taxes Provision for income taxes related to other comprehensive ...... income (loss) items Other ...... comprehensive income (loss)14) (Note dollar against the euro and the Japanese yen. face We transactional currency exposures that arise when we enter into transactions, generally on an intercompany basis, denominated in currencies other than the local currency. also We face currency exposure that arises from translating the results of our global operations to the U.S. dollar at exchange rates that have fl fl FINANCIALS oa $,1. $,1. $,5. $ 7. $3,975.4 $572.9 $2,152.4 $2,511.1 $9,211.8 . Total refl Other long-term liabilities 22 modifi or terminated, pleted, com- are contracts existing and initiated are contracts new as time over materially tochange expected be can obligations ofthese amount The 31, 2006. December of as current is table obligations contractual The obligations. ofcontractual table inthe included not are they payments, ofthese nature contingent ofthe Because obtained. is marketing for approval regulatory that event in the product pharmaceutical ofthe sales of the apercentage upon based payments royalty tomake have may we arrangement, the by required If agency). tory regula- appropriate the by marketing for product of the approval (e.g., product pharmaceutical ofthe cycle life 4 3 2 1 interest payments Long-term debt,including Total Our current noncancelable contractual obligationsthatwillrequire future cash paymentsare asfollows (in millions): 1 Year Years Years 5 Years likely to generate cash fl cash togenerate 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 perspective, abusiness from that, note We also objectives. testing cal clini- achieves successfully compound the if development tocease unlikely however, are we payments; contingent the making toavoid us allow would which product, of the development terminate tounilaterally discretion the us give often arrangements these Inaddition, high. very is indevelopment products for rate occur, failure will the as this that unlikely it makes development in pharmaceutical risk inherent The period. one inany ofoperations results tothe material be could toexpense charge aggregate the period, reporting same inthe reached tobe happen would arrangements these by covered products multiple for However, milestones if period. reporting one in any Other prtn ess 422 22 3. 7. 107.2 72.5 76.8 24.2 136.0 36.1 92.2 19.8 412.2 152.6 Purchase obligations . Operating leases. Capital lease obligations . Thiscategory comprises primarily minimumpensionfundingrequirements. We have includedourlong-term liabilitiesconsisting primarily ofournonqualifi We have includedthefollowing: Ourlong-term debtobligationsincludebothourexpected principalandinterest obligationsandourinterest rate swaps.We u liabilities. curve atDecember 31,2006to compute theamountofcontractual obligationfor interest onthevariable rate debtinstrumen • Purchase obligations,consisting primarily• ofallopenpurchase orders atoursignifi • Contractual paymentobligationswitheachofoursignifi • obligations. purchase orders maybecancelable; however, for purposesofthisdisclosure, we have notdistinguished between cancelable andn Individually, these arrangements are not material material not are arrangements these Individually, ected onourbalance sheet 4 ...... 71 71 — — — — 67.1 67.1 . 1 ...... 5681 7. $,0. $ 6. $3,295.2 265.4 $ $1,703.5 374.0 $ $5,638.1 . 2 2150 ,7. 109 83 16.4 68.3 140.9 1,879.4 2,105.0 . ows from sales ofproducts. sales from ows ed. 3 ... 3. 7. 159 3. 484.1 138.2 135.9 78.6 836.8 . cant vendors, whichare noncancelable andare notcontingent. Less Than 1–3 3–5 More Than Than More 3–5 1–3 Period by Due Payments Than Less ed supplemental pensionfundingrequirements anddeferred compensation the related sales are recorded. are sales related the period same inthe established are rebates and counts dis- for Provisions ofdelivery. point atthe recorded are sales remaining The chain. retail amajor or distributor a wholesale customer, typically tothe shipped are ucts prod- time atthe is this sales, ofour percent 90 than more For ofownership. rewards and risks the assumes buyer the and buyer tothe passes ofgoods title time atthe ofproducts sales from revenue We recognize Accruals 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 fi our In preparing APPLICATION POLICIES ACCOUNTING OF CRITICAL cant operating locations asofDecember 31,2006.Someofthese We regularly review the supply levels of our sig- ofour levels supply the review We regularly nancial statements in accordance in accordance nancial statements sed theinterest rate forward ts andswaps. nancial position, oncancelable purchase FINANCIALS 23 cit cit cits,is (1,288.6) $ 367.9 $ 379.4 1,300.1 cant changes cant 1,246.1 (1,242.2) $ 379.4 $ 383.3 cant U.S. rebate and discount ective actual the of pharmaceuti- ...... cit, we adjust our rebate reserves. rebate our adjust we cit, 1 Most of our rebates outside the U.S. are contractual believeWe that our accruals for sales rebates and Approximately 85 percent and 90 percent of our results were less than 0.3 percent of net sales for eachof the years presented. Adjustments of the estimates for these rebates and discounts to actual discounts are reasonable and appropriate based on current facts and circumstances. Federally mandated Medicaid state rebate and pharmaceutical assistance reduced rebates Medicare and (Medicaid) programs sales million, by $571.7 million, $637.1 and mil- $641.0 lion in 2006, 2005, and 2004, respectively. A 5 percent change in the Medicaid and Medicare rebate amounts we recognized in 2006 would lead to an approximate $29 million effect on our income before income taxes. As of December 2006, 31, our Medicaid and Medicare million. $259.0 was liability rebate global rebate and discount liability resulted from sales of our products in the U.S. as of December2006 31, and 2005, respectively. The following represents a roll-for- ward of our most signifi liability balances, including Medicaid millions): (in 1 Other ContingenciesProduct and Liabilities Litigation Product litigation liabilities and other contingencies are, by their nature, uncertain and are based upon complex judgments and probabilities. The factors we consider in developing our product litigation liability reserves 2006 2005 2006 Rebate and discount liability, beginning of year...... lar period our rebate adjustments may incorporate revi- sions of accruals for several periods. In determining the appropriateaccrual amount, we consider our historical percentage a as product by payments rebate Medicaid of our historical sales as well as any signifi in sales trends, an evaluation of the current Medicaid rebate laws and interpretations, the percentage of our products that aresold to Medicaid recipients, and our product pricing and currentrebate/discount contracts. Rebate and discount liability, end of year...... Cash payments of discounts and rebates . . . . 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 defi cal budget ned by the statutory rates cantly as a percent of sales. ed structure eliminates the incentive for specula- We establishWe sales rebate and discount accruals in The largest of our sales rebate/discount amounts As a result of restructuring our arrangements with cant products sold to major wholesalers in the U.S. uctuated signifi uctuated nifi and in major markets outside the U.S.,primarily by reviewing periodic inventory reports supplied by our major wholesalers and available prescription volume information for our products,or alternative approaches. attemptWe to maintain wholesaler inventory levels at an average of approximately one month or less on a consistent basis across our product portfolio. Causes of unusual wholesaler buying patterns include actual or anticipated product supplyissues, 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. could also be the result of speculative buying by wholesalers in anticipation of price increases. When we believe wholesaler purchasing patterns have caused an unusual increase ordecrease 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 amountstocking of 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/discount 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 accrualinclude Medicaid, managed care, Medicare, chargebacks, long- term-care, hospital, discount card programs, and various other government programs. base We these accruals primarily upon our historical rebate/discount payments made to our customer segment groups and the provisions of current rebate/discount contracts. calculate We these rebates/discounts based upon a percentage of our sales for each of our products as defi and the contracts with our various customer groups. are rebates associated with sales covered by Medicaid. Although we accrue a liability for Medicaid rebates at the time we record the sale (when the product is shipped), the Medicaid rebate related to that sale is typically billed up to six months Due to the time later. lag, in any particu- FINANCIALS 24 benefi medical and sion pen- for eligible employees past ofour ages retirement we consider the age assumption, retirement expected our Inevaluating rate. discount the to determine curve company-specifi anuse actuarially-determined, fi ofleading views the and investments); growth are of which 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 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 benefi Pension andPension Assumptions Retiree Plan Medical 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 nancial position of the insurers, and the possibility of possibility the and insurers, ofthe position nancial 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 nancial statements ts together with our expecta- our with together ts cant effect on the amounts amounts the on effect cant t plans. In evaluating Inevaluating t plans. cant product liability liability cant product ned benefi led, to the tothe led, ts. c yield c yield t affected by approximatelyaffected million. $29 be would taxes income year, one before by ed income our adjust- were 2006 for retirees offuture age expected the regarding assumption our If $14 million. approximately by change would taxes income before income point, age percent- aquarter by changed tobe were 2006 for assets plan on return expected the If million. $28 approximately by change would taxes income before income point, age percent- aquarter by changed tobe were 2006 for rate discount the If million. $24 approximately by cost interest and cost service 2006 ofthe aggregate the decrease would decrease Aone-percentage-point million. $28 approximately by increase would expense annual 2006 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 tions of future retirement ages. retirement offuture tions Impairment ofImpairment Assets Long-lived estimates for tax contingency reserves are appropriate appropriate are reserves contingency tax for estimates our that We believe examination. ofan resolution or nation, exami- a tax during obtained information new authorities, taxing the by interpretations or ofregulations issuance the result from signifi could adjustments example, For uncertainties. additional and circumstances and infacts changes for adjusted is reserve contingency tax The estimated. reasonably be can contingency ofthe amount the and assessed be will we that probable is it believe we when contingencies tax for ity aliabil- We record systems. court tax jurisdictions’ various the through concluded as and/or regulation legislation, from resulting law intax tochanges due contingencies tax of inestimates exist uncertainties Inherent authorities. these by assessments interest and 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 these estimates. from vary could results Actual judgment. management’s require projections, and assumptions supportable and fl cash future estimated The adjusted. is basis cost the and value, fair its over value book net asset’s ofthe excess tothe equal recorded is identifi is impairment an If value. carrying its fl cash undiscounted projected comparing by determined is Impairment recoverable. be not may asset ofan value carrying the indicate incircumstances changes or events ever when- and basis aperiodic on impairment potential for assets oflong-lived value carrying the We review We believe our pension and retiree medical plan as- plan medical retiree and pension our We believe le tax returns based on our interpreta- our on based returns tax le cant amendments to existing tax law and and law tax toexisting amendments cant ows to be generated by the asset to asset the by generated tobe ows ows, based on reasonable reasonable on based ows, ed, a loss aloss ed, FINANCIALS 25 dent cant of these are nancial position or liquid- nancial position. nancial ow trends in 2007, with capital cally noted below, the resolution led lawsuits against these companies these companies lawsuits against led Actual results could differ materially and will Barr Laboratories, Inc. (Barr), submitted an ANDA in an ANDA Inc. (Barr), submitted Barr Laboratories, a generic version market to 2002 seeking permission Dr. Reddy’s Laboratories, Ltd. (Reddy), Teva Ltd. (Reddy), Teva Laboratories, Reddy’s Dr. and Zenith Goldline Pharmaceuticals, Pharmaceuticals, by Teva acquired Inc., which was subsequently each submitted Teva), (together, Pharmaceuticals seeking (ANDAs) Drug Applications New Abbreviated prior of Zyprexa generic versions market to permission (expiring U.S. patent our relevant of the expiration to or not was invalid that this patent in 2011) and alleging fi We enforceable. the Southern District Court for in the U.S. District is valid, of Indiana, seeking a ruling that the patent court and being infringed. The district enforceable on April 14, 2005, and on all counts in our favor ruled 26, 2006, that ruling was upheld by the on December Reddy and Teva Circuit. the Federal Court of Appeals for confi are of that decision. We seeking a review are without merit and we claims are and Teva’s Reddy’s a have would outcome An unfavorable prevail. to expect of results impact on our consolidated adverse material liquidity, and fi operations, • Patent Litigation areWe engagedthe in following patent litigation mat- ters brought pursuant to procedures set out in the Hatch-Waxman Act (the Drug Price Competition and Patent Restoration Term Act 1984): of • LEGAL AND REGULATORY MATTERS areWe a party to various legal actions and govern- ment investigations. The most signifi described below. While it is not possible to predict or determine the outcome of these matters, webelieve that, except as specifi of all such matters will not have a material adverse effect on our consolidated fi ity, but could possibly be material to our consolidated results of operations in any one accounting period. ation of strong cash fl expenditures billion. of approximately $1.1 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 success of our new product launches; asset impairments,restructurings, and acquisitions of compounds underdevelopment result- ing in acquired in-process research and development charges; foreign exchange rates; wholesaler inventory changes; other regulatory developments, litigation and government investigations; and the impact of govern- mental actions regarding pricing, importation, and reimbursement for pharmaceuticals. undertake We no duty to update these forward-looking statements. t. t. rst This half of the year. weow, expect a continu- nance the acquisition,the nance cient to pay assessments that may result from We believeWe that our estimates for the valuation al- We haveWe recorded valuation allowances against 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 incometax expense. Other income will primarily include net interest income and income from the partnering and out-licensing of molecules. In terms of cash fl For the full year of 2007, we expect earnings per share to be in the range of $2.89 This guidance to $2.99. includes per the estimated share dilutive $.10 impact of the ICOS acquisition related to the incremental inter- est expense on debt used to fi FINANCIAL EXPECTATIONS FOR 2007 the amortization ICOS of intangibles and other integra- tion costs. A disproportionate amount of this dilution is expected to be incurred in the fi guidance also includes the IPR&D charges related to the ICOS acquisition and the in-licensing a diabetes of compound from OSI, together estimated to be a total of $.29 per share as discussed in Note 3, as wellas additional restructuring and other special charges as discussed in Note 4, estimated to be $.07 per share. expectWe sales to grow in the high single or low double digits, impacted favorably by the inclusion of all Cialis revenue subsequent to the acquisition. Gross margins as a percent of sales are expected to improve slightly compared with 2006. In addition, we expect operat- ing expenses to grow in the low double digits, driven primarily by the inclusion of all Cialis operating ex- penses subsequent to the acquisition and increased marketing and selling expenses in supportof Cymbalta, Zyprexa, and the diabetes care franchise, as well as ongoing investment in research and development that will continue to place Lilly among the industry leaders in terms of research and development as a percent of sales. also We expect other income—net to contribute less than million, $100 a reduction from 2006 due to the removal of the Lilly ICOS joint venture after-tax profi and suffiand examinations of our tax returns. lowances against the deferred tax assets are appropriate based on current facts and circumstances. A 5 percent change in the valuation allowance would result in a change in net income of approximately $25 million. FINANCIALS 26 • the Whitehead Institute for Biomedical Research and and Research Biomedical for Institute Whitehead the ofTechnology, Institute Massachusetts the Inc., ticals, of operations, liquidity,and fi a material adverse impactonourconsolidated results that we willprevail. Anunfavorable outcome could have litigation, andaccordingly, we can provide noassurance not possible to predict ordetermine theoutcome of this patents are notvalid are withoutmerit.However, itis that claimsmadebythesegenericcompanies thatour in litigationinvolving ourGemzarpatents andbelieve in response to Sun’s ANDA fi lawsuit against SunintheSouthernDistrict ofIndiana 2013 patent isinvalid. InDecember 2006,we fi Inc. (Sun)fi we received notice thatSunPharmaceutical Industries the Indianacourt lacksjurisdiction.InOctober 2006, lawsuit, Maynefi in response to theANDA fi lawsuit against MayneintheSouthernDistrict ofIndiana similar ANDA for Gemzar. InOctober 2006,we fi notice thatMaynePharma(USA)Inc.(Mayne)fi has beendismissed. InSeptember 2006,we received the Indianacourt lacksjurisdiction.TheCalifornia action also moved to dismiss ourlawsuitinIndiana,asserting District Courtfor theCentral District ofCalifornia. Sicor Sicor fi being infringedbySicor. Inresponse to ourlawsuit, seeking arulingthatthesepatents are valid andare U.S. District Courtfor theSouthernDistrict ofIndiana, In February 2006,we fi and 2013),alleging thatthesepatents are invalid. expiration ofourrelevant U.S.patents (expiring in2010 to market genericversions ofGemzarpriorto the submitted ANDAs inNovember 2005seekingpermission Sicor Pharmaceuticals, Inc.(Sicor), asubsidiaryofTeva, of operations, liquidity,andfi a material adverse impactonourconsolidated results that we willprevail. Anunfavorable outcome could have litigation, andaccordingly, we can provide noassurance possible to predict ordetermine theoutcome ofthis merit andwe expect to prevail. However, itisnot case. We believe Barr’s andTeva’s claimsare without infringed byTeva. Notrialdate hasbeensetineither relevant U.S.patents are valid, enforceable, andbeing Southern District ofIndiana,seekingarulingthatour lawsuit against Teva intheU.S.District Courtfor the a genericversion ofEvista. InJune2006,we fi submitted anANDA seekingpermission to market enforceable, andbeinginfringedbyBarr. Teva hasalso Indiana, seekingarulingthatthesepatents are valid, in theU.S.District Courtfor theSouthernDistrict of In November 2002,we fi patents are invalid, notenforceable, ornotinfringed. patents (expiring in2012-2017)and alleging thatthese of Evista priorto theexpiration ofourrelevant U.S. In June 2002, we were sued by Ariad Pharmaceu- Ariad by sued were we 2002, In June led adeclaratory judgmentactionintheU.S. led anANDA for Gemzar,alleging thatthe led amotionto ourlawsuit,asserting led alawsuitagainst Sicor inthe led alawsuitagainst Barr ling. Inresponse to our ling. We expect to prevail nancial position. nancial position. led a led a led a led a Zyprexa, Prozac, and Prozac Weekly Prozac and Prozac, Zyprexa, to respect with advisors, and consultants physician of remuneration and physicians with communications our including practices, promotional and marketing U.S. toour related investigation acivil commenced had it that us advised ofPennsylvania District Eastern offi the 2004, In March Investigations Government Axid benefi apharmacy intowith entered we agreements rebate certain regarding inquiry an ing offi Attorney’s U.S. the providers. Beginning in August 2006, we have received received have we 2006, inAugust Beginning providers. care ofhealth remuneration and toZyprexa, respect with practices promotional and marketing formulary, California’s on status Zyprexa’s maintain and to obtain efforts toour related ofdocuments production seeking offi General’s Attorney California the from subpoena a received we 2006, InSeptember toZyprexa. respect with practices promotional and marketing our and ofZyprexa tosales relating ofdocuments production seeking ofFlorida, State ofthe Unit, Control Fraud icaid thesubpoena from offi a received we 2005, InJune investigations. tothe ing relat- information and ofdocuments range abroad ing provid- including investigations, inthese Attorney U.S. the with cooperating We are agreements. rebate the by covered sales product tothe related reporting price best Medicaid ofLilly’s areview includes inquiry The likelihood of any monetary damages is remote. remote. is damages monetary ofany likelihood the that therefore and issues these on prevail ultimately will we that merit, legal without are allegations these that We believe rendered. been has decision No processes. natural covers impermissibly and unenforceable is patent the that contention our on 7, ofAugust 2006, week the held was ofMassachusetts Court District U.S. the with trial bench aseparate Inaddition, Circuit. Federal the for ofAppeals Court tothe decision the appeal will cessful, unsuc- if and judge, court trial the by overturned verdict jury the tohave seeking We are oftrial. date the through patent ofthe ofissuance date the from Evista and Xigris of sales U.S. toall royalty percent a2.3 applying by lated calcu- indamages, million $65 approximately plaintiffs the awarded jury The patent. the infringe sales Evista and Xigris that case inthe decision initial an issued in Boston ajury 2006, 4, May On patent. ofthe validity tothe relating us by raised issues certain toconsider inorder patent the and Trademark Offi Patent States United the 2005, InJune products. of these sales future and past on royalties seeking and body, man hu- inthe phenomenon signaling cell ofanatural covery dis- tothe related ofapatent infringement the inducing were Evista, and Xigris products, ofour oftwo sales that alleging ofMassachusetts District the for Court District U.S. inthe College ofHarvard Fellows and President the ® , Evista, Humalog, Humulin, Prozac, and Zyprexa. Zyprexa. and Prozac, Humulin, Humalog, , Evista, ce commenced a re-examination of are-examination ce commenced ce of the U.S. Attorney for the the for Attorney U.S. ce ofthe ce advised that it is also conduct- also is it that ce advised ce of the Attorney General, Med- General, Attorney ce ofthe t manager covering ™ . In October 2005, 2005, . InOctober ce FINANCIALS 27 ed for resi- We areWe prepared to continue our vigorous defense haveWe insurance coverage for a portion of our In addition, we have been named as a defendant In the second quarter of 2005, we recorded a net The U.S. Zyprexa product liability claims notsubject The 2005 settlement totaling $700.0 million was more than 8,000 claims for $690.0 million plus $10.0 $690.0 million 8,000 claims for than more described above; and described above; product and expected the then-known regarding costs a formulate could we the extent liability claims to number and of the probable estimate reasonable majority of those A substantial of the claims. cost and then-known to related were and costs exposures claims. Zyprexa expected million to cover administration of the settlement. That of the settlement. administration cover million to settlement by special is being administered settlement Weinstein. by Judge appointed masters than more settle to attorneys number of plaintiffs’ $500 million. approximately 18,000 claims for rst quarter 2007. of cation in which the members of the purported class are One of these four lawsuits has been certifi dents of Quebec. The allegations in the Canadian actions are similar to those in the litigation pending in the U.S. to these agreements include approximately 340 lawsuits in the U.S. covering approximately 900 claimants and an additional 400 claims of which we are aware. In addition, we have been served with a lawsuit seeking class certi- fi seeking refunds and medical monitoring. In early 2005, we were served with four lawsuits seeking class action status in Canada onbehalf of patients who took Zyprexa. • The cost of the June 2005 Zyprexa settlements settlements • of the June 2005 Zyprexa cost The and defense liability exposures • product for Reserves of Zyprexa in all remaining cases. currently We antici- pate that trials in seven cases in the Eastern District of New will York begin in the second quarter of 2007. Zyprexa product liability claims exposure. Thethird- party insurance carriershave raised defenses to their liability under the policies and are seeking to rescind the policies. The dispute is now the subject of litigation in the federal court in Indianapolis against certain of the carriers and in arbitration in Bermuda against other carriers. While we believe our position has merit, there can be no assurance that we will prevail. 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. pretax charge billion of $1.07 for product liability mat- ters. The charge took into account our estimated re- coveries from our insurance coverage related to these matters. The charge covered the following: • In January 2007, we reached agreements with a • agreements reached In January 2007, we paid during 2005. The January 2007 settlements were recorded in other current liabilities in our December 31, 2006 consolidated balance sheet and will be paid in the fi nes led led that other nancial position. We It is possible is It nal agreement) to settle settle to nal agreement) nes, penalties, or other mon- other or penalties, nes, led lawsuits and other asserted ed of many other claims of individu- led suit. The lawsuits and unfi Since June 2005, we have entered agree- into (and in September 2005 a fi (and in September number of previously fi claims. The two primary settlements were as follows: in principle • an agreement reached 2005, we In June Zyprexa product liability litigation to settle a substantial majority of the claims. The agreements cover a total of approximately 28,500 claimants, including a large in the Federal District Court for the Eastern District of New No. (MDL York 1596). ments with various claimants’ attorneys involved in U.S. that we improperly promoted the drug. Almost all the of federal lawsuits are part of a Multi-District Litigation (MDL) proceeding before The Honorable Jack Weinstein compensatory and punitive damages and typically ac- cuse us of inadequately testing for and warning about side effects of Zyprexa. Many of the claims also allege ries from the use of Zyprexa, with the majority alleging that the product caused or contributed to diabetes or high blood-glucose levels. The claims seek substantial of Zyprexa product liability lawsuits in the United States and have been notifi als who have not fi claims (together the allege “claims”) a variety of inju- Product Litigation Liability Related and haveWe been named as a defendant in a large number tion of health care health of tion providers. torneys general are seeking broad a range of Zyprexa documents, including documents relating to sales, marketing and promotional practices, and remunera- effort being coordinated by an executive committee of attorneys general. are We aware that23 states are participating in this joint effort, and we anticipate that additional states will join the investigation. These at- civil investigative demands or subpoenas from the at- torneys general of a number of states. Most of these requests are now partmultistate of a investigative care professionals, managed care arrangements, and Medicaid best price reporting comply withapplicable regulations. and laws comprehensive compliance-related activities designed to ensure that our marketing and promotional practic- es, physician communications, remuneration of health sults of operations, liquidity, and fi have implemented and continue to review and enhance a broadly based compliance program that includes estimate the amount or range of amounts of any fi result penalties might or from that adverse an outcome. It is possible, that an however, adverse outcome could have a material adverse impact on our consolidated re- criminal charges and fi etary or nonmonetary remedies. cannot We predict or determine the outcome of these matters or reasonably Lilly products could become subject to investigation and that the outcome of these matters could include FINANCIALS 28 the respective states. the respective of courts inthe Mississippi and Mexico, New Virginia, fi lawsuits similar with served were we In2006, 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 • Reserves for product liability exposures anddefense • The cost oftheJanuary2007Zyprexa settlements; and following: the covered charge The of2006. quarter fourth inthe $494.9 million of charge apretax incurred we above, discussed inadequately tested for and warned about side effects of effects side about warned and for tested inadequately we that allege lawsuits these suits, liability product the with As grounds. similar on York in2006 ofNew District fi were lawsuits Two additional fees. attorneys’ and damages, punitive damages, treble ofZyprexa, cost ofthe arefund seeking theories, law common and statute, RICO civil federal the statutes, protection consumer state certain under brought 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 tobe York purporting ofNew District number andcost oftheclaims. formulate areasonable estimate oftheprobable Zyprexa product liabilityclaimsto theextent we could costs regarding thethen-known andexpected In 2005, two lawsuits were fi were lawsuits two In 2005, two with served were we 2004, In December settlements 2007 January ofthe aresult As t programs, as well as the costs the de- the costs the as well as t programs, led by the states of Alaska, West West ofAlaska, states the by led led in the Eastern Eastern inthe led led in the Eastern Eastern inthe led insurance carriers on past claims. past on carriers insurance our from collect tofully able be will we that assurance no is there above, noted as Inaddition, losses. liability product future for self-insured largely tobe continue will we that expect and been have we products, keted mar- currently ofour all substantially for Therefore, market. insurance restrictive toavery due insurance ity diffi experienced have we years, few past Inthe future. inthe products other for claims related and liability ofproduct numbers tolarge subject become could we that possible is it fi and liquidity, ofoperations, results consolidated our on impact adverse amaterial have could litigation related and liability product ofZyprexa resolution ultimate The concluded. be will above described settlements liability product Zyprexa 2007 January the that assurance no be can there probable, is it believe we although addition, In asserted. be may that claims and oflawsuits number drug. the promoted improperly and Zyprexa ing statements. ing forward-look- toupdate duty no We undertake mission. fi 10-K and 10-Q Forms on report recent most our and section this in earlier discussed are prospects and operations our affect may that factors other and legal, technological, governmental, competitive, Economic, projected. those from materially todiffer results actual cause may that uncertainties and torisks subject are they but made, are they time atthe expectations management’s on based are document, inthis made those including us, by made projections or statements forward-looking any that investors caution we of1995, Act Reform Litigation ties Securi- Private ofthe provisions harbor safe the Under STATEMENTS FORWARD-LOOKING CONCERNING CAUTION 1995—A PRIVATE LITIGATION SECURITIES ACT OF REFORM nancial position. Because of the nature of pharmaceutical products, products, ofpharmaceutical nature ofthe Because We cannot predict with certainty the additional additional the certainty with predict We cannot led with the Securities and Exchange Com- Exchange and Securities the with led culties in obtaining product liabil- inproduct obtaining culties FINANCIALS 29 , ® cant accounting policies policies accounting cant uctuations in foreign cur- $ 6,524.5 $ 5,874.1 6,524.5 $ $ 1,748.9 1,565.0 $ 7,798.1 $ 7,668.5 $ 7,798.1 $ 1,801.01,366.2 3,818.6 3,536.2 3,818.6 1,554.9 1,619.0 3,028.6 2,653.2 9,058.1 9,828.3 $ $ 863.7 798.7 4,290.9 4,636.9 6,080.0 $ 6,052.5 $ 608.9 608.9 658.7 443.9 478.0 443.9 $14,645.3 $13,857.9 $14,645.3 $13,857.9 210.9 212.9 210.9 514.6 274.6 875.5 263.1 3,197.5 1,718.4 1,733.8 . The other pharmaceuticals category 5,014.5 3,894.3 2,020.2 ® $ 9,659.6 $ 8,599.2 $ 6,207.4 $ 6,728.5 $15,691.0 $15,691.0 and Vancocin ®

1 t or loss from operations before income taxes. The accounting policies of the in- nancial statements. Income before income taxes for the animal health business was cant business segment—pharmaceutical products. Operations of the animal health busi- , and other products for livestock and poultry. Cardiovascular products consist primarily of liated customers liated liated customers liated ® , Coban ® Most of our pharmaceutical products are distributed through wholesalers that servepharmacies, physicians Our business segments are distinguished by the ultimate end user of the product: humans or animals. Perfor- The assets of the animal health business are intermixed with those of the pharmaceutical products business. areWe exposed to the risk of changes in social, political, and economic conditions inherent in foreign opera- Net sales are attributed to the countries based on the location of the customer. Long-lived assets Long-lived United States ...... Europe Other foreign ...... countries ...... Europe Other foreign ...... countries

ReoPro and Xigris. Anti-infectives include primarily Ceclor United States ...... includes Cialis, Axid, and other miscellaneous pharmaceutical products and services. and other health care professionals, and hospitals. In 2006, our three largest wholesalers each accounted for between percent percent 12 and of consolidated 17 net sales. they Further, each accounted for between per- 10 percentcent and 14 of accounts receivable as of December 2006. 31, Animal health products are sold primarily to wholesale distributors. mance is evaluated based on profi dividual segments are substantially the same as those described in the summary of signifi in Note 1 to the consolidated fi approximately million, $184 million, $215 and $223 million in 2006, 2005, and 2004, respectively. Long-lived assets disclosed above consist of property and equipment and certain sundry assets. tions, and our results of operations and the value of our foreign assets are affected by fl rates. exchange rency Animal health ...... Cardiovascular ...... Anti-infectives...... Geographic Information Net sales—to unaffi 1 Net sales—to unaffi Year Ended December 31 2006 2005 2004 2005 2006 31 December Ended Year Neurosciences...... Endocrinology Oncology...... We operateWe in one signifi Segment Information Segment ELI LILLY AND COMPANY AND SUBSIDIARIES millions) in (Dollars ness segment are not material and share many of the same economic and operating characteristics as pharma- ceutical products. Therefore, they are included with pharmaceutical products for purposes of segment reporting. The largest category of products is the neurosciences group, which includes Zyprexa, Cymbalta, Strattera, and Prozac. Endocrinology products consist primarily of Humalog, Humulin, Actos, Byetta, Evista, Forteo, and Humatrope. Oncology products consist primarily of Gemzar and Alimta. Animal health products include Tylan Rumensin Other pharmaceuticals...... Net sales ...... FINANCIALS o 4.6 25 5.9 51.73 57.78 .38 51.19 60.44 .68 .38 52.52 .68 57.26 (.23) 49.76 .38 (.23) 57.81 exchanges. stock Swiss and London, York, New the on listed is stock common Our .73 . Low . High. .38 .73 prices closing stock Common .64 . . share. per paid Dividends .64 . share—diluted per (loss) Earnings . share—basic per (loss) Earnings 30 3 2 1 944.4 — (98.6) (140.1) 1,073.4 (45.4) 1,018.5 859.0 — 1,792.6 (85.0) 700.6 894.7 871.3 54.98 1,908.5 . 58.86 (loss) income Net . principle. inaccounting ofachange .40 (85.2) 171.9 $3,49 845.7 50.41 1,821.9 effect cumulative and taxes income before (loss) Income .77 55.27 . $3,667.7 income—net. Other . charges. .40 1,999.5 .77 898.2 54.26 special other and $3,601.1 restructuring, impairments, Asset 57.32 .76 . expenses. Operating First $3,879.1 . ofsales Cost 51.35 .40 .76 . sales Net 58.25 — .80 Second . Low 834.8 . . High. .40 .80 (32.2) 1,056.7 prices closing 822.0 stock Common .12 Third — . share. per 1,040.5 paid Dividends (46.9) .12 873.6 806.5 . share—diluted. per Fourth Earnings 1,105.8 — 1,883.7 (56.0) 132.3 . share—basic per Earnings 2006 860.6 2,012.7 215.0 (102.7) 945.2 income Net . $3,71 1,953.9 . taxes. income before Income 860.4 . income—net. $3,866.9 Other . . charges. 2,168.8 special other and $3,864.1 restructuring, impairments, 1,019.0Asset . expenses. Operating $4,245.3 . ofsales Cost . sales Net data) per-share except millions, in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Selected QuarterlyData(unaudited) Refl 2000, to 1998 years tax for examination IRS completed a recently of impact the included which analysis, 2005 Afourth-quarter fo taxes income before loss anet reporting $111.9 despite of million expense atax incurred we 2005, of quarter second the In share before the cumulative effect of a change in accounting principle was $.66. See Note 2 for additional information. additional 2for Note See $.66. was principle accounting in Th achange of $.02. was effect principle cumulative the accounting in before achange of share effect cumulative this of impact share per earnings diluted The $11.8 million. 19.2 to percent. declined rate tax fourth-quarter the aresult, As percent. 26.3 be should 2005 for rate tax our benefi atax in resulted quarter second the 13)in (Note billion $1.07 of charge liability calculated based upon existing tax laws in the countries in which we reasonably expected to deduct the charge. the deduct to expected reasonably we which in countries the in laws tax existing upon based calculated ects the impact of a cumulative effect of a change in accounting principle in the fourth quarter of 2005 of $22.0 million, net million, $22.0 of 2005 of quarter fourth the in principle accounting in achange of effect acumulative of impact the ects 05Fut Tid eod First Second Third Fourth 2005 t that was less than our effective tax rate, as the tax benefi tax the as rate, tax effective our than less was t that 2,3 744 (252.0) 794.4 r the quarter. The product product The quarter. r the e net income per diluted diluted per income e net of income taxes of of taxes income of led us to conclude that that conclude to us led 1 736.6 t was t was 4.7 7.4 FINANCIALS 31 1.8 million. The diluted are before the cumulative 1,810.1 1,810.1 2,560.82,707.9 1 Lilly with Amgen Group Peer without Amgen Group Peer S&P 500 8.2% 7.8% 12.6% 15.2% 12.6% 7.8% 8.2% 13.5% 13.1% 20.4% 24.4% 20.4% 13.1% 13.5% 18.2% 17.5% 28.4% 35.2% 28.4% 17.5% 18.2% 26.3% 38.5% 21.5% 21.7% 21.5% 38.5% 26.3% 1,092,150 1,082,230 1,088,936 1,085,088 931.1 716.8 240.1 (130.0) 240.1 716.8 931.1 $10,795.8 19,042.0 $12,835.821,688.3 4,358.2 24,867.0 24,580.8 $ 8,768.9 4,687.8 4,491.9 $ 7,804.1 5,763.5 3,025.5 2,691.1 2,350.2 2,149.3 2,350.2 2,691.1 3,025.5 749.8 700.9 1,131.8 715.9 7,912.5 7,550.9 6,539.0 5,293.0 6,539.0 7,550.9 7,912.5 4,497.0 4,284.2 4,055.4 3,424.0 4,055.4 4,284.2 4,497.0 726.4 597.5 548.5 493.0 548.5 597.5 726.4 $ 1,298.1 $ 1,898.1 $ 1,706.6 $ 1,130.9 5,716.3 7,593.7 5,560.8 5,063.5 5,560.8 7,593.7 5,716.3 3,474.2 3,223.9 2,675.1 2,176.5 2,675.1 3,223.9 3,474.2 2,717.5 2,941.9 3,261.7 3,457.7 3,261.7 2,941.9 2,717.5 $14,645.3 $13,857.9 $12,582.5 $11,077.5 $12,582.5 $13,857.9 $14,645.3 1,979.6 10,791.9 10,919.9 9,764.8 8,273.6 10,919.9 9,764.8 10,791.9 1.81 1.66 2.37 2.50 1.54 1.45 1.36 1.27 1.36 1.45 1.54 $344,000 $311,000 $280,000 $258,000 $280,000 42,900 $311,000 $344,000 45,000 56,200 44,500 42,600 54,600 52,400 50,800 17.0% 11.2% 22.1% 24.5% 1.63 2.45 Dec. 2001 Dec. 2002 Dec. 2003 Dec. 2004 Dec. 2005 Dec. 2006 707.4 801.8 755.3 $90 $80 $70 $110 $100 $140 $130 $120 41,500 3,129.3 44,800 8,152.3 3,418.0 3,494.4 4,889.8 5,085.5 2,662.7 3,546.5 21,955.4 10,980.7 1,087,490 $ 9,694.4 $ 1,077.8 $15,691.0 $378,000 ects the impact of a cumulative effect of a change in accounting principle in 2005 of $22.0 million, net of income taxes of $1 VALUE OF $100 INVESTED ON LAST BUSINESS DAY OF 2001 Comparison of Five-Year Cumulative Total Return Among Lilly, S&P 500 Stock Index, and Peer Group* to benchmark 2006 compensation of executive officers: Abbott Laboratories; Amgen Inc.; Bristol-Myers Squibb Company; Glaxo SmithKline; Johnson & Johnson; Merck & Co.; Pfizer, Inc.; Schering-Plough Corporation; and Wyeth. We added Amgen to our peer group for 2006 benchmarking because it is comparable in size to Lilly and is a company with which we compete for management and scientific talent. The graph shows the peer group with and without Amgen. & Poor’s 500 Stock Index and our peer group* for the years 2002 through 2006. The graph assumes that, on December 31, 2001, a person invested $100 each in Lilly stock, the S&P 500 Stock Index, and the peer group’s common stock. The graph measures total shareholder return, which takes into account both stock price and dividends. It assumes that dividends paid by a company are reinvested in that company’s stock. *We constructed the peer group as the industry index for this graph. It comprises the nine companies in the pharmaceutical industry that we used This graph compares the return on Lilly stock with that of the Standard Refl Net income ...... Net income Income before income taxes and cumulative effect . . . . . a change of in accounting principle Income taxes...... Marketing and administrative...... Other Shareholders’ equity...... Supplementary Data Return ...... on shareholders’ equity Property and equipment—net ...... Long-term ...... debt Current liabilities...... Weighted-average number of shares of number Weighted-average outstanding—diluted (thousands)...... Net income as a percent of sales ...... Net income per share—diluted ...... Dividends declared per share...... Research and development ...... Operations Net sales ...... Cost of sales ...... Selected Financial Data (unaudited) Data Financial Selected ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except net sales per employee and per-share data) 2006 2005 2004 2003 2002 1 effect of a change in accounting principle was $1.83. See Note 2 for additional information. earnings per share impact of this cumulative effect of a change in accounting principle was $.02. The net income per diluted sh Number of shareholders ...... of record Effective...... tax rate Net sales per employee...... Number of employees ...... Return ...... on assets ...... Capital expenditures Depreciation and amortization...... Total assets.Total ...... Financial Position Financial ...... Current assets FINANCIALS signifi have we which over incompanies Investments value. in fair declines other-than-temporary any for adjusted cost tial specifi upon based computed are securities ofavailable-for-sale sales on losses and gains Realized basis. aregular on ofimpairment indicators for investments these We review ofimpairment. indicator an fi the and depressed, been has value the oftime issuer, length ofthe the prospects near-term indevelopment, of projects company-specifi include evaluation this inmaking consider we tors Fac- inearnings. recognized are other-than-temporary tobe considered losses Unrealized income. comprehensive inother reported oftax, net losses, and gains unrealized the with value atfair carried are securities able-for-sale ings or losses reported in other income—net. We own no investments that are considered to be trading securities. trading to be considered are that investments no We own income—net. inother reported losses or ings 32 gains and losses respective the tooffset inincome currently recognized losses and gains with tomarket marked basis. aquarterly on derivatives ofour effectiveness and correlation the reviews fl acash or hedge value afair either as individually instruments the designate we initiated, are contracts derivative As hedged. being transactions and liabilities, assets, the on gains and losses offset tracts con- derivative on losses and gains because risk additional create not do and policies risk-management porate Risk-management instruments: . cost toLIFO Reduction . supplies and materials Raw . inprocess Work . . products Finished classifi are they pool, investment larger defi this meeting items If value. fair approximates investments ofthese cost The equivalents. Cash equivalents: shares. incremental other and options stock ofdilutive effect the plus shares common ofoutstanding number weighted-average the on based mates. fi ofthe date the at disclosures related and expenses, revenues, liabilities, ofassets, amounts reported the affect that assumptions eliminated. been have transactions and balances intercompany All liabilities. rent refl are interests shareholders’ outside the percent, 100 than less is subsidiaries solidated fi consolidated inthe included are subsidiaries majority-owned and owned wholly ofall accounts The (GAAP). States United inthe accepted generally practices accounting with presentation: of Basis Signifi of 1: Summary Note data) per-share except millions, in (Dollars SUBSIDIARIES AND COMPANY AND LILLY ELI Notes toConsolidatedFinancial Statements replacement cost. Inventories at December 31 consisted of the following: ofthe 31 consisted atDecember Inventories cost. replacement fi the by valued are inventories Other inventories. total ofour percent 46 approximately or States, United continental inthe located inventories our all substantially Inventories: Investments: For derivative contracts that are designated and qualify as fair value hedges, the derivative instrument is is instrument derivative the hedges, value fair as qualify and designated are that contracts derivative For is, that basis, adiluted on presented are footnotes, inthe noted otherwise unless amounts, per-share All offi preparation The nancial condition of the industry. We do not evaluate cost-method investments for impairment unless there is is there unless impairment for investments cost-method evaluate We not do industry. ofthe condition nancial cant infl We state all inventories at the lower of cost or market. We use the last-in, fi last-in, the We use market. or of cost lower atthe inventories all We state uence but not a controlling interest are accounted for using the equity method with our share ofearn- share our with method equity the using for accounted are interest acontrolling not but uence

Substantially all debt and marketable equity securities are classifi are securities equity marketable and debt all Substantially nancial statements and during the reporting period. Actual results could differ from those esti- those from differ could results Actual period. reporting the during and statements nancial We consider all highly liquid investments, with a maturity of three months or less, to be cash cash tobe less, or months ofthree amaturity with investments, liquid highly all We consider The accompanying consolidated fi consolidated accompanying The nancial statements in conformity with GAAP requires management to make estimates and and estimates tomake management requires GAAP with inconformity statements nancial cant Accounting Policies Our derivative activities are initiated within the guidelines of documented cor- ofdocumented guidelines the within initiated are activities derivative Our ed consistent with the classifi with ed consistent rst-in, fi rst-in, nancial statements have been prepared in accordance have prepared been nancial statements rst-out (FIFO) method. FIFO cost approximates current current approximates cost FIFO method. (FIFO) rst-out nancial statements. Where our ownership ofcon- ownership our Where statements. nancial c drivers of the decrease in stock price, status status price, instock decrease ofthe c drivers 20 2005 2006 cation of the pool. ofthe cation $2,270.3 $ 644.5 2,383.0 1,551.5 (112.7) 187.0 ed Avail- as available-for-sale. 1,958.4 214.7 1,272.4 $ 471.3 $1,878.0 (80.4) rst-out (LIFO) method for for method (LIFO) rst-out ow hedge. Management c identifi ected in other noncur- inother ected nition are part ofa part are nition cation of the ini- ofthe cation FINANCIALS 33 uc- ow hedg- ow xed rate are ow hedges of of hedges ow ed, a loss is recorded nite lives were $130.0 uctuating currency ex- (5,223.5) $ 7,912.5 $ 4,584.5 6,314.1 $ 166.8 2,070.6 13,136.0 nite life. No material impairments nancial instruments. The objective of 1,976.7 6,718.5 4,852.8 5,564.4) oating rate debt and investment posi- 13,716.7 $ 168.7 $ 8,152.3 uctuations in interest rates. These fl 2006 2006 2005 rm commitments. Forward and option contracts xed and fl oating rate debt or investments to a fi nite lives arising from acquisitions and research alliances oating rate are designated as fair value hedges of the under- uctuationsinterest in rates on earnings. Our primary interest rate Other intangibles with fi nancing, investing, and operating.address We a portion of these risks through a Property and equipment is stated on the basis of cost. Provisions for depreciation of ed into earnings in the same period the hedged transaction affects earnings. Hedge inef- ow hedges. Interest expense on the debt is adjusted to include the payments made or received xed rate debt or investments to a fl ows to be generated by the asset to its carrying value. If an impairment is identifi In the normal course of business, our operations are exposed to fl We enterWe into foreign currency forward and option contracts to reduce the effect of fl At December property 31, and equipment consisted of the following: Depreciation expense for 2006, 2005, and 2004 was $627.4 million, $577.2 million, and $495.9 million, respec- lying instruments. Interest rate swaps or collars that convert fl Buildings...... Equipment...... Land ...... Land

change rates (principally the euro and the Japanese yen). Foreign currency derivatives used for hedging are put in place using the same or like currencies and duration as the underlying exposures. Forward contracts are princi- pally used to manage exposures arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. These contracts are recorded at fair value with the gain or loss recognized in other income. The purchased option contracts are used to hedge anticipated foreign currency transactions, primarily intercompany inventory activities expected to occur within the These next year. contracts are designated as cash fl those future transactions and the impact on earnings is included in cost of sales. may We enter into foreign curren- cy forward contracts and currency swaps as fair value hedges of fi generally have maturities not months. exceeding 12 Goodwill and other intangibles:Goodwill other and fectiveness is immediately recognized in earnings.Derivative contracts that are not designated as hedging instru- ments are recorded at fair value with the gain or loss recognized in current earnings during the period of change. under the swap agreements. es, the effective portion of gains and losses on these contracts is reportedas a component of other comprehensive income and reclassifi tuations can vary the costs of fi controlled program of risk management that includes the use of derivative fi controlling these risks is to limit the impact of fl risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fi tions and may enter into interest rate swaps or collars to help maintain that balance. Interest rate swaps or collars that convert our fi designated as cash fl recognized on the underlyingexposure. For derivative contracts that are designated and qualify as cash fl Construction in progress ...... Less allowances for depreciation ...... ( Property equipment: and are amortized over their estimated useful lives, ranging from years, 5 to 15 using the straight-line method. Good- will is not amortized. Goodwill and other intangibles are reviewed to assess recoverability at least annually and when certain impairment indicators are present. Goodwill and net other intangibles with fi million,million respectively, and $139.6 at December 2006 31, and 2005, and were included in sundry assets in the consolidated balance sheets. Goodwill is our only intangible asset with an indefi occurred with respect to the carrying value of our goodwill or other intangible assets in 2006, 2005, or 2004. buildings and equipment are computed generally by the straight-line method at rates based on their estimated useful to 50 lives years (12 for buildings years and 3 to 18 for equipment). review We the carrying value of long-lived assets for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Impairment is determined by comparing projected undiscount- ed cash fl equal to the excess of the asset’s net book value over its fair value, and the cost basis is adjusted. tively. Approximately million million, of interest $106.7 $140.5 million, costs and were $111.3 capitalized as part of property and equipment in 2006, 2005, and 2004, respectively. rental Total expense for all leases, including FINANCIALS on etr icm)ls...... loss. (income) venture Joint te ...... Other . 34 income . Interest . expense Interest income—net:Other occurs. milestone ofthe payment requiring event the when expensed generally are product benefi period the over them amortize and paid milestones identifi been has use future alternative no which for and marketing for approval regulatory received yet not have that process development and research andResearch development: income—net. inother recorded generally are us by earned payments Milestone product. pharmaceutical ofthe cycle life development inthe point important an represents and determinable, objectively substantive, is event the if event milestone ofthe achievement the upon tous due payments milestone of amount full the recognize We immediately agreement. supply ofthe term the over sales net as recognized ally gener- are products the tosupply commitment arelated and products commercialized toour rights marketing of sale the both include that agreements out-licensing from received fees Initial date. approval product expected the through amortized are development under compounds ofour partnering the from receive we fees Initial form. per- we calls ofsales number the applicable, if and, partners copromotion our by reported sales net upon based recorded. are sales related the period same inthe established are rebates and discounts for Provisions ofdelivery. point atthe recorded are sales remaining The chain. retail amajor or distributor awholesale customer, tothe typically shipped are products time atthe is this sales, ofour percent 90 than more For ofownership. rewards and risks the assumes buyer the and Revenue recognition: carriers. insurance the among ofinsolvencies level future projected and existing the and carriers, the by raised be might that tocoverage defenses ofany assessment our limits, age cover- deductibles, existing on based recoverables insurance We estimate ofincome. statement the on charges classifi are receivables These realized. be will they probable is it when recoveries insurance-related for receivables We record insurance. by covered is suits ofthese disposing and defending with associated costs ofthe Aportion estimable. reasonably and probable when accrued are contingencies loss liability signifi with inconnection incurred tobe expected costs defense Legal usage. product regarding data and experience claims historical on primarily based expenses these We estimate costs. oftheir estimate sonable fi not but incurred claims liability product certain for We accrue to us. available information the on based estimable and probable both are they extent tothe exposures estimated our for accrued have we us, against asserted currently claims liability product tothe respect With sheets. balance dated refl are recoverables insurance mated Litigation liabilities: and environmental material. not are commitments rental minimum future and into, entered obligations lease capital sheets, balance consolidated inthe equipment and inproperty included leases Capital respectively. 2004, and 2005, 2006, for million $286.8 and million, $294.4 million, $293.6 toapproximately amounted material), (not rentals contingent con- ofthe amount the and assessed be will we that probable is it believe we when contingencies tax for liability a We record taxable. be and States United tothe remitted to be 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. acquisition ofour aresult as 2007 inJanuary venture joint ofthe ownership complete the We acquired taxes. ofincome net We also generate income as a result of collaboration agreements. Revenue from copromotion services is is services copromotion from Revenue agreements. ofcollaboration aresult as income generate We also The joint venture (income) loss represents our share of the Lilly ICOS LLC joint venture results of operations, ofoperations, results venture joint LLC ICOS Lilly ofthe share our represents loss (income) venture joint The 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 Other income—net, consisted of the following: ofthe consisted income—net, Other We recognize revenue from sales of products at the time title of goods passes to the buyer buyer tothe passes ofgoods title time atthe ofproducts sales from revenue We recognize We recognize as incurred the cost of directly acquiring assets to be used in the inthe used tobe assets acquiring ofdirectly cost the incurred as We recognize ected on a gross basis as liabilities and assets, respectively, on our consoli- our on respectively, assets, and liabilities as basis agross on ected ed. Once the product has obtained regulatory approval, we capitalize the the capitalize we approval, regulatory obtained has product the Once ed. Litigation accruals and environmental liabilities and the related esti- related the and liabilities environmental and accruals Litigation ted. Milestones paid prior to regulatory approval of the ofthe approval toregulatory prior paid Milestones ted. 20 20 2004 2005 2006 led to the extent we can formulate area- formulate can we extent tothe led $(237.8) $ 238.1 (261.9) (117.7) (96.3) ed as a reduction of the litigation litigation ofthe areduction as ed 0. $51.6 $105.2 (212.1) (156.7) (196.2) (252.3) $(314.2) $(278.4) (11 79.0 (11.1) cant product cant product nancial FINANCIALS 35 scal scal 2004 cers and key employees and are payable in c grant dates scheduled in advance. With respect to option awards given to new As discussed further we adopted Statement in Note 7, of Financial Accounting Stan- We calculateWe basic earnings per share based on the weighted-average number of outstanding Under our policy, all stock option awards are approved prior to the date of grant and the exercise price is Prior to January 2005, 1, we followed Accounting Principles Board (APB) Opinion 25, Accounting for Stock The following table illustrates the effect on net income and earnings per share if we had applied the fair value Add: Compensation expense for stock-based performance awards included in reported net income, net of relatedDeduct: tax stock-based effects. Total employee compensation ...... expense determined under fair-value-based method for all awards, net of related tax effects ...... 34.5 ...... Pro forma net income (300.9) $1,543.7 Earnings per share: Basic, as reported...... Basic, pro forma Diluted, ...... as reported $1.67 Diluted, pro forma...... $1.42 $1.66 $1.42 Net income, as reported...... $1,810.1 Stock-based compensation: common shares and incremental shares. calculate We diluted earnings per share based on the weighted-average number of outstanding common shares plus the effect of dilutive stock options and other incremental shares. dards No. (revised 123 2004), Share-Based Payment (SFAS 123R), effective January 2005. 1, SFAS 123R requires the recognition of the fair value of stock-based compensation in net income. Stock-based compensation primar- ily consists of stock options and performance awards. Stock options are granted to employees at exercise prices equal to the fair market value of our stock at the dates of grant. Options fully vest three years from the grant date and have a term years. of 10 Performance awards are granted to offi shares of our common stock. The number of performance award shares actually issued, varies if any, depending on the achievement of certain earnings-per-share targets. Performance awards fully vest at the end of the fi year of the grant. 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 sharesand treasury stock to satisfy stock option exercises and for the issuance of performance awards. the average of the high and low market price on the date of grant. The Compensation Committee of the Board of Directors approves the value of the award and the date of grant. Options that are awarded as part of annual total compensation are made on specifi hires, our policy requires approval of such awards prior to the grant date, and the options are granted on a pre-de- termined monthly date immediately following thedate of hire. Issued to Employees, and related interpretations in accounting for our stock options and performance awards. Under APB 25, because the exercise price of our employee stock options equals the market price the of underlying stock on the date of grant, no compensation expense was recognized. SFAS However, 123R requires us to present pro forma information as if we had accounted for our employee stock optionsand performance awards under the fair value method of that statement. For purposes of pro forma disclosure, the estimated fair value of the options and performance awards at the date of the grant is amortized to expense over the requisite service period, which generally is the vesting period. recognition provisions of SFAS to stock-based 123R employee compensation. Earnings per share: tingency can be reasonably estimated. The taxcontingency reserveis adjusted for changes in facts and circum- stances, and additional uncertainties. See regarding Note 10 the 2004 tax expense associated with the completed repatriation earnings of reinvested outside the U.S. pursuant to the American Jobs Creations Act. FINANCIALS $11.8 million. $11.8 of taxes ofincome net million, of$22.0 principle inaccounting ofachange effect inacumulative resulted 2005 31, 47 December ofFIN on adoption The asset. long-lived related ofthe life useful the over depreciated is which asset, long-lived related ofthe amount carrying the increasing by amount acorresponding tocapitalize required are we tion, Inaddi- period. subsequent each value present toits adjusted is which incurred, is it inwhich period inthe obligations retirement asset conditional for ofaliability value fair the torecord us 47 FIN requires 143. No. Statement FASB statements. The IPR&D charge is not deductible for tax purposes. tax for deductible not is charge IPR&D The statements. fi consolidated 2007 inour acquisition tothe subsequent ofoperations results ICOS’ include will and of 2007 fi inthe expense an as IPR&D the include We will purposes. tax for deductible tobe expected not is and goodwill as recorded be will million $800 Approximately asset. intangible tothe related established be will million $700 ofapproximately liability 2015 to2017. tax from range Adeferred which country, ineach lives patent expected remaining Cialis’ over amortized be will asset intangible (IPR&D). The development and research in-process quired toac- million $300 approximately and toCialis related asset intangible acquired tothe allocated be will price chase fi been not has price purchase ofthe allocation the fi was which billion, $2.3 ofapproximately price purchase aggregate an for cash an impact on our consolidated fi consolidated our on impact an fi for effective is 108 SAB misstatement. year current a inquantifying considered be should misstatements year ofprior reversal or ofcarryover effects the how on ance this pronouncement. ofadopting impact ofthe discussion 12 Note further for See 31, 2006. December effective 158 was SFAS required. also are disclosures footnote occur. Additional changes the inwhich year inthe income comprehensive through tus fi employer’s ofthe end ofthe as status funded its mine offi statement inits liability or ofadefi status underfunded or overfunded ofthe recognition the quires 158 re- SFAS 132(R). and 87, 106, No. 88, Statements ofFASB amendment Plans—an Postretirement Other and 36 common AME for million of$85.4 cash at $37.6 million, valued options AME outstanding remaining the for change inex- stock common ofour shares topurchase options replacement of 0.7 million issuance million, at$314.8 ued val- stock common ofour shares million of4.2 of issuance consisted million $442.8 ofapproximately price chase pur- at$18. aggregate The valued stock our and ofcash acombination or stock common our for exchanged was stock common ofAME share outstanding each agreement, merger ofthe terms merger. the Under in atax-free (AME) Inc. Evolution, Molecular ofApplied stock common outstanding ofthe all acquired we 12, 2004, February On Acquisition Inc. Evolution, Molecular Applied product. ofthis selling and marketing development, further effi operational torealize us enable will and tous ofCialis value full the brings acquisition The tion. dysfunc- oferectile treatment the for Cialis sells and markets manufactures, that venture joint LLC ICOS Lilly the in partner our (ICOS), Corporation ofICOS stock common outstanding ofthe all 29, acquired we 2007, January On Acquisition Corporation ICOS Note 3: Acquisitions rent liabilities. tononcur- current from payable taxes ofincome million to$960 million $900 approximately reclassify will we that and earnings, retained on impact amaterial have not will 48 ofFIN adoption the expect we analysis, our completed fi inthe Interpretation this toadopt required are we therefore, 15, 2006; fi for effective is Interpretation The return. inatax taken tobe expected or fi the for attribute measurement and old thresh- arecognition 109. No. prescribes Statement 48 FIN ofFASB Taxes, interpretation inIncome an Uncertainty for Accounting (FIN) 48, Interpretation FASB issued (FASB) Board Standards Accounting Financial the 2006, In June Note 2: Implementation of New Financial Accounting Pronouncements In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, which provides interpretive guid- interpretive provides which 108, No. (SAB) Bulletin Accounting Staff issued SEC the 2006, In September In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defi for Accounting Employers’ 158, No. Statement issued FASB the 2006, In September Under the terms of the agreement, each outstanding share of ICOS common stock was redeemed for $34 in $34 for redeemed was stock common ofICOS share outstanding each agreement, ofthe terms the Under of interpretation an Obligations, Retirement Asset 47, FIN Conditional for issued Accounting FASB the In 2005, nancial position, the measurement of a plan’s assets and its obligations that deter- that obligations its and ofaplan’s assets measurement the position, nancial nancial nancial statements. nancial statement recognition and measurement of a tax position taken taken position ofatax measurement and recognition statement nancial nalized, we anticipate that approximately $1.7 pur- ofthe approximately that billion anticipate we nalized, scal years ending after November 15, 2006, and did not have have not did and 15, 2006, November after ending years scal scal year, and the recognition of changes in that funded sta- funded inthat ofchanges year, recognition the scal and rst quarter of 2007. While we have not yet yet not have we While of2007. quarter rst ned benefi scal years beginning after December nanced through borrowings. While While borrowings. through nanced t postretirement plan as an asset asset an as plan t postretirement ned ned Benefi ciencies in the inthe ciencies t Pension t Pension rst quarter nancial FINANCIALS 37 ows that ows cult to value. Of the $442.8 rst quarter of 2007. nancial statements. nancial rst quarter expect of 2007. We to complete these restructur- ows were then discounted to the present value using an appropriate discount rate. This In 2004, we incurred an IPR&D million charge related of $29.9 to a development stage compound acquired Thereare several methods that can be used to determine the estimated fair value of the acquired IPR&D. We We hiredWe independent third parties to assist in the valuation of assets that were diffi In December 2005, management approved, as part of our ongoing efforts to increase productivity and reduce During 2004, management approved actions designed to increase productivity, to address current challenges from Merck KGaA for a potential treatment for insomnia. This compound did not have any alternative future use. Product Acquisitions In January 2007, we enteredan into agreement with OSI Pharmaceuticals, Inc. to acquire the rights to its com- pound for the potential treatment 2 diabetes. of Type At the inception of this agreement, this compound was in the development stage (Phase I clinical trials) and had no alternative future uses. 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 and will be included as expense in the fi million purchase price, $362.3 million was attributable to acquired IPR&D. The IPR&D represents compounds that were under development at that time and that had not yet achieved regulatory approval for marketing. AME’s two lead compounds for the treatment of non-Hodgkin’s lymphoma and rheumatoid arthritis represented approxi- mately 80 percent of the estimated fair value of the IPR&D. These IPR&D intangible assets were written off by a charge to income immediately subsequent to the acquisition because the compounds did not have any alternative future use. This charge was not deductible for tax purposes. The ongoing activity with respect to each of these compounds under development is not material to our research and development expenses. utilized the “income method,” which applies a probability weighting to the estimated future net cash fl are derived from projected sales revenues and estimated costs. These projections were based on factors such as relevant market size, patent protection, historical pricing of similar products, and expected industry trends. The estimated future net cash fl analysis was performed for each project independently. The discount rate we used in valuing the acquired IPR&D projects was percent. 18.75 ing activities by December 2007. 31, our cost structure, decisions that resulted in non-cash charges of $154.6 million for the write-down of certain im- paired assets, million, and other primarily charges of $17.3 related to contract termination payments. The impaired assets, which have no future use, include manufacturing buildings and equipment no longer needed to supply pro- jected capacity requirements, as well as obsolete researchand development equipment. The impairment charges are necessary to adjust the carrying value of the assets to fair value. Asset Impairments and Related Restructuring and Other Charges In the fourth quarter of 2006, management approved plans to close two research and development facilities and one production facility outside the U.S. Management also made the decision to stop construction of a planned insulin manufacturing plant in the U.S. in an effort to increase productivity in research and development opera- tions and to reduce excess manufacturing capacity. These decisions, as well as other strategic changes, resulted in non-cash charges of $308.8 million for the write-down of certain impaired assets, substantially all of which have no future million, use, and other primarily charges related of $141.5 to severance and contract termination pay- ments. The impairment charges are necessary to adjust the carrying value of the assets to fair value. In addition, in early 2007 the Board approved other related actions to offer voluntary severance to up to 250 employees at one of our plants in the U.S. Severance and other costs related to all of these actions will result in estimated additional charges of approximately million (pretax) $125 in the fi Note 4: Asset Impairments, Restructuring, and Other Special Charges The components of the charges included in asset impairments, restructuring, and other special charges in our consolidated statements of income are described below. stock and options for certain AME employees, and transaction costs of $5.0 million. The fair value of our common stock was derived using a per-share which value was of $74.14, our average closing stock price for February and 11 2004.12, The fair value for the options granted was derived using a Black-Scholes valuation method using assump- tions consistent with those we used in valuing employee options. Replacement options to purchase our common stock granted as part of this acquisition have terms equivalent to the AME options being replaced. AME’s results of operations subsequent to the acquisition are included in our consolidated fi FINANCIALS discussion. 13 Note additional for See investigation. practices promotional and marketing Evista reported previously ofthe tion 38 fi within mature securities indebt investments ofour $1.2 billion Approximately required. not is closure dis- and available readily not is investments other and method ofequity value fair The debt). long-term (principally . (liabilities). Risk-management instruments—assets . portion. current including debt, Long-term . securities Debt . . equity Marketable investments Noncurrent . securities Debt investments Short-term fi outstanding ofour A summary Instruments Financial of Value Fair ratings. credit high their given obligations their tomeet tofail counterparties any expect not tofi counterparties by ofnonperformance event inthe losses tocredit-related exposed fi one toany exposure ofcredit amount the limit we policies, porate cor- documented with Inaccordance securities. government U.S. percent 30 and securities, corporate percent 29 securities, of41 asset-backed percent comprised were securities indebt investments our 31, 2006, December At fi major with investments interest-bearing our all substantially We place procedures. review credit ongoing our by mitigated is concentration this with associated risk The required. not generally is collateral receivables; oftrade portion asubstantial for account organizations care managed and products oflife-sciences distributors Wholesale investments. bearing interest- and receivables oftrade principally consist risk tocredit us subject potentially that instruments Financial Investments and Instruments Financial 5: Note in2005. $1.07 and billion in2006 of$494.9 million charges pretax net recorded we toZyprexa, related were ofwhich majority substantial the exposures, liability product ofour aresult As remain. claims 1,300 Approximately medication. tothe relating us against claims 28,500 ofapproximately atotal tosettle litigation liability product Zyprexa inU.S. involved attorneys claimants’ with agreements reached 13, have inNote we further discussed As Charges Special Other and Liability Product expenses. severance ofvoluntary primarily consisted charges affi overseas inour activities torestructuring related charges ofseverance million $35.1 including million, $68.5 totaled actions ofthese aresult as ofpositions elimination tothe related expended and incurred charges other and restructuring The $12.2 were million. payments, termination lease including charges, site Other value. tofair assets ofthe value carrying the toadjust necessary are charges impairment The assets. ofthe all substantially destroyed ofor disposed have and assets, these using ceased We have million. of $486.3 charges impairment asset recognized we aresult, As charges. related other and severance impairments, in asset resulted and components marketing and sales and development, and research manufacturing, inthe operations primarily affected actions These portfolio. product inour investments prior toleverage and marketplace, in the Equity method and other investments investments other and . method Equity The other signifi other The We determine fair values based on quoted market values where available or discounted cash fl cash discounted or available where values market quoted on based values fair We determine . . cant component of our 2004 special charges was a provision for $36.0 million for the resolu- the for million $36.0 for aprovision was charges special 2004 ofour component cant nancial institutions, in U.S. government securities, or with top-rated corporate issuers. issuers. corporate top-rated with or securities, government inU.S. institutions, nancial nancial instruments and other investments at December 31 follows: atDecember investments other and instruments nancial arigAon Fi au Cryn mut Fair Value Carrying Amount Fair Value Carrying Amount 2006 2005

$ 1,001.9 $ 79.4 $ $ 781.7 $(3,705.2) 834.1 88.4 19.7 834.1 834.1 1,076.2 1,076.2 $ 1,296.6 $1,296.6 8. $ ,3. $2,031.0 $2,031.0 $781.7 19.7 (336.0) (336.0) 94 1. $118.0 118.0 $ 79.4 $ N/A 102.4 N/A $(3,682.7) $(6,484.8) $(6,484.2) nancial institution or corporate issuer. We are corporate or institution nancial nancial instruments but do do but instruments nancial liates. The severance severance The liates. ow analyses ve years. FINANCIALS 39 ow hedges, excluded excluded hedges, ow oating rate debt from ac- ow hedges of anticipated for- (721.3) $5,763.5 $1,487.4 $2,048.6 $7,774.7 6,484.8 460.7 15.9 92.6 25.6 25.6 37.3 80.5 1,500.0 1,939.2 811.4 7.1 17.6 7.1 $52.0 113.0 9.0 91.6 10.8 50.0 63.5 nance subsidiary, issued billion $1.50 109.9 210.8) 266.3 300.0 400.0 $43.7 3,705.2 1,000.0 $1,487.4 $3,494.4 $2,848.4 2006 2006 2005 2006 2006 2005 2006 2005 2004 xed rate into a variable rateof interest at essentially oating rate bonds with a maturity date in 2008. repaid We $1.00 nancial institution, which converts the fi oating rate extendible notes. The maturity date of these notes is January 2008, 1, but holders of the oating rate bonds outstanding at December 2006 31, are due in 2037 and have variable interest rates at LIBOR In August 2005, Eli Lilly Services, Inc. (ELSI), our indirect wholly-owned fi The net adjustment to unrealized gains and losses of tax) (net on available-for-sale securities increased (de- Principal and interest on the private placement bonds due in 2007 and 2008 are due semiannually over the In September 2005, ELSI issued billion $1.50 of fl A summary of the unrealized gains and losses (pretax) of our available-for-sale securities other in compre- We expectWe to reclassify an estimated $25.5 million of pretax net losses on cash fl During the years ended December 2006, 31, 2005, and 2004, net losses related to ineffectiveness and net loss- Less ...... current portion ( notes may extend the maturity of the notes, in monthly increments, until September 2010. These 1, notes pay inter- est at essentially a rate equivalent to LIBOR (5.34 percent at December 2006). 31, repaid We $500.0 million of the notes in December 2006. The parent company fully and unconditionally guarantees the ELSI notes. of 13-month fl

6.55 percent ESOP ...... debentures (due 2017) SFAS 133 fair value adjustment ...... Unrealized ...... gross losses Floating rate bonds (due 2008 and 2037)...... Private placement bonds (due 2007–2008) ...... creased) other comprehensive income by $0.3 million, $(4.6) million, and million $(18.2) in 2006, 2005, and 2004, respectively. Activity related to our available-for-sale investment portfolio was as follows: remaining terms of each of these notes. In conjunction with these bonds, we entered into interest rate swap agree- ments with the same fi hensive income at December follows: 31 Other, includingOther, capitalized ...... leases 2.90 percent notes (due 2006–2008) ...... Floating rate extendible ...... notes (due 2008) 4.50 to 7.13 percent notes (due 2012–2036).4.50 to 7.13 ...... Long-term debt at December consisted 31 of the following: Note 6: Borrowings 6: Note Proceeds from sales ...... Unrealized gross gains ...... Unrealized gross gains

Realized gross gains on sales...... from the assessment of effectiveness were not material. es related to the portion of our risk-management hedging instruments, fair value and cash fl Realized gross losses on sales...... eign currency transactions and the variability in expected future interest payments on fl cumulated other comprehensive loss to earnings during 2007. This assumes that short-term interest rates remain unchanged from the prevailing rates at December 2006. 31, plus our six-month credit spread, adjusted semiannually (total of 5.46 percent at December 2006). 31, The interest was to accumulate over the life of the bonds and be payable upon maturity. had We an option to begin periodic interest pay- ments at any time. exercised We this option in November 2006 and paid all previously accrued interest on the bonds. billion of the notes in September 2006 and the remaining $500.0 million in December 2006. The remaining $400.0 mil- fl of lion FINANCIALS option valuation model for estimating the fair value of the stock options. The lattice model allows the use of a range ofa range use the allows model lattice The options. stock ofthe value fair the estimating for model valuation option a lattice-based utilized we grant, option stock 2005 the with beginning aresult, As assumptions. input related the fl of cash ments 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 noted. previously as atmaturity, only payments interest requiring instruments debt tocertain part inlarge due borrowings, on ofinterest payments cash exceeded interest capitalized In2004, interest. ofcapitalized net tively, respectively. percent, 4.75 and percent 5.89 were obligations, debt hedged for swaps rate ofinterest effects the including 2005, and 31, 2006 atDecember rates interest and obligations debt on based rates borrowing effective weighted-average of the compensation cost recognized for exercised stock options as afi as options stock exercised for recognized cost compensation of the benefi tax classify now we 123R, SFAS adopting after Inaddition, 25. APB under options stock for recognized was expense no because awards performance for toexpenses only relate 2004 benefi tax related as well as respectively, 2004, and 2005, in2006, million, $53.0 and million, $403.5 million, of$359.3 amount inthe cost tion compensa- stock-based We recognized ofadoption. date the after periods inthe income innet recognized be shall 123, ofSFAS provisions original the under determined ofadoption, date atthe vested yet not ofawards expense modifi or granted awards toall apply 123R ofSFAS sions lines may be withdrawn. be may lines the which under ofoccurring probable are that conditions no are there and material, not are fees commitment and balances Compensating program. paper commercial our backs ofwhich $1.20 billion facilities, credit bank ted commit- ofunused $1.21 have we billion 31, paper. 2006, December At commercial and tobanks payable of notes $19.4 2010, 2011, $21.5 and million; 2009, million; $1.40 billion; $16.0 million. 2008, lion; 40 in2004. compensation employee tostock-based 123R ofSFAS provisions recognition value fair the applied had we if share per earnings and income net ofour acalculation 1for Note See recognized. was expense compensation no ofgrant, date the on stock underlying ofthe price market the equals options stock employee ofour price exercise the because 25, APB Under awards. performance and options stock our for inaccounting interpretations related and toEmployees, sued awards. ofperformance issuance the for and exercises option stock to satisfy stock treasury and shares issued newly We provide period. vesting the equals generally which grantees, individual ofthe period service requisite the over expense compensation stock-based the We recognize grant. ofthe year fi ofthe end atthe vest fully awards Performance targets. earnings-per-share ofcertain achievement the on depending any, if varies issued, actually shares award ofperformance number The stock. common ofour in shares tooffi granted are awards Performance of10 years. aterm have and date grant the from years three vest fully Options ofgrant. dates atthe stock ofour value market fair tothe equal prices atexercise toemployees granted are options Stock awards. performance and options ofstock consists primarily compensation Stock-based income. innet compensation ofstock-based value fair ofthe recognition the requires 123R SFAS 1, 2005. January effective 123R), (SFAS Payment Share-Based 2004), 123 (revised SFAS We adopted Plans 7: Stock Note 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. ofthe term the over LIBOR In connection with the adoption of SFAS 123R, we reassessed the valuation methodology for stock options and and options stock for methodology valuation the reassessed we 123R, ofSFAS adoption the with In connection In accordance with the requirements of SFAS 133, the portion of our fi ofour portion the 133, ofSFAS requirements the with In accordance respec- million, $32.0 and million $299.6 totaled borrowings on ofinterest payments cash 2005, and In 2006 We have converted substantially all fi all substantially converted We have respectively, $13.4 and million, million $8.6 included borrowings short-term 2005, and 31, 2006 December At We elected the modifi the We elected Is- Stock for Accounting 25, Opinion (APB) Board Principles Accounting followed we 1, 2005, toJanuary Prior fi next the for debt long-term on ofmaturities amounts aggregate The are but ESOP ofthe obligations are debentures (ESOP) Plan Ownership Stock Employee percent 6.55 The 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 carrying ofthe sum tothe equal amount an as sheets balance consolidated inthe ected ows rather than an operating cash fl cash operating an than rather ows ed prospective transition method for adopting SFAS 123R. Under this method, the provi- the method, this Under 123R. SFAS adopting for method transition prospective ed ts of $115.9 million, $122.9 million, and $18.5 million, respectively. The amounts for for amounts The of$115.9ts respectively. $18.5 and $122.9 million, million, million, xed-rate debt tofl debt xed-rate ow as under our previous disclosure. disclosure. previous our under as ow ed after the date of after ed In the adoption. addition, unrecognized oating rates through the use of interest rate swaps. The The swaps. rate ofinterest use the through rates oating nancing nancing cash fl ts resulting from tax deductions in excess inexcess deductions tax from resulting ts cers and key employees and are payable payable are and employees key and cers xed-rate debt obligations that is hedged hedged is that obligations debt xed-rate ve years are as follows: 2007, $210.8 mil- $210.8 2007, follows: as are years ve ow in the consolidated state- consolidated inthe ow scal FINANCIALS 41 — 2006 2006 2004 2005 Common Stock Weighted-Average Remaining Remaining of Weighted-Average Stock Weighted-Average Shares Common Attributable to Options (in thousands) Date Exercise Price of Options Contractual Term Grant Aggregate (in years) Intrinsic Value Weighted-Average Shares (in thousands) Fair Value ts of $11.3 million, $36.8ts of $11.3 million, and $36.8 million during those same years. As of December 2006, 31, the total remaining unrecognized compensation cost related to nonvested stock op- Prior to 2005, we utilized a Black-Scholes option-pricing model to estimate the fair value of the options. This Theweighted-average fair values of the individual options granted during 2006, 2005, and 2004 were $15.61, The intrinsic value of options exercised during 2006, 2005, and 2004 amounted to $40.8 mil- million, $131.9 The fair values of performance awards granted in 2006, 2005, and 2004 were $55.65, $56.18, and $70.33, re- Stock option activity during 2006 is summarized below: tions amounted to $83.1 million, which will be amortized over the weighted-average remaining requisite service period months. of 17 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, no shares were issued in 2004, and approximately 0.5 million shares million and shares 1.7 were issued in 2005 and 2006, respectively. Approximately $16.06, and $26.19, respectively, determined and $26.19, $16.06, using the following assumptions: Nonvested at January 2006. 1, ...... Granted ...... Vested ...... Forfeited 32,539 Nonvested at December 2006. 31, ...... 4,873 (12,007) (1,233) $22.75 lion, and million, $163.8 respectively. The total grant date fair value of options vested during 2006, 2005, and 2004, 24,172 million, $265.5amounted to $249.1 million, and $337.2 million, respectively. received We cash of $66.2 million, 20.75 15.61 million from exercises million, of stock options$105.9 and $117.9 during 2006, 2005, and 2004, respectively, and 22.46recognized related tax benefi 22.32

A summary of the status of nonvested shares as of December2006, 31, and changes during the year then ended, is presented below: Outstanding ...... at January 2006 1, Granted ...... Exercised...... Forfeited 90,082 or expired...... Outstanding ...... at December 2006 31, 4,873 Exercisable at December 2006. 31, ...... (1,907) (4,238) $69.37 88,810 64,638 56.16 34.70 69.67 69.38 70.42 4.93 3.91 $8.6 8.6

Dividend yield ...... Weighted-average volatility ...... Range of volatilities...... 24.8%–27.0% 2.0% 27.6%–30.7% 25.0% 2.0% 27.8% 35.2% 1.57% Risk-free interest rate...... Weighted-average expected life...... 4.6%–4.8% 2.5%–4.5% spectively. 7 years 3.43% 7 years 7 years of assumptions relatedvolatility, to risk-free interest rate, and employee exercise behavior. Expected 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 interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The model incorporates exercise and post-vesting forfeiture assumptions based on an analysis of historical data. The expected life of the 2006 and 2005 grants are derived from the output of the lattice model. model did not allow for the input of a range of factors. Accordingly, volatility was derived from the historical volatility of our stock price and the risk-free interest rate was derived fromthe weighted-averageyield of a treasury security with the same term as the expected life of the options. The expected life of the options was based on the weighted- average life of our historical option grants and the dividend yield was based on our historical dividends paid. FINANCIALS tc-ae opnain 393 5.8 122.1 128 2,145 5.6 (130.6) $101.4 (2,297) 42 910 8.4 377.9 $(100.7) 6,704 161 $10,926.7 104.1 (386.0) 11.7 5.6 $3,571.9 6.2 . . 31, 2006. atDecember 359.3 Balance (6,874) 934 (1,763.2) . . transactions. ESOP 2,662.7 . compensation Stock-based . . plans—net. 17.2 (106.3) stock employee under ofstock Issuance (129.1) (17.6) . treasury for Purchase 103.8 10,027.2 . shares oftreasury Retirement 262 $1.63 share: per . declared 9.7 dividends Cash (271) 3,323.8 6.7 income Net 943 . (1,677.0) . 31, 2005. atDecember Balance 403.5 1,979.6 . transactions. ESOP 172.9 (111.9) . compensation Stock-based plans stock employee . under ofstock Issuance (381.7) . treasury for Purchase 9,724.6 . shares oftreasury Retirement $1.54 share: per . declared dividends Cash 3,119.4 $104.2 349.9 income Net . 13.2 (1,555.9) . 31, 2004. atDecember Balance 53.0 1,810.1 952 . . ofAME Acquisition . transactions. 110.7ESOP (17.4) . compensation Stock-based $(118.6) plans stock employee . under ofstock Issuance . shares oftreasury Retirement $9,470.4 $1.45 share: per . declared dividends Cash income Net $2,610.0 . . 1, 2004. atJanuary Balance follows: as were equity ofshareholders’ components incertain Changes Note 9: Shareholders’ Equity arrangements. out-licensing and refl now is which liabilities, environmental and litigation inproduct toadecrease attributable primarily is liabilities noncurrent inother decrease The items. ofother avariety and arrangements, out-licensing and collaboration our from income swaps. rate ininterest adecrease by offset liabilities tion litiga- inproduct increase an by primarily caused is liabilities current inother increase The items. ofother a variety health benefi retiree inprepaid decrease tothe attributable primarily is assets insundry decrease The items. ofother 1), avariety and (Note assets intangible and goodwill assets, tax (Note 13), deferred contingencies environmental and litigation product our from recoveries insurance estimated software, computer capitalized our include assets sundry Our Liabilities Other and Assets Other 8: Note shares. million 45.2 than more not for Plan Stock Lilly 2002 the under in2007. issued tobe expected are 2.1 shares million Our other noncurrent liabilities include product litigation and environmental liabilities (Note 13), deferred (Note 13), deferred liabilities environmental and litigation product include liabilities noncurrent other Our and (Note 13), taxes, other liabilities environmental and litigation product include liabilities current other Our granted be may grants stock restricted or awards, performance options, additional 31, 2006, December At ected in other current liabilities, offset by an increase in deferred income from our collaboration collaboration our from income indeferred increase an by offset liabilities, current inother ected ts as a result of the adoption of SFAS 158 (Note 12). ofSFAS adoption ofthe aresult as ts diinl Common Stock in Treasury Shares Costs—ESOP Earnings Deferred (in Retained Capital Additional thousands) Paid-in Amount FINANCIALS 43 t plans in t plans. The funding had no net impact t trust. The cost basis of the shares held in the trust t trust with 40 million shares of Lilly common stock to provide a source of As December of 2006, 31, we have purchased $2.58 billion of our announced $3.0 billionshare repurchase haveWe 5 million authorized shares preferred of stock. As of December 2006 31, and 2005, no preferred stock haveWe funded an employee benefi We haveWe an ESOP as funding a vehicle for the existing employee savings plan. The ESOP used the proceeds of a Under a Shareholder Rights Plan adopted 1998, in all shareholders receive, along with each common share The rights plan provides that, if an Acquiring Person acquires percent or 15 more of our outstanding common Alternatively, in a transaction if, not approved by the board of directors, we are acquired in a business combi- At any time after an Acquiring Person has acquired percent 15 or more but less than 50 percent of our out- has been issued. been has on shareholders’equity as we consolidate the employee benefi was $2.64 billion and is shown as a reduction in shareholders’ equity, which offsetsthe resulting increases of $2.61 billion in additional paid-in capital and $25 million in common stock. Any dividend transactions between us and the trust are eliminated. Stock held by the trust is not considered outstanding in the computation of earnings per share. The assets of the trust were not used to fund any of our obligations under these employee benefi 2004. or 2005, 2006, loan from us to purchase shares of common stock from the treasury. The ESOP issued $200 million of third-party debt, repayment of which was guaranteed by us (see Note The 6). proceeds were used to purchase shares of our common stock on the open market. Shares of common stock held by the ESOP will be allocated to participating employees annually through as part 2017 of our savings plan contribution. The fair value of shares allocated each expense. compensation as recognized is period owned, a preferred stock purchase right entitling them to purchase from the company one one-thousandth of a share of Series B Junior Participating Preferred Stock (the Preferred Stock) at a price of $325. The rights are exercisable only after the Distribution Date, which is generally the 10th business day after the date of a public announcement that a person (the Acquiring Person) has acquired ownership percent of 15 or more of our com- mon stock. may We redeem the rights for $.005 per right, up to and including the Distribution Date. The rights will expire on July 28,2008, unless we redeem them earlier. stock and our redemption right has expired, generally each holder of a right (other than the Acquiring Person) will have the right to purchase at the exercise price the number of shares of our common stock that have a value of two times the exercise price. nation transaction or sell 50 percent or more of our assets or earning power after a Distribution Date, generally each holder of a right (other than the Acquiring Person) will have the right to purchase at theexercise price the number of shares of common stock of the acquiring company that have a value of two times the exercise price. standing common stock, the board of directors may exchange the rights (other than those owned by the Acquiring Person) for our common stock or Preferred Stock at an exchange ratio of one common share (or one one-thou- sandth of a share of Preferred Stock) per right. funds to assist us in meeting our obligations under various employee benefi program. acquired We approximately million million and 2.1 6.7 shares in 2006 and 2005, respectively, under this program. FINANCIALS 2006, 2005, and 2004, respectively, to consolidated income before income taxes and cumulative effect of a change ofachange effect cumulative and taxes income before income toconsolidated respectively, 2004, and 2005, 2006, benefi employee prepaid for liability tax deferred the in reduction The reserved. fully are that credits tax tostate related is carryforwards credit tax ofthe portion ing remain- The expire. never will carryforwards credit tax ofthe $12.0 and million back carried be will million $80.7 taxes; income future toreduce available million of$286.9 carrybacks and carryforwards credit tax have We also reserved. fully are that purposes tax income state for losses operating tonet related is carryforwards other for asset tax deferred ofthe portion remaining ofthe component primary The expire. never will carryforwards the fi within $29.1 expire million: will million of$34.7 purposes tax income U.S. and national . assets—net tax Deferred liabilities . . tax Total deferred . . Other. benefi employee Prepaid . equipment and Property Deferred tax liabilities . assets. tax Total deferred allowances . . Valuation . Other. . instruments Financial . disposals Asset purchases Asset . . ofintangibles. Sale . carrybacks and carryforwards Tax credit . carryforwards Other State . State . netr ...... Inventory . Foreign . Federal Deferred 44 benefi and Compensation Deferred tax assets . taxes. Income . Foreign . Federal Current principle: counting inac- ofachange effect cumulative before toincome attributable taxes ofincome composition the is Following Taxes 10: Income Note Unremitted earnings to be repatriated due to change in tax law intax tochange due repatriated tobe earnings Unremitted Domestic and Puerto Rican companies contributed approximately 18 percent, 43 percent, and 6 percent in 6percent and percent, 43 18 percent, approximately contributed companies Rican Puerto and Domestic inter- for carryforwards, loss operating net including carryforwards, other had we 31, 2006, December At Signifi cant components of our deferred tax assets and liabilities as of December 31 are as follows: as 31 are ofDecember as liabilities and assets tax deferred ofour components cant t ...... ts . t . ts ts was a result of the adoption of SFAS 158 in 2006 (Note 12). 158 in2006 ofSFAS adoption ofthe aresult was ts (6.) 465.0 (465.0) — . 20 20 2004 2005 2006 20 2005 2006 $ 593.5 $ 713.4 (1,424.0) 2,017.5 2,511.2 $755.3 $197.7 (485.8) (493.7) (237.0) (701.2) 504.4 563.1 293.2 286.9 390.6 192.2 276.2 113.5 161.3 (25.2) 83.2 98.0 78.3 94.6 .4 1188 556.9 1,178.8 218.7 1. $47.6 $517.4 92.4 45.5 (86.8) (86.8) (74.0) 519.9 649.8 $58.3 2,143.3 235.7 89.4 175.2 $ 715.9 $1,131.8 2,599.0 414.8 166.0 391.5 (6.) 574.9 (462.9) (.5) (.5) 8.7 637.8 $396.6 (455.7) (2,085.0) (236.8) (1,145.6) (702.6) 11.6 (10.6) 11.6 ve years; $5.6 million of million $5.6 years; ve FINANCIALS 45 ned in the AJCA, dur- 35.0% 35.0% 35.0% 26.3% 38.5% 26.3% (1.5) (1.3) (2.4) 3.8 (4.8) (19.1) (4.8) 1,092,1501,088,936 $1.83$1.66 $2,001.6 $2,001.6 $1,810.1 1,083,887 1,088,754 $1.84$1.67 1,083,677 1,088,115 4,0355,259 (1.4) (6.7) (4.8) 35.0% 22.1% 2,153 $2.45 $2.45 $2,662.7 1,087,490 1,085,337 1,086,239 2006 2006 2005 2004 (Shares in thousands) in (Shares 2004 2005 2006 Following is a reconciliation of the effective income tax rate applicable to income before income taxes and Cash payments of income taxes totaled $864.0 billion, million, and $1.78 $487.0 million in 2006, 2005, and 2004, The American Jobs Creation Act of 2004 (AJCA) created a temporary incentive for U.S. corporations to repa- Sundry ...... Effective income tax rate...... cumulative effectof a change in accounting principle: Income before cumulative effect of a change in accounting principle available to common shareholders ...... The following is a reconciliation of the denominators used in computing earnings per share before cumulative ef- fect of a change in accounting principle: Note 11: EarningsNote 11: Per Share Additional repatriation due to change in tax law ...... Non-deductible acquired in-process research and development General business credits...... — — — — 15.8 4.3 United States federal ...... statutory tax rate (deduct) Add International operations, including Puerto Rico ......

ing 2005. At December 2006, 31, we had an aggregate of $5.7billion of unremitted earnings of foreign subsidiaries that havebeen or are intended to be permanently reinvested for continued use in foreign operations and that, if distributed, would result in taxes at approximately the U.S. statutory rate. triate undistributed income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations 2005. in recorded We a related tax liability of $465.0 million as of December 2004, 31, and subsequently repatriated $8.00 billion in incentive dividends, as defi in accounting principle. have We a subsidiary operating in Puerto Rico under a tax incentive grant that begins to expire at the end have of 2007. We a new tax incentive grant, not yet effect, in that will last for a period at least of years10 from its inception date. respectively. The higher cash payments of income taxes in 2005 are primarily attributable to the tax liability associ- ated with the implementation of the AJCA and the resolution of an IRS examination for the years 1998 to 2000. Diluted earnings per share before cumulative effect of a change in accounting principle...... Stock options and other incremental shares...... Weighted-average number of common shares outstanding—diluted ...... in accounting principle ...... Diluted earnings per share Weighted-average . . . . . number of common shares outstanding including incremental shares...... Basic earnings per share before cumulative effect of a change Basic earnings per share Weighted-average number of common shares outstanding, FINANCIALS Expected return on plan assets for net benefi net for assets plan on return Expected benefi net for increase ofcompensation Rate benefi for increase ofcompensation Rate 46 thereafter. and in2009 to6percent year per 1percent decreasing in2007, of8percent rate annual atan toincrease assumed were rates trend Health-care-cost 31, 2006. December benefi health retiree and plans pension defi U.S. our on ofreturn rates annualized 20-year and 10- our 2002, and in2001 conditions market benefi worldwide ofour percent 84 approximately defi U.S. inour assets plan Our economists. and advisers fi ofleading views the and allocations, asset conditions, market ofcurrent analysis an results, actual with benefi net for rate Discount benefi for rate Discount (1,388.7) 62.2 10,980.7 10, 31 ofDecember as assumptions Weighted-average (1,588.7) (1,588.7) 1,856.8 (Percents) (26.5) (720.3) 12,569.4 200.0 12.7 11,001.2 782.5 . equity Shareholders’ . (loss). income comprehensive other Accumulated (325.9) (1,615.2) $1 . . Total liabilities 1,844.1 . taxes income Deferred $(1,289.3) 23,570.6 Accrued retirement benefi 2,341.2 . liabilities. current Other $2,380.8 Total assets . . . Sundry . pension Prepaid 158.” SFAS toAdopting “Prior labeled column inthe below table inthe included is liability minimum additional the ofrecognizing effect The rules. accounting prior tothe pursuant liability minimum additional an recognized have would we 31, 2006, 158 atDecember SFAS toadopt required been not we Had periods. infuture results operating our affect not will it and presented, period prior any for or 31, 2006, December ended year the for ofincome ment state- consolidated our on effect no 158 had ofSFAS adoption The table. following inthe presented are 31, 2006 adoption of 158. SFAS at (loss) income comprehensive other inaccumulated recognized amounts the as basis same the on cost periodic ofnet acomponent as recognized subsequently be will amounts Those (loss). income comprehensive of other acomponent as recognized be will period same inthe cost pension periodic net as recognized not are and periods insubsequent arise that losses and gains Further, actuarial 158. SFAS by changed not were which amounts, such amortizing for rules accounting prior tothe pursuant cost pension periodic net as recognized subsequently be will loss comprehensive inother amounts The rules. accounting prior tothe pursuant sheet balance consolidated inour status funded plans’ the against netted previously were which costs, service prior unrecognized and losses actuarial unrecognized net the represents atadoption loss comprehensive other toaccumulated adjustment The oftax. net loss, comprehensive other toaccumulated adjustment acorresponding with sheet, balance 31, 2006 health benefi retiree defi our for obligation benefi projected the and assets ofplan value fair the between difference the (i.e., status funded the recognize we that 158 requires SFAS 158. ofSFAS provisions disclosure and recognition the adopted we 31, 2006, December On Benefi 12: Retirement Note We used a measurement date of December 31 to develop the change inbenefi change the 31 todevelop ofDecember date ameasurement We used compared assumptions historical our considered have we assets, plan on return expected the In evaluating 31: ofDecember as assumptions weighted-average our represents following The atDecember sheet balance consolidated our 158 on ofSFAS provisions the ofadopting effects incremental The t plans) of our defi ofour t plans) ned ned benefi t ...... 958 8. 1,586.9 681.1 905.8 t . t obligation ...... t obligation ts t costs ...... t costs t pension plans and the accumulated postretirement benefi postretirement accumulated the and plans t pension ned benefi t plan were approximately 9.4 percent and 10.9 percent, respectively, as of as respectively, 10.9 and 9.4 percent, percent approximately were t plan t obligation . . . . t obligation t costs . . . . . t costs t costs t costs . t pension plans and retiree health benefi health retiree and plans t pension t plan assets. Including the investment losses due to overall tooverall due losses investment the Including assets. t plan ned benefi Defi 06 2005 2006 2005 2006 4.7 4.6 5.8 5.7 9.0 t pension and retiree health plans comprise comprise plans health retiree and t pension ned Benefi ned 56 — — 5.6 5.8 9.0 9.0 47 — — 4.7 5.9 t Pension Plans Retiree Health Benefi Health Retiree Plans t Pension FS18 FS18 2006 158 SFAS 158 SFAS dpig dpig December 31, Adopting Adopting Prior to Effect of As Reported at at Reported As of Effect to Prior t obligation, change in plan as- in plan change t obligation, t plans in the December December inthe t plans t obligation for our our for t obligation 6.0 6.0 9.0 6.0 9.0 6.0 21,955.4 ned benefi nancial 2,015.3 ,091.5 t Plans 974.7 t t FINANCIALS 47 ned ned t Plans t (707.9) (97.3) (77.2) (77.2) 64.8 (101.3) — 61.5 965.7 1,089.1 155.4 $1,388.4 102.8 $ 279.9 1,673.6 745.4 $ 279.9 80.7 — 194.7 2 4.5 t Plans t (5.9) 97.9 72.2 (85.7) (82.5) (82.5) (25.0) 171.1 931.8 103.0 965.7 846.1 (577.5) (583.4) 1,157.3 — $ — 1,740.7 $ $ 262.7 $ 262.7 $1,673.6 t plans. doWe not expect any t RetireeHealth nedBenefi t pension plans and unrecognized net t Pension Plans Retiree Health Benefi ts of $85.7 million related to our retiree $2,419.6 $2,419.6 (270.4) (530.9) (36.6) (268.4) 4,797.8 4,797.8 $5,190.7 $5,190.7 71.4 5,628.4 375.0 296.2 296.2 2,237.9 2,237.9 311.2 311.2 297.4 297.4 5,482.4 $2,163.3 $2,163.3 (147.2) (146.0) $2,163.3 261.7 261.7 651.9 651.9 (73.9) — — Pension Plans Benefi Defi Pension nedBenefi 63.4 38.7 64.9 (43.4) ned benefi ned 913.1 221.3 190.1 280.0 343.5 454.7 (287.9) (291.2) Defi 2006 2006 2005 2006 2005 6,519.0 1,788.6 1,852.0 6,480.3 5,482.4 (1,009.4) $1,890.7 $1,890.7 $1,091.5 $1,091.5 $5,628.4 t related to our retiree health benefi ect expected future service, as appropriate, are expected to be paid t pension plans and $92.3 million of unrecognized net actuarial loss and t plans, which were as follows: t) ...... t) ned benefi ned t ...... t t payments, which refl t cost $119.7 million of unrecognized net actuarial million of unrecognizedt cost loss $119.7 and $7.7 prior t obligation t t plans. In 2007, we expect to recognize from accumulated other comprehensive loss as components ts paid ...... ts paid t obligation at end of year ...... t obligation at end of year t obligation at beginning of year ...... ts paid ...... t pension and retiree health benefi The following benefi Included in accumulated other comprehensive loss at December 2006 31, are the following amounts that have Employer contribution ...... plan assets to be returned to us in 2007. follows: as health benefi health of net periodic benefi service cost related to our defi million of unrecognized$15.6 prior service benefi not yet been recognized in net periodic pension cost: unrecognized net actuarial billion losses and un- of $1.79 recognized prior service costs of $63.4 million related to our defi actuarial losses million of $931.8 and unrecognized prior service benefi Net amount recognized ...... Actual return on plan assets ...... Benefi Change in plan in assetsChange value Fair of plan assets at beginning year of ...... Benefi benefi retirement Accrued Accumulated other comprehensive loss before ...... income taxes 2012–2016 ...... 2012–2016 1,847.0 615.8 2008 ...... 2008 ...... 2009 ...... 2010 ...... 300.32011 307.7 316.7 326.7 90.7 95.9 101.2 107.3 ...... 2007 $ 292.5 $ 85. Foreign currency exchange rate changes and other adjustments ...... Benefi Reduction discount in rate, foreign currency exchange rate changes, and otheradjustments ...... Service cost ...... Interest cost Actuarial (gain) loss ...... Change in benefi Benefi sets, funded status, and amounts recognized in the consolidated balance sheets at December for 31 our defi benefi

Net amount recognized ...... Amounts recognized in the consolidated balance sheetof consisted Funded status ...... Funded status ...... Unrecognized net actuarial loss Unrecognized prior service cost (benefi value Fair of plan assets at end of year ...... Prepaid pension Sundry ...... Other current liabilities ...... — — — 377.2 FINANCIALS Total ...... Total of discretionary funding to our postretirement health benefi health postretirement toour funding of discretionary defi toour in2007 funding discretionary ofadditional million $80 approximately tocontribute expect we year. the for Inaddition, requirements funding mum Other . Real estate ...... estate Real 48 . securities Debt . instruments equity-like and securities Equity Asset Category (Percents) Defi . cost service ofprior Amortization . assets plan on return Expected cost Interest . . cost Service benefi periodic ofnet Components December 31, 2005. December of as respectively, million, $1.51 $870.3 and and 31, billion 2006, ofDecember as respectively, $1.22and billion, defi the for benefi projected The respectively. 2005, and 31, 2006 atDecember lion 06 05 04 06 05 2004 2005 2006 Benefi 2004 2005 Pension 2006Plans Net periodic benefi . loss actuarial Recognized 2004 were not signifi not were 2004 benefi these with associated Expenses ofemployees. lives service the over cost related respectively. 2004, and 2005, 2006, years the for million $75.5 $96.1 and $106.5 million, million, totaled plans the under Expenses match. of our level the and contributions employee on based are plan tothe contributions Our tosave. incentive an with ployees defi benefi postretirement accumulated 31, 2006, December the decrease would rates inthese decrease percentage-point Aone- 16.4 percent. by increase would expense annual 2006 ofthe components cost interest and cost service the benefi postretirement accumulated 31,ber 2006, portion of the growth investment classifi investment growth ofthe portion diversifi that well are securities equity public is instruments equity-like and equity ofthese component largest The investments. market private and public ofboth portfolio asset plan ofour percent 75 approximately torepresent expected are that instruments classifi investment the growth Within ments. fi to15 percent 5percent and investments growth percent to95 percent 85 approximately prises ned contribution plans is generally to provide additional fi additional toprovide generally is plans contribution ned In 2007, we expect to contribute approximately $80 million to our defi toour million $80 approximately tocontribute expect we In 2007, Net pension and retiree health benefi health retiree and pension Net benefi accumulated total The We provide certain other postemployment benefi postemployment other certain We provide defi We have year, Decem- the future each point percentage one by increased tobe were rates trend health-care-cost the If Our defi Our defi U.S. Our t obligation by 9.9 percent and the aggregate of the 2006 service cost and interest cost by 14.1 by cost percent. interest and cost service 2006 ofthe 9.9 by aggregate the and t obligation percent ned benefi ned benefi ned contribution savings plans that cover our eligible employees worldwide. The purpose of these ofthese purpose The worldwide. employees eligible our cover that plans savings contribution ned ned benefi cant. t pension plans with projected benefi projected with plans t pension tcs ...... t cost . t pension plan and retiree health plan asset allocations as of December 31 are as follows: as 31 are ofDecember as allocations asset plan health retiree and plan t pension t pension and retiree health benefi health retiree and t pension ed and invested in U.S. and international small-to-large companies. The remaining remaining The companies. small-to-large international and inU.S. invested and ed t obligation for our defi our for t obligation t cost ned benefi cation is represented by other alternative growth investments. growth alternative other by represented is cation t expense included the following components: following the included t expense cation, the plan asset strategy encompasses equity and equity-like equity-like and equity encompasses strategy asset plan the cation, t obligation would increase by 11.0 percent and the aggregate of 11.0 by aggregate the and increase percent would t obligation t plans. We also expect to contribute approximately $75 million million $75 approximately tocontribute expect We also t plans. ts primarily related to disability benefi todisability related primarily ts $286.6 $280.0 (494.8) 343.5 ned benefi 149.6 t obligations in excess of plan assets were $2.23 billion billion $2.23 were assets ofplan inexcess t obligations 8.3 t plans during 2007. during t plans ecnaeo Percentage of Assets Plan Health Retiree 2005 2006 Assets Percentage of Plan Pension 2005 2006 nancial security during retirement by providing em- providing by retirement during security nancial $297.4 $238.8 167 99.7 106.7 296.2 286.4 $262.0 $230.0 $262.0 $230.0 7.6 7.3 7.3 7.6 t plan investment allocation strategy currently com- currently strategy allocation investment t plan (445.9) (402.2) (402.2) (445.9) 100 ned Benefi 78 12 t pension plans was $5.65 billion and $4.88 bil- $4.88 and billion $5.65 was plans t pension 1 9 100 100 14 14 1 — — 10 10 75 t obligation and fair value of the plan assets assets plan ofthe value fair and t obligation t Retiree Health Retiree t ned benefi t pension plans to satisfy mini- tosatisfy plans t pension $ 72.2 $172.5 107.9 t plans in 2006, 2005, and and 2005, in2006, t plans (89.9) (15.6) 97.9 ts and accrue for the the for accrue and ts 80.762.5 86.6 57.8 86.6 $3. $92.1 $137.6 $ $47.6 61.5 100 (75.6) (60.2) (75.6) (15.6) (15.6) (15.6) 80 10 10 t Plans xed-income xed-income invest- 100 9 11 80 FINANCIALS ce 49 led lawsuits led ling. We expect expect ling. We a motion led led a lawsuit against Mayne in lawsuit against a led nancial position. nancial led a lawsuit against Barr in the U.S. District Barr in the U.S. District a lawsuit against led led a lawsuit against Sicor in the U.S. District the U.S. District in Sicor a lawsuit against led ling. In response to our lawsuit, Mayne fi our lawsuit, Mayne to ling. In response dent that Reddy’s and Teva’s claims are without merit and we merit and we without claims are and Teva’s dent that Reddy’s led a declaratory judgment action in the U.S. District Court for the for Court in the U.S. District judgment action a declaratory led led an ANDA for Gemzar, alleging that the 2013 patent is invalid. In December In December is invalid. that the 2013 patent Gemzar, alleging for ANDA an led cally noted below, the resolution of all such matters will not have a material nancial position or liquidity, but could possibly be material to our consolidated led a similar ANDA for Gemzar. In October 2006, we fi 2006, we In October Gemzar. for a similar ANDA led nancial position. nancial nancial position. nancial led a lawsuit against Teva in the U.S. District Court for the Southern District of Indiana, seeking a the Southern District Court for in the U.S. District Teva a lawsuit against led led a lawsuit against Sun in the Southern District of Indiana in response to Sun’s ANDA fi ANDA Sun’s to of Indiana in response Sun in the Southern District a lawsuit against led cant of these are described below. While it is not possible to predictor determine the outcome of these mat- In June 2002, we were sued by Ariad Pharmaceuticals, Inc., the Massachusetts Institute the Technology, of to prevail in litigation involving our Gemzar patents and believe that claims made by these generic companies that that claims made by these generic companies and believe our Gemzar patents in litigation involving prevail to of this the outcome or determine predict to possible it is not without merit. However, are not valid are our patents a have could outcome An unfavorable will prevail. that we no assurance provide can we litigation, and accordingly, liquidity, and fi of operations, results impact on our consolidated adverse material Sicor Pharmaceuticals, Inc. (Sicor), a subsidiary of Teva, submitted ANDAs in November 2005 seeking permission to to 2005 seeking permission in November ANDAs submitted a subsidiary of Teva, Inc. (Sicor), Pharmaceuticals, Sicor in 2010 and 2013), (expiring U.S. patents of our relevant the expiration of Gemzar prior to generic versions market fi 2006, we In February invalid. are that these patents and alleging being infringed and are valid are of Indiana, seeking a ruling that these patents the Southern District Court for fi Sicor our lawsuit, to In response by Sicor. that the Indiana court our lawsuit in Indiana, asserting dismiss to also moved Sicor of California. District Central that Mayne notice received 2006, we In September action has been dismissed. lacks jurisdiction. The California Pharma (USA) Inc. (Mayne) fi fi the ANDA to of Indiana in response the Southern District that Sun notice received 2006, we lacks jurisdiction. In October that the Indiana court our lawsuit, asserting to Inc. (Sun) fi Industries Pharmaceutical fi 2006, we Court for the Southern District of Indiana, seeking a ruling that these patents are valid, enforceable, and being enforceable, valid, are seeking a ruling that these patents of Indiana, the Southern District Court for In of Evista. a generic version market to permission seeking an ANDA has also submitted Teva infringed by Barr. fi June 2006, we has been set No trial date and being infringed by Teva. enforceable, valid, are U.S. patents ruling that our relevant it is However, prevail. to expect without merit and we claims are and Teva’s that Barr’s believe We in either case. assurance no provide can we of this litigation, and accordingly, the outcome or determine predict to not possible of results on our consolidated impact adverse a material have could outcome An unfavorable will prevail. that we liquidity, and fi operations, expect to prevail. An unfavorable outcome would have a material adverse impact on our consolidated results of results impact on our consolidated adverse a material have would outcome unfavorable An prevail. to expect liquidity, and fi operations, that these patents and alleging in 2012-2017) (expiring U.S. patents of our relevant the expiration prior to Evista fi 2002, we or not infringed. In November not enforceable, invalid, are was subsequently acquired by Teva Pharmaceuticals (together, Teva), each submitted Abbreviated New Drug New Abbreviated submitted each Teva), (together, Pharmaceuticals by Teva acquired was subsequently of our the expiration to prior of Zyprexa generic versions market to seeking permission (ANDAs) Applications fi We or not enforceable. invalid was that this patent in 2011) and alleging (expiring U.S. patent relevant a ruling that the of Indiana, seeking the Southern District Court for in the U.S. District these companies against 14, 2005, on April on all counts in our favor ruled court infringed. The district and being enforceable is valid, patent Reddy and Teva Circuit. the Federal 26, 2006, that ruling was upheld by the Court of Appeals for and on December confi are that decision. We of seeking a review are • • Barr Laboratories, Inc. (Barr), submitted an ANDA in 2002 seeking permission to market a generic version of a generic version • market to permission in 2002 seeking an ANDA Inc. (Barr), submitted Barr Laboratories, Patent Ligitation areWe engaged in the following patent litigation matters brought pursuantto procedures set out in the Hatch- Waxman Act (the Drug Price Competition and Patent Restoration Term Act of 1984): Inc., which Pharmaceuticals, and Zenith Goldline Pharmaceuticals, Teva Ltd. (Reddy), Laboratories, Reddy’s • Dr. adverse effect on our consolidated fi results of operations in any one accounting period. Note 13: Contingencies 13: Note areWe a party to various legal actions, government investigations, andenvironmental proceedings. The most signifi ters, we believe that, except as specifi Whitehead Institute for Biomedical Research and the President and Fellows of Harvard College in the U.S. District Court for the District of Massachusetts 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 seek- ing royalties on past and future sales of these products. In June 2005, the United States Patent and Trademark Offi commenced a re-examination of the patent in order to consider certain issues raised by us relating to the validity of the patent. 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 FINANCIALS 50 fi in the paid be will and sheet balance consolidated 31, 2006 December inour liabilities current inother corded In January2007,we reached agreements• with anumberofplaintiffs’ attorneys to settle more than18,000claims In June2005,we reached anagreement• in principle (andinSeptember 2005afi follows: as were settlements primary fi ofpreviously number alarge including claimants, 28,500 mately ofapproxi- atotal cover agreements The claims. ofthe majority asubstantial tosettle litigation liability product 1596). York (MDL No. ofNew District Eastern the for Court District Federal inthe Weinstein Jack Honorable The before proceeding (MDL) Litigation 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 of Zyprexa, use the from ofinjuries avariety “claims”) allege the (together notifi been have and States United in the lawsuits liability product ofZyprexa number inalarge adefendant as named been We have and Related Liability Litigation Product providers. care ofhealth remuneration and toZyprexa, respect with practices promotional and ing market formulary, California’s on status Zyprexa’s maintain and toobtain efforts toour related ofdocuments tion offi General’s Attorney California the from asubpoena received we 2006, InSeptember Zyprexa. to respect with practices promotional and marketing our and ofZyprexa tosales relating ofdocuments production offi the from a subpoena received we 2005, InJune investigations. tothe relating information and ofdocuments range abroad providing ing includ- investigations, inthese Attorney U.S. the with cooperating We are agreements. rebate the by covered sales product tothe related reporting price best Medicaid ofLilly’s areview includes inquiry The Zyprexa. and Prozac, benefi apharmacy intowith entered we agreements rebate tain offi Attorney’s U.S. the 2005, Weekly. InOctober Prozac and Prozac, toZyprexa, respect with advisors, and consultants ofphysician remuneration and physicians with tions communica- our including practices, promotional and marketing U.S. toour related investigation acivil menced offi the 2004, In March Investigations Government remote. is damages monetary ofany likelihood the that therefore and issues these on prevail ultimately will we that merit, legal without are allegations these that We believe rendered. been has decision No processes. natural covers impermissibly and unenforceable is patent the that contention our on 7, ofAugust 2006, week the held was chusetts ofMassa- Court District U.S. the with trial bench aseparate Inaddition, Circuit. Federal the for ofAppeals Court the to decision the appeal will unsuccessful, if and judge, court trial the by overturned verdict jury the tohave seeking We are oftrial. date the through patent ofthe ofissuance date the from Evista and ofXigris sales U.S. toall royalty remedies. fi and charges criminal include could matters ofthese outcome the that and toinvestigation subject become could products Lilly other that possible is It providers. care health of 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 anticipate we and effort, joint inthis participating are states 23 that aware We are general. ofattorneys committee executive an by coordinated being effort investigative ofamultistate part now are requests ofthese Most states. of ofanumber general attorneys the from subpoenas or demands investigative civil received have we 2006, August Medicaid best price reporting comply with applicable laws and regulations. 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, of operations, results consolidated our on impact adverse amaterial have could outcome adverse an fi ofany ofamounts range 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 for approximately $500million. being administered by specialsettlement masters appointed byJudgeWeinstein. 8,000 claimsfor $690.0millionplus$10.0to cover administration ofthesettlement. Thatsettlement is Since June 2005, we have entered into agreements with various claimants’ attorneys involved in U.S. Zyprexa Zyprexa inU.S. involved attorneys claimants’ various with into agreements entered have we 2005, June Since The 2005 settlement totaling $700.0 million was paid during 2005. The January 2007 settlements were re- were settlements 2007 January The 2005. during paid was million $700.0 totaling settlement 2005 The We cannot predict or determine the outcome of these matters or reasonably estimate the amount or or amount the estimate reasonably or matters ofthese outcome the determine or predict We cannot ed of many other claims of individuals who have not fi not have who ofindividuals claims other ofmany ed ce of the U.S. Attorney for the Eastern District of Pennsylvania advised us that it had com- had it that us advised ofPennsylvania District Eastern the for Attorney U.S. ce ofthe ce of the Attorney General, Medicaid Fraud Control Unit, of the State of Florida, seeking seeking ofFlorida, State ofthe Unit, Control Fraud Medicaid General, Attorney ce ofthe 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 ce advised that it is also conducting an inquiry regarding cer- regarding inquiry an conducting also is it that ce advised t manager covering Axid, Evista, Humalog, Humulin, Humulin, Humalog, Evista, Axid, covering t manager nes, penalties, or other monetary or nonmonetary nonmonetary or monetary other or penalties, nes, 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 nal agreement) to settle more than ce seeking produc- Beginning in led claims rst FINANCIALS 51 t edfor residents nancial position. nancial led in the Eastern District of New in 2006 York on similar cation in which the members of the purported class are led by the states of Alaska, West Virginia, New Mexico, and 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 We cannotWe predict with certainty the additional number of lawsuits and claims that may be asserted. In addition, Because of the nature of pharmaceutical products, it is possible that we could become subject to large num- In 2005, two lawsuits were fi In December 2004, we were served with two lawsuits brought in state court in Louisiana on behalf of the As a result of the January 2007 settlements discussed above, we incurred a pretax charge million of $494.9 in In addition, we have been named as a defendant in numerous other product liability lawsuits involving pri- In the second quarter of 2005, we recorded a net pretax charge billion $1.07 of for product liability matters. We areWe prepared to continue our vigorous defense of Zyprexa in all remaining cases. currently We anticipate haveWe insurance coverage for a portion of our Zyprexa product liability claims exposure. The third-party The U.S. Zyprexa product liability claims not subject to these agreements include approximately 340 lawsuits Reserves for product liability exposures and defense costs regarding the then-known and expected Zyprexa product product Zyprexa and expected the then-known regarding costs defense and liability exposures product for Reserves of the claims. number and cost of the probable estimate a reasonable formulate could we the extent liability claims to claims to the extent we could formulate a reasonable estimate of the probable number and cost of the claims. A number and cost of the probable estimate a reasonable formulate could we the extent claims to claims. Zyprexa and expected then-known to related were costs and of those exposures majority substantial 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. bers of product liability and related claims for other products in the future. In the past few years, we have experi- enced diffi Mississippi in the courts of the respective states. and are now part of the MDL proceedings in the Eastern District of New York.these In 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. In 2006, we were served with similar lawsuits fi Louisiana Department of Health and Hospitals, alleging that Zyprexa caused or contributed to diabetes or high blood-glucose levels, and that we improperly promoted the drug. These cases have been removed to federal court • The cost of the January 2007 Zyprexa settlements; and settlements; • of the January 2007 Zyprexa The cost • the fourth quarter of 2006. The charge covered the following: • The cost of the June 2005 Zyprexa settlements described above; and described above; settlements • of the June 2005 Zyprexa The cost liability product and expected the then-known regarding costs and defense liability exposures • product for Reserves deductibles and coverage limits. The charge took into account our estimated recoveries from our insurance coverage related to these matters. The charge following: covered the that we will prevail. marily diethylstilbestrol (DES) and thimerosal. The majority of these claims are covered by insurance, subject to insurance carriers have raised defenses to their liability under the policies and are seeking to rescind the policies. The dispute is now the subject of litigation in the federal court in Indianapolis against certain of the carriers and in arbitration in Bermuda against other carriers. While we believe our position has merit, there can be no assurance that trials in seven cases in the Eastern District New of will York begin in the second quarter of 2007. we have been served with a lawsuit seeking class certifi seeking refunds and medical monitoring. In early 2005, we were served with four lawsuits seeking class action status in Canada on behalf of patients who took Zyprexa. One of these four lawsuits has been certifi of Quebec. The allegations in the Canadian actions aresimilar those to in the litigation pending in the U.S. quarter of 2007. in the U.S. covering approximately 900 claimants and an additional 400 claims of which we are aware.In addition, although we believe it is probable, there can be no assurance that the January 2007 Zyprexa product liability settle- ments described above will be concluded. The ultimate resolution of Zyprexa product liability and related litigation could have a material adverse impact on our consolidated results of operations, liquidity, and fi ages, and attorneys’ fees. additional Two lawsuits were fi grounds. 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. payments for their members or insured patients being prescribed Zyprexa. These actions have now been consoli- dated into a single lawsuit, which is brought under certain state consumer protection statutes, the federal civil RICO statute, and common law theories, seeking a refund of the cost of Zyprexa, treble damages, punitive dam- on behalf of all consumers and third-party payors, excluding governmental entities, which have made or will make FINANCIALS 52 (968.1) 89.6 $(1,388.7) (1,588.7) $(165.8) $(420.6) (11.7) $(255.4) $(1,588.7) $(214.6) signifi not were $— 0.3 abenefi 12) were $20.0 $(202.9) $560.4 $19.7 542.4 . 31, 2006. atDecember Balance (loss) income . $ 18.0 comprehensive Other . 1, 2006. atJanuary balance Beginning follows: as were (loss) income comprehensive ofother component toeach related balances accumulated The (Loss) Income Comprehensive 14: Other Note liabilities. environmental certain for coverage for providing carriers insurance ability li- our with asettlement reached We have costs. ofthose topayment tocontribute expected be can parties other towhich extent the and costs, estimated methods, cleanup potential conditions, site regarding information able avail- applicable, as intoaccount, takes This matters. environmental other certain and remediation, costs, cleanup Superfund estimated for accrued We have sites. own ofour ofcertain remediation continue We also cleanup. the of amount entire the for liable severally and jointly be may party responsible each Superfund, Under 10 sites. than tofewer respect with parties responsible potentially ofseveral one as designated been have we Superfund, as known commonly Act, Liability and Compensation, Response, Environmental Comprehensive the Under Matters Environmental 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 fl cash as designated swaps rate interest on expense ly, interest for respective- 2004, and 2005, in2006, $17.1 and oftax, net $15.6 options and million, $21.4 million, currency million, foreign on losses realized for respectively, 2004, and 2005, in2006, oftax, net $23.1 million, and million, $3.8 lion, fl ofcash portion effective The income. innet included ofsecurities sales on gains realized net for respectively, 2004, and 2005, in2006, oftax, net $9.8 and million, lion, The amounts above are net of income taxes. The income taxes associated with the adoption of SFAS 158 (Note ofSFAS adoption the with associated taxes income The taxes. ofincome net are above amounts The Generally, the assets and liabilities of foreign operations are translated into U.S. dollars using the current current the using dollars intoU.S. translated are operations offoreign liabilities and assets the Generally, ofreclassifi net is securities on (losses) gains unrealized The cant, as income taxes were not provided for foreign currency translation. currency foreign for provided not were taxes income as cant, t of $777.5 million. The income taxes related to the other components of comprehensive income income ofcomprehensive components other tothe related taxes income The t of$777.5 million. Translation on Liability of Cash Flow Comprehensive Comprehensive Flow Cash of Liability on Translation urny Gis Pnin dpin oto f Other of Portion Adoption Pension Gains Currency oeg nelzd iiu Efcie Accumulated Effective Minimum Unrealized Foreign an euiis dutet FS18 egs Loss Hedges 158 SFAS Adjustment Securities Gains ow hedges is net ofreclassifi net is hedges ow cation adjustments of$16.9 $9.1 adjustments million, cation mil- ow hedges. cation adjustments of $2.3 mil- of$2.3 adjustments cation ows; therefore, FINANCIALS 53 , ows. ca- cer icts of of icts rm,and The Red Red The The Red Book Red The nancial account- nancial is reviewed on a periodic nancial reporting was nancial reporting based on the rm subject to shareholderratifi nancial results. The internal auditors The Red Book Red The nancial accounting and reporting that we rm to discuss audit activities, internal controls, cer Senior Vice President and Chief Financial Offi nancial position, results of operations, and cash fl nancial code of ethics, which further reinforces their nancial information. A staff of internal auditors regularly nancial statements in accordance with generally accepted nancial reporting, our underlying system of internal con- rm have full and free access to the committee. nancial information that is transparent, complete, timely, rel- ned in Rules 13a-15(f) and 15d-15(f) under the Securitiesned and 15d-15(f) in Rules 13a-15(f) Exchange Act dence in our fi dentiality of proprietary information. rm. The audit committee meets several times during the year with manage- cer President and Chief Operating Offi nancial reporting has been assessed by Ernst Their responsibility LLP. & Young is nancial management must sign a fi nancial statements and other fi to enableemployees to report suspected violations anonymously. Employees who report nancial statements present fairly our fi nancial policies that govern critical areas, including internal controls, fi nancial reporting as defi duciary accountability, and safeguarding of corporate assets. Our internal accounting control nancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of The Red Book nancial statements have been audited by an Ernst independent LLP, registered & Young public accounting nancial statements. The statements have been prepared in accordance with generally accepted accounting prin- ) that applies to all employees worldwide, requiring proper overall business conduct, avoidance of confl nancial reporting matters, including reviews of our externally published fi The internal control over fi We conductedWe an evaluation of the effectiveness of our internal control over fi The fi In addition the to system of internal accounting controls, we maintain a code conduct of (known as Our audit committee includes four nonemployee members the of board of directors, all of whom are indepen- We areWe dedicated to ensuring that we maintain the high standards of fi duciaryresponsibilities. nancial reporting is included on page 55 of our annual report. nancial reporting were effective asof December 2006. 31, because However, of its inherent limitations, internal rm. Their responsibility is to examine our consolidated fi fi Sidney Taurel Ph.D. John C. Lechleiter, Derica Rice W. conditions, or that the degree of compliance with the policies or procedures may deteriorate. to evaluate management’s assessment and evidence about whether internal control over fi designed and operating effectively. report Ernst & Young’s with respect to the effectiveness of internal control over fi control over fi effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in reports directly to the audit committee of the board of directors. framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, we concluded that our internal controls over monitors, on a worldwide basis, the adequacy and effectiveness of internal accounting controls. The general auditor fi the CEO, the COO, and all fi suspected violations are protected from discrimination or retaliation by the company. addition In to basis with employees worldwide, and allemployees are requiredto report suspected violations. A hotline number is published in Book interest, compliance with laws, and confi February 2007 9, Chairman of the Board andChief Executive Offi in accordance with management’s authorization and are properly recorded, andthat accounting records are ad- equate for preparation of fi ternal control over fi of 1934. have We global fi ing and reporting, fi systems are designed to provide reasonable assurance that assets are safeguarded, that transactions are executed Management’s Report on Internal Control Over Financial Reporting—Eli Lilly and Company and Subsidiaries Management of Eli Lilly and Company and subsidiaries is responsiblefor establishing and maintaining adequatein- Management of Eli Lilly and Company and subsidiaries is responsible for the accuracy, integrity, and fair presentation of the fi ciples in the United States and include amounts based on judgments and estimates bymanagement. In management’s opinion, the consolidated fi Management’s Reports Management’s Management’s Report for Financial Statements—Eli Lilly and Company and Subsidiaries fi and the independent registered public accounting fi registered accounting public independent the and tion, approve both audit and nonaudit services performed by the independent registered public accounting fi review the reports submitted by the fi ment, the internal auditors, and the independent public accounting fi and fi dent from our company. The committee charter, which is published in the proxy statement, outlines the members’ roles and responsibilities and is consistent with enacted corporate reform laws andregulations. It is the audit com- responsibilitymittee’s to appoint an independent registered public accounting fi auditing standards of the Public Company Accounting Oversight Board (United States). opinion Ernst with & Young’s respect to the fairness of the presentation of the statements (see opinion on page 54) is included in our annual re- port. Ernst reports & Young directly to the audit committeethe of board of directors. evant, andaccurate. Our culture demands integrity and an unyielding commitment to strong internal practices and policies. Finally, we have the highest confi trols, and our people, who are objective in their responsibilities and operate under a code of conduct and the highest level of ethical standards. have established. are We committed to providing fi FINANCIALS 54 opinion. our for basis areasonable provide audits our that We believe presentation. statement cial 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 These 31, 2006. December ended period inthe years three ofthe each for income fl cash ofincome, statements consolidated related the and 2005, and 31, 2006 December of as subsidiaries and Company and Lilly ofEli sheets balance consolidated accompanying the audited We have Company and Lilly Eli Shareholders and Directors of Board Report ofIndependentRegisteredPublicAccountingFirm expressed an unqualifi expressed 9, 2007 February dated report our and Commission Treadway ofthe Organizations ofSponsoring Committee the by issued Framework Control-Integrated inInternal established criteria on based 31, 2006, ofDecember as ing fi over control internal subsidiaries’ and Company and Lilly ofEli effectiveness the States), (United principles. accounting accepted generally U.S. with inconformity 2006, fl cash their and operations oftheir results dated fi dated February 9, 2007 February Indiana Indianapolis, counting pronouncement for defi 12 inNote fi tothe discussed As compensation. stock-based and obligations retirement asset for pronouncements accounting new adopted 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 In our opinion, the fi the opinion, In our As discussed in Notes 2 and 7 to the fi 7tothe 2and inNotes discussed As Board Oversight Accounting Company Public ofthe standards the with inaccordance audited, have We also

nancial position of Eli Lilly and Company and subsidiaries at December 31, 2006 and 2005, and the consoli- the and 2005, and 31, 2006 atDecember 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 2006 Eli Lilly and Company and subsidiaries adopted a new ac- anew adopted subsidiaries and Company and Lilly Eli in2006 statements, nancial ned ned benefi cant estimates made by management, as well as evaluating the overall fi overall the evaluating as well as management, by made estimates cant nancial statements, in 2005 Eli Lilly and Company and subsidiaries subsidiaries and Company and Lilly Eli in2005 statements, nancial t pension and other postretirement plans. postretirement other and t pension ows for each of the three years in the period ended December 31, December ended period inthe years three ofthe each for ows nancial statements. An audit also includes assessing the the assessing includes also audit An statements. nancial nancial statements are the the are statements nancial ows, and comprehensive comprehensive and ows, nancial report- nancial nancial state- nan- FINANCIALS 55 nancial reporting nancial nancial reporting. Our statementsnancial accor- in nancial statements for external purposes in nancial reporting may not prevent or detect mis- assess- reporting,nancial evaluating management’s nancial statements. nancial thereon. opinion ed 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- ing of internal control overfi nancial reporting based on our audit. nancial reporting as of December 2006, 31, based on the COSO criteria. nancial reporting and the preparation of fi ect the transactions and dispositions of the assets of the company; (2) provide reasonable nancial reporting as of December 2006, 31, is fairly stated, in all material respects, based on nancial reporting as of December 2006, 31, based on criteria established in Internal Control—Integrated nancial reporting and for its assessment of the effectiveness of internal control over fi We conductedWe our audit in accordance with the standards of the Public Company Accounting Oversight Board A company’s internal control over fi Because of its inherent limitations, internal control over fi In our opinion, management’s assessment that Eli Lilly and Company and subsidiaries maintained effective We alsoWe have audited, in accordance with the standardsof the Public Company Accounting Oversight Board

regarding the reliability of fi included obtaining an understand (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over fi over fi over responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over fi Control Over Financial Reporting, that Eli Lilly and Company and subsidiaries maintained effective internal control fi over Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO crite- ria). Eli Lilly and Company and subsidiaries’ management is responsible for maintaining effectiveinternal control Eli Lilly and Company haveWe audited management’s assessment, included in the accompanying Management’s Report on Internal Report of Independent Registered Public Accounting Firm Public Accounting Registered of Independent Report Board of Directors and Shareholders company’s assets that could have a material effect on the fi dance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations management of and directors of the company; and provide (3) rea- sonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the accordance with generally accepted accounting principles. A company’s internal control over fi includes those policies and procedures pertain that (1) to the maintenance of records that, reasonable in detail, accurately and fairly refl assurance that transactions are recorded as necessary to permit preparation of fi basis for our opinion. ment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. believe We that our audit provides a reasonable internal control over fi the COSO criteria. Also, in our opinion, Eli Lilly and Company and subsidiaries maintained, in all material respects, effective internal control over fi trols may become inadequate because of changes in conditions, or that the degree of compliance with the policies deteriorate. may procedures or statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that con- (United States), the 2006 consolidated fi port dated February 2007, expressed 9, an unqualifi Indianapolis, Indiana February 2007 9, PROXY STATEMENT 56 Offi Executive Chief and Board ofthe Chairman TaurelSidney toattend. plan you if even meeting, atthe represented are shares your certain tobe inorder Internet the on or telephone, by mail, by tovote you Iurge important. Your very is vote at11:00 Indiana, EDT. a.m. Center, Indianapolis, Corporate Lilly Auditorium, Center 16, Lilly atthe 2007, April Monday, on ofshareholders meeting annual our toattend invited You cordially are Shareholder: Dear 2007 5, March Notice of2007AnnualMeetingandProxy Statement

I look forward to seeing you at the meeting. meeting. atthe you toseeing forward I look 60. page on described meeting tothe admission for procedures our note Please meeting. atthe consider will we business the describe follow that statement proxy and ofmeeting notice The cer PROXY STATEMENT 5757 cer nancial community. A page at the back of this proxy statement contains an year 2007 year laboratories contract and use policy to animal care the company’s extending of animal research outsourcing offi of chairman and chief executive the roles separating Attendance at the meeting will be limited to shareholders, those holding proxies from shareholders, and This combined proxy statement and annual report to shareholders and the proxy are being mailed on or about to allow shareholders to amend the company’s bylaws by majority vote amend the company’s to shareholders allow to of directors. other than the election matters certain for standard vote Shareholders of record at the close of business onFebruary 2007, will 15, be entitled to vote at the meeting • to elect four directors of the company to serve three-year terms terms three-year serve to of the company • directors four elect to the for auditors LLP as principal independent • & Young of Ernst by the audit committee the appointment ratify to directors of the annual election for provide to of incorporation articles the to amendments • approve to Plan Stock 2002 Lilly the company’s goals for performance • reapprove to of on the feasibility report of directors that the board requesting proposal • on a shareholder vote and consider to on international report of directors that the board requesting proposal • on a shareholder vote and consider to a policy establish of directors that the board requesting proposal • on a shareholder and vote consider to • to consider and vote on a shareholder proposal requesting that the company amend its articles of incorporation of incorporation amend its articles that the company requesting proposal • on a shareholder and vote consider to majority adopt a simple of directors that the board requesting proposal • on a shareholder and vote consider to Indianapolis, Indiana March 5, 2007 James B. Lootens Secretary By order of the board of directors, invited guests from the media and fi admission ticket. If you plan to attend the meeting, please bring this ticket with you. March 5, 2007. The annual meeting of shareholders of Eli Lillyand Company will be held at the Lilly Center Auditorium, Lilly Cor- porate Indianapolis, Center, Indiana, a.m. on Monday, April EDT for 2007, the at 11:00 following 16, purposes: Notice of Annual Meeting of Shareholders of Annual Meeting Notice April 2007 16, and at any adjournment of the meeting. PROXY STATEMENT 58 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 oftwo one instructions, give not do you If direct. you as voted be will shares your instructions, broker the give you If nonvotes. Broker proposals. various the for requirements vote differing are There item? each of approval the for required are votes many How outstanding. and issued were stock common ofcompany shares 1,134,034,234 date, record ofthe As ing. meet- annual the for aquorum constitutes proxy, by represented or present shares, outstanding ofthe A majority aquorum? constitutes What shares: including date, record the on held you stock ofcommon share each for vote You one have meeting. annual atthe vote may date) record (the 15, 2007 February on ofbusiness close ofthe as Shareholders vote? to entitled is Who judgment. best their with inaccordance proxy that tovote intend persons Those meeting. the before brought be might that matters other toany respect with proxy the on named persons tothe authority ary discretion- gives proxy accompanying the need, unforeseen an is there incase Nonetheless, passed. already has nominations and proposals shareholder for deadline the because ofbusiness items other any expect not We do agenda? the on business of items other any be there Will Nine items: meeting? annual the at on vote shareholders the will What specifi information certain contains that statement aproxy with you provide must we proxy, your for asks company the When meeting. annual ofthe adjournment 16, atany and 2007, April Monday, on held tobe meeting) annual (the ers ofsharehold- meeting annual atthe voted tobe proxies soliciting is Company and Lilly ofEli ofdirectors board The statement? proxy this Ireceive did Why General Information • election ofdirectors• • The managementproposal to amendthearticles• ofincorporation requires the vote of80percent ofthe The appointmentofprincipalindependentauditors, themanagement proposal regarding• performance goals, The four nomineesfor director• receiving themost votes willbeelected. Abstentions andinstructions to withhold attributed to your account intheLilly• Employee 401(k)Plan(theplan). held for you inanaccount withabroker,• bank,orothernominee held directly inyour• nameastheshareholder ofrecord a shareholder proposal• onadoptingasimple majorityvote standard for matters otherthanelection ofdirectors. a shareholder proposal• onamendingthecompany’s articles ofincorporation a shareholder proposal• onseparating theroles ofchairmanandchiefexecutive offi a shareholder proposal• oninternational outsourcing ofanimalresearch a shareholder proposal• onextending thecompany’s animalcare andusepolicyto contract laboratories reapproving• performance goalsfor thecompany’s stock plan amending thecompany’s• articles ofincorporation to allow for annualelection ofdirectors • ratifi proposal. outstanding shares. For thisitem, abstentions andbroker nonvotes have thesameeffect asavote against the proposal. Abstentions willnotbecounted eitherfor oragainst theproposal. and theshareholder proposals willbeapproved ifthevotes cast for theproposal exceed thosecast against the count asvotes against anominee. authority to vote for oneormore ofthenomineeswillresult inthose nomineesreceiving fewer votes butwillnot ed by law. cation oftheappointmentprincipalindependentauditors If your shares are held by a broker, the broker will ask you how you want your shares to be voted. voted. tobe shares your want you how you ask will abroker, by broker the held are shares your If cer cation of auditors, ofauditors, cation PROXY STATEMENT 5959 ed you of their avail- cation of the appointment cer or agent of a corporation or partnership), please indicate your ed you of their availability. Voting by telephone has the same effect as voting Shareholders in the United States, Puerto Rico, and Canada may vote by telephone by following the You may voteYou online at www.proxyvote.com. Follow the instructions on the enclosed proxy if card or, Sign and date each proxy card you receive and return it in the prepaid envelope. Sign your nameexactly as small number of shares from a prior stock ownership plan, which can be voted only on the directions of the on the directions only be voted plan, which can ownership a prior stock from small number of shares credited) are the shares whose accounts participants to You have theYou right to revoke your proxy at any time before notifying the meeting by (1) the company’s secretary Note that if you previously elected to receive these materials electronically, you didnot receive a proxy card. • shares credited to the accounts of participants who do not return their voting instructions (except for a for (except instructions their voting of participants who do not return the accounts to • credited shares accounts. individual participants’ to credited not yet • held in the plan that are shares How many shares in the 401(k) plan can I vote? may vote allYou the shares allocated to your account on the record date. In addition, unless you decline, your vote will also apply to a proportionate number of other shares held in the 401(k) plan for which voting directions are not received. These undirected shares include: You may instructYou the plan trustee on how to vote your shares in the 401(k) plan by mail, by telephone, or on the Internet as described above, except that, if you vote by mail, the card that you use will be a voting instruction card rather than a proxy card. How do I vote my shares in the 401(k) plan? How do I vote in person? If you are a shareholder of record, you may vote your shares in person at the meeting. we encourage However, you to vote by proxy card, by telephone, or on the Internet even if you plan to attend the meeting. ability. Voting on the Internet has the same effect as voting by mail. If you vote on the Internet, do not return your proxy card. Internet voting will be p.m. available EDT April until 2007. 11:59 15, in writing or (2) delivering a later-dated proxy by telephone, on the Internet, or in writing. If you are a shareholder of record, you may also revoke your proxy by voting in person at the meeting. How do I vote shares that are held by my broker? If you have shares held by a broker or other nominee, you may instruct your broker or other nominee to vote your shares by following instructions that the broker or nominee provides for you. Most brokers offer voting by mail, telephone, and on the Internet. By Internet. you received these materials electronically, the instructions in the e-mail message that notifi by mail. If you vote by telephone, do not return your proxy card. voting Telephone will be p.m. available until 11:59 EDT April 2007. 15, instructions on the enclosed proxy if you card received or, these materials electronically, by following the instruc- tions in the e-mail message that notifi By telephone. telephone. By name and your title or capacity. If the stock is held in custody for a minor (for example, under the Uniform Trans- fers to Minors Act), the custodian should sign, If the stock not the minor. is held in joint ownership, one owner may sign on behalf of all owners. If you return your signed proxy but do not indicate your voting preferences, we will vote on your behalf for the election of the nominees for director listed below, for the ratifi of the independent auditors, for the management proposals on amending the articles of incorporationand reap- proving performance goals for the company’s stock plan, and against the shareholder proposals. If you wish to vote by mail, rather than by telephone or on the Internet as discussed below, you may request paper copies of these materials, including a proxy card, by Please calling make sure 317-433-5112. you give us the con- trol number from the e-mail message that you received notifying you of the electronic availability of these materi- als, along with your name and mailing address. By mail. it appears on the proxy. If you are signing in a representative capacity (for example, as an attorney-in-fact, execu- administrator, guardian,tor, trustee, or the offi How do I voteby proxy? If you are a shareholder of record, you may vote your proxy by any one of the following methods. PROXY STATEMENT unrelated to the company. tothe unrelated manner. inthis applied votes their tohave elected who participants other all with ally proportion- shares undirected tothe preferences voting your apply automatically will trustee the cline.” Otherwise, decisions. ing fi ERISA, Under applies. vote their towhich shares undirected of portion the and accounts totheir credited shares ofvoting purpose limited the for (ERISA) Act Security Income 60 each account. notifi e-mail separate receive may you account, one than more have you If Internet. the on or telephone by voting for instructions and materials the viewing for address aweb with along available are materials the when you notifying message e-mail an receive will you feature, this elect you If online. reports annual and statements proxy future receive wish, may, you if you plan, 401(k) ofthe amember or ofrecord ashareholder are you Yes. If electronically? materials proxy future receive to opportunity an offer company the Does at http://investor.lilly.com/bylaws.cfm. online available are bylaws ofthe Copies bylaws. inthe described as information other certain provide must notice That 2007. 6, November by notice written company the give must meeting annual atthe business other any propose to wishing shareholder any that provide bylaws company’s the Inaddition, 46285. Indiana Center,rate Indianapolis, Corpo- Lilly secretary, corporate company’s tothe addressed be should Proposals 2007. 6, November by it receive we that so inwriting proposal the submit must she or he statement, proxy year’s innext inclusion for considered aproposal tohave wishes ashareholder If 21, 2008. April for scheduled is meeting annual 2008 company’s The meeting? annual 2008 the for proposal ashareholder Isubmit do How directors? of board the Icontact do How meeting. atthe usher tothe ticket your detector. Present ametal including security, through topass need You will streets. McCarty and ofDelaware intersection atthe fountain ofthe south tothe entrance Center Lilly the use Please Auditorium. ter fi Please statement. proxy ofthis end atthe appears that ticket admission the presenting by attend may date record ofthe as shareholders All meeting? annual the attend to Iwant if Ido should What Inc. Associates, IVS ofelection, inspector independent an by tabulated are votes The votes? the tabulates Who receive. you card instruction voting and card proxy each for once tovote need will you Internet, the on or telephone by vote you if Alternatively, card. each return and sign voted, are shares your To all that account. one ensure than inmore shares hold you that means It card? proxy one than more Ireceive if mean it does What received. otherwise not are instructions voting which for shares toall portionally pro- applied preferences voting their tohave elected have who participants plan other by voted be will Your shares shares? plan my401(k) vote not Ido if happens What All such communications will be forwarded to the relevant director(s), except for solicitations or other matters matters other or solicitations for except director(s), relevant tothe forwarded be will communications such All to: addressed board, ofthe members more or toone communications written You send can de- “I marked box the check should you shares, undirected tothe applied vote your tohave want not do you If fi named are participants All If you have questions about admittance or parking, you may call 317-433-5112. call may you parking, or admittance about questions have you If afi on available be will Parking Indianapolis, Indiana 46285 Indiana Indianapolis, Lilly Corporate Center Secretary Corporate c/o Company and Lilly Eli Director,Presiding of Directors Board ll it out and bring it with you to the meeting. The meeting will be held at the Lilly Cen- Lilly atthe held be will meeting The meeting. tothe you with it bring and out it ll duciaries under the terms of the 401(k) plan and under the Employee Retirement Retirement Employee the under and plan 401(k) ofthe terms the under duciaries rst-come, fi rst-come, rst-served basis in the garage indicated on the map on page 111. page on map the on indicated garage inthe basis rst-served duciaries are required to act prudently in making vot- inmaking prudently toact required are duciaries cations for cations PROXY STATEMENT 6161 es us that they wish to continue receiving individu- ts of electronic delivery? cial shareholders can request information about householding from their banks, brokers, or other hold- Shareholders who participate in householding will continue to receive separate proxy cards. Householding Benefi If you hold your shares in a brokerage account, you may also have the opportunity to receive proxy materials You may sign for up You electronic delivery in two ways: Ifyou received these materials electronically, you do not need to doanything to continue receiving materials • If you vote online as described above, you may sign up for electronic delivery at that time. delivery electronic • may sign up for you as described above, online vote If you http://proxyonline.lilly.com. time by visiting may sign up at any • You If you participate in householding and wish to receive a separate copy of the 2006 annual report and 2007 proxy statement, or if you wish to receive separate copies of future annual reports and proxy statements, please call or writeus Householding at 317-433-5112 to: Department, will We Mercedes 51 Edgewood, Way, New 11717. York deliver the requested documents to you promptly upon your request. What if I want to receive a separate copy of the annual report and proxy statement? What is “householding”? “householding”? What is haveWe adopted “householding,” a procedure under which shareholders of record who have the same address and last name and do not receive proxy materials electronically will receive only one copy of our annual report and proxy statement unless one or more these of shareholders notifi May I change my mind later? may discontinue You Yes. electronic deliveryat any time. For more information, call 317-433-5112. What are thecosts of electronic delivery? The company charges nothing for electronic delivery. of course, may, You incur the usual expenses associated with Internet access, such as telephone charges or charges from your Internet service provider. Electronic delivery reduces the company’s printing and mailing costs. Itis also a convenient way for you to receive your proxy materials and makes it easy to vote your shares online. If you have shares in more than one account, it is an easy way to avoid receiving duplicate copies proxy of materials. ers of record. What are the benefi al copies. This procedure saves printing and postage costs by reducing duplicative mailings. will not affect dividend check mailings. electronically. Please follow the instructions of your broker. electronically future. the in PROXY STATEMENT 62 forstatement information. more proxy 96 ofthis page See in2010. expire will that term another toserve election for standing is and nominated been has directors ofthese Each meeting. annual year’s atthis expire will terms directors’ four following The 2007 of Class Biographies Directors’ Board ofDirectors Mayo Clinic Cancer Center 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 and Land Securities plc. Securities Land and Inc., Companies, McGraw-Hill ofThe director anonexecutive is He plc. ofSchroders, ecutive ex- chief group and Co. Schroder ofJ. Henry chairman including there, ofpositions a number in1966 held and Group Schroder the joined He plc. ofSchroders, chairman was he to 2000, 1995 From 2000. April since Europe, Citigroup chairman, as served has Bischoff Winfried Sir Citigroup Europe Chairman, Outstanding Directors. Outstanding of Institute ofthe president in1999. ofFame Hall past is He Accounting ofthe member 62nd the named was and Governance Corporate on Panel Ribbon Blue Directors of Corporate Association National ofthe amember was He States. United ofthe General Comptroller the to Council Advisory Accountability ofthe chairman is He Inc. &Fragrances Flavors tional Interna- and Corporation ofComcast boards the on serves He Institute. Research Scripps ofThe atrustee is and Board Oversight Accounting Company Public ofthe Council Advisory offi executive chief and chairman as served in1964 and &Sells Haskins in1999. Deloitte, joined He retirement his until 1989 offi executive chief and chairman as Mr. served Cook Offi Executive Chief and Chairman Retired Kathi P.Kathi Seifert ofGovernors. Board Clinic Mayo the and Foundation Mayo ofthe oftrustees board the on serves Prendergast Dr. 1975. since School Medical Mayo atthe positions teaching other several held has He Medicine. Individualized for Center ofthe director the and School Medical atMayo peutics Thera- Experimental and Pharmacology ofMolecular Professor and Biology Molecular and ofBiochemistry Professor Guggenheim Marion and Edmond the is Dr. Prendergast Ph.D. M.D., G.Prendergast, Franklyn Cook J. Michael Bischoff Winfried Sir Papers Inc.; the U.S. Fund for UNICEF; and the Fox Cities Performing Arts Center. Arts Performing Cities Fox the and UNICEF; for Fund U.S. the Inc.; Papers Appleton Inc.; International, Lexmark Corporation; Products Consumer Revlon Inc.; valu ofSuper- boards the on serves Seifert Ms. LLC. Perspectives, of Pinnacle chair is She pany. Com- Paper Howard Fort and Foods, Beatrice &Gamble, atProcter positions management held Seifert Ms. Kimberly-Clark, tojoining Prior forces. sales Canadian and U.S. Clark’s Kimberly- oversaw also She products. care personal for investment capital and programs, R&D positioning, product and branding for plans global manages and develops that team the leading recently most businesses, products consumer international and domestic the both with inconnection capacities inseveral served in1978 and Kimberly-Clark joined She 2004. June until Corporation Kimberly-Clark for president vice executive as served Seifert Ms. Corporation Kimberly-Clark President, Vice Executive Retired Age 57 Director since 1995 1995 since Director 57 Age Age 64 Director since 2005 2005 since Director 64 Age Age 65 Director since 2000 since Director 65 Age cer from 1986 through 1989. ofthe Mr. through 1986 amember is from cer Cook Age 61 Director since 1995 since Director 61 Age cer, Deloitte and Touche and LLP cer, Deloitte cer of Deloitte and Touche LLP from from Touche and LLP ofDeloitte cer PROXY STATEMENT 6363 cer of Motorola, Inc., cer of the company since October cer, Eastman cer, Kodak Company cer from 1993 to January 2000 and as presi- cer from 1990 to October 1993, and president and cer Age 65 Director since 1995 cer of Bank One, Cleveland, N.A.; president of the Federal Reserve Age 53 Director since 2005 ce until 2008.until ce Age 63 Director since 1987 Age 66 Director since 2000 cer from Fisher 1988 1990. to is a senior Mr. advisor for Kohlberg Kravis President and Chief Operating Offi Retired Chairman of the Board and Chief Executive Offi Fisher servedMr. as chairman of the board of Eastman Kodak Company from 1993 to Decem- ber 2000. He also served as chief executive offi dent from 1993 Prior until 1996. to joining Kodak, he was an executive offi serving as chairman and chief executive offi chief executive offi Roberts & Company, and a directorGeneral of Motors Corporation and Visant Corporation. He is a former chairman of PanAmSat Corporation, and was chairman of the National Academy of Engineering from 2000 to 2004. 2005. He joined Lilly as in 1979 a senior organic chemist and has held management positions in England and the U.S. He was named vice president of pharmaceutical product development in 1993 and vice president of regulatory affairs he was In 1996, in 1994. named vice president for development and regulatory affairs. Lechleiter Dr. became senior vice president of pharma- ceutical products in 1998, and executive vice president, pharmaceutical products and corporate development in 2001. He was named executive vice president, pharmaceutical operations in 2004. He is a member of the American Chemical Society. In 2004, Lechleiter Dr. was appointed to the Visiting Committee of Harvard Business School and to the Health Policy and Management Execu- tive Council of the Harvard School of Public Health. He also serves as a member of the Board of Trustees of Xavier University (Cincinnati, Ohio). In 2006, he became a member of the board of directors and executive committee of the Fairbanks Institute and a member of the United Way of Central Indiana board of directors. In addition, he serves as a distinguished advisor to The MuseumChildren’s Indianapolis of and as a memberExternal of the Dean’s Advisory Board at the UniversityIndiana Medicine. School of Dr. Lechleiter hasDr. served as president and chief operating offi Karen N. Horn, Ph.D. Ms. Horn served as president of Private Client Services and managing director of Marsh, Inc., a subsidiary of MMC, from 1999 until her retirement in 2003. Prior to joining Marsh, she was senior managing director and head of international private banking at Bankers Company; Trust chair and chief executive offi Bank of Cleveland; treasurer of Bell of Pennsylvania; andvice president of First National Bank of Boston. Ms. Horn serves as director Rowe Price of T. Mutual Funds; The U.S. Russia Invest- ment Fund, a presidential appointment; Simon Property Group, Inc.; and Fannie Mae. Ms. Horn has been senior managing director of Brock Capital Group since 2004. John C. Lechleiter, Ph.D. Executive Vice President for Academic Affairs and Provost, The University Southwest- of Texas ern Medical Center; Dean, The University Southwestern of Texas Medical School; and Regental Professor of Pharmacology, 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 and dean of The University South- of Texas western Medical School since 2005 and professor of pharmacology at The University of Texas Southwestern Medical Center He holds since 1981. the Raymond and Ellen Willie Distinguished Chair in 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 VirginiaSchool of Medicine from and to 1981 was 1971 named a professor of pharmacology He is a directorthere in 1977. of Regeneron Pharmaceuticals,Gilman was Inc. Dr. a recipient of the Nobel Prize in Physiology or Medicine in 1994. George M.C. Fisher M.C. George Alfred G. Gilman, M.D., Ph.D. Retired President, Private Client Services, and Managing Director, Marsh, Inc.

Class of 2008 The following four directors will continuein offi PROXY STATEMENT 64 inoffi continue will directors four following The 2009 of Class Economic Association. American ofthe president past and Sciences and ofArts Academy American ofthe member a is He Inc. Studies, Economic and Inc.; Group, International American Relations; Foreign on Council ofthe adirector and Commission Trilateral ofthe committee executive of the amember Dr. is Feldstein Economics. Business for Association National ofthe afellow and Society, Econometric ofthe afellow Academy, British ofthe fellow acorresponding Society, Philosophical American ofthe amember is He adviser. Reagan’s economic chief Ronald President and Advisers ofEconomic Council ofthe chairman as served he 1984, through 1982 in1968. From professor in1967 associate an and atHarvard professor assistant an became He University. atHarvard ofEconomics F. Professor George Baker the and search offi executive chief and president Dr. is Feldstein University Harvard Economics, of F. Professor Baker Offi Executive Chief and President the leader of the DuPont Engineering Polymers and DuPont and Polymers Engineering DuPont of the leader the became he In1990, ofareas. inanumber positions management and ofsales avariety held engineer, and in1981 aproduction as DuPont joined Mr. Fyrwald Solutions. Industry Food DuPont and Liqui-Box, Qualicon, DuPont Company, Solae The included which businesses, health and nutrition ofDuPont’s manager general and president vice previously was He 2003. since &Nutrition Agriculture ofDuPont president vice group been has Mr. Fyrwald &Nutrition Agriculture DuPont President, Vice Group Ellen R. Marram R. Ellen Fyrwald J. Erik Ph.D. Feldstein, S. Martin Citymeals-on-Wheels. Citymeals-on-Wheels. and Institute, Work and Theater, Families Center Lincoln Hospital, York-Presbyterian New ofThe boards the on serves She companies. private several as well as Company York Times New The and Company Motor ofFord ofdirectors board ofthe amember is Marram Ms. ers. Broth- Lever and &Johnson, Johnson Brands, atNabisco/Standard positions of marketing aseries held she to1986, 1970 from and Division; ofNabisco’s Grocery president was she fi of- executive chief and president was she to1993, 1988 From Group. Beverage Tropicana offi executive chief and president was Marram Ms. 1998, through offi executive and is currently an advisor to the fi tothe advisor an currently is and to2005 2000 from LLC Partners, Castle atNorth director amanaging was She services. afi LLC, Group Barnegat ofThe president is Marram Ms. LLC Group Barnegat The President, Company. Solae The and L.L.C.; Continent 8th Center; Art Moines Des Group; Advisory President’s al Internation- (BIO); CropLife Organization Industry Biotechnology ofthe boards the on serves Mr. Fyrwald ofe-commerce. president vice then and development business and plans rate ofcorpo- president vice appointed was he In1998, polymers. engineering for marketing and sales ofglobal head became he 1996, until when Americas the for business Plastics Pacifi Asia cer of the Nabisco Biscuit Company, an operating unit of Nabisco, Inc.; from 1987 to 1988, to1988, 1987 from Inc.; ofNabisco, unit operating an Company, Biscuit Nabisco ofthe cer c region, a position he held until 1994. He was named leader of the DuPont Nylon Nylon DuPont ofthe leader named 1994. was until He held he aposition c region, cer of a start-up B2B exchange for the food and beverage industry. From 1993 1993 From industry. beverage and food the for exchange B2B ofastart-up cer Age 47 Director since 2005 since Director 47 Age Age 60 Director since 2002 since Director 60 Age ce until 2009. Age 67 Director since 2002 since Director 67 Age cer, National Bureau of Economic Research, and George George and Research, Economic of cer, Bureau National rm. Prior to joining North Castle, she served as the chief chief the as served she Castle, North tojoining Prior rm. cer of the National Bureau of Economic Re- ofEconomic Bureau National ofthe cer

rm that provides business advisory advisory business provides that rm ™ Butacite cer of Tropicana and the the and ofTropicana cer ® businesses for the the for businesses PROXY STATEMENT 6565 cer of the French cer since July 1998 and chairman of cer Age 58 Director since 1991 Mr. Taurel has been Taurel the company’s chief executiveMr. offi Chairman of the Board and Chief Executive Offi the board since January He also 1999. served as president from February through 1996 September 2005. He joined the company and has in 1971 held management positions in the company’s international operations based in São Paulo, Vienna, Paris, and London. Mr. servedTaurel as president of Eli Lilly International Corporation from executive 19861991, to vice president of the pharmaceutical division from to 1993, 1991 and executive vice president of the company from 1993 He is a member to 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 Pharmaceutical Research and Manufacturers of America (PhRMA), a mem- ber the of board of overseers of the Columbia Business School, a trustee at the Indianapolis Museum of Art, a director of the Championships, RCA Tennis and a member of The Business Council and The Business Roundtable. In early 2003, he was appointed to the President’s Export Council to provide advice on international trade issues. He is an offi Legion of Honor. of Legion Sidney Taurel Sidney PROXY STATEMENT 66 fi of such employee acurrent is (ii) director the &Young LLP); Ernst (currently auditor independent ofLilly’s partner current guidelines. listing Exchange Stock York New the with consistent standards independence categorical adopted has board the relationship, such of any accounting, charit legal, ing, consulting, bank- industrial, commercial, include can relationships Material company. the with relationship amaterial has that offi or shareholder, apartner, as or directly either company, the with relationship material no has she or he that determined has board the unless independent considered is director No committee. governance corporate and directors the by areview on based ofdirectors independence the determines annually board The Independence Determinations 74–75. pages on Matters Committee Governance Corporate and Directors see criteria, selection current the including process, nomination director the on information more For committee. governance corporate and directors tothe process screening the delegates board The candidates. potential inidentifying used tobe criteria the establishing for and membership board for candidates selecting for responsible is board The Candidates Director of Selection offi executive chief the than offi executive chief The directors. ofindependent more) or percent (75 majority asubstantial be always should There andMix of Offi Independent Directors Board the of Composition II. include: responsibilities Their management. company’s ofthe results and actions the tooversee shareholders the by elected are directors The Board the of Role I. secretary. corporate company’s tothe request upon form inpaper or investor.lilly.com/guidelines.cfm athttp:// online available is guidelines ofthe copy Acomplete guidelines. ofthose highlights provides summary following The governance. ofcorporate inmatters follows it that guidelines established has ofdirectors board The Highlights oftheCompany’s CorporateGovernance Guidelines previous three years: three previous time. that within audit company’s listed the on worked personally fi ofsuch employee or apartner longer) no is (but years three last the within was member family immediate fi inthe participates cer should be a board member. Other offi member. Other aboard be should cer • ensuring thatasuccession planisinplace• for allsenior executives. selecting, compensating, evaluating, and,whennecessary,• replacing thechiefexecutive offi evaluating board processes• andperformance selecting, compensating, andevaluating directors• overseeing thecompany’s• managementofsignifi providing oversight• oflegal andethical conduct approving majormanagementinitiatives • approving corporate• strategy providing general oversight• ofthebusiness • a director whoisemployed• (orwhoseimmediate family member isemployed asanexecutive offi a director who receives• anydirect compensation from Lilly otherthanthedirector’s normaldirector • a director who isanemployee• ofLilly, orwhoseimmediate family member isanexecutive offi Specifi compensating otherexecutive offi company where any Lilly executive offi compensation from Lilly otherthan for service asanon-executive employee. compensation, orwhoseimmediate family memberreceives more than $100,000peryear indirect the director from beingindependentfollowing completion ofthat service. Temporary service byanindependent director asinterim chairmanorchiefexecutive offi In addition, a director is not considered independent if any of the following relationships existed within the the within existed relationships following ofthe any if independent considered not is adirector In addition, rm; (iii) the director has an immediate family member who is a current employee of such fi ofsuch employee acurrent is who member family immediate an has director (iii) the rm; cally, a director is not considered independent if (i) the director or an immediate family member is a is member family immediate an or (i) director if the independent considered not is adirector cally, rm’s audit, assurance, or tax compliance (but not tax planning) practice; or (iv) the director or or director the (iv) or practice; planning) tax not (but compliance tax or assurance, rm’s audit, cer should expect to be elected to the board by virtue of his or her offi her or ofhis virtue by board tothe elected tobe expect should cer cers cer-Directors cer-Directors able, and familial relationships, among others. To among others. relationships, theable, materiality and evaluate familial cer serves onthat company’s compensation committee. cers may, from time to time, be board members, but no offi no but members, board be totime, time may, from cers cant business risks cer willnotdisqualify cer of an organization organization ofan cer cer, and cer ofLilly. ce. rm and who who and rm cer) byanother cer cer other rm rm and PROXY STATEMENT

6767 or

rec- his require from will consider resignation will her scal year. scal committee’s or matter the “withheld” his the on on committee votes act tender of action will number promptly Board board governance The vote. shall it. greater a corporate vote”) cer, will resign from the board at the time he or she the board from will resign cer, accept and to shareholder receives withheld the t organization that receives grants or contributions from Lilly Lilly from or contributions grants that receives t organization who of directors whether The directors. “majority cation director board (a vote. for the certifi to nonprofi of a cer election independent nominee Commercial banking, capital markets, and indenture trustee relationshipsbanks—immaterial between Lilly and various Citigroup Lilly grants and contributions to Harvard University and the National Bureau of Economic Research—immaterial following such shareholder the any of recommend the icts of interest, as well as material provided by management related to transactions, days “for” of and 90 cer-director, including the chief executive offi including the chief executive cer-director, election, votes cer of a company that makes payments to or receives payments from Lilly for property or services or services property for Lilly payments from or receives to payments that makes company of a cer majority scal year exceeding the greater of $1 million or 2 percent of that organization’s gross revenues in a revenues gross organization’s of that or 2 percent of $1 million the greater exceeding year scal cation offer a within of than scal year. scal Directors certifi for uncontested single fi single Members of the audit, compensation, and directors and corporate governance committees must meet all ap- In February 2007, the directors and corporate governance committee reviewed directors’ responses to a in a single fi in a single completing a full three-year term. term. a full three-year completing the board to the situation and recommend will assess committee governance and corporate The directors the resignation. accept whether to retires or otherwise ceases to be an active employee of the company. employee be an active to or otherwise ceases retires birthday. their seventy-second executive offi executive fi in a single revenues gross that company’s of or 2 percent of $1 million the greater that exceed election resignation approval • A nonemployee director who retires or changes principal job responsibilities will offer to resign from the board. the board. from resign to will offer or changes principal job responsibilities who retires • director A nonemployee • offi A company that follows of shareholders than the annual meeting not later the board from will retire • directors Nonemployee them from prevent policy would retirement the board’s though even reelection for • stand may Directors • a director who is employed by, who is a 10 percent shareholder of, or whose immediate family member is an family or whose immediate of, shareholder 10 percent by, who is a • who is employed a director offi • who is an executive a director an Dr. PrendergastDr. SeifertMs. Yes Lilly grants and contributions Yes to Mayo Clinic, Mayo Medical School, and Mayo Foundation—immaterial None Mr. FyrwaldMr. GilmanDr. HornMs. MarramMs. Yes Yes chemicals—immaterial DuPont purchase of Lilly’s Yes Yes Lilly’s grants and contributions to the University of Texas Southwestern Medical Center—immaterial None None Mr. CookMr. FeldsteinDr. FisherMr. Yes Yes Yes None None NameSir Winfried Bischoff Yes Independent Transactions/Relationships/Arrangements a description of categories or types of transactions, relationships, or arrangements considered by the board ad- (in dition to those listed above) in reaching its determination that the directors are independent. referenced above. The committee recommended this conclusion to the board and explained the basis for its deci- sion, and this conclusion was adopted by the full board. The committee and the board determined that noneof the directors10 listed below has had during the last three years any of the (i) relationships listed above any or (ii) other material relationship with the company that would compromise his or her independence. The table below includes relationships, or arrangements between the company and the directors or parties related to the directors. The committee determined that non-employee all 10 directors listed below are independent, and that the members of the audit, compensation, and directors and corporate governance committees also meet the independence tests questionnaire asking about their relationships with the company (and those of their immediate family members) and other potential confl plicable independence tests of the New Stock York Exchange, Securities and Exchange Commission, and Internal Revenue Service. the following the ommendation Voting In her Director Tenure Director Tenure Subject the to company’s charter documents, the governance guidelines establish the following expectations for tenure: director PROXY STATEMENT and recommend to the board whether to accept them. toaccept whether board tothe recommend and offers resignation the toconsider themselves amongst acommittee appoint will vote withheld amajority receive not did who directors independent the then election, same atthe vote withheld amajority receives committee governance corporate and directors ofthe member offer. each If resignation the toaccept whether regarding deliberations board the vacancy or reduce the size of the board. ofthe size the reduce or vacancy the tofi whether board tothe recommend will committee governance corporate and directors the accepted, is nation resig- the If resignation. directors’ the rejected board the why reasons the applicable, if and, reached was decision the which by process ofthe explanation afull including decision, the after days business four within Commission 68 ofethics. code inthe covered tomatters respect with programs secretary. corporate company’s tothe request upon in: out set is code This Commission. Exchange and Securities and Exchange York Stock New ofthe requirements the with complies which ofethics, code company’s the approved board The Code of Ethics year, the signifi Throughout plan. strategic corporate the for direction toprovide opportunity an board the allowing company, the facing opportunities and sues is- strategic the regarding management from update toan meeting extended an devotes year, each board Once the Strategy Corporate year. next the for compensation her or his inestablishing committee sation offi tive execu- chief ofthe performance the inassessing annually directors independent the leads director presiding The Offi Executive Chief of Evaluation annually. atleast directors independent the with offi executive chief the for planning succession offi executive chief The leadership. senior for grams offi executive chief and chairman anew which by ate process appropri- an board tothe recommends director presiding The oftime. aperiod for persons different totwo signed as- be could roles these transition, ofleadership periods short relatively during particularly and circumstances, effi most the offi executive chief and ofchairman roles the combines customarily board The Offi Executive Chief and Chairman of Selection Board the of IV. Responsibilities Key committee. the by board full tothe made are changes for recommendations Any compensation. board reviews annually committee governance corporate and directors The Ownership Equity and Compensation Director III. of overall director compensation is in the form of company equity. ofcompany form inthe is compensation director of overall • the company’s• CodeofEthical Conductfor Lilly FinancialManagement,asupplemental code for ourchief The RedBook,acomprehensive code• ofethical andlegal business conduct applicable to allemployees Any director who tenders his or her resignation under this provision will not participate in the committee or or committee inthe participate not will provision this under resignation her or his tenders who director Any Exchange and Securities tothe furnished 8-K aForm on decision board’s the disclose will company The The audit committee and public policy and compliance committee assist in the board’s oversight of compliance of compliance oversight board’s inthe assist committee compliance and policy public and committee audit The form inpaper or athttp://investor.lilly.com/code_business_conduct.cfm online available are documents Both fi responsibilities ofthoseindividualsinassuring proper accounting, fi executive offi worldwide andto ourboard ofdirectors pro- development management and succession overseeing for responsible are directors independent The asignifi accordingly, company; inthe positions ownership equity meaningful hold should Directors nancial stewardship. cer. The results of this review are discussed with the chief executive offi executive chief the with discussed are review ofthis cer. results The cient and effective leadership model for the company. The board anticipates that, in certain occasional occasional incertain that, anticipates board The company. the for model leadership effective and cient cer, chiefoperating offi cer cer cer, andallmembers offi cant corporate strategy decisions are brought to the board for approval. for board tothe brought are decisions strategy corporate cant cer and other key leadership positions. He or she reviews this plan plan this reviews she or He positions. leadership key other and cer cer; Succession Planning cer develops and maintains a process for advising the board on on board the advising for aprocess maintains and develops cer cer will be selected. be will cer nancial managementthatrecognizes theunique nancial reporting, internal controls, and cer, believing this generally provides provides generally this cer, believing cer and considered by the compen- the by considered and cer cant portion cant portion ll PROXY STATEMENT 6969 ed as ed cer. cer. icts, or appears cer; cer will bring the matter to the attention of the chairman, the of the chairman, the attention to will bring the matter cer cers or their immediate family members, or shareholders own- ict, board decisions on certain matters of corporate governance ict of interest and any safeguards imposed to prevent such actual or apparent such actual or apparent prevent imposed to any safeguards and ict of interest cer. ict. The board, after consultation with counsel, takes appropriate steps to ensure ict appearance or confl a of icts; and (v) the overall fairness of the transaction to the company. to of the transaction fairness icts; and (v) the overall ict, with the interests of the company. Directors must disclose to the company all relationships that create a icts of Interest promptly as practicable. as practicable. promptly independent directors, who will approve the transaction only if they determine that it is in the best interests of the interests that it is in the best determine if they only the transaction approve who will independent directors, as including factors, all relevant will consider or committee the board the transaction, In considering company. entering to (ii) the alternatives the transaction; into entering for rationale business company’s (i) the applicable third to those available to comparable is on terms (iii) whether the transaction transaction; person a related into the transaction for (iv) the potential generally; employees to relationships, of employment parties, or in the case confl an actual or apparent to lead to confl the transaction. amend or terminate to the company for it advisable render that would circumstances or the secretary. committee, governance and corporate the chair of the directors director, presiding committee) governance and corporate with the chair of the directors in consultation other shall determine of only consisting committees or by one of its existing by the board should be considered whether the matter independent directors. transaction. the independent directors unless the directors decide that, due to the subject matter of the session, another of the session, the subject matter decide that, due to the directors unless the independent directors should preside; independent director To avoid any confl To ve percent or greater of the company’s outstanding stock). The policy covers any related person transaction that ict appearance an or confl a of • Related person transactions must be approved by the board or by a committee of the board consisting solely of solely consisting of the board or by a committee by the board • be approved must transactions person Related no changed are that there ensure to the transaction monitor will periodically committee • or relevant The board offi or executive • director Management or the affected the in the transaction, (or if either is involved determine shall jointly • director the presiding The chairman and and decisions about the all discussions from he or she will be recused transaction, in the • is involved If a director be ratifi must and if not practicable, practicable, whenever in advance • be approved must The transaction • presides at all meetings of the board at which the chairman is not present, including executive sessions of of sessions including executive at which the chairman is not present, • of the board at all meetings presides • and the independent directors; the chairman as a liaison between serves and agendas and schedules; and meeting the board sent to information • approves generally • directors. meetings of the independent call has the authority to • leads the board’s process for selecting and evaluating the chief executive offi executive the chief and evaluating selecting for process • the board’s leads Policy Procedures The board has adopted a policy and procedures for review, approval and monitoring of transactions involvingthe com- pany and “related persons” (directors and executive offi are made solely by the independent directors. These include executive compensation and the selection, evaluation, and removal of the chief executive offi Review and Approval of Transactions with Related Persons ing fi meets the minimum threshold for disclosure in the proxy statement under the relevant SEC rules (generally, transac- tions involving amounts exceeding $120,000 in which a related person has a direct or indirect material interest). Confl Occasionally a director’s businessor personal relationships may give rise to an interest that confl confl Presiding Director The board appoints a presiding director from among the independent directors (currently Ms. Horn). The presiding director: to confl V. Functioning of the Board the of Functioning V. Executive Session of Directors The independent directors meet alone in executive session at everyregularly scheduled board meeting. addition, In at least twice the independent a year, directors meet in executive session with the chief executive offi that all directors voting on an issue are disinterested. In appropriate cases, the affected director will be excused from issue. discussions the on PROXY STATEMENT Orientation and Continuing Education Orientation policy. above the with consistent arrangement this tomonitor continues and approved committee compensation The 94. page on described as aircraft, corporate the 70 secretary. corporate company’s tothe request upon form needed. as session inexecutive meet committees other all basis; aregular on session inexecutive alone meet committees compensation and audit the In addition, meetings. ofcommittee agenda and frequency the determines committee ofeach chair The appropriate. deems it as committees) governance corporate and directors and compensation, audit, the (except committee a current disband or committees new form may board The annually. charters committee all approves and reviews mittee com- governance corporate and directors the and annually, charter own its approves and reviews committee Each Functioning of Committees members. board the the consulting chairm after committee governance corporate and directors the by board tothe recommended are chairs ofcommittee selection and membership Committee committee. any chair may directors independent Only committees. compliance and policy public and governance, corporate and directors compensation, audit, the on serve may tors direc- independent Only below. described are committees board-appointed six ofthe membership and duties The Number, and Independence Structure, Committees Board VI. term. three-year a new to director the nominating torecommend whether considering when years three every atleast directors individual of contributions the considers also committee The directors. all from inputs on based processes board and tees, commit- its board, of the performance the assesses annually committee governance corporate and directors The Performance and Processes Board of Assessment committees. respective totheir advisers pendent inde- toretain authority sole have committees governance corporate and directors and compensation, audit, the standards, listing Exchange York Stock New with Inaccordance so. todo desirable be would it feel they whenever expense, atcompany advisers, independent own their toretain free also are committees the and directors pendent inde- The necessary. it deem they whenever ofmanagement tomembers access direct have directors Independent Access to ManagementDirector and Independent Advisers offi ecutive ex- and directors other towhich committee, audit the for sessions training mandatory periodic We hold meetings. between mailings periodic and retreat, strategy annual the atmeetings, sessions educational through education continuing ongoing receive directors Inaddition, directors. new for inplace is process orientation A comprehensive • The board orrelevant• committee willreview thetransactions annually to determine whetheritcontinues to bein Currently the only related person transaction is the time-share arrangement for Mr. Taurel’s personal use of Mr. for use Taurel’s personal arrangement time-share the is transaction person related only the Currently the company’s best interests. All six committee charters are available online at http://investor.lilly.com/board-committees.cfm or in paper inpaper or athttp://investor.lilly.com/board-committees.cfm online available are charters committee six All cers are invited. We also afford directors the opportunity to attend external director education programs. education director external toattend opportunity the directors afford We also invited. are cers an of the board and after considering the desires of the desires considering and after an of the board PROXY STATEMENT 7171 Science and Science Technology Member Public Policy and Public Policy Compliance Member Chair cant business development projects. projects. development business cant Directors and Directors Corporate Governance Finance 54243 ects the highest standards of integrity standards ects the highest nancings and borrowings, and signifi nancings and borrowings, Board Audit Compensation 1 that complies with laws and regulations and refl and regulations with laws that complies to public policy and social, political, and economic issues that may affect the company. that may affect issues and economic public policy and social, political, to fi expenditures, capital repurchases, • reviews and makes recommendations regarding the company’s strategic research goals and objectives goals research strategic the company’s regarding recommendations • and makes reviews and development. research in pharmaceutical trends and technologies, • developments, new reviews • oversees the processes by which the company conducts its business so that the company will do so in a manner will do so so that the company its business conducts by which the company • the processes oversees • reviews and makes recommendations regarding policies, practices, and procedures of the company that relate that relate of the company and procedures policies, practices, regarding recommendations • and makes reviews stock including dividends, and strategies, structure capital regarding recommendations • and makes reviews Ms. Horn LechleiterDr. Member Member Chair Member Sir Winfried Bischoff CookMr. FeldsteinDr. FisherMr. FyrwaldMr. Member GilmanDr. Member Member Member Member Member Chair Member Member Member Member Member Chair Chair Member Member Member Member Mr. Golden Mr. Ms. Marram PrendergastDr. Ms. Seifert TaurelMr. Number of 2006 Meetings Member Member 7 Member Member Chair Member 10 Member Member Member Member Chair Member Mr. Golden retiredMr. from the board of directors as of April 24, 2006. 1 Science and Technology Committee In 2006, each director attended more than 90 percent of the total number of meetings of the board and the com- mittees on which he or she serves. In addition, all board membersare expected to attend the annual meetings of shareholders, and all attended in 2006. Current committee membership and the number of meetings of the full board and each committee 2006 in are shown in the table below. Membership and Meetings of the Board and Its Committees Membership and Meetings Public Policy and Compliance Committee Policy Compliance Public and Compensation Committee The duties of the compensation committee are described and on page the compensation 77, committee report is shown on page85. Directors and Corporate Governance Committee The duties of the directors and corporate governance committee are described on page 74. Committees of the Board of Directors of the Committees Audit Committee The duties of the audit committee are described in the audit committee report found on pages 75–76. Finance Committee PROXY STATEMENT 3 2 1 72 employees: not are who todirectors compensation annual following the provided we In 2006, committees. its or board the on serving for compensation additional no receive employees are who Directors Directors’ Compensation tors’ Deferral Plan. The table shows the expense recognized by the company for each director’s stock award. stock director’s each for company the by recognized expense the shows table The Plan. Deferral tors’ Direc- Lilly under below described further as board, the on service her or his ends director the until issued not are shares the however toforfeiture; subject not are they inthat vested fully are awards stock prior all and award stock Options—Grant Timing and Price” on page 82. page on Price” and Timing Options—Grant Incentives—Stock “Equity under description the see Please employees. for used is as price and timing for cedure pro- same the using established were 17, grants option Stock 2007. ofFebruary as vested were options standing 2006 fi refl column inthis amounts The below): described (further Plan Deferral tors’ i ifidBshf 9,0 1928$767$18,823 $27,647 $139,228 $97,000 Bischoff Winfried Sir s efr 1900$3,2 2,4 $275,875 $268,875 $259,618 $289,919 0 $230,869 $264,128 0 $247,228 $269,538 $743 $1,044 $269,875 $641 $27,647 $1,253 0 $663 $27,647 $27,647 $27,647 0 $139,228 0 $27,647 $27,647 $139,228 0 $139,228 $139,228 $109,000 $27,647 $139,228 $139,228 $102,000 $139,228 $92,000 $122,000 $139,228 $139,228 $96,000 Ms. Seifert $91,000 $102,000 Dr. Prendergast Ms. Marram $103,000 $108,000 Horn Ms. Dr. Gilman Mr. Fyrwald Mr. Fisher Dr. Feldstein Mr. Cook No stock options were granted in 2006, as the stock option program for directors was discontinued in 2005. in2005. discontinued was directors for program option stock the as in2006, granted were options stock No This shares). (2,672 of$145,000 value fair date agrant with ofstock award an received director nonemployee Each Direc- Lilly the under account share deferred intotheir compensation cash 2006 deferred directors following The Name r ihr$100926 1,971 $51,000 $108,000 Mr. Fisher Mr. Cook ae20 ahDfre Shares Cash 2006 Deferred Name nancial statements. Aggregate total numbers of stock option awards outstanding are shown below. All out- All below. shown are outstanding awards option ofstock numbers total Aggregate statements. nancial or Paid in Cash Cash in Paid or Fees Earned Earned Fees ($) 1 ect the expenses related to options granted in 2003 and 2004 recognized in our inour recognized 2004 and in2003 granted tooptions related expenses the ect Stock Awards Awards Stock ($) 2 Stock Option Awards Awards Option Stock ($) 3 Compensation All Other ($) 4 6 $282,698 Total Total ($) 5 PROXY STATEMENT 7373 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 (Exercisable) Outstanding Stock Options $73.11 $73.11 $73.11 $73.11 $73.11 $73.11 $73.11 $73.11 $75.94 $75.94 $75.94 $75.94 $57.85 $57.85 $57.85 $57.85 $57.85 $57.85 $57.85 $57.85 $75.92 $75.92 $75.92 $75.92 $75.92 $75.92 $75.92 $73.98 $73.98 $73.98 $73.98 $73.98 $73.98 ights, by his or her spouse to attend board 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2012 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2014 2/17/2014 4/19/2010 4/19/2010 4/19/2010 4/19/2010 2/18/2011 2/18/2011 2/18/2011 2/18/2011 2/18/2011 2/18/2011 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/18/2013 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/19/2002 2/19/2002 2/19/2002 2/19/2002 2/19/2002 2/19/2002 2/19/2002 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/18/2003 2/20/2001 2/20/2001 2/20/2001 2/20/2001 2/20/2001 2/20/2001 4/20/2000 4/20/2000 4/20/2000 4/20/2000 This account allows the director, in effect, to invest his or her deferred cash cash his or her deferred invest to in effect, the director, allows This account Ms. MarramMs. Dr. PrendergastDr. Ms. HornMs. Mr. FyrwaldMr. Gilman Dr. — SeifertMs. — — — Mr. CookMr. FeldsteinDr. Fisher Mr. — — — 0 NameSir Winfried Bischoff Grant Date Expiration Date Exercise Price compensation in Lilly stock. In addition, the annual award of shares to each director noted above (2,672 shares shares (2,672 above noted each director to of shares In addition, the annual award stock. in Lilly compensation chairperson’s preparation time preparation chairperson’s has ended. board on the service after payable Plan (as described below), Deferral Account. Share Deferred • retainer of $80,000 per year (payable monthly) monthly) • (payable of $80,000 per year retainer • meeting attended each committee $1,000 for the for as compensation conducted meeting • each committee for chairpersons the committee $2,000 to director • the presiding to of $20,000 per year retainer expenses. and usual travel customary • for reimbursement Directors’ in the Lilly account stock in a deferred annually equaling $145,000, deposited • stock of Lilly Shares • Directors do not participate in a Lilly pension plan or non-equity incentive plan. This amount includes expenses for Sir Winfried Bischoff’s spouse to travel to and participate in board functions For all directors other than Sir Winfried Bischoff, these amounts consist of tax reimbursementsfor income im- that included spouse participation. puted to him or her for use of the corporate aircraft, or commercial fl functions that included spouse participation. 5 6 4 Stock Compensation Stock compensation for directors consists of: Lilly Directors’ Deferral Plan This plan allows directors to defer receipt of all or part of their retainer and meeting fees until after their service on the board has ended. Eachdirector can choose to invest the funds in either of two accounts: Cash Compensation The company provides directors the following cash compensation: PROXY STATEMENT der, and ethnicity. The board is particularly interested in maintaining a mix that includes the following backgrounds: following the includes that amix inmaintaining interested particularly is board The der, ethnicity. and data on the candidate’s qualifi candidate’s the on data additional gathers management, by assisted committee, the favorable, is evaluation initial committee’s the and teria cri- selection the tosatisfy appears candidate the If candidate. the recommending party the by supplied information additional any and information available publicly on based candidate the evaluates initially committee The holders. including: sources, identifi are candidates Potential members. board other from input direct ceives to active employees and directors. directors. and employees to active apply limits These individual. each for year per of$90,000 uptoamaximum charities toeligible made $25 over tions dona- ofcharitable percent 100 matches foundation the program, this Under employees. toU.S. available generally is which program, gift matching Inc. Foundation, Company and Lilly Eli inthe toparticipate eligible are Directors Program Gift Matching Lilly stock. ofLilly inshares paid are account share 74 fi chosen intheir ofdistinction level ahigh achieved have shall or companies multinational or national traded licly pub- more or one with experience substantial have shall Candidates decisions. and deliberations board’s ofthe quality the enhance will that experiences and ofbackgrounds amix represent who directors independent seeks board The secretary. corporate company’s tothe request upon form inpaper or board-committees.cfm athttp://investor.lilly.com/ online available is charter committee’s The performance. board and compensation, director independence, director governance, ofcorporate matters oversees also committee The committees. board and board the on membership for candidates recommends committee governance corporate and directors The Overview Directors andCorporateGovernance CommitteeMatters Director Nomination Process Director • an independentexecutive search• fi • shareholders • management • incumbent directors • information technology. government andpublicpolicy • medicine andscience • • international business active orretired• chiefexecutive offi • The committee employs the same process for evaluating all candidates, including those submitted by share- by submitted those including candidates, all evaluating for process same the employs committee The board’s selection criteria. re- which committee, governance corporate and directors tothe process screening the delegates board The fi Board membership should refl should membership Board deferred inthe Amounts upto10 for years. installments inannual or sum inalump paid be may accounts Both amount ofinterest thataccrued in2006for theparticipatingdirectors was$182,102,atarate of5.6percent. Department underSection1274(d)oftheInternal Revenue Code.Therate for 2007is5.7percent. Theaggregate applicable federal long-term rate, compounded monthly, asestablished thepreceding December bytheU.S.Treasury Deferred CompensationAccount. transferred untilthedirector endshisorherservice ontheboard. on thedate dividendsare paid.Allshares inthedeferred share accounts are hypothetical andare notissued or been earned.Hypothetical dividendsare “reinvested” inadditionalshares basedonthemarket price ofthestock shares ofLilly stock basedonthemarket price ofthestock atthetimecompensation would otherwisehave in 2006)iscredited to thisaccount onapre-set annualdate. Funds inthisaccount are credited ashypothetical All committee members are independent as defi as independent are members committee All nance orbanking,andmarketing orsales cations, availability, probable level of interest, and any potential confl potential any and of interest, level probable availability, cations, ect diversity in its broadest sense, including persons diverse in geography, gen- ingeography, diverse persons including sense, broadest inits diversity ect Funds inthisaccount earninterest eachyear atarate of120percent ofthe rm retained bythecommittee to assist inlocating candidates meeting the cers andseniorexecutives, particularly thosewithexperience inoperations, ned in the New York Stock Exchange listing requirements. listing Exchange York Stock New in the ned ed by recommendations from several several from recommendations by ed icts of interest. If If ofinterest. icts elds. elds. PROXY STATEMENT 7575 nancial nancial nancial nancial cation) cation) ll a vacancy, as cer, and the gen- cer, cations to the chairman nal recommendation to statementsnancial disclosures. and nancial reporting process on behalf of the cer, the chief accounting officer, nancial statements be included in the company’s ned in the New Stock York Exchange listing standards nancial statements and the reporting process, includ- nancial offi nancial cant judgments, and the clarity of the disclosures in the fi nancial reporting. also We periodically meet in executive session. ned in the rules of the Securities and Exchange Commission. cant management judgments underlying the fi nancial statements and related disclosures withmanagement and the independent auditors, nancial expert as defi In reliance on the reviews and discussions referred to above, we recommended to the board (and the board We discussedWe with the company’s internal and independent auditors the overall scope and plans for their We haveWe discussed with the independent auditors matters required to be discussed by Statement on Auditing The independent auditors report to us. have We sole authority to appoint (subject to shareholder ratifi Under Section of the company’s bylaws, 1.9 a shareholder who wishes to directly nominate a director candidate eral auditor) to discuss the results of their examinations, their evaluations of the company’s internal controls, and the overall quality of the company’s fi and to terminate the engagement of the independent auditors. board. Management has the primary responsibility for the fi ing the systems of internal controls and disclosure controls. In this context, we have met and held discussions with management and the independent auditors. Management represented to us that the company’s consolidated fi The audit committee (“we” or “the committee”) reviews the company’s fi Audit CommitteeAudit Report Audit CommitteeAudit Membership All members of the audit committee are independent as defi Audit Committee Matters Audit applicable to audit committee members. The board directors of has Michael determined J. Cook is that anaudit Mr. committee fi including a review of the signifi Process for Submitting Recommendations and Nominations Nominations and SubmittingProcess Recommendations for A shareholder who wishes to recommend a director candidate for evaluation by the committee pursuant to this process should forward the candidate’s name and information about the candidate’s qualifi the boardto nominate the candidate for election by the shareholders (or select to the candidate to fi applicable). of the directors and corporate governance committee, in care of the corporate secretary, at Lilly Corporate Center, Indianapolis, Indiana 46285. The candidate must meet the selection criteria described above and must be willing and expressly interested in serving on the board. statements were prepared in accordance with generally accepted accounting principles, and we have reviewed and discussed the audited fi 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 fordirect discussions to determine themutual levels of inter- est in pursuing the candidacy. If these discussions are favorable, the committee makes a fi respective audits including internal control testing under Section 404 of the Sarbanes-Oxley Act. periodically We meet with the internal and independent auditors, with and without management present, and in private sessions with members of senior management (such as the chief fi subsequently approved the recommendation) that the audited fi Standards (Communication No. 61 with Audit Committees), including the quality, not just the acceptability, of the ac- counting principles, the reasonableness of signifi at the 2008 annual meeting (i.e., to propose a candidate for election who is not otherwise nominated by the board through the recommendation process described above) must give the company written notice by November 6, 2007. The notice should be addressed to the corporate secretary at Lilly Corporate Indianapolis, Center, Indiana 46285. The notice must contain prescribed information about the candidate and about the shareholder proposing the candidate as described in more detail in Section of the bylaws. 1.9 A copy of the bylaws is available online at http://investor.lilly. com/bylaws.cfm. The bylaws will also be provided by mail without charge upon request to the corporate secretary. statements. In addition, we have received the written disclosures and the letter from the independent auditors re- quired by the Independence Standards Board Standard No. 1 (IndependenceDiscussions with Audit Committees) and have discussed with the independent auditors the auditors’ independence from the company and its management. In concluding that the auditors are independent, we determined, among other things, that the nonaudit services provid- ed by Ernst LLP & Young (as described below) were compatible with their independence. Consistent with the require- ments of the Sarbanes-Oxley Act of 2002,we have adopted policies to avoid compromising the independence of the independent auditors, such as prior committee approval of nonaudit services and required audit partner rotation. PROXY STATEMENT dance with the preapproval policy. preapproval the with dance inaccor- committee the by preapproved were services such All 2005. and auditor, in2006 independent company’s &Young LLP, the Ernst by basis aworldwide on rendered services for incurred fees the shows table following The Independent Auditor Fees year. audit completed the for curred auditor. ofthe independence the toimpair services the for potential the and fi 76 follows: as are procedures and policy committee’s The independence. auditor’s the impair might services ofsuch provision the whether toassess auditor, inpart independent the by performed services all preapproves committee audit The Auditor Independent the by Performed Services P.Kathi Seifert Ph.D. M.D., G.Prendergast, Franklyn Ph.D. Feldstein, S. Martin Chair Cook, J. Michael Committee Audit ratifi toshareholder subject auditors, independent company’s the appointed also We have mission. fi for 31, 2006, December ended year the for 10-K Form on report annual ciently detailed to allow the committee to make an informed judgment about the nature and scope of the services services ofthe scope and nature the about judgment informed an tomake committee the toallow detailed ciently Tax Fees Tax Audit-Related Fees Audit Fees Total Fees Other All • The committee mayapprove• • • The committee approves• theannual • 2005: primarily related to tax planning and various compliance services compliance various and planning tax to related primarily • 2005: U.S. the outside services compliance to related primarily • 2006: • fi regulatory and statutory with connection in auditor the by provided normally services • Other fi quarterly of • Reviews fi subsidiary and consolidated of audit • Annual • 2005: primarily related to upgrading and maintaining on-line training programs training on-line maintaining and upgrading to related primarily • 2005: U.S. the outside services compliance to related primarily • 2006: After the end of the audit year, management provides the committee with a summary of the actual fees in- fees actual ofthe asummary with committee the provides year, audit ofthe management end the After suf- fees and services the about information with committee the provides management engagement, each For delegated to thecommittee chair. To theextent approvals are required between regularly scheduled committee meetings,preapproval authorityis year. Asspecifi known atthattime.Managementwillalsopresent atthattimeanestimate ofallfees for theupcoming audit audit, statutory audits,andquarterly reviews for theupcoming audityear aswell asanyotherengagements Process. the auditor isthebest choice to provide theservice. provision oftheservices would notimpairtheindependence oftheauditor, and(iii)managementbelieves that permissible under SECandPublicCompanyAccounting Oversight Board rules, (ii)thecommittee believes the compliance services, tax planning,andtax advice withoutimpairingtheauditor’s independence. Tax services. of theseservices doesnotimpairtheindependence oftheauditor. audit, andthatare traditionally performed bytheindependent auditor. Thecommittee believes thattheprovision Audit-related services Sarbanes-Oxley Act. can provide. Since 2004,auditservices have includedinternal controls attestation work underSection404ofthe may alsopreapprove otherauditservices, whichare thoseservices thatonly theindependentauditor reasonably conditions, andfees resulting from changesinauditscope, company structure, orothermatters. Thecommittee Assurance and related services reasonably related to the performance of the audit or reviews of the fi the of reviews or audit the of performance the to related reasonably services related and Assurance —2006 and 2005: primarily related to employee benefi employee to related primarily 2005: and —2006 Atthebeginningofeachaudityear, managementrequests priorcommittee approval oftheannual Thecommittee believes that,inappropriate cases, theindependentauditor can provide tax c engagementsare identifi nancial statements are assurance andrelated services thatare reasonably related to theperformance ofthe other services nancial statements, including Sarbanes-Oxley 404 attestation attestation 404 Sarbanes-Oxley including statements, nancial audit services ed thereafter, they are brought forward to thecommittee for approval. t plan and other ancillary audits, and accounting consultations accounting and audits, ancillary other and t plan to beprovided bytheindependentauditor if(i)theservices are engagementand,ifnecessary, anychangesinterms, ling with the Securities and Exchange Com- Exchange and Securities the with ling lings nancial statements (millions) (millions) cation, for 2007. for cation, 06 2005 2006 04$1.0 $0.4 58$5.8 $5.8 01$0.1 $0.1 78$8.7 $7.8 15$1.8 $1.5 PROXY STATEMENT 7777 cers. and the senior cer, rm, Frederic W. Cook & Co., W. rm, Frederic cers and other senior ts of the executive offi cers. Those recommendations are are Those recommendations cers. cers serves on the board of directors. on the board serves cers c compensation recommendations for executive executive for recommendations c compensation c compensation recommendations for the committee’s the committee’s for recommendations c compensation cers of the company. the committee However, may not delegate any With the oversight of the CEO, chief operating offi of the CEO, chief operating With the oversight cers of the company and provides oversight of the company’s global com- The committee has retained Frederic W. Cook and his fi W. Frederic has retained The committee cers’ compensation. The use of an independent consultant provides additional assurance additional assurance provides use of an independent consultant The compensation. cers’ cer, the consultant prepares the specifi prepares the consultant cer, cer or employee of the company or employee cer and Management. cers cer of another entity, at which one of our executive offi of another entity, at which one of our executive cer The committee meets several times each year (5 times in 2006). Committee agendas are established established are agendas (5 times in 2006). Committee each year times several meets The committee cers (other than the CEO as noted above). The CEO gives the committee a performance assessment and assessment a performance the committee The CEO gives above). (other than the CEO as noted cers as its independent compensation consultant to assist the committee in evaluating executive compensation programs programs compensation executive in evaluating the committee assist to consultant as its independent compensation offi and in setting executive The objectives. with company and consistent reasonable are programs compensation executive that the company’s management. The consultant for any services and does not perform committee the to directly reports consultant and trends compensation to with respect meetings and advises the committee in committee participates regularly to addition, with respect In awards. compensation of individual plan design, and the reasonableness practices, best offi the chief executive of and has no knowledge of the recommendations in the development the CEO does not participate consideration; the committee. to presented are when they the recommendations on related person transactions) person on related Meetings. in consultation with the committee chair and the committee’s independent compensation consultant. The consultant. independent compensation and the committee’s chair with the committee in consultation meeting. each regular following session in executive meets committee Role of Independent Consultant. Role Role of Executive Offi of Executive Role vice president of human resources, the company’s global compensation group formulates recommendations on recommendations formulates group compensation global the company’s resources, of human president vice plan design, and the specifi philosophy, of compensation matters offi offi of the other named executive each for recommendation compensation The CEO and the senior consultant. of its compensation with the assistance committee by the then considered the executive for not present but are meetings committee attend generally resources of human president vice compensation. of their own any discussion or for sessions Directors’ compensation is established by the board of directors upon the recommendation of the directors • been an offi has ever • is or was a participant in a “related person” transaction in 2006 (see pages 69–70 for a description of our policy in 2006 (see pages 69–70 for • transaction person” in a “related is or was a participant • offi is an executive • • • Compensation Discussion Analysis and Executive Compensation Policy As a research-based pharmaceutical company, our long-term success depends on our ability develop, to discover, and market a stream of innovative medicines that address important medical needs. In addition, the intense global Executive Compensation Executive None the of compensation committee members Compensation Committee Interlocks Participation Insider and The committee’s primary processes for establishing and overseeing executive compensation can be found in the Compensation Discussion andAnalysis section under “The Committee’s Processes” on page 78. Additional pro- include: procedures cesses and The Committee’s Processes and Procedures pensation philosophy. The committee also acts as the oversight committee with respect to the company’s deferred compensation plans, management stock plans, and bonus plans covering executive offi management. In overseeing those plans, the committee may delegate authority for day-to-day administration and interpretation of the plan, including selection of participants, determination of award levels within plan param- eters, and approval of award documents, to offi authority under those plans for matters affecting the compensation and benefi The compensation committee acts on behalf of the board of directors and by extension the shareholders to estab- lish the compensation of executive offi Compensation Committee Matters Committee Compensation Authority of Scope and corporate governance committee. PROXY STATEMENT 78 are: those Among objectives. its achieving is program compensation executive company’s the that inensuring it toassist ofprocesses anumber established has committee compensation The Processes Committee’s The programs: compensation its all inestablishing company the people. for respect and integrity, ofexcellence, values core company’s tothe committed are who ganization or- ofthe levels atall individuals talented highly retain and motivate, toattract, able be we that critical is it goals, To do. these we that inall achieve productivity improve tocontinually us require costs care health on pressures • • Compensation andbenefi • Compensation andbenefi • To• be effective, performance-based compensation programs shouldenable employees to easily understand how Compensation shouldfoster thelong-term• focus required for success inthepharmaceutical industry. While Compensation shouldreward• performance. Ourprograms shoulddeliver top-tier compensation given top-tier Compensation shouldrefl • Compensation shouldbebasedonthelevel ofjobresponsibility,• individualperformance, andcompany of thepresiding director to conduct aperformance review oftheCEObased onhisorherachievement ofthe for theyear. Attheendofyear, theindependentdirectors meetinexecutive session underthedirection beginning oftheyear to agree upontheCEO’s performance objectives (bothindividualandcompany objectives) directors, underthedirection ofthepresiding director, meet withtheCEOinexecutive session annually atthe all employees, including theCEOandotherexecutive offi Assessment ofIndividualPerformance. replaces thestock option program (theshareholder value award is discussed onpages84–85.) Bonus Plan,theperformance award program and,beginning in2007,theshareholder value award which the sizeofpayouts underthecompany’s three formula-based incentive programs—the EliLilly andCompany in more detail below, thecommittee hasestablished specifi Instead, itmakes asubjective determination after considering suchmeasures collectively. Second, asdescribed return. Thecommittee doesnotapply aformula orassign theseperformance measures relative weights. performance, includingsales, earningspershare, return onassets, return onequity,andtotal shareholder in establishing total compensation ranges, thecommittee considers various measures ofcompany andindustry Assessment ofCompanyPerformance. career andfamily. retirees, andleading-edge work/life programs to helpemployees managethesometimesconfl programs includeastrong retirement program, fl attract andretain highly talented employees whoare looking for theopportunityto buildacareer. These company’s nationally recognized benefi effectively carry outhisorherresponsibilities. for executives shouldberare and limited to thosethatare important to theexecutive’s abilityto safely and structure ofcompensation andbenefi always refl it relates to theirdaily jobs,itwillnotbeaneffective motivator. a performance measure maybeintheory,ifpractice employees cannot easily understand how itworks orhow through contributing to thecompany’s achievement of itsstrategic andoperational goals.Nomatter how elegant their efforts can affect their pay,bothdirectly through individualperformance accomplishments andindirectly have greater infl increasing proportion oftheircompensation tiedto longer-term performance because they are inapositionto all employees receive amixofbothannualandlonger-term incentives, employees athigherlevels have an remain motivated andcommitted to Lilly. company performance, theprograms shouldcontinue to ensure thatsuccessful, high-achieving employees will objectives ofpay-for-performance andretention must bebalanced. Even inperiodsoftemporary downturns in company performance lagstheindustry, theprograms shoulddeliver lower-tier compensation. In addition,the individual andcompany performance; likewise, where individualperformance falls shortofexpectations and/or force, we must remain competitive withthepayofotherpremier employers whocompete withusfor talent. company’s results. should belinked to company performance andshareholder returns, because they are more able to affect the performance. Asemployees progress to higherlevels intheorganization, anincreasing proportion oftheirpay guide that objectives same the on programs compensation executive its bases committee compensation The ect differences injobresponsibilities, geographies, andmarketplace considerations, theoverall uence onlonger-term results. t programs shouldattract employees whoare interested inacareer atLilly. The t programs shouldbeegalitarian. While theprograms andindividualpaylevels will ect thevalue ofthejobinmarketplace. To attract andretain ahighly skilled work t programs shouldbebroadly similaracross theorganization. Perquisites The committee usescompany performance measures intwo ways.First, Individual performance hasastrong impactonthecompensation of t programs provide acompetitive advantage byhelpingthecompany exible healthcare coverage optionsfor active employees and c company performance measures thatdetermine cers. Withrespect to theCEO, theindependent icting demandsof PROXY STATEMENT 7979 ects rst year, year, rst ciently similar ciently cers. ts” on pages 83–84. Inc.; Schering-Plough zer, c and sales/marketing talent are unique to the the unique to are talent c and sales/marketing ts package. The committee believes that this program balances both the cers, the committee receives a performance assessment and assessment a performance receives the committee cers, cers were within the corporate merit budget. The corporate merit budget was merit budget. The corporate within the corporate were cers meaning the company’s overall budget for base salary increases. The aggregate The aggregate base salary increases. budget for overall meaning the company’s t with that of all other executives. See “Severance Benefi See “Severance t with that of all other executives. The committee reviews each executive’s base pay, bonus, and equity incentives base pay, bonus, and equity incentives each executive’s reviews The committee cers from three times to two times annual base salary plus bonus. This change aligns times annual two to times three from cers As described above under “The Committee’s Processes,” base salary increases were were base salary increases Processes,” under “The Committee’s As described above cer. As with the CEO, the performance evaluation of these executives is based on of these executives evaluation the CEO, the performance As with cer. , meaning the relative pay differences for different job levels. job levels. different for pay differences , meaning the relative cers’ benefi cers’ The committee benchmarks the company’s programs with a peer group of global pharmaceutical pharmaceutical of global with a peer group programs benchmarks the company’s The committee ts in a way that furthers the compensation objectives discussed above. Following is a discussion t for executive offi executive t for In establishing base Taurel’s salary Mr. for 2006, the committee applied the principles described above under “The Committee’s Processes.” In an executive session including all independent directors, the commit- tee 2005 assessed Taurel’s performance. Mr. They accomplish- considered Taurel’s the company’s and Mr. ment of objectives that had been established at the beginning of the year and its own subjective assessment of his performance. leadership, They Taurel’s noted that in 2005 under Mr. the company achieved 6 percent sales growth, with strong growth of several recently launched products offsetting declines in Zyprexa and Strattera sales. The company’s successful implementation of Six Sigma exceeded objectives in its fi Individual performance. assessments. by individual performance driven compensation recommendation from the CEO and also exercises its judgment based on the board’s interactions interactions based on the board’s its judgment exercises the CEO and also from recommendation compensation offi with the executive the to contribution his or her and his or her organization, by the executive objectives pre-agreed of achievement accomplishments. and other leadership performance, company’s Benchmarking. scientifi needs for companies’ Pharmaceutical companies. Bristol- Amgen; Abbott Laboratories; talent: for companies with these compete must Lilly and as such, industry Pfi & Co.; & Johnson; Merck Johnson GlaxoSmithKline; Squibb Company; Myers compensation executive the companies’ compares The committee Laboratories. Wyeth and Corporation; suffi if the jobs are the pay of individual executives and also compares as a whole, programs that the ensure to primarily data the peer group uses The committee meaningful. the comparison make to of range middle within the broad meaning generally is competitive, as a whole program compensation executive The levels. performance the targeted achieves when the company companies pay of the peer group comparative performance. by individual and company driven position is relative individual’s Compensation Review. Total these primary In addition to independent consultant. of the committee’s guidance with the annually and other perquisites program, compensation the deferred reviews the committee elements, compensation scenarios. and change-in-control severance under various be required and payments that would compensation, in reasonable were of compensation that these elements determined the committee the 2006 review, Following the board, to recommended the committee trends, governance corporate evolving to In response the aggregate. the severance reduce in 2006 to pay programs severance the change-in-control amendments to and it approved, benefi offi the executive agreed-upon objectives, contribution to the company’s performance, and other leadership accomplishments. accomplishments. and other leadership performance, the company’s to contribution objectives, agreed-upon committee compensation the to and is provided director the CEO by the presiding with is shared This evaluation compensation. setting the CEO’s in its consideration for offi the other named executive For offi the executive for increases The data. 2006, and peer group for 2005, planned performance for performance based on company established while performers successful and motivate retain to salary increases allow of the merit budget is to objective plan. business within the company’s affordability maintaining Internal relativity The corporate “merit budget,” The corporate • • • • • Components of Executive Compensation for 2006 For 2006, the compensation of executives consisted of the same four primary components as were provided to otherlevels of management—base salary, a cash incentive bonus award under the Eli Lilly and Company Bonus Plan, equity grants of a performance award performance-based (a stock incentive award under the 2002 Lilly Stock Plan) and stock options, and benefi a mix of cash and equity compensation,the mix of currently-paid and longer-term compensation, and the security of benefi foundational of the committee’s considerations in establishing each of the components for the executive offi SalaryBase Base salary is the guaranteed element of employees’ annual cash compensation. The value of base salary refl the employee’s long-term performance, skill set and the market value of that skill set. In setting base salaries for 2006, the committee considered the following factors: PROXY STATEMENT 80 2006: for awards the establishing when following the ered consid- committee The formula. the by yielded amount the from upward, not but downward, payout award an just toad- discretion has committee the period, performance ofthe end the At topayment. acondition is performance fi company’s the by determined then are year the for year. payouts ofeach Bonus beginning atthe participants for established are salary, of base apercentage as expressed amounts, target bonus plan, the Under column. Compensation” Plan Incentive Table “Non-equity the under Compensation Summary inthe appear 2006 for paid bonuses The in 2004. adopted plan incentive formula-based ashareholder-approved Plan, Bonus Company and Lilly Eli the under mined deter- were representatives, sales than other U.S. inthe employees non-management all 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’ toalign inorder program bonus cash annual an established has company The Bonuses Incentive Cash • • • • ing productivity within the law division. law the within productivity ing improv- and programs, compliance company’s the enhancing strategies, litigation successful in implementing 2006. March effective 4percent by ary Dr. sal- annual Paul’s increased committee The unsuccessful. tobe likely compounds identifying quickly more and candidates, phase of early success and number the increasing development, and ofdiscovery phases in all productivity improved Laboratories Research Lilly that noting efforts, development and research company’s heavily weighted toward incentive compensation andequitycompensation thanthatofthe otherexecutive offi company performance andshareholder returns. Thus,for example, Mr. Taurel’s overall compensation ismore progress to higherlevels intheorganization, agreater proportion ofoverall compensation isdirectly linked to compensation. ofthemix ofoverall Consideration offi operating chief and topresident promotion ofhis inrecognition 18 by percent salary Dr. annual Lechleiter’s increased had mittee com- The company. ofthe areas functional operational other and manufacturing, marketing, and sales of the productivity the inincreasing leadership his considered committee the toDr. performance, regard Lechleiter’s 2006. March effective percent 4.4 by Taurel’s salary annual Mr. increased committee the in2005, leadership strong continued ofhis Inrecognition diversity. and ment, made signifi also company The share. per earnings inadjusted 11 an and increase share percent per earnings reported in increase toa9percent led productivity Improved employees. 2,000 nearly by attrition through headcount its toreduce able was company the control, headcount strict Through initiatives. productivity other did as in view ofourcompensation objectives. data to test for reasonableness andcompetitiveness ofbase salaries,butwe alsoexercised subjective judgment Peer group data are alsoeffective motivators because they are easyto track andclearly understood byemployees. Under the line earningsso thatemployees can bedirectly rewarded for theirproductivity improvements. Themeasures appropriately onimproving bothtop-line sales andbottom-line earnings.Specialemphasisisgiven to bottom 2006. Thecommittee believes thatthis mixofperformance measures willencourage employees to focus under “Adjustments for Certain Items” (target of7percent growth). Themeasures were determined inJanuary growth) and75percent onearningspershare (EPS)growth adjusted for certain items asdescribedbelow established 2006company performance measures based25percent onsales growth (target of5percent Company performance measures. percent; andMr. Armitage, 75percent. Taurel, 125percent; Dr. Lechleiter, 100percent; Dr. Paul, 85percent; Mr. Golden,85percent; Mr. Rice, 75 committee established thefollowing bonustargets for 2006(expressed asapercentage ofbasesalary):Mr. proportion oftheirtotal cash compensation tiedto company performance through thebonusplan.Thus, Consistent withourexecutive compensation policy,individualswithgreater jobresponsibilities hadagreater of peergroup companies andasubstantial portionofthatcompensation waslinked to company performance. objective wasto setbonustargets such thattotal annualcash compensation was withinthebroad middle range Bonus Targets. With regard to Dr. Paul’s performance, the committee gave particular weight to his leadership of the ofthe leadership tohis weight particular gave committee the toDr. performance, Paul’s regard With Mr. Rice’s base salary was raised upon his promotion to chief fi tochief promotion his upon raised was Mr. Rice’s salary base leadership his noted committee the increase), (an 8 percent salary Mr. annual Armitage’s In establishing The committee reviewed similar considerations for each of the other named executives. In addition, with with Inaddition, executives. named other ofthe each for considerations similar reviewed committee The nancial results for the year relative to predetermined performance measures. Satisfactory individual individual Satisfactory measures. performance topredetermined relative year the for results nancial cant strides in brand equity and customer satisfaction, compliance and enterprise risk manage- risk enterprise and compliance satisfaction, customer and equity inbrand strides cant Bonustargets were basedonjobresponsibilities, internal relativity, andpeergroup data. Our specifi c to theexecutive’s position,where applicable. Asnoted above, we usedthepeergroup cer in October 2005, and therefore did not increase his annual salary in2006. salary annual his increase not did therefore and 2005, inOctober cer For allparticipantsintheplan,includingexecutive offi Consistent withourcompensation objectives, asemployees nancial nancial offi cer in May 2006. inMay cer cers, thecommittee cers. PROXY STATEMENT 8181 cers cer. nancial offi nancial cer. Mr. Rice received an additional Mr. cer. ed time periods of one or more years. We nancial offi nancial cantly at all levels consistent with marketplace cers with possible payouts ranging from zero to 200 percent $1,100,000 $1,100,000 c earnings-per-share (EPS) levels over specifi 2 $450,000 $450,000 1 cers’equity grants from 40 percent to 50 percent of the total grant value. In making this determination, the plan formula, payouts can range from zero to 200 percent of target depending on company performance. In performance. depending on company of target percent 200 to zero from range can payouts plan formula, would the payouts at which rates (that is, the growth and EPS both sales for rates growth the target establishing our peer in of companies 2006 performance the expected considered committee the of target), be 100 percent discussed objectives compensation with the Consistent estimates. analyst on published investment based group, our peer for growth expected the median approximately represented percentages growth the target above, and Lilly payouts in above-target result would the peer group exceeding performance Lilly accordingly, group; offi executive to The bonuses paid payouts. in below-target result would lagging the peer group performance for 2006 were 134 percent of target as a result of above-target growth in both sales (7 percent) and adjusted and adjusted (7 percent) both sales in growth of above-target as a result of target 134 percent 2006 were for on page 84.) discussed are items certain for (Adjustments percent). (11 earnings per share For 2005, the committee had lowered grant values signifi Mr. Golden retiredMr. in April 2006, and his 2006 stock option grant was forfeitedaccordance in with its terms. His Mr. Rice’s grants Rice’s were madeMr. before he was promoted to chief fi Retired Golden Mr. NameCurrent TaurelMr. LechleiterDr. PaulDr. ArmitageMr. Rice Mr. Stock Options $3,600,000 $2,340,000 Performance Awards $1,200,000 $900,000 $3,600,000 $2,340,000 $1,200,000 $900,000 2006 performance award was prorated based on the portion of the year worked. grant of stock options valued at $471,900 in May 2006 upon his promotion to chief fi 1 2 Equity Incentives—Performance Awards Performance awards provide employees with shares of Lilly stock if certain company performance goals are achieved, aligning employees with shareholder interests and providing an ownership stake in the company. The awards, normally granted annually, are structured as a schedule of shares of Lilly stock based on the company’s specifi of achievement granted performance awards for 2006 to executive offi of the target amount, depending on 2006EPS growth as adjusted based on predetermined criteria. No dividends are paid on the awards during the performance period. At the end of the performance period, the committee has trends, and had also shifted the mix of awards to increase emphasis on performance awards and decrease em- phasis on stock options. For 2006, the committee maintained the same total grant values but continued to place greater emphasis on performance-based equity incentives by increasing the performance award portion of execu- tive offi committee reviewed available peer groupdata but found it provided only limited insight because of rapidly chang- ing equity grant practices. Grant values for individuals were determined by individual performance and internal relativity. Consistent with the company’s compensation philosophy, individuals at higher levels received a greater proportion of total pay in the form of equity. The values for 2006 grants for the named executives were as follows: Equity Incentives—Total Equity Program Equity Incentives—Total Through 2006, we employed two forms of equity incentives granted under the 2002 Lilly Stock Plan: stock options and performance awards. These incentives foster the long-term perspective necessary for continued success in our business. They also ensure that our leaders are properly focused on shareholder value.Stock options and per- formance awards have traditionally been granted broadly and deeply within the organization, with approximately 4,900 management and professional employees now participating. In determining the value of grants for execu- tives, the committee’s overall objective was to set combined grant values of stock options and performance awards that were competitive within the broad middle range of peer company long-term incentive grant amounts. The committee approves grant values (expressedU.S. in dollars) prior to the pre-established grant date. The commit- processtee’s for setting grant dates is discussed on page 82. Then, on the grant date those values are converted to the equivalent number of shares using the same valuation methodology as the company uses to determine the accounting expense of the grants under Statement of Financial Accounting Standards (SFAS) 123R. PROXY STATEMENT 82 options. replace not do we date, grant the after declines price stock the if likewise, options; reprice not does company The performance. long-term on focused employees keep helps also vesting three-year The retirement. before company the leaves employee the if forfeited are exercised, not if and, years three for exercised be cannot typically they because employees key retain tohelp intended are options Inaddition, growth. long-term on ployees em- focus help ofgrant, date the on price market atthe granted options, 10-year company’s The time. over creases in- price stock the if only value have options because shareholders with incentives employee align options Stock Incentives—StockEquity Options following: the intoconsideration took and 2006, inJanuary awards performance 2006 of the offi ecutive ex- For formula. the by yielded amount the from upward, not but downward, payout award an toadjust discretion The company offers core employee benefi employee core offers company The Benefi Post-Employment and Employee gain. employee for manipulated • provide our global• workforce witha reasonable level offi • • • • • timing isdriven bythree considerations: committee’s October meetingorinDecember whenthere isnomeetinginOctober. Themid-February grant date employees), isinmid-February. Thisdate isestablished bythecommittee well inadvance –typically atthe employees. Theannualequitygrant date for alleligible employees, includingexecutive offi options) provides assurance thatgrant timingisnotbeingmanipulated to result inaprice thatisfavorable to TimingandPrice.Grant grant value from 60to 50percent. total equitygrant values were unchangedfrom 2005;however, we decreased thestock option portionofthetotal of thetotal equitygrant values (measured inaccordance withSFAS 123R)established bythecommittee. The size. Grant offi toexecutive grants option 2006 the inestablishing following the considered committee The share retention guidelinesdiscussed onpage84. retirement, orbyconsent ofthecommittee. Theadditionalone-year restriction periodisconsistent withour to forfeiture iftheexecutive leaves thecompany priorto February 2008,except byreason ofdeath,disability, focus andretention, theawards to executive offi Longer-term focusandretention considerations. percent oftarget. target growth inadjusted earningspershare (11percent) resulted ina2006performance award payout at150 above-target payouts andLilly performance laggingthepeergroup would result inbelow-target payouts. Above- expected growth for ourpeergroup; accordingly, Lilly performance exceeding thepeergroup would result in compensation objectives discussed above, thetarget growth percentage represented approximately themedian committee considered theexpected earningsperformance ofcompanies inourpeergroup. Consistent withthe value anditiseasily understood byemployees. Insettingthetarget growth percentage of7percent, the The committee believes EPSgrowth isaneffective motivator because itisclosely linked to shareholder as EPSgrowth (adjusted asdescribedbelow under“Adjustments for Certain Items”) over aone-year period. Company performance measure. the total grant value from 40to 50percent. committee decidedto maintain thesamegrant values in2006butincreased theperformance award portionof Target size. grant Our process for establishing the grant date well in advance provides assurance that grant timing is not being being not is timing grant that assurance provides inadvance well date grant the establishing for process Our fi the on effective are grants the hires, tonew ofgrants event In the —To take advantage offavorable local tax lawsfor stock optionsincertain jurisdictions outsidetheU.S., —It iswithinabouttwo weeks after release ofquarterly earnings, sothatthestock price atthattimecan —It coincides withthecompany’s calendar-year-based performance management cycle, allowing supervisors fi options maynotbegranted withinaspecifi prospects. reasonably beexpected to fairly represent themarket’s collective view ofourthen-current results and awards bystrengthening thelinkbetween payandperformance. to deliver theequityawards close intimeto performance appraisals, whichincreases theimpactof nancial reports. cers, the payout was in the form of restricted stock, as noted below. The committee approved the terms terms the approved committee The below. noted as stock, ofrestricted form inthe was payout the cers, Asnoted above under“EquityIncentives—Total EquityProgram,” stock optiongrants were 50percent Asnoted above, following asubstantial reduction intotal equitygrant values in2005,the Thecommittee’s procedure for timingofequitygrants (performance awards andstock Asinprevious years, thecommittee established theperformance measure ts ts coverage in order to: inorder coverage ts ed number ofdaysbefore orafter announcing earningsorfi To enhance theperformance awards’ incentives for longer-term cers for 2006are payable inrestricted stock thatissubject nancial supportintheevent ofillness orinjury,and rst trading day of the month following hire. following month ofthe day trading rst cers (more than4,900 cers: ling PROXY STATEMENT 8383 ts ts ed ed ts and the and ts ights. In In ights. ed Deferred Deferred ed cers, except that the cers and includemedical and edplan, Lilly also offers a non-qualifi cers may travel on the company aircraft to tsto executive offi ts is partially borne by the employee, including each ecting employees’ careers with the company. All U.S. t levels depending on the employee’s job level and seniority, the cers upon termination of their employment. ts the to company clearly outweigh only use the Taurel’s of the expense. Mr. culties in converting the Lilly EPS targets into an award based on the surviving an award into targets EPS the Lilly culties in converting cant perquisites or personal benefi or perquisites cant cers, participate in these plans. the extent that To any employee’s retirement ights in 2006 was to attend outside board meetings for the two public companies cers. The program is intended to preserve employee morale and productivity and 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 ciency benefi ciency Eligible terminated employees would receive a severance payment ranging from six months’ to to months’ six from payment ranging a severance receive would employees terminated Eligible Unlike “single trigger” plans that pay out immediately upon a change in control, the Lilly program program the Lilly upon a change in control, trigger” plans that pay out immediately “single Unlike ts ts to named executive offi ts available are the same for all U.S. employees and executive offi nancial protection upon loss of employment. The only exception is performance awards, a portion of awards, is performance exception The only of employment. upon loss nancial protection cer. cer. ned in the program. See pages 93–94 for a more detailed discussion. discussion. detailed a more See pages 93–94 for ned in the program. t exceeds IRS limits for amounts that can be paid through a qualifi Double trigger. trigger. Double The cost of both employee and post-employment benefi thereafter. This is consistent with the purpose of the program, which is to provide employees with a guaranteed with a guaranteed employees provide which is to with the purpose of the program, This is consistent thereafter. of fi level and the control the change in prior to based on time worked be paid out upon change in control, which would this partial payment believes The committee at the time of the change in control. level payout or forecasted target of the diffi because is appropriate EPS. company’s requires a “double trigger”—a change in control followed by an involuntary loss of employment within two years years within two of employment loss by an involuntary followed change in control trigger”—a a “double requires Severance payment. bonus (with bonus established base salary plus cash years’ two for all eligible are Executives base salary. years’ two the change in control). bonus paid prior to bonus or the last target year’s as the higher of the then-current Although there are some differences in benefi The company has adopted a change-in-control severance pay program for nearly all employees of thecom- Covered terminations. Covered each as is by the employee, good reason or (ii) for by the company (i) without cause is terminated employment defi The benefi • • • • enhance productivity and job satisfaction through programs that focus on work/life balance. on work/life that focus programs through • and job satisfaction productivity enhance

basic elements of the program are comparable for all employees: Perquisites executive offi company without undue concern over whether the transactions may jeopardize the executives’ own employment. 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 executives to consider corporate transactions that are in the best interests of the shareholders and other constituents of the pany, includingpany, the executive offi Except in the case of a change in control of the company, the company is not obligated to pay severance or other benefi enhanced Compensation in 2006 on page Table 91. Severance Benefi tion program. The program allows executives to save for retirement in a tax-effective way at minimal cost to the company. Under this unfunded program, amounts deferred by the executive are credited at an interest rate of 120 percent of the applicable federal long-term rate, as described in more detail following the Non-qualifi Deferred CompensationDeferred Program Executives may defer receipt of part or all of their cash compensation under the company’s deferred compensa- company aircraft is made available where Lechleiter, for the personal and the committee Dr. Taurel use be- Mr. of lieves the security and effi The company does not provide signifi IRS limits. Plan provide a reasonable level of retirement income refl employees, including executive offi benefi retirement plan and savings plan. These plans provide only the difference between the calculated benefi dental coverage, disability insurance, and life insurance. In addition, the Lilly 401(k) Plan and the Lilly Retirement incremental cost of providing the aircraft. Lechleiter Dr. did not use the corporate aircraft for personal fl addition, depending on seat availability, family members of executive offi accompany executives who are traveling on business. There is no incremental cost to the company for these trips. at which he serves as an independent The director. compensation committee service believes Taurel’s that Mr. on these boards, and his ability to conduct company business while traveling to board meetings, provides clear benefi to the company. As described has entered Taurel into a time on page share 94, Mr. arrangement for the corporate aircraft under which he pays the company a lease fee forpersonal use. This amount offsets part of the company’s corporate aircraft for personal fl PROXY STATEMENT Executive Compensation Recovery Policy Policy Recovery Compensation Executive Table. Compensation Summary inthe shown as $1,000,000 exceeded that salary base Lechleiter’s ofMr. Taurel’s portion Dr. the and essentially was law this under compensation non-deductible the 2006, For interests. shareholder 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.” based “performance- as deductibility full for plans, stock management its under awards performance and options stock below. table compensation summary refl as goals compensation overall our with consistent and feasible extent tothe deductibility corporate full for programs compensation incentive our toqualify is policy Our requirements. other meet and shareholders defi as compensation, performance-based offi executive named tothe 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 Deductibility obligations). retirement asset 47 ofFIN (conditional adoption tothe relating change accounting ofan effect cumulative 2005 the eliminated committee the Inaddition, charges. special other and restructuring impairments, asset major charges, liability ofproduct 2006 and 2005 inboth effect the eliminate to EPS adjusted committee the calculation, awards year. 2006 the For (comparator) previous the or year award Share Retention Guidelines; Hedging Prohibition Hedging Guidelines; Retention Share 84 offi executive for (zero oftarget percent 60 from range and grids, target individual on based are Payouts period. performance athree-year over price stock company’s ofthe growth the on based ofstock shares out pays SVA The forward. going program option stock our replaces which (SVA), award value shareholder the program, equity anew implementing is company the in2007, Beginning Decisions Compensation 2007 awards. performance and bonuses tocash related income covers policy This compensation. incentive or of bonus amount the toincrease was wrongdoing ofthe effect the and restatement the for need the caused partially or caused offi executive an if ofarestatement subject the subsequently were that sults offi achievement on based was that equity) or (cash compensation incentive recover may company the icy, offi toexecutive applicable policy recovery compensation executive an adopted has committee The artifi not are and business core ofthe growth underlying the represent payments award that toensure intended are adjustments The items. ofcertain effect the eliminate to determined were awards performance and bonuses 2006 which on results earnings the adjusted committee the period, performance ofthe beginning atthe established criteria on based and practice past with Consistent Items Certain for Adjustments own. they that stock Lilly tothe exposures economic their tohedge permitted not are Employees retirement. or disability, ofdeath, reason by except 2008, toFebruary prior company the leaves executive the if toforfeiture subject is that stock ofrestricted form inthe issued were performance 2006 for earned shares award performance objective, this with year. one Consistent atleast for oftaxes, net awards, performance and options stock from received shares offi executive our We expect growth. long-term on afocus tofoster help guidelines retention Share • • • • The company has taken steps to qualify compensation under the Eli Lilly and Company Bonus Plan, as well as as well as Plan, Bonus Company and Lilly Eli the under compensation toqualify steps taken has company The Excise tax. become vested. Accelerated ofequityawards. vesting eligibility andbenefi entitled to asupplement oftwo years ofagecredit andtwo years ofservice credit for purposesofcalculating Pension supplement. years’ benefi years following termination ofemployment. Allexecutives, includingnamedexecutive offi Benefi be bornebythecompany. Code imposesanexcise tax ontheemployee. Thecosts ofthisexcise tax, includingrelated tax gross-ups, would employee, inconnection withachangeincontrol exceed certain limits,Section280GoftheInternal Revenue t continuation. In theevent thepaymentsmadeto theemployee, orthevalue ofotherbenefi t continuation. t levels underthecompany’s defi Basic employee benefi Under theportionofprogram covering executives, aterminated employee would be Any unvested equityawards atthetimeoftermination ofemployment would ned in the tax law, is fully deductible if the programs are approved by by approved are programs the if deductible fully is law, tax inthe ned ts suchashealthandlife insurance would becontinued for upto two cers listed in the summary compensation table below. However, below. table compensation summary inthe listed cers cers) to 140 percent of target. Targets are set based on an an on based set are Targets oftarget. percent to140 cers) cially infl ned benefi ated or defl or ated t pensionplan. cer engaged in intentional misconduct that that misconduct inintentional engaged cer ated due to such items either in the inthe either items tosuch due ated ts received bythe cers are entitled to two cers. Under this pol- this Under cers. cers to retain all net net all toretain cers ected ected in the nancial re- PROXY STATEMENT 8585 ($) Total Compensation Compensation

5 ($) All Other Other All Compensation

4 ($) Change in in Change Pension Value

3 cers received 50 percent of their total ($) $325,640 $134,878 $475,494 $2,391,079 Non-equity Incentive Plan Incentive Compensation

2 6 ($) Option Awards Option

2 ($) Stock AwardsStock cer except as part of a non-equity incentive plan. ed that the Compensation Discussion and Analysis fairly and com- 1 2006 $1,650,3332006 $5,400,000 $1,112,000 $3,805,333 $3,510,0002006 $2,764,308 $3,967,976 $916,167 $1,417,4342006 $1,490,080 $1,864,460 $1,156,247 $701,657 $192,409 $1,240,000 $1,394,053 $15,229,817 $68,790 $1,043,514 $1,339,911 $11,305,093 $607,463 $705,165 $231,862 $55,789 $42,691 $5,727,393 $4,415,339 2006 $615,000 $675,000 $590,928 $580,466 $168,627 $37,722 $2,667,743 2006 $285,900 $550,000 $619,167 t and perquisite programs. Management has the primary responsibility for the company’s cers: cer cer cer ling with the Securities and Exchange Commission. cer The performance award programremains in place, and executive offi The following table summarizes the compensation committee’s 2007 equity compensation decisions for cer cers and oversees the deferred compensation plan, the company’s management stock plans, and other man- nancial statements on pages 40–41 of our annual report. No bonus was paid to a named executive offi A discussion of the assumptions used in calculating these values may be found in Note 7 to our 2006 audited John C. Lechleiter, Ph.D. President and Chief Operating Offi Steven M. Paul, M.D. Executive Vice President, Science and Technology Robert A. Armitage Senior Vice President and General Counsel Derica Rice W. Senior Vice President and Offi Financial Chief Current Current Retired Charles E. Golden Retired Executive Vice President and Chief Financial Offi Name and Principal Position Taurel Sidney Chief Board and the Chairman of Executive Offi Year Salary ($) Name TaurelMr. LechleiterDr. PaulDr. ArmitageMr. Rice Mr. Awards Value Shareholder $3,060,000 $1,989,000 Performance Awards $1,200,000 $855,000 $3,060,000 $1,989,000 $855,000 $1,200,000 $855,000 $855,000 fi nancial statements and reporting process, including the disclosure of executive compensation. With this in mind, 1 2 Summary Compensation Table Karen N. Horn, Ph.D., Chair Fisher M.C. George ErikJ. Fyrwald Ellen R. Marram agement incentive, benefiagement fi we have reviewed and discussed with management the Compensation Discussion and Analysis found on pages 77–85 of this report. The committee is satisfi pletely represents the philosophy, intent, and actions of the committee with regard to executive compensation. We recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement for fi Compensation Committee Report The compensation committee (“we” or “the committee”) evaluates and establishes compensation for executive offi expected investment return for largecap companies. Because the SVA pays in shares, it has stronger retention power. equity grant value for 2007 in performance award shares and 50 percent in SVA shares. All other compensation programs are unchanged from 2006. named executive offi PROXY STATEMENT tions, restricted stock grants, and restricted stock units. units. stock restricted and grants, stock restricted tions, op- stock awards, performance for provides which Plan, Stock Lilly 2002 the and plan, incentive anon-equity Plan, Bonus Company and Lilly Eli the 77, include page on and beginning Analysis, and Discussion Compensation the We have no employment agreements with our named executive offi executive named our with agreements employment no We have 86 6 5 4 3 expense for Mr. Golden’s 2006 stock option award, which was forfeited on his retirement according to its terms. terms. toits according retirement his on forfeited was which award, option Mr. stock for Golden’s 2006 expense cost of maintenance not related to trips. totrips. related not ofmaintenance cost the and aircraft, company-owned ofthe costs purchase the salaries, pilots’ as such usage, on based change not fi the include not do we travel, business for primarily used are aircraft company-owned the Since executive. the by payments lease share time 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 ofany company tothe cost incremental the We calculate coverage. dental and ofMr. cost the medical and Golden’s retiree perquisites, gross-ups, tax contributions, 401(k) plan compensation. deferred on earnings above-market or preferential ceived This amountThis refl individual’s each for match company the include which column, ofthis components the shows below table The offi executive named No individual. each for value inpension change the are column inthis amounts The Plan. Bonus Lilly the under 2007 inMarch made performance 2006 for Payment 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 companied him on business trips, at no incremental cost to the company. company. tothe cost incremental atno trips, business on him companied ac- occasionally Mr. have Inaddition, Taurel’s members family participation. spouse included that functions board toattend Taurel’s expenses Mrs. includes also column inthis amount The meetings. board outside tend toat- aircraft corporate ofthe ofuse company tothe cost incremental the $91,069,(d) Includes representing retirement. upon reimbursement one-time this for eligible are plan benefi his on company the by made payments tax toMr. FICA for imputed income on Golden (c) Tax reimbursements participation. spouse involving functions pany com- certain toattend aircraft corporate the on spouses executives’ the by travel for (b) Tax reimbursements participation. spouse ing involv- functions company certain toattend aircraft corporate the on wife his by travel for and meetings board outside toattend aircraft toMr. imputed corporate income ofthe on Taurel use his for (a) Tax reimbursements r ie$690$2 b $37,722 $55,789 $42,691 $475,494 $68,790 0 0 0 $192,409 $96,424 0 0 0 0 0 0 Expense Medical 0 Retiree (b) $822 (d) $92,007 $361,916 (c) Perquisites (b) $819 (b) $592 (a) $17,154 $1,382 (b) $2,070 $36,900 Gross-ups Tax $54,970 $42,099 $99,020 Match 401(k) $66,720 Mr. Golden Mr. Rice Mr. Armitage Dr. Paul Dr. Lechleiter Mr. Taurel Name ts accrued under the company’s non-qualifi company’s the under accrued ts ects expense to the company for options granted to Mr. Golden in 2004 and 2005. There was no no was There 2005. and toMr. in2004 granted Golden options for company tothe expense ects ed pension plan. All participants in the non-qualifi inthe participants All plan. pension ed cers. xed costs that do do that costs xed Compensation” Total “All Other Other “All Total ed pension ed pension cer cer re- PROXY STATEMENT 9 8787 $471,900 $900,000 $900,000 $450,000 $450,000 Awards of Equity Equity of $1,100,000 $1,200,000 $1,200,000 $3,600,000 $3,600,000 $2,340,000 $2,340,000 Fair Value Grant Date $1,100,000 $56.18 $52.54 cers received cers Awards of Option Option of ($/share) Base Price Price Base Exercise or or Exercise $56.18 8 3 27,108 54,217 $56.18 72,289 $56.18 30,000 216,867 $56.18 140,964 $56.18 66,265 66,265 Option Option Awards: Awards: Options All Other Other All Securities Securities Number of of Number Underlying Underlying 7 cer at the time of grant and at 39,160 39,160 2 Maximum Maximum (# shares)(# 7 ed above, Rice and and except for Mr. Target Estimated Estimated (# shares)(# Under Equity Equity Under Possible Payouts 0 16,020 32,040 041,65283,304 021,36042,720 0 64,080 128,160 019,580 019,580 0 8,010 16,020 Incentive Plan Awards Plan Incentive (# shares)(# Threshold Threshold 6 ($) 1 Maximum $1,458,090 cer at the time they weregranted. 6 ($) Target Estimated Estimated Possible Payouts Under Non-Equity 0$526,243$1,052,486 0 $1,112,000 $2,224,000 0$778,742$1,557,484 0$2,062,917$4,125,834 0$729,045 0 $433,183 $866,366 Incentive Plan Awards Plan Incentive cer when he was promoted to his current position effective 2006, May 1, and ($) Threshold Threshold 4 4 — — — — — — — — 1/20/2006 Committee Committee Action Date Action 12/19/2005 12/19/2005 12/19/2005 12/19/2005 12/19/2005 12/19/2005 12/19/2005 12/19/2005 12/19/2005 12/19/2005 Compensation Compensation 5 5/1/2006 2/10/2006 2/10/2006 2/10/2006 2/10/2006 2/10/2006 2/10/2006 2/10/2006 2/10/2006 2/10/2006 2/10/2006 2/10/2006 2/10/2006 Our performance awards granted in 2006 paid out in January 2007, and the named executive offi For 2006 performance, payouts were percent 150 of target. In order to receive a performance award payout, Mr. Golden’s 2006 Golden’s stockMr. option award was forfeited on his retirement according to its terms. The value shown is the grant date fair value equity of the full Golden’s award; incentive Mr. however, grant was Mr. Golden’s bonus Golden’s paymentMr. was prorated, based on the amount of base salary he earned prior to his retirement equity Golden’s incentiveMr. grant payout was prorated, based on his retirement date. His actual stock award is Mr. Rice became anMr. executive offi Stock options granted under the 2002 Lilly Stock Plan are described in the Outstanding Equity Awards at Fiscal stock award Rice’s andMr. stock option award granted in February 2006 were not approved by the compensation Thesecolumns show the range of payouts targeted for 2006 performance under the 2002 Lilly Stock Plan as These columns show the range of payouts targeted for 2006 performance under the Eli Lilly and Company Bonus Dr. PaulDr. ArmitageMr. RiceMr. GoldenMr. 24,030 32,040 12,015 9,656 $1,251,963 $1,669,284 $625,982 $503,078 Name TaurelMr. LechleiterDr. Performance Awards 62,478 96,120 Value on December 31, 2006 $3,255,104 $5,007,852 prorated based on his retirement date. listed in the table below. committee because he was not anexecutive offi Year-End Table below.Year-End Table Analysis. The dollar amount recognized by the company for these performance awards isshown in the Summary Compensation in the column titled Table “Stock Awards” and their valuation assumptions are referenced in foot- note 2 to that table. The 2006 stock award payout was made in January 2007 and is shown in more detail below. described in the section titled “Equity Incentives—Performance Awards” in the Compensation Discussion and 2007 bonus payment for 2006 performance has been made based on the metrics described, at 134 percent of target, and is shown in the Summary Compensation in the column titled Table “Non-equity Incentive Plan Compensation.” Plan as described in the section titled “Cash Incentive Bonuses” in the Compensation Discussion and Analysis. The and is shown in the Summary Compensation on page Table 85. received a special grant of stock options at that time. Mr. RiceMr. — Mr. ArmitageMr. — Dr. PaulDr. — Dr. LechleiterDr. — NameCurrent TaurelMr. Date Grant — Retired GoldenMr. — the following shares: 8 9 7 5 6 3 4 2 1 Grants Plan-Based of 2006 During Awards 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 a participant must have remained employed with the company through December 2006 31, (except in the case of death, disability, or retirement). In addition, an executive who was an executive offi PROXY STATEMENT 1 88 31, 2006 December at Awards Equity Outstanding 77–85. pages on Analysis and Discussion Compensation inthe found be can programs sation compen- equity ofour discussion More options. stock on equivalents dividend pay We not do 10 years. after expire topayment. prior retired he because restricted not are Golden’s shares offi executive an not was he because Mr. restricted not are Rice’s2008. shares February until resigns) executive the if toforfeiture subject (and restricted remain will shares Mr. these Golden, r odn78,107 Mr. Golden Retired Mr. Rice Mr. Taurel Name Dr. Lechleiter Dr. Paul Mr. Armitage Current No executive offi executive No Options are granted at 100 percent of fair market value on the date of grant; they vest after three years and and years three after vest they ofgrant; date the on value market offair percent at100 granted are Options cer had any unearned equity awards outstanding as of December 31, 2006. ofDecember as outstanding awards equity unearned any had cer Number of Securities Securities of Number Unexercised Options Options Unexercised Exercisable Underlying 120,000 120,000 120,000 120,000 120,000 240,000 350,000 350,000 100,000 100,000 120,000 175,000 125,000 350,000 350,000 120,000 23,800 80,000 80,000 60,000 60,000 14,000 10,000 10,000 12,000 23,100 11,200 46,000 46,000 23,000 80,000 (#) 50,000 50,000 50,000 20,000 20,000 60,000 25,000 10,000 75,900 25,000 5,000 5,700 7,300 7,000 3

12 11 11 9 8 7 Number of Securities Securities of Number Unexercised Options Options Unexercised Unexercisable Underlying 400,000 200,000 120,000 255,621 140,964 216,867 25,000 23,077 30,000 127,811 27,108 (#) 50,000 72,289 25,000 53,254 80,000 85,207 54,217 3 pinAad Stock Awards Option Awards 10 4 4 4 9 9 4 1 Option Exercise Price ($) Price $52.54 $55.65 $56.18 $56.18 $56.18 $56.18 54.80 64.06 64.06 64.06 64.06 64.06 66.38 66.38 66.38 66.38 66.38 66.38 55.65 55.65 55.65 55.65 55.65 73.98 74.28 74.28 73.98 74.28 74.28 74.28 73.98 75.92 75.92 75.92 75.92 75.92 75.92 88.41 88.41 88.41 88.41 88.41 88.41 88.41 79.28 79.28 79.28 79.28 79.28 79.28 57.85 57.85 57.85 57.85 57.85 57.85 61.22 56.18 73.11 73.11 73.11 73.11 73.11 73.11 Option Expiration Option Expiration 10/16/2009 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 12/14/2014 10/19/2007 10/19/2007 10/19/2007 10/19/2007 10/19/2007 10/17/2008 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 12/17/2010 5/30/2008 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 7/18/2007 2/15/2013 2/15/2013 2/15/2013 2/15/2013 2/15/2013 2/10/2015 2/10/2015 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 4/30/2011 4/30/2011 4/30/2011 4/30/2011 4/30/2011 Date cer at the time of grant, and Mr. and ofgrant, time atthe cer 13 13 13 13 13 Number of Shares Have Not Vested Vested Not Have or Units That 32,345 24,030 32,040 64,690 62,478 21,564 (#) 13,478 92,120 5,000 3,000 00 00 6 5 6 5 6 5 6 5 of Shares or Units Have Not Vested Vested Not Have Market Value Value Market of Stock That $3,370,349 2 $5,007,852 $3,255,104 $1,669,284 $1,123,484 $1,251,963 $1,685,174 $702,204 $260,500 $156,300 ($) PROXY STATEMENT 8989 cers: fth anniversary fth t of his children, and t of his children, and t of his children, and $1,552,236 on Vesting ($) Value Realized 2 3 ed under sections 401(a) and 401(k) of the on Vesting (#) Number of Shares Acquired Acquired Shares of Number 1 Value Realized on Exercise ($) Exercise on plan qualifi ned contribution Option AwardsOption Awards Stock ve option grants shown were shortened to correspond with the fi rst fi rst on Exercise (#) Exercise on Number of Shares Acquired Acquired Shares of Number ects additional restrictedstock grants totaling 8,000 shares. ts ect the difference between the exercise price of the option and the market price at the time of ect the market value of the stock on the day the stock vested. These shares represent performance 02/17/2012 02/18/2005 10/19/2007 10/20/2000 02/10/2015 02/11/2008 10/16/2009 10/18/2002 10/04/2011 10/03/2003 07/18/2007 07/21/2000 02/15/2013 02/17/2006 05/30/2008 06/04/2001 02/09/2016 02/10/2009 12/17/2010 12/18/2003 02/14/2014 02/19/2007 10/17/2008 10/19/2001 04/29/2016 05/01/2009 02/18/2011 02/20/2004 Expiration Date Date Vesting Expiration Date Date Vesting

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 • The Lilly Employee 401(k) Plan, a defi • Employee The Lilly The exercise period for the fi Options were granted 2006 on May 1, and expire on April 2016. 29, Mr. Golden transferredMr. 118,683 shares of this option to an irrevocable trust for the benefi Mr. Golden’s two Golden’s mostMr. recent options’ vesting dates were accelerated due to his retirement on April 30, 2006. Dr. LechleiterDr. transferred 118,683 shares of his option an to irrevocable trust for the benefi These options were granted outside of the normal annual cycle and vest in three installments, as follows: 25 per- Shares paid out in January 2006 for 2005 performance. These shares vested in February 2007. transferred Taurel Mr. 348,683 shares of this option to an irrevocable trust for the benefi Options were granted on February 2006 10, and expire on February 2016. 9, Shares paid out in January 2007 for 2006 performance. These shares are restricted until February 2008. The vesting date each of option is listed in the table below by expiration date: These two columns show performance award shares paid in restricted shares with a holding period of one year. In addition to the January 2005 performance award, Golden this for number Mr. includes performance awards Amounts refl Amounts refl Retired GoldenMr. 109,170 $2,443,373 28,766 Mr. Rice2,800$57,24600 TaurelMr. LechleiterDr. Dr. Paul ArmitageMr. Mr. 147,110 13,110 2,890 $3,189,738 0 $269,072 $59,664 28,000 14,000 0 $1,585,360 $792,680 9,000 10,600 $509,580 $588,572 Name Current Current of Mr. Golden’s retirement. Golden’s Golden retired Sinceof Mr. Mr. within months of receiving 12 the 2006 stock option, it did not vest, and it was forfeited. these shares vested on April 30, 2002. 2005;cent on December 25 percent 19, on December 2008; 18, and 50 percent on November2, 2009. The restricted stock shares pay dividends during the restriction period, but the dividends are not preferential. For Paul this alsoDr. refl paid out in restricted stock in January 2006 for 2005 performance, which vested on his retirement. these shares vested on April 30, 2002. these shares vested on April 30, 2002. exercise. awards issued in January 2005 for company performance in 2004, which were subject to forfeiture for one year following issuance. We maintainWe two programs to provide retirement income to all eligible U.S. employees, including executive offi Retirement Benefi Retirement 2 3 1 Options Exercised and Stock Vested in 2006 13 10 11 12 9 7 8 4 5 6 3 2 PROXY STATEMENT in the event ofbankruptcy. event in the age and years of service at the time of retirement. Benefi ofretirement. time atthe 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; would have received without the qualifi the without received have would tax-qualifi the under payable amount the between difference the employees eligible benefi a pension atax-qualifi from paid 90 7 6 5 4 3 2 1 Pension Benefi towards his eligibility for abenefi for eligibility his towards receive a reduced retirement benefi $11,615,578. $1,033,206. retirement benefi 60. This additional service credit increased the present value of his non-qualifi ofhis value present the increased credit service additional This 60. below. described further are service. He qualifi benefi survivor and joint and only), decrement (post-retirement 2000CH r riaetax-qualifi Mr. Armitage Dr. Paul Current r ietax-qualifi Mr. Rice r odntax-qualifi Mr. Golden Retired Plan Name Mr. Taurel Name Dr. Lechleiter Mr. Golden’s additional years of service credit increased the present value of his non-qualifi ofhis value present the increased credit ofservice Mr. years Golden’s additional to eligible him making 60, age reaches he when ofservice year one approximately with credited be will Mr. Armitage age past company the by employed be still he should 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 is Dr. Lechleiter benefi retirement full for Mr. eligible Taurel currently is benefi ofaccumulated value ofpresent calculation The • The Lilly Retirement Plan(theretirement• plan),atax-qualifi The following table shows benefi shows table following The The retirement plan benefi plan retirement The Section 415 of the Internal Revenue Code generally places a limit on the amount of annual pension that can be be can that pension ofannual amount the on alimit places generally Code 415 Revenue Internal Section ofthe information aboutthevalue ofthesepension benefi retirement benefi Compensation Table onpage85for information aboutcompany contributions to thenamedexecutive offi and earningsthereon are paidoutinaccordance withelections madebytheparticipant.SeeSummary The matching contributions are intheform ofLilly stock. Theemployee contributions, company contributions, 4 2 3 ts in 2006 t ($220,000). However, since 1975 the company has maintained anon-tax-qualifi maintained has company However, 1975 the since t ($220,000). t. Early retirement benefi retirement Early t. es for approximately 32 percent less than his full retirement benefi retirement full his than less percent 32 approximately for es ts to eligible employees. SeetheSummaryCompensationTable onpage85for additional ed plan ($175,000) as well as on the amount of annual earnings that can be used to calculate tocalculate used be can that earnings ofannual amount the on as well as ($175,000) plan ed non-qualifi non-qualifi non-qualifi non-qualifi non-qualifi non-qualifi tax-qualifi tax-qualifi tax-qualifi ts shown in the table are net present values. The benefi The values. present net are table inthe shown ts t, it does not change the present value of his non-qualifi ofhis value present the change not does it t, ed plan ed plan ed plan ed plan ed plan ed plan ed plan ed plan ed plan ed plan ed plan ed plan t under the company’s retirement program. Since this arrangement only applies applies only arrangement this Since program. retirement company’s the t under total total total total total total ts that named executive offi executive named that ts ed plan’s limit. The non-qualifi The plan’sed limit. ts are further described below. described further are ts Number of Years of Credited Credited of Years of Number Service 35 35 35 27 27 14 14 10 17 17 8 8 7 6 5 ts. t assumes a discount rate of 6 percent, mortality RP RP mortality of6percent, rate adiscount t assumes ts. t calculations are based on “points,” with an employee’s employee’s an “points,” on with based are t calculations ed defi Accumulated Benefi Accumulated cers are entitled to under the retirement plan. retirement the tounder entitled are cers es for approximately 13 percent less than his full full his than less 13 percent approximately for es Present Value of of Value Present $30,103,284 $31,307,130 $14,909,762 $15,147,061 ve out of the last 10 years of service (average (average ofservice 10 years last ofthe out ve $5,682,282 $2,650,529 $1,203,846 $2,892,975 $6,376,251 ed plan is unfunded and subject to forfeiture toforfeiture subject and unfunded is plan ed ned benefi $242,446 $378,739 $237,299 $165,003 $581,787 $746,790 $608,916 $230,177 $693,969 t of 25 percent. t of25 t ($) ed pension benefi t planthatprovides monthly 1 ed plan and the amount they they amount the and plan ed t also depends on the retiree’s retiree’s the on depends t also t. Early retirement benefi retirement Early t. Last Fiscal yearLast ($) ts are not payable as a lump alump as payable not are ts Payments During ed pension benefi $864,244 $850,758 $13,486 ed pension benefi — — — — — — — — — — — — — — — t under the plan is is plan the t under ed plan that pays pays that plan ed t shown above by by above t shown cers. t. t by ts points equaling the sum of his or her age plus years of service. Employees who retire (i) at age 65 with at least fi ve years of service, (ii) at age 62 with at least 80 points, or (iii) with 90 or more points receive an unreduced benefi t. Employees may elect early retirement with reduced benefi ts under either of the following two options: • Employees with between 80 and 90 points may retire with a benefi t that is reduced by three percent for each year that the employee has left to reach 90 points or age 62. • Employees who have less than 80 points, but who have reached age 55 and have at least 10 years of service, may retire with a benefi t that is reduced as described above and is further reduced by six percent for each year that the employee has left to reach 80 points or age 65.

All U.S. retirees are entitled to medical insurance under the company’s plans. Retirees with spouses or un- married dependents may elect that, upon the retiree’s death, the plan will pay survivor annuity benefi ts at either 25 or 50 percent of the retiree’s annuity benefi t. Election of the higher survivor benefi t will result in a lower annuity payment during the retiree’s life. Dr. Paul joined the company in 1993. If he remains employed by the company past age 60, he will receive 10 years’ additional service credit, and as a result, his retirement benefi t will not be reduced for early retirement. When Mr. Armitage joined the company in 1999, the company agreed to provide him with a retirement benefi t based on his actual years of service and earnings at age 60. When Mr. Armitage reaches age 60 with 9.75 years of service, he will be treated as though he has, for eligibility purposes only, 20 years of service. The additional service credits will make him eligible to begin reduced benefi ts nine months earlier, but will not change the timing or amount of his unreduced benefi ts (shown in the Pension Benefi ts in 2006 Table above). Mr. Golden received additional service credit when be began his employment in February 1996, contingent upon his remaining employed by Lilly for 10 years. His retirement benefi ts include the standard retiree medical benefi ts that would be available to retirees of the same age and with the same number of years of service credited. A grant of additional years of service credit to any employee must be approved by the compensation committee of the board of directors.

Nonqualifi ed Deferred Compensation in 2006 Executive Registrant Aggregate Aggregate Aggregate Contributions in Last Contributions in Last Earnings in Distributions in Balance at Last Named Executive Plan Fiscal Year ($) 1 Fiscal Year ($) 2 Last Fiscal Year ($) Last Fiscal Year ($) Fiscal Year End ($) 3 Current Mr. Taurel non-qualifi ed savings 85,820 85,820 79,063 02,517,012 PROXY STATEMENT deferred compensation 0 0 433,657 8,086,877 total 85,820 85,820 512,720 10,603,889 Dr. Lechleiter non-qualifi ed savings 53,520 53,520 30,424 0677,192 deferred compensation 259,884 0 125,752 2,390,033 total 313,404 53,520 156,176 3,067,225 Dr. Paul non-qualifi ed savings 41,770 41,770 25,454 0621,447 deferred compensation 0 0 0 0 total 41,770 41,770 25,454 621,447 Mr. Armitage non-qualifi ed savings 28,899 28,899 14,670 0271,672 deferred compensation 527,858 0 80,027 1,583,742 total 556,757 28,899 94,697 1,855,414 Mr. Rice non-qualifi ed savings 23,700 23,700 4,002 0101,584 deferred compensation 0 0 0 0 total 23,700 23,700 4,002 101,584 Retired Mr. Golden non-qualifi ed savings 3,954 3,954 36,969 10,405 622,345 deferred compensation 0 0 131,934 0 2,460,323 total 3,954 3,954 168,903 10,405 3,082,668 1 The amounts in this column are also included in the Summary Compensation Table on page 85 , in the salary column (non-qualifi ed savings) or the non-equity incentive plan compensation column (deferred compensation). 2 The amounts in this column are also included in the Summary Compensation Table on page 85, in the all other compensation column as a portion of the 401(k) match. 3 Of the totals in this column, the following totals have previously been reported in the Summary Compensation Table for this year, and for previous years:

Name 2006 ($) Previous Years ($) Total ($) Mr. Taurel $171,640 $3,170,235 $3,341,875 Dr. Lechleiter $366,924 $1,815,963 $2,182,887 Dr. Paul $83,540 $135,171 $218,711 Mr. Armitage $585,657 $1,281,715 $1,867,372 Mr. Rice $47,400 0 $47,400 Mr. Golden $7,908 $1,995,961 $2,003,869

91 PROXY STATEMENT schedules are irrevocable. Both plans are unfunded and subject to forfeiture in the event of bankruptcy. ofbankruptcy. event inthe toforfeiture subject and unfunded are plans Both irrevocable. are schedules distribution associated and elections deferral All committee. compensation the by approved as ofhardship event the in except employment, their during withdrawals make not may but retirement, following up to10 installments annual in or sum inalump funds the toreceive elect may Participants 2007. for 5.7 is percent and 2006 for percent 5.6 was which compounding, monthly with Code Revenue 1274(d) Internal ofthe Section under Department Treasury U.S. the by December preceding the for established as rate long-term federal applicable ofthe at120 percent interest with credited are program this under executives by deferred Amounts plan. compensation deferred company’s the under offi Executive participate. to eligible are employees all and elections, investment and participation same the with Plan, 401(k) company the as manner same inthe administered is plan This plans. to401(k) regard with IRS the by prescribed limits contribution the beyond match, acompany receive and salary, base her or ofhis apercentage tocontribute executive each allow a non-qualifi 92 UponPotential Termination Payments of Employment benefi and payments potential the describes table following The Control in Change or Termination Upon Payments Potential 4 3 2 1 following a change in control) would be in the discretion of the compensation committee. compensation ofthe discretion inthe be would incontrol) achange following benefi or payments such toprovide agreement Any employment. offi executive entitle that plans pension as under described arrangements “Pension Benefi (ii) certain and below, described as company, ofthe incontrol achange following terminations (i) for certain Except offi executive named the towhich arrangements and plans Continuation of Medical and Welfare Benefi Welfare and ofMedical Continuation Current noutr emnto 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 reason good or • Involuntary termination • Involuntary 0 0 • 0 0 Mr. Rice reason good or • Involuntary termination • Involuntary termination • Voluntary 0 0 VoluntaryMr. Armitage reason good or • Involuntary termination • Involuntary retirement • Voluntary Dr. Paul reason good or • Involuntary termination • Involuntary retirement • Voluntary Dr. Lechleiter termination 00000 0 noutr emnto 0 0 0 0 0 0 0 0 0 0 0 0 reason good or • Involuntary termination • Involuntary retirement • Voluntary Mr. Taurel outr eieet(/00)0$14,909,762 0 • Voluntary retirement (4/30/06) Mr. Golden Retired See the footnote 5 to the Summary Compensation Table on page 86. Table page on Compensation Summary 5tothe footnote the See Benefi Pension the See Benefi Retirement Regular and Pay “Accrued See Benefi Pension Program—Incremental Pay Severance “Change-in-Control See termination after CIC after termination CIC after termination CIC after termination CIC after termination control (CIC) control in change after termination The Nonqualifi The ed savings plan and a deferred compensation plan. The non-qualifi The plan. compensation adeferred and plan savings ed ed Deferred Compensation in 2006 Table above shows information about two company programs: programs: company two about information shows Table above in2006 Compensation Deferred ed ts in 2006 Table on page 90. Table page on in2006 ts cers and other executives may also defer receipt of all or part of their cash compensation compensation cash oftheir part or ofall receipt defer also may executives other and cers Cash Severance Severance Cash cers to severance, perquisites, or other enhanced benefi enhanced other or perquisites, toseverance, cers Payment 28430$,4,5 2554$,6,5 21478$7,511,922 $2,114,798 $1,160,453 $255,584 $1,146,757 $2,834,330 883260 $8,853,216 52410$,5,3 $24,000 $1,254,031 $5,204,160 39108$,9,2 1630$6,6 34053$11,782,155 $3,470,583 $264,460 $116,360 $3,999,724 $3,931,028 25180$076$400$8,7 9443$4,511,124 $974,403 $880,075 $24,000 $70,796 $2,561,850 ts” below. Pension Benefi Pension (present value) (present Incremental ts” and “Change-in-Control Severance Pay Program— Pay Severance “Change-in-Control and ts” t 3 1 Medical / Welfare /Welfare Medical Benefi cers would be entitled upon termination of employment. ofemployment. termination upon entitled be would cers ts” above, there are no agreements, arrangements or or arrangements agreements, no are there above, ts” Continuation of value) ts (present $24,000 ts under the company’s compensation and benefi and compensation company’s the under ts $96,424 ts to a terminating executive offi executive toaterminating ts 4 2 2 Continuation of Equity Awards (unamortized Acceleration and and Acceleration expense as of 12/31/06) 60000$9,477,216 0 $600,000 3000$,9,7 $9,571,464 $2,699,273 $390,000 ed savings plan is designed to designed is plan savings ed t” below. 00$15,006,186 ts upon termination of their oftheir termination upon ts Excise Tax Tax Excise Gross-up cer (other than Termination Termination Benefi Total Total ts t PROXY STATEMENT 9393 t of t ts are explained below. explained ts are ed savings plan. ed pension benefi ts, age, and service credit at credit ts, age, and service ed retirement plan. See “Retirement “Retirement plan. See ed retirement See the narrative ed savings plan. ed Deferred Compensation in 2006 t levels in effect immediately prior to prior to immediately in effect t levels fty (50) miles. cant harm to the business reputation of reputation the business harm to cant ts are explained below. explained are ts times the 2006 annual base salary plus two t of two ts from the benefi ts from ve years after retirement or the option’s normal expiration date. normal expiration or the option’s retirement after years ve cers (the “CIC Program”). The amounts shown in the table for The amounts shown the in table above do not include payments

As described in the Compensation Discussion and Analysis under

ts. cer is for good reason if it results from (i) a material diminution in the (i) a material from if it results good reason is for cer cer by the company is for cause if it is for any of the following reasons: reasons: any of the following if it is for cause is for by the company cer harm or other signifi economic cant tsthat are not available to salaried employees generally. Represents the present value of an incremental non-qualifi of an incremental value the present Represents t. Represents the CIC Program benefi Program the CIC Represents ed Deferred Compensation in 2006 Table for information about the 401(k) plan and “Non- about the information for Compensation in 2006 Table ed Deferred ts under the Lilly Retirement Plan and the non-qualifi Plan Retirement the Lilly ts under The amounts shown in the table do not include distributions of plan balances under the 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

A termination of employment due death to or disability does not entitle the named executive

ts provided to all U.S. retirees, including retiree medical and dental insurance. The amounts insurance. and dental medical including retiree all U.S. retirees, to provided ts ts” on page 89. The amounts shown in the table above as Incremental Pension Benefi Pension as Incremental above in the table amounts shown ts” on page 89. The ed Deferred Compensation” on pages 91–92 for information about the non-qualifi information on pages 91–92 for Compensation” ed Deferred ts to the extent they are provided on a non-discriminatory basis salaried to employees generally upon (i) the employee’s willful and continued refusal to perform, without legal cause, his/her material duties, his/her material cause, without legal perform, to refusal willful and continued (i) the employee’s or gross dishonesty (ii) any act of fraud, the company; harm to economic in demonstrable resulting in signifi resulting misconduct a felony. to contendere of guilty or nolo of a plea of or the entering or (iii) conviction the company; or authority, duties, responsibilities relationship, reporting position, title, of the executive’s or status nature his/her workload; increase that materially him/her of additional responsibilities to or the assignment in the executive’s reduction base salary; (iii) a material then-current the executive’s in (ii) any reduction (iv) a the change in control; prior to the year for those in effect bonuses below earn incentive opportunities to benefi employee in the executive’s reduction material the change in control; (v) the failure to grant to the executive stock options, stock units, performance shares shares units, performance options, stock stock the executive to grant to (v) the failure the change in control; on the basis the change in control (12) month period following 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 to prior period immediately (3) year the three basis for him/her on an annualized average to rights granted than fi by more of the executive or (vi) relocation the change in control; —A termination by the executive offi by the executive —A termination —A termination of an executive offi of an executive —A termination two years of age credit and two years of service credit that is provided under the CIC Program. The following The following under the CIC Program. that is provided credit of service years and two of age credit years two Covered terminations. Covered benefi compensation, plan, based on the named executive’s of the current terms December 31, 2006. Eligible terminations include an involuntary termination for reasons other than cause, or a other than cause, reasons for termination include an involuntary terminations 31, 2006. Eligible December the change in control. following years within two good reason, for executive by the termination voluntary and Company Bonus Plan. 2006 under the Eli Lilly bonus for times cash pension benefi Incremental Cash severance payment. Benefi 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 a retirement-eligible when However, days thereafter. 30 terminated options are stock until the earlier of fi in force her options remain Regular pension benefi Regular pension following the Nonqualifi the following qualifi 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 options (except stock period), and restricted during the award time worked basis for paid on a reduced (which are awards performance awards. performance in payment of previous awarded stock shown in the table above as Continuation of Medical / Welfare Benefi / Welfare as Continuation of Medical above in the table shown • • • • pay and vacation salary Accrued • • The value of accelerated vesting of certain unvested equity grants upon retirement. Under the company’s stock stock Under the company’s upon retirement. equity grants unvested of certain vesting • of accelerated The value • • Welfare benefi • Welfare • the non-qualifi 401(k) plan and the Lilly under of plan balances Distributions cers to any payments or benefi Change-in-Control Severance Pay Program. “Severance Pay” on pages 83–84, the company maintains a change-in-control severance pay programfor nearly all employees, including thenamed executive offi “involuntary or good reason termination” following a change in control are based on the following assumptions and plan provisions: offi Death and Disability. Table onpage Table 91. Lilly deferred compensation plan. Those amounts are shown in the Non-qualifi Deferred Compensation. termination of employment. These include: and benefi Accrued Pay and Regular Retirement Benefi PROXY STATEMENT The table shows shares held by named executives in the Lilly Employee 401(k) Plan, shares credited to the ac- tothe credited shares Plan, 401(k) Employee Lilly inthe executives named by held shares shows table The not increase his benefi his increase not 94 offi executive named the benefi stock common ofcompany ofshares number the forth sets table following The Offi Executive and Directors by Ownership Stock Common Ownership ofCompany Stock benefi fringe taxable determining of purposes for Service Revenue Internal the by established as Levels Fare Industry Standard (ii) the and able), tofi equivalent of(i) amount an greater at the capped fl and crew including Mr. aircraft, company the agreement, Taurel leases time-share the Under aircraft. ofcompany use personal his Mr. with with Taurel inconnection arrangement intoatime-share entered has company The travel. all toMr. Taurel available for made is aircraft company the reasons security for policy, board under above, noted As Transaction Related Person rent fi then-cur- company’s the on based calculated award, performance ofthe value ofthe one-half receive would ployee em- the 30, June on occurred incontrol achange if example, For incontrol. change tothe prior year ofthe portion torefl reduced made, be would awards performance ofoutstanding payment apartial incontrol a change of 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 • • • Continuation ofmedical andwelfare benefi Mr. qualifi Because Taurel already standard actuarialassumptions were usedto calculate eachindividual’s incremental pensionbenefi executive offi would berecognized inconnection withtheacceleration ofunvested equitygrants. Inaddition, thetwo named retirement regardless ofreason. Theamountsinthiscolumn represent thepreviously unamortizedexpense that be 8,000shares ofrestricted stock heldbyDr. Paul; allotherunvested equityawards automatically vest upon and Paul, theonly equityaward receiving accelerated vesting andterm extension because oftheCICPlanwould three years following termination. For thethree retirement-eligible employees, Mr. Taurel andDrs. Lechleiter stock options,restricted stock, orotherequityawards would vest, andoptionswould beexercisable for upto Acceleration andcontinuation ofequityawards. rate of$12,000peryear. welfare benefi reason for termination. Thesameactuarialassumptions were usedto calculate continuation ofmedical and would beentitled to equivalent medical anddental coverage intheordinary course asretirees regardless ofthe Mr. Taurel andDrs. Lechleiter and Paul, there islimited incremental benefi employee medical, dental, life, andlong-term disabilityinsurance. For thethree retirement-eligible employees, two years following acovered termination ofcontinued coverage equivalent to thecompany’s current active 25 percent federal income tax rate, a1.45percent Medicare tax rate and a3.4percent state income tax rate. for the280Gexcise taxes. Theamountsinthetable are basedona280Gexcise tax rate of20percent, astatutory excise taxes aswell asanyincome andexcise taxes payable bytheexecutive asaresult ofanyreimbursements 280G oftheInternal Revenue Code.Thecompany hasagreed to reimburse theaffected employees for those Excise taxgross-up. would already have beenfully expensed. employment. There would benoincremental expense to thecompany for thiscontinuation because theoption the CICPlanofcontinuation oftheiroutstanding stock optionsfor upto three years following termination of ight services, for personal fl personal for services, ight nancial forecast for the year. the for forecast nancial icutrt:6percent RP 2000CH benefi &survivor Joint (post-retirementMortality only): rate: Discount cers whoare notretirement-eligible, Messrs. Armitage andRice, would receive thebenefi ts aswere usedto calculate incremental pensionbenefi t. t: 25% of 25% pension t: Uponachangeincontrol, employees maybesubjectto certain excise taxes underSection cers, and all directors and executive offi executive and directors all and cers, ts. ights. He pays a time-share fee based on the company’s cost of the fl ofthe cost company’s the on based fee atime-share pays He ights. es for a full pension benefi pension afull for es

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 UndertheCICPlan,uponacovered termination, anyunvested rst-class airfare for the relevant fl relevant the for airfare rst-class cers cers cers as a group, as of February 5, 2007. 2007. 5, ofFebruary as agroup, as cers t, the additional age credit and service credit do do credit service and credit age additional the t, ts, withtheadditionofanassumed COBRA t undertheCICPlanbecause they cially owned by the directors, directors, the by owned cially ight (if commercially avail- (ifcommercially ight ight ight but t: ect ect the t under PROXY STATEMENT 9595 878,107 760,000 Within 60 Days of February 5, 2007 Stock Options Exercisable 2 3 3 cially owned by each individual, cially Benefi Total Shares Owned 1 ciallyOwned Class Plan SharesPlan cial owners of more than 5 percent of the outstanding Directors’ Deferral Directors’ Number of Shares Shares of Number of Percent cers as a group (21 people): 2,071,697 Capital Research and Management Company acts as investment advisor to various investment companies. It cers percent as a group of the outstanding own 0.18 common stock of the company. 24,349 Golden’s of Mr. The shares shown Lechleiter for Dr. include shares 10,698 that are owned by a family foundation for which he is a di- See description of the Directors’ Deferral Plan, pages 73–74. Unless otherwise indicated in a footnote, each person listed in the table possesses sole voting and sole invest- Ellen R. Marram Paul, M.D. M. Steven Ph.D. Prendergast, M.D., G. Franklyn Seifert P. Kathi Rice W. Derica TaurelSidney All directors and executive offi — 3,036 — 19,335 — 4,585 16,366 — 6,528 19,335 15,489 — 69,396 — 7,528 14,000 19,022 37,410 1,114,992 530,900 5,600 14,000 2,390,000 86,200 Name of Individual or Identity of GroupRobert A. ArmitageSir Winfried BischoffJ. Michael Cook 401(k) Plan Shares Martin S. Feldstein, Ph.D. Fisher M.C. George J. ErikFyrwald Alfred G. Gilman, M.D., Ph.D.Charles E. Golden 1,218 — — — — — — — 1,716 8,115 6,528 7,601 13,861 14,383 49,701 4,391 10,115 7,528 — 24,383 9,401 13,861 227,900 4,491 11,200 127,778 8,400 11,200 14,000 — — Karen N. Horn, Ph.D.John C. Lechleiter, Ph.D. 12,538 — 26,258 — 201,258 26,258 14,000 shares were pledged Cook’s and 1,800 shares of Mr. were on deposit in a margin account as of February 5, 2007. ment power with respect to the shares shown in the table to be owned by that person. No person listedthe in table owns percent more of the outstanding than 0.10 common stock of the company. All directors and executive offi rector. Dr. Lechleiter Dr. rector. has shared voting power and shared investment power over the shares held by the foundation. has sole voting power with respect to 17,450,000 shares (approximately percent 1.5 of shares outstanding) and sole The Endowment has sole voting and sole investment power with respect to its shares. The board of directors of the Endowment is Thomas composed M. Lofton, of Mr. N. Clay chairman; Robbins, Mr. president; Mrs. Mary K. Lisher; Drs. Otis R. Bowen and William G. Enright; and Messrs. Carmichael, Daniel P. Eli Lilly Ratliff II, and Eugene F. (Emeritus Director). Each of the directors is, either directly or indirectly, a shareholder of the company. Wellington Management Company, LLP Company, Management Wellington 75 State Street Boston, Massachusetts 02109 66,929,125 5.9% (as of 12/31/06) Capital Research and Management Company 333 South Hope Street Los Angeles, California 90071 108,167,000 9.6% (as of 12/29/06) Lilly Endowment, Inc. (the “Endowment”) 2801 North Meridian Street Indianapolis, Indiana 46208 140,350,804 (as of 2/5/07) 12.4%

Principal Holders of Stock the best of theTo company’s knowledge, the only benefi Name and Address Benefi 3 1 2 shares of the company’s common stock are the shareholders listed below: including the shares in the respective plans. In addition, the table shows shares that may be purchased pursuant to stock options that are exercisable within 60 days of February 5, 2007. counts of outside directors in the Directors’ Deferral Plan, and total sharesbenefi PROXY STATEMENT the board’s authority to change that number and tofi and number that tochange authority board’s the qualifi and elected been have successors their until and terms respective their for toserve elected are directors times, all At meeting. annual fi be would vacancy the ofdirectors, number inthe increase an by created a vacancy including meeting, annual 2007 the after occurring board the on vacancy ofany case inthe Inaddition, meeting. annual ateach terms one-year for elected be would directors all meeting, 2010 annual the with beginning and terms, one-year for elected be would ofshareholders meetings annual 2009 and 2008 atthe expire terms whose directors that means This expire. terms then-current their once terms year one- for election for stand will amendments ofthe effectiveness tothe prior elected Directors obtained. is approval shareholder after promptly todo intends company the which ofIndiana, ofState Secretary the with amendments these ments to the Amended Articles ofIncorporation. Articles Amended tothe ments amend- ofthe effectiveness the upon immediately effective to be bylaws, company’s tothe amendments forming con- adopted also has board The underlining. by indicated additions and strike-outs by indicated deletions with changes proposed the shows statement, proxy Atothis inAppendix forth set article, This adopted. is proposal this 96 ofdirectors. election annual the for toprovide amendments approval, for shareholders tothe recommending and approving, resolutions adopted unanimously board the committee, governance corporate and directors of the recommendation the on 2006, InDecember years. three every elected class each with classes, intothree divided is ofdirectors board the that provide currently ofIncorporation Articles Amended company’s The Directors of Election Annual for Provide to Incorporation of Articles Company’s the Amend to Proposal 3. Item 2007. for auditors dent indepen- principal as &Young LLP Ernst of appointment the ratifying FOR vote you that recommends board The so. todo wish they if astatement tomake opportunity the have will representatives Those questions. toappropriate torespond available be will and meeting annual atthe present tobe &Young expected are of Ernst ratifi for shareholders tothe submitted being is appointment this bylaws, the with Inaccordance 2007. year the for pany fi the appointed has committee audit The Appo the Ratify to Proposal 2. Item statement. proxy ofthis 62 page 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 nominees ofthe Each in2010. held ofshareholders meeting annual atthe expire will year this elected directors for year. term each The election for standing directors of the one-third approximately with classes intothree divided is board the ofincorporation, articles company’s the Under Directors of 1. Election Item Items ofBusinesstoBeActedUponattheMeeting shares. ofits toall respect with power investment shared and outstanding) ofshares percent 2.3 (approximately shares to26,252,339 respect with power shares. ofits toall respect with power investment • Kathi P. Seifert Franklyn• G.Prendergast, M.D.,Ph.D. J. MichaelCook • • Sir Winfried Bischoff cation. Ernst & Young served as the principal independent auditors for the company in 2006. Representatives Representatives in2006. company the for auditors independent principal the as &Young served Ernst cation. Article 9(b) of the company’s Amended Articles of Incorporation contains the provisions that will be affected if if affected be will that provisions the contains ofIncorporation Articles Amended company’s ofthe 9(b) Article fi the upon effective become will proposal this approved, If Wellington Management Company, LLP, acts as investment advisor to various clients. It has shared voting voting shared has It clients. tovarious advisor investment as LLP, Company, acts Management Wellington lled by interim election of the board, with the new director to serve a term ending at the next next atthe ending aterm toserve director new the with board, ofthe election interim by lled ed. This proposal would not change the present number of directors, and it would not change change not would it and ofdirectors, number present the change not would proposal This ed. intment Independent of Auditors Principal rm of Ernst & Young LLP as principal independent auditors for the com- the for auditors independent principal as &Young LLP ofErnst rm ll any vacancies or newly created directorships. directorships. created newly or vacancies any ll ling of Amended Articles of Incorporation containing containing ofIncorporation Articles ofAmended ling PROXY STATEMENT 9797 ed ed ed boards edlimit ve years. The years. ve cers would no longer be fully cers in the proxy statement. However, ed board structure, which haslong a history in ed boards may enhance shareholder value by forcing an entity ed board, the company has other means to compel a takeover bidder 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 es as “performance-based” is not subject to this deduction limitation. ed board structure. The board considered the view of some shareholders who believe that classifi rmative vote least of at 80 percent of the outstanding common shares is needed to pass this proposal. any shares subject to grants under the 2002 Plan or prior shareholder approved stock plans (the 1989, 1994 and stock approved under the 2002 Plan or prior shareholder grants to subject any shares at the time that plan terminated in April 2002; at the time that plan terminated The board also considered benefi The 2002 Lilly Stock Plan (“2002 Plan”) allows the grant of performance awards that qualify as performance- The directors and corporate governance committee and the board heard advice from outside governance and 1998 Lilly Stock Plans) that are not issued or transferred due to termination, lapse, or forfeiture of the grant; and of the grant; lapse, or forfeiture termination, due to or transferred not issued Plans) that are Stock 1998 Lilly • 80,000,000 shares; Plan) Stock (the 1998 Lilly plan shareholder-approved under the previous available that were • 5,243,448 shares • options granted of stock price of the exercise the company as payment to by grantees exchanged • any shares Shares Subject Plan to The maximum number of shares of Lilly stock that may be issued or transferred for grants under the 2002 Plan is the sum of: 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 directors of 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 elect to the directors annually. 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 Section of the Internal 162(m) Revenue Code of 1986, as amended (the “Code”), limits the amount of compensa- tion expense that the company can deduct for income tax purposes. In general, public a corporation cannot deduct compensation in excess million of $1 paid to any of the named executive offi compensation qualifi that based compensation under Section One of the conditions 162(m). to qualify as performance-based is that the material terms of the performance goals must be approved by the shareholders at least every fi last such approval for the 2002 Plan was when the plan itself was approved in 2002. preserve To the tax status of performance awards as performance-based, and thereby to allow the company to continue to fully deduct the compensation expense related to the awards, we are now asking the shareholders to reapprove the performance goals. are We not amending or altering the 2002 Plan. If this proposal is not adopted, the committee will continue to grant performance awards under the 2002 Plan but certain awards to executive offi tax deductible by the company. Item 4. Reapproval of Material of Terms Performance Goals for the 2002 Lilly Stock Plan The board recommends that you vote FOR amending the company’s articles incorporation. of company’s the amending FOR vote you that board recommends The Vote Required The affi seeking control of a targetcompany 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 generally concurred with that view, it also took note that even without a classifi to negotiate with the board, including a shareholder rights plan, certain “supermajority” vote requirements in its Amended Articles of Incorporation (as described in the company’s response to Item 9 at pages and cer- 105–106), tain provisions of Indiana law. 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 of Incorporation to provide for the annual election of directors. The board believes that by taking this action, it can provide shareholders further assurance that thedirectors are accountable to shareholders while maintaining appropriate defenses to respond to inadequate takeover bids. Background of Proposal of Background The proposal isa result of ongoing review of corporate governance matters by the board. The board, assisted by the directors and corporate governance committee, considered the advantages and disadvantages of maintaining the classifi PROXY STATEMENT options under the 2002 Plan to nonemployee directors. There are currently 10 nonemployee directors. 10 nonemployee currently are There directors. tononemployee Plan 2002 the under options tooffi grants make may “committee”) (the mittee offi 10 all executive including 41,500mately employees, offi including company, ofthe employees all Plan 2002 the Under Under the Plan Grants stock. Lilly affecting changes relevant other conditions on a grantee’s entitlement to receive payment under a performance award. aperformance under payment to receive a grantee’s entitlement on conditions additional impose may committee The period. award ofthe end tothe company the by employed remain generally must agrantee payment, toreceive Inorder Awards. Performance Stock for limit share 100,000 the with pliance com- ofdetermining purposes for date) payment the on stock ofLilly value market the on (based ofshares payment a as counted is payment cash such and Award, Performance aStock under payable stock ofLilly shares ofthe all or of part inlieu cash topay elect can committee The $8,000,000. is year calendar inany individual toan payment maximum the Awards, Performance toDollar As 100,000. is year calendar inany Awards Performance of Stock inpayment individual an by received be may that ofshares number maximum The Awards”). Performance (“Dollar maximum. tothe threshold the from levels mance perfor- atvarious payable amounts dollar or ofshares number the and levels, performance maximum and target 98 formance goals specifi goals formance per- more or one on based period award ofthe beginning atthe goals performance the establishes committee The awards. ofperformance form inthe Plan 2002 the under issued be may shares of18,000,000 mum Amaxi- 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 2002 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. in the the date over exercise price the by stock of of number exercise multiplied Lilly shares 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 may which price, option the establishes committee The Code. the under options stock favored tax other or options, • other Lilly stock price goals. • total shareholder return• any oftheforegoing goalsbefore• theeffect ofacquisitions,divestitures, accounting changes, andrestructuring • Market Value Added(MVA—the• difference between acompany’s fair market value, asrefl • EVA corporate ordivisionalnetsales • • divisional income • net income • earnings per share Stock Options and Stock Appreciation Rights. Appreciation Stock and Options Stock reclassifi offs, spin dividends, stock splits, stock for toadjustment subject is number maximum The under the2002Planorpriorshareholder approved stock plans. Awards may be denominated either in shares of Lilly stock (“Stock Performance Awards”) or in dollar amounts amounts indollar or Awards”) Performance (“Stock stock ofLilly inshares either denominated be may Awards fi consecutive more or (four period award the establishes also committee The and specialcharges stock price, andtheeconomic bookvalue ofcapital employed) Performance Awards. Performance the under shares 2,500,000 than together, more for considered SARs, and options receive may grantee No on based amount an toreceive right –the (“SARs”) rights appreciation stock grant also may committee The ® (after tax operating profi ed in the 2002 Plan. The material terms of those performance goals are: goals performance ofthose terms material The Plan. 2002 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 t less theannualtotal cost ofcapital) nancial performance of the company or a subsidiary, division, or other business business other or division, asubsidiary, or company ofthe performance nancial cers and employees in its discretion. The board may grant stock stock grant may board The discretion. inits employees and cers The committee may grant nonqualifi grant may committee The cers, are eligible to participate. The compensation com- compensation The toparticipate. eligible are cers, cers, are eligible to participate. Currently approxi- Currently toparticipate. eligible are cers, scal quarters), the threshold, the threshold, quarters), scal ed options, incentive stock stock incentive options, ed ected primarily inits cations cations or t of PROXY STATEMENT

9999 cers (a)) in column ected available for future issuance under issuance future for available (c) Number of securities remaining (c) Number of securities remaining equity compensation plans (exclud- equity compensation ing securities refl warrants, and rights warrants, price of outstanding options, of outstanding price (b) Weighted-average exercise exercise (b) Weighted-average 9,797,960 $75.74 320,555 79,012,219 $68.59 45,157,699 warrants, and rights warrants, The committee may also issue or transfer shares under a restricted (a) Number of securities to be issued be issued (a) Number of securities to upon exercise of outstanding options, of outstanding upon exercise ned in Article of the 2002 12 Plan), in order to preserve all of the grantee’s cers) received stock option grants for 755,302 shares and all other employees (3,854 em- cers received stock option grants as set forth on page 87 in the Grants of Plan-Based Awards 1 The future amounts that will be received by grantees under the 2002 Plan are not determinable. In 2006, the The Committee may provide in the grant agreement, or by subsequent action, that the following shall occur in A maximum of 3,000,000 shares of Lilly stock may be issued or transferred under the 2002 Plan in the form of Restricted Stock Grants or Stock Units. The committee may grant stock unit awards subject to vesting and transfer restrictions and conditions of payment At any time prior to payment, the committee can adjust awards for the effectof unforeseen events that have cers offi as a group (10 Total 88,810,179 $69.38 45,478,254 Equity compensation plans approved by security approved plans Equity compensation holders Plan category Equity compensation plan not approved by security not approved plan Equity compensation holders Other Information The 2002 Plan remains effective until April unless 2012, 14, earlier terminated by the board. The board may amend the 2002 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 The 2002 Plan is administered and interpreted by the committee, each member of which must be a “nonemployee” director 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 grants to 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 2002 Plan and may delegate authority to others for plan administration, subject to limitations imposed by SEC and IRS rules and state law. market value of Lilly stock on the date of grant, increase (iii) the number of shares authorized for issuance or transfer, or (iv) increase any of the various maximum limits established for stock options, performance awards, and restricted stock. Securities Equity Under Issuance Compensation Authorized for Plans which plans under our compensation 31, 2006, regarding as of December information presents table The following issuance. been authorized for have stock common of Lilly shares as a group received payouts for performance awards totaling 321,468 shares and all other employees received performance awards, restricted stock grants, and restricted stock shares. units totaling 2,357,195 During 2006 and in connection Table, with the 2006 award year received performance awards as detailed on page 87 in the narrative following the Grants of Plan-Based Awards During 2006 Also Table. in 2006, the executive offi rights: any outstanding (i) stock option not already vested shall become immediately exercisable; any (ii) restriction periods on restricted stock grants shall immediately lapse; and outstanding (iii) performance awards will be vested and paid out on prorated a basis, based on the maximum award opportunity and the number of months elapsed compared to the total number of months in the award period. named executive offi ployees) received options grants for 4,804,932 shares. With respect to the 2006 award the executive year, offi the event of a change in control (as defi Authority Committee of restricted stock grants or stock unit awards, considered together. 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 and the shares become freely transferable. a substantial effect on the performance goals and would otherwise make application of the performance goals the committee However, unfair. may notincrease the amount that would otherwise be payable to individuals who are subject to Section of the Code. 162(m) determined by the committee. The value of each stock unit equals the fair market value of Lilly stock and may include the right receive to the equivalent of dividends on the shares granted. Payment is madethe in form of Lilly stock. PROXY STATEMENT latory agencies around the world. Lilly fully recognizes the fundamental ethical obligation to treat animals used in used animals totreat obligation ethical fundamental the recognizes fully Lilly world. the around agencies latory effi and safe that toensure essential is inresearch ofanimals use appropriate the time, some for underway been have testing animal of use the tominimize efforts While products. ofour evaluation thorough and careful entails This worldwide. people Claim No. 5C-00295. In addition to ruling in PETA’s favor, the Court ordered Covance to pay PETA PETA pay to Covance ordered Court the favor, PETA’s in ruling to addition In 5C-00295. No. Claim Proposal Research Animal of Outsourcing International and Proposal Use and Care Animal to Opposition in Statement stewardship. corporate Company’s ofour part gral inte- an as measures welfare animal basic topromoting tocommit Board the urge we Accordingly, must. Company Jersey, New Princeton, azcentral.com/arizonarepublic/eastvalleyopinions/articles/1021credit21.html) explanation.” for out cry atleast welfare, inanimal interest particular no with toaviewer even … kept are they inwhich surroundings ofthe bleakness the and handled are animals the inwhich manner “rough fi the publicizing from PETA to stop refused Kingdom United inthe Langan Peter Judge Honorable The it. publicizing from inEurope ofAnimals ment Treat- Ethical the for People toenjoin sued Covance that torments psychological and abuses physical gross to such Plan. Stock Lilly 2002 the for goals performance the of reapproval FOR vote you that recommends board The and theexercise price of outstanding grants. ministrator mayadjust thenumberofshares available for grant, thenumberofshares subjectto outstanding grants, options intheevent ofretirement, disability,anddeath. Intheevent ofstock splitsorotherrecapitalizations, thead- schedules established bytheplanadministrator. There are provisions for early vesting andearly termination ofthe market value atthetimeofgrant. Theoptionsshallnotexceed 11years induration andshallbesubjectto vesting resources. Thestock optionsare nonqualifi nonmanagement employees worldwide. Theplanisadministered bytheseniorvice president responsible for human 100 4 3 2 1 atwww.lilly.com. website our on Report Citizenship Corporate inour found be can ofanimals use our on report rent cur- Lilly’s resources. ofcompany use unnecessary an is reporting additional that believes and 6below) Item 5and Item PETA’s on (this behalf submitted proposals both reviewed has board ofthe committee compliance and policy public The tifi scien- and “ethical toan commitment stated its for leader, commended is industry an as Company, The Policy. Use and Care Animal an Web site its on posted has Lilly Eli media. the by exposed been recently have and uncommon not are laboratories inindependent Abuses tests. such toconduct laboratories independent retaining as well as Statement: Supporting measures. ofenrichment implementation the including Policy, to the adhering are laboratories contract and in-house towhich extent the on information include report the that request shareholders Further, the needs. behavioral and social animals’ addresses ii) it and basis, aregular on ratories labo- outside such with reviewed is and laboratories contract toall extends i) it that: toensure Policy Use and Resolved proposal. following the submitted have respectively, shares, 100 benefi 23510, Virginia Norfolk, Street, Front 501 (PETA), Treatment ofAnimals Ethical the for ofPeople behalf on 98115 Page, P.O. Washington Meredith and Moran, 15889, Seattle, Jamie Box Animals of Use and Care Regarding Proposal Shareholder 5. Item 1 to all outside contractors all the more relevant, indeed urgent. indeed relevant, more the all contractors outside to all

The case captioned t around company major every about just with worked “We’ve that stated Development Early of Director Covance’s 2005, October In http://www.lilly.com/about/policies/#animal PETA’s undercover investigator videotaped the systematic abuse of animals at Covance’s laboratory in Vienna, VA over a six mont asix VA over Vienna, in laboratory Covance’s at animals of abuse systematic the videotaped investigator undercover PETA’s Represents shares intheLilly GlobalShares Stock Plan,whichpermitsthecompany to grant stock optionsto c obligation to ensure the appropriate treatment of animals used inresearch…” used ofanimals treatment appropriate the toensure c obligation Lilly is dedicated to the discovery and development of medicines that improve the health and well-being of well-being and health the improve that ofmedicines development and discovery tothe dedicated is Lilly Resolution. this tosupport shareholders We urge the so laboratories, testing animal ofthe doors closed the behind on goes what monitor cannot Shareholders in headquartered laboratory independent an Inc., atCovance, recorded ofatrocities However, disclosure the , that the Board issue a report to shareholders on the feasibility of amending the Company’s Animal Care Care Animal Company’s the ofamending feasibility the on toshareholders areport issue Board the , that Covance Laboratories Limited v. PETA Europe Limited Limited v. PETA Europe Limited Laboratories Covance cacious medicines become available to patients. Furthermore, it is a requirement dictated by regu- by dictated arequirement is it Furthermore, to patients. available become medicines cacious 2 has made the need for a formalized, publicly available animal welfare policy that extends extends that policy welfare animal available publicly aformalized, for need the made has Our Company conducts tests on animals as part of its product research and development, development, and research product ofits part as animals on tests conducts Company Our lm and instead ruled in PETA’s favor. The Judge stated in his opinion that the the that opinion inhis inPETA’s stated ruled Judge favor. The instead and lm ed for U.S.tax purposes.Theoptionprice cannot beless thanthefair was fi led in the High Court of Justice, Chancery Division, Leeds District Registry, Registry, District Leeds Division, Chancery Justice, of Court High the in led 3 Filmed footage showed primates being subjected subjected being primates showed footage Filmed Ł 50,000 in costs and fees. and costs in 50,000 cial owner of approximately 675 and 675 and ofapproximately owner cial 1 4 h investigation. he world” (http://www. PROXY STATEMENT 101101 ict with ict magazine also reported that Eli article noted that the rationale c obligation to ensure the ap- . Purposely re-locating research 8 Forbes Forbes c interest ensuring in that appropriate standards are in However, many However, of the countries to which the Company is re-locating its 7 The November 2006, 13, issue of ning, and replacing animal use. 5 6 cant portion of its research in foreign laboratories, with 20% of its scien- reported that “Increasingly, Lilly is moving its research and development…to cial owner of approximately 281 shares, has submitted the following proposal. Eli Lilly has publicly committed to an “ethical and scientifi China Daily, (Aug. p.10 18, 2005) Business Week Business ; Forbes, Vol. p. 76 178 No. (Nov. 10 13, 2006) ; Business Week (Jan. 30, 2006) , that the Board report to shareholders on the rationalefor increasingly exporting the Company’s animal Shareholders deserve to know whether animal testing is being moved to foreign countries in order to circum- Our Company now conductssignifi a As a global company, Lilly develops contractual relationships with select laboratory animal research and Lilly maintains the highest standards animal of care and usein all our facilities.the In United States, Lilly In January 2006, Lilly’s Labs Go Global” “Comparative Advantage” “Comparative “Lilly Eyes for R&D Sales Rise”; http://www.lilly.com/about/policies/#animal “ at bay” and quotedpharmaceutical a industry executive who “admits that Chinese testing companies lackquality control and high standards on treatment.” Lilly had “announced plans recently to set up research units The in China.” for shifting animal testing to China is that “scientists are cheap, lab animals plentiful and pesky protesters held 7 8 5 6 propriate treatment of animals used in research, to minimize the number animals of involved, and to pursue the development of alternative test systems.” Lilly requires—at a minimum—adherence to U.S. animal welfare standards at its facilities in foreign countries. Supporting Statement: Resolved experimentation to countries which have either non-existent or substandard animal welfare regulations and little or no enforcement. the Further, shareholders request that the report include information on the extent to which Gloria Eddie, J. 1060 Cambridge Avenue, Menlo Park, California 94025, on behalf of People for the Ethical Treat- ment of Animals (PETA), benefi Item 6. Shareholder Proposal Regarding International Outsourcing of Animal Research research responsibly. have We both an ethical and a scientifi place company at and third party facilities to ensure appropriate standards of animal care yield valid study results. vent American animal welfare laws and reduce oversight and other protections for animals, and whether research conducted at Lilly facilities in other countries is held to at least the same standards as animal testing conducted at its U.S. facilities. tists based in China (its largest non-U.S.-based Research & Development team) to regions with lower animal costs, easy animal availability, and lower welfare standards is in direct confl Lilly’s stated commitment to reducing, refi animal welfare, Lilly has increased oversight of these companiesto assess their adherence to these expectations. In addition, we continue work to to harmonize global animal welfare standards. The board recommends that you vote AGAINST this proposal and Item 6 below. throughout the world are subject to local laws, which may vary fromcountry country. to Regardless of local varia- tions, Lilly seeks to do business only with those companies that share our commitment to animal welfare. Lilly requires these companies to comply with applicable local laws and treat ensure animals To in a humane manner. national authorities regularly inspect all animal facilities. animal supply companies inside and outside the United States. Animal research and animal supply companies complies with local, state, and national laws and regulations on the use of animals research, in which are enforced by the relevant authorities. All animal facilities are subject to external review and inspection. For example, our U.S. facilities are subject to unannounced site inspections by the U.S. Department of Agriculture. In Europe, local and has been accredited by the Association for the Assessment and Accreditation of Laboratory Animal Care Inter- national (AAALAC) for more than 30 years. AAALAC accreditation is a voluntary process that includes a detailed, 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. Globally, Lilly China, India, and the former Soviet bloc.” animal research and testing are known for having no or poor animal welfare standards and negligible oversight. PROXY STATEMENT pendent Chair will enhance Investor confi Investor enhance will Chair pendent In addition, the presiding director: presiding the In addition, CEO’s ofthe performance. review annual an and meeting board regular each after session executive an including matter), subject the on based chosen is director independent another (unless present not is chairman the at which board ofthe meetings atall presides board, the by appointed is who director independent an director, presiding the Additionally, members. non-employee independent, be must board ofthe percent 75 principles, governance our structure. governance offi executive chief and chairman the not or whether independence, board toensure designed are principles These principles.) governance board’s ofthe a description for 66–70 pages (See governance. ofcorporate principles sound under operating board independent astrong, has already Lilly that We believe it. against avote recommend and proposal this reviewed have board ofthe committee compliance and policy public the and committee, governance corporate and directors the ofdirectors, board The Offi Executive Chief and Chairman of Roles the Separating Regarding Proposal the to Opposition in Statement resolution. this FOR avote urge we accountability, and dence challenges. enduring to these torespond company our position better will leadership Board Independent We believe value. long-term company’s our impact may model business this on dependence and pricing drug on Pressure countries. developed in other those than medicines for prices higher pay who purchasers, American from revenue substantial generated has crisis. the toaddress solutions toforge able better be and imperative, ethical tothis focus greater bring will Board vigorous and Chair independent an We believe medicines. products. topharmaceutical inaccess crisis the them among foremost management.” with interact directors inwhich way the change ultimately must it and independence, embrace must board ofthe leadership “the that and enough” not is Board ofthe ofamajority Independence “the state: Guidelines 102 Company. toour guidance and direction strategic gives Board The CEO. the and ofmanagement oversight dent indepen- providing by interests shareholder’s toprotect is ofDirectors Board ofthe purpose primary This nance. Offi Statement: Supporting meeting. shareholder 2007 ofthe time atthe ineffect tions offi executive an as served Offi Executive Chief and ofChairman roles the separating possible, Resolved: proposal. following the submitted has shares, 50 approximately 49221-1793, Michigan, benefi Adrian, Drive, Heights Siena 1257 East Sisters, Dominican Adrian The Offi Executive Chief and Chairman of Roles the Separating Regarding Proposal 7.Item Shareholder proposal. this AGAINST vote you that recommends board The 5above. Item following Opposition” in “Statement the see Please Proposal Research Animal of Outsourcing International and Proposal Use and Care Animal to Opposition in Statement • leads theboard process• for selecting andevaluating theCEO cer. This is a basic element of sound corporate governance practice. governance corporate ofsound element cer. abasic is This The board is composed of a majority of independent board members, currently 10 out of 12 directors; under under 10 of12 out directors; currently members, board ofindependent ofamajority composed is board The Indepen- with Company our for direction strategic proper the provide can Board our that toensure In order 27.15 by ofshareholders. supported percent was in2006 on voted resolution A similar signifi undergoing is sector pharmaceutical ofthe model business current The life-saving company’s toour access no or limited have world the around others and ofAmericans Millions company, our facing issues policy complex address board the help also will structure board independent An and Principles Core Corporate CalPER’s separation. such recommend Institutions ofrespected A Number Inde- An CEO. and ofChair roles the separating by effectively more roles both accomplish likely will Board The We believe an Independent Board Chair—separated from the CEO—is the preferable form of corporate gover- ofcorporate form preferable the CEO—is the from Chair—separated Board Independent an We believe obliga- contractual any breach necessarily would complying that extent tothe apply not shall proposal This The shareholders of Eli Lilly & Company request the Board of Directors establish a policy of whenever ofwhenever apolicy establish ofDirectors Board the request &Company Lilly ofEli shareholders The We believe in the principle of the separation of the roles of Chairman and Chief Executive Executive Chief and ofChairman roles ofthe separation ofthe principle inthe We believe cer of the Company serves as Chair of the Board ofDirectors. Board ofthe Chair as serves Company ofthe cer dence in our Company and strengthen the Integrity of the Board ofDirectors. Board ofthe Integrity the strengthen and Company inour dence cer (CEO) roles are separated, through a counterbalancing acounterbalancing through separated, are (CEO)cer roles cer, so that an independent director who has not not has who director cer, independent an that so cant challenges. The industry industry The challenges. cant cial owner of owner cial cer cer PROXY STATEMENT 103103 cant challenges. challenges. cant http://knowledge.wharton.upenn.edu Knowledge @Wharton, cantly enhanced value proposition that improves pa- cient and effective leadership model for the company. The Company is one of the very few companies in the S&P 500 that does not allow shareown- led at Goodyear Tire & Rubber Company failed to passes even though approximately 90 percent of points out that there is a lack of hard evidence to show that separating the roles boosts returns for share- 9 , that the shareowners of Eli Lilly & Company (“Company”) urge the Company to take all steps necessary, cial owner of approximately 5.4 million shares, has submitted the following proposal. The primary tool for directly impacting the Company’s governance practice is by amending the Company’s This proposal asks for a majority vote standard to amend the bylaws since a supermajority vote can be almost CalPERS believes that corporate governance procedures and practices, and the level of accountability they Guided by the active oversight of our independent directors, our company will continue to be a strong advocate for We agreeWe that the current business model of the pharmaceutical sector is undergoing signifi A recent Wharton School of Business article entitled “Splitting Up the Roles of CEO and Chairman: Reform or Red We alsoWe agree that access to medicine continues to be a serious concern; the board’s however, corporate gov- • independent directors chairman and the the a liaison between as serves and and schedules, meeting agendas and the board to sent information • approves generally • independent directors. meetings of the call to has authority “Splitting up the Roles of CEO and Chairman: Reform or Red Herring?”, June 2, 2004,

9 ers to amend the Company’s bylaws. Approximately of companies 96% in the S&P 500 and the Russell 1000 allow shareowners to amend the bylaws. Though the default under Indiana state law is to only allow the board of directors to amend the bylaws, Indiana state law does allow Indiana corporations to amend the articles of incorporation to allow for shareowners to amend the bylaws. The company, has however, chosen not to allow shareowners to amend the bylaws even though approximately percent 96 of corporations do so, as noted above. bylaws. This is why we are sponsoring this proposal which, if passed and implemented, would make the Company more accountable to shareowners by allowing shareowners to amend the bylaws by majority vote. As a trust fund with more than million 1.4 participants, and as the owner of approximately 5.4 million shares of the Company’s common stock, the California Public Employees’ Retirement System (CalPERS) thinks shareowners should have the ability to impact the corporate governance of any company we own via a bylaw amendment. impossible to obtain because of abstentions and broker non-votes. For example, a proposal to declassify the board of directors fi Supporting Statement: votes cast were in favor of the proposal. While it is often stated by corporations that the purpose of supermajority requirements is to provide corporations the ability to protect minority shareholders, supermajority requirements are most often used, in CalPERS’ opinion, to block initiatives opposed by management and the board of directors but supported by most shareowners. The Goodyear Tire & Rubber Company vote is a perfect illustration. Item 8. Shareholder Proposal Regarding Amending the Company’s Bylaws California Public Employees’ Retirement System Sacramento, Box (CalPERS), 942707, P.O. California 94229-2707, benefi Resolved in compliance with applicable law, to allow its shareowners to amend the Company’s bylaws by a majority vote. Cur- rently, the Company does not allow shareowners to amend the Company’s bylaws. Theboard recommends that you vote AGAINSTthis proposal. Thecompany has adopted a strategy, approved by the board, to transform the cost structure through a variety of productivity initiatives and to provide customers withsignifi a tient outcomes through tailoring drug, dose, timing of treatment, and relevant information. ernance principles ensure effective independent oversight of the company’s responses to thisproblem. The public policy and compliance committee of the board, composed solely of independent directors, provides independent oversight of public policy issues for the board, including access to medicines. reforms that improve access to neededmedicines and reduce the cost structure for health care while protecting the in- dustry’s ability to invest in innovation for the next generation of breakthrough medicines. At the same time, we will help to address the immediate needs of those without access to health care through patient assistance programs. In 2006 alone, we distributed products with a retail value of more than $300 million free of charge through these programs. Herring?,” holders. A majority of the top 500 (315) Standard & Poor’s 500 index maintain a CEO/Chairman role. As the article points out, most companies that separate these roles do so because they are troubled or facing a major executive succession challenge. Lilly neither expects, nor is facing, either of these problems. Additionally, the article points out that by divid- ing roles a company may weaken its ability to develop and implement strategy. agree, We and believe that combining the roles of board chair and CEO generally provides the most effi PROXY STATEMENT minority shareholders to actions detrimental to their best interests. interests. best totheir detrimental toactions shareholders minority expose would instead and practices governance corporate strong already our enhance not would proposal this ing adopt- that view our with consistent is This directors. tothe power that reserve who those than worse or better no Caylor of Georgia State University State ofGeorgia Caylor L. Marcus and D. Brown Lawrence by study a2004 Infact, performance. tobetter lead or governance corporate benefi practices governance corporate strong that agree We certainly valued. highly more are governance corporate good with nies “shareholder-friendly” company in our industry in a survey of institutional investors. ofinstitutional inasurvey industry inour company “shareholder-friendly” most the named were we when recognized was area inthis year, leadership our Last toshareholders. countable ac- and transparent fully remains company the ensure that practices, best with consistent principles, governance corporate comprehensive adopted has company The governance. incorporate aleader toremain, intends and years, many for been has board the contrary, the On shareholders. tothe accountable more directors the make 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 fi has hand, other the on board, The ests. inter- special own their tofurther amendments bylaw adopt could shares outstanding ofthe half than less cantly signifi holding shareholders meeting), atthe 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, 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 it. against vote you that recommends and shareholders ofthe interests long-term best inthe not is proposal this that believes ofdirectors board The Bylaws Company’s the Amending Regarding Proposal the to Opposition in Statement 104 11 10 possible. extent greatest tothe apply Resolved: proposal. following the submitted benefi 10968, NY Piermont, Gate, Steiner, 112William Abbottsford Standard Vote Majority aSimple Adopting Regarding Proposal 9.Item Shareholder proposal. this AGAINST vote you that recommends Directors of Board The fi Company’s fi long-term its and governance corporate togood committed is Company this that statement astrong be would it proposal, this toimplement steps totake were Company the If &Co. McKinsey by study arecent by illustrated as governance, corporate excellent have that ofcorporations shares for premium tofi related closely are impose, seek shareholder approval to adopt a majority voting standard for directors beginning in 2008. in2008. beginning directors for standard voting amajority toadopt approval shareholder seek classifi the toeliminate approval (1) shareholder seeking shareholders: to accountability and governance incorporate leadership continuing its todemonstrate steps major two taken has “Corporate Governance and Firm Performance”, Georgia State University, December 7, 2004 December University, State Georgia Performance”, Firm and Governance “Corporate Institutional Investor, The proponent also suggests that adopting this proposal will enhance company performance because compa- because performance company enhance will proposal this adopting that suggests also proponent The and company atthe principles governance good tofoster necessary is proposal this suggests proponent The fi has ofdirectors board The includ- principles, operating governance corporate offundamental anumber establish bylaws company’s The proposal. this FOR support your We urge Shareholders recommend that our Board take each step necessary to adopt a simple majority vote to vote majority asimple toadopt necessary step each take Board our that recommend Shareholders ve, three, and one year stock performances were -16%, -13%, and 2%, respectively, action is warranted. warranted. is action -16%, were respectively, -13%, 2%, and performances stock year one and three, ve, t shareholders, but we do not believe that this particular proposal will improve the company’s company’s the improve will proposal particular this that believe not do we but t shareholders, February 2006 February nancial performance. CalPERS also believes that shareholders are willing to pay a topay willing are shareholders that believes also CalPERS performance. nancial duciary obligations to the company and all its shareholders, including large insti- large including shareholders, its all and company tothe obligations duciary 11 found that companies that permit shareholders to amend the bylaws performed performed bylaws the toamend shareholders permit that companies that found duciary duties to consider and balance the interests of all shareholders shareholders ofall interests the balance and toconsider duties duciary 9—Adopt Vote Simple Majority cial owner of approximately 1,400 shares, has has shares, 1,400 ofapproximately owner cial ed board (see Item 3), and (2) agreeing to agreeing (2) and 3), Item (see board ed nancial performance. Considering the the Considering performance. nancial 10 Further, in 2007, the board board the Further, in2007, cers, authority to authority cers, - PROXY STATEMENT - 12 105105 f directors. ce and removal of directors and removal ce Yes on 9 Adopt Simple Majority Vote duciary duty under the law to act in a manner it believes to be in the best interests of the nancial performance. It isintuitive that, when directors are accountable for their actions, they nancial performance. nancial Most proposals submitted to a vote of the company’s shareholders can already be adopted by a simple majority The amendment of the articles of incorporation’s provisions relating to the terms of offi the terms to relating provisions of incorporation’s The amendment of the articles This topicwon a 66% yes-voteaverage at 20 major companies in 2006. The Council of Institutional Investors Our current rule allows a small minority to frustrate the will of our shareholder majority. For example, in re- When one considers abstentions and broker non-votes, a supermajority vote can bealmost impossible to ob- Corporate governance procedures and practices, and the level of accountability they impose, are arguable This proposal is not intended to unnecessarily limit our Board’s judgment in crafting the requested change to While the supermajority provision does require a clear mandate by shareholders, it is by no means an insur- The board has a fi The board believes that these supermajority voting provisions protect all shareholders by making it more diffi approved by the board of directors by the board approved combinations. The board believes that in adopting these supermajority voting provisions, shareholders intended to preserve • Removal of directors • of directors Removal • • Merger, consolidation, recapitalization or certain other business combinations involving the company that are not that are the company involving combinations other business or certain • recapitalization consolidation, Merger, and other business such mergers to relating provisions • of incorporation’s the articles The amendment of Under Item 3, the board is recommending that shareholders approve amendments to these provisions establishing annual election o Statement in Opposition to the Proposal Regarding Adopting a Simple Majority Vote Standard This proposal, whichdoes not pertain to the election of directors, calls for the elimination of provisions in the company’s articles of incorporation that require more than a simple majority vote for certain actions to be approved. The boarddirectors of believes that this would not bethe in best long-term interest of the shareholders and recom- mends that you vote against it. vote. in 1985 the However, company’s shareholders voted to increase the approval requirement for certain important actions. These actions, which require the approval of at least 80 percent of the outstanding shares of stock entitled to vote, relate to: 12 www.cii.org formally recommends adoption of this proposal topic. quiring an 80%-vote on a number of key governance issues, if our vote is an overwhelming 79%-yes and only 1%-no—only could force 1% their will on our 79%-majority. tain. For example, a proposal for annual election of each director at Goodyear (GT) failed to pass even though 90% of votes cast were in favor of the proposal. While companies often state that the purpose of supermajority require- ments is to provide companies with the ability protect to minority shareholders, supermajority requirements are arguable most often used to block initiatives opposed by management but supported by most shareholders. The Goodyear Tire & Rubber Company vote is a perfect illustration. closely relatedto fi perform Shareholders better. are willing to pay a premium for shares of corporations that have excellentcorporate governance, as illustrated by a recent study by McKinsey & Co. If our Company were to remove its supermajority requirements, it would be a strong statement that our Company is committed to good corporate governance and its long-term fi the fullest extent feasible in accordance with applicable laws and existing governance documents. cult for one or a few large shareholders to replace important corporate governance rules of the company to 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 of the company’s shareholders. company and its shareholders. The board believes that in the event of an unfriendly or unsolicited bid from one or a few large shareholders to take over or restructure the company, these supermajority voting provisions encourage bidders to negotiate with the board on behalf of all shareholders. In addition, they allow the board time and bargain- ing leverage to consider alternative proposals that maximize the value of the company for all shareholders, includ- ing large institutional investors as well as smaller institutions and individual shareholders. and maximize the value of Lilly stock for all shareholders by protecting against self-interested actions by one or a few large shareholders, as well as to help ensure that important corporate governance rules are not changed without the clear consensus of a substantial majority of stockholders that such change is prudent and in the best interests of the company. PROXY STATEMENT 106 2007 5, March Secretary B. Lootens James ofdirectors, board ofthe order By expenses. out-of-pocket ofcustomary $17,000 exceed not reimbursement plus will services those for fee the that We expect mail. electronic and mail, telefax, telephone, interview, personal by proxies solicit may Georgeson ies. ofprox- solicitation and distribution inthe toassist Inc. Communications Shareholder Georgeson retained We have offi directors, but mail, by primarily proxies tosolicit We expect company. ofthe stock hold they whom for persons from instructions obtaining toand material proxy sending for expenses reasonable their custodians other or ries, fi nominees, brokers, pay We will ofproxies. solicitation our with inconnection expenses all pay We will Solicitation Proxy Company’s the Regarding Information Other offi an became he time atthe held he ofshares number total the reported incorrectly Mr. Rice and children, Derica minor and wife tohis ofshares transfers and donations charitable inreporting late Mr. was plan, Santini Gino 10b5-1 his under trading ofstock asale inreporting late was fi timely were reports all that concluded we review, that on Based information. and records other as well as company, tothe provided ofreports copies reviewed have of holdings and in changes benefi reports andCommission Exchange Securities offi executive and directors our rules, Commission Exchange and Securities Under 16(a) Benefi Section Other Matters proposal. this AGAINST vote you that recommends board The ofshareholders. majority vast the by supported are decisions crucial that ensure help instead but will, shareholder tonullify serve not do provisions supermajority that view board’s declassifi board for proposals 12 ofthe management season, proxy 2006 ofthe survey Co. Communications Shareholder Georgeson to Further, according vote. percent 86.2 an with in2006 proposal same the adopted successfully Goodyear that out topoint However, fails he board. the todeclassify proposal amanagement for in2005 vote percent 80 necessary the toachieve failure Goodyear’s cites proponent the Lilly, beyond Looking proposals. management for shares outstanding ofthe percent 80 over ofwell votes favorable obtains commonly company The hurdle. mountable

cers, and other employees of the company may also solicit in person or by telephone, telefax, or electronic mail. mail. electronic or telefax, telephone, by or inperson solicit also may company ofthe employees other and cers, cation requiring an 80 percent vote, 11 were approved by the requisite vote. This reinforces the the reinforces This vote. requisite the by 11 vote, approved percent were 80 an requiring cation cial Ownership Reporting Compliance Compliance Reporting Ownership cial led except that, due to administrative error, Dr. John Lechleiter error, Dr. Lechleiter John toadministrative due that, except led cer. Upon discovery, these matters were promptly reported. promptly were matters these cer. discovery, Upon cial ownership of company stock. We stock. ofcompany ownership cial cers are required tofi required are cers ducia- le with le the with PROXY STATEMENT 107107 lled by by lled rst class class rst ce at any time, rmativeof vote ce for a term expir- ce for a term expiring ce. When the number of directors ce forone-year a term expiring at the rmative vote of the holders of any particu- ce of one class expiring At Com- each year. ce. ve 2008,each class of directors of the fi ned in Article hereof), 13 voting together as a single class. ce, though less than a quorum, as make to all classes as nearly ce for a three year term. In the case of any vacancy on the Board of xed from time to time solely by resolution of the Board of Directors, rmativevote of at least 80% of the votes entitled to be cast by holders of cation of their respective successors in offi ve directors of the second class shall be elected to hold offi Prior to the 2008 annual meeting of shareholders, the Board of Directors (exclusive of Preferred Stock The ce until the election and qualifi (c) Any(c) director or directors (exclusive of Preferred Stock Directors) may be removed from offi but only for cause and only by the affi all the outstanding shares of Voting Stock (as defi (d) Notwithstanding(d) any other provision of these Amended Articles of Incorporation or of law which might otherwise permit a lesser vote or no vote, but in addition to any affi lar class of Voting Stock required by law or these Amended Articles of Incorporation, the affi at least 80% of the votes entitled to be cast by holders of all the outstanding shares of Voting Stock, voting together as a single class, shall be required amend or repeal to alter, this Article 9. Directors) shall beis divided three into classes, with the term of offi mencing with the annual meeting of shareholders in 1985, fi whose term shall then or thereafter expire shall be elected to hold offi 1986 next annual meeting fi of, at the 1987 annual meeting, and six directors of the third class shall be elected to hold offi ing shareholders. at In the case of any vacancy on the Board of Directors occurring after the 1988 2007 annual meeting Commencing with the annual meeting of shareholders in 1986, each class of directors whose term shall then expire shall be elected to hold offi Directors, including a vacancy created by an increase in the number of directors, the vacancy shall be fi election of the Board of Directors with the director so elected to serve for the remainder of the term the direc- tor being replaced in the case of an or, additional director, for the remainder of the term of the class to which the director has been assigned. until the next annual meeting of shareholders. All directors shall continue in offi is changed, any newly created directorships or any decrease in directorships shall be so assigned among the classes by a majority of the directors then in offi equalnumber in as possible. No decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Election of directors need not be by written ballot unless the By-laws so provide. acting by not less than a majority of the directors then in offi (b) (a) The(a) number of directors of the Corporation, exclusive of directors who may be elected by the holders any of one or more series of Preferred Stock pursuant to Article 7(b) (the “Preferred Stock Directors”), shall not be less than nine, the exactnumber to be fi Appendix A Appendix Amendments to Article 9 of the Company’s Articles of Incorporation The following9. provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation, and it is expressly provided that the same are intended to be in furtherance and not in limitation or exclusion of the powers conferred by statute: BOARD OF DIRECTORS 108 Corporation Kimberly-Clark President, Vice Retired Executive P.Kathi Seifert Center Cancer Director, Mayo Clinic Center for Individualized Medicine; Mayo Director and Clinic Emeritus, Mayo Therapeutics, Medical School; Experimental and Professor of MolecularPharmacology Molecular Biology, and Professor Guggenheim Marion and Edmond of Biochemistry Ph.D. M.D., G.Prendergast, Franklyn Group LLC Barnegat The President, Ellen R.Marram Professor of Texas of University The Pharmacology, Medical Southwestern Center ofMedical Texas University The Center; Dean, Medical Regental Southwestern School;and of Texas University The for Provost, Affairs Academic and ViceExecutive President Southwestern Ph.D. M.D., G.Gilman, Alfred Director, Managing and Client Services, Private Retired President, Marsh, Inc. Ph.D. Horn, N. Karen &Nutrition Agriculture Group DuPont Vice President, Fyrwald J. Erik of Chief Board the and Retired Offi Chairman Executive George M.C. Fisher F. George and Professor Baker University of Economics, Harvard Chief and Offi Executive President Ph.D. Feldstein, S. Martin Chief and Offi Executive Retired Chairman Cook J. Michael Citigroup EuropeChairman, Bischoff Winfried Sir Chief and Offi Operating President Ph.D. C.Lechleiter, John of Chief Board the and Chairman Offi Executive TaurelSidney Board ofDirectors cer, Research Bureau of Economic National cer cer, Deloitte &Touche LLP cer cer, Kodak Company Eastman SENIOR MANAGEMENT 109 ‡ cer Operations Committee Policy and Strategy Committee

Ad hoc member of both committees * † ‡ Jacques Tapiero President, Intercontinental Operations Albertus van J. den Bergh President, Global Customer Vice Solutions Thomas R. Verhoeven, Ph.D. and President, Product Research Vice Development James A. Ward President and Chief Procurement Vice Offi Abbas S. Hussain European Operations President, Patrick C. James Health President, Elanco Animal Peter Johnson J. Corporate Strategy Director, Executive Patricia A. Martin Global Diversity President, Vice Nobles Anne President, Corporate Affairs Vice L. SullivanSharon President, Human Resources, Vice Global Compensation, and HR Services cer cer Thomas Grein W. President and Treasurer Vice Simon N. R. Harford President and Controller Vice Michael C. Heim President and Chief Information Vice Offi Andrew M. Dahlem, Ph.D. and President, LRL Operations, Vice Europe Laboratories, Lilly Research A.Alecia DeCoudreaux President and General Counsel, Vice Lilly USA CarmelJ. Egan, Ph.D. President, Project Management Vice Timothy R. Franson, M.D. President, Global Regulatory Vice Affairs William Chin, M.D. W. Research President, Discovery Vice and Clinical Investigation Robert A. Cole President, Global Parenteral Vice Engineering, and Operations, Environmental Health and Safety Newton Crenshaw F. President and General Manager, Lilly Japan E. Paul Ahern, Ph.D. API President, Global Vice Manufacturing Robert Armstrong, W. Ph.D. Global External President, Vice Development and Research M.D. Alan Breier, Medical, and Chief President, Vice Medical Offi cer

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cer † cer cer * Lorenzo Tallarigo, M.D. President, International Operations Richard Pilnik D. President and Chief Group Vice Offi Marketing Elizabeth H. Klimes President, Six Sigma Vice Frank M. Deane, Ph.D. President, Quality Vice Deirdre P. Connelly Deirdre P. Operations President, U.S. Bryce Carmine D. President, Global Brand Development Gino SantiniGino President, Corporate Senior Vice Strategy and Policy Senior Vice President and Chief Senior Vice Offi Financial Senior Vice President, Human Senior Vice Resources Rice Derica W. Anthony Murphy, J. Ph.D. Steven M. Paul, M. Steven M.D. Science President, Vice Executive and President, and Technology, Laboratories Lilly Research Scott A. Canute Operations President, Manufacturing Senior Vice President and General Senior Vice Counsel John C. Lechleiter, Ph.D. Operating Offi President and Chief Robert A. Armitage Chairman of the Board and Chief of the Board and Chief Chairman Offi Executive Senior Management Senior Sidney Taurel CORPORATE INFORMATION 110 standards oftheExchange. is incompliancewithallcorporategovernance listing the effectthat,tobestofhisknowledge,company fi In addition,thecompany’s chief executive offi the company’s Form 10-Kand10-Qreports. this report.Thecertifi respect tothefi Securities andExchange Commissionregulationswith offi The company’s chief executive offi certifi CFO and CEO and Co.” symbol: LLY. Mostnewspaperslistthestock as“Lilly(Eli) York, London,andSwissstock exchanges. NYSE ticker Eli LillyandCompany commonstock islistedontheNew listings Stock cfm our SECfi To accessthesereportsmorequickly, you canfi request to: quarterly reportsonForm 10-Qareavailable upon written Securities andExchange CommissiononForm 10-Kand Paper copiesofthecompany’s annualreporttothe reports 10-Q and 10-K this report,beginningonpage56. For moreinformation,seetheproxy statementsectionof Indiana, onMonday, April16,2007,at11:00a.m. EDT. Center Auditorium, EliLillyandCompany, Indianapolis, The annualmeetingofshareholderswillbeheldatLilly Annual meeting Corporate Information led withtheNewYork Stock Exchange acertifi cer have providedallcertifi Indianapolis, Indiana46208-0665 P.O. Box 88665 Eli LillyandCompany lings onlineat:http://investor.lilly.com/edgar. nancial informationanddisclosuresin cations cations areavailable asexhibits to cations requiredunder cer andchief fi cer has nd allof cation to nancial 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.Thisreducespaper mailedtothe Shareholders mayelecttoreceive annualreportsand materials proxy of delivery Online 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 services Telephone: 1-800-833-8699 South St.Paul, Minnesota55075 161 NorthConcordExchange St. Paul, Minnesota55164-0854 P.O. Box 64854 Shareowner RelationsDepartment Telephone: 1-800-833-8699 St. Paul, Minnesota55164-0854 P.O. Box 64854 Shareowner RelationsDepartment Wells Fargo Shareowner Services _ Annual Meeting Admission Ticket

Eli Lilly and Company 2007 Annual Meeting of Shareholders Monday, April 16, 2007 11 a.m. EDT

Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285

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Eli Lilly and Company Annual Meeting of Shareholders April 16, 2007 Complimentary Parking Lilly Corporate Center

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112 Year in Review Trademarks 1 Financial Highlights ® 2 Letter to Shareholders Actos (pioglitazone hydrochloride) ® 6 Innovation at Lilly: The Portfolio and the Pipeline Alimta (pemetrexed disodium) ™ 8 Lilly Takes Big Steps to Meet Urgent Medical Needs Arxxant (ruboxistaurin mesylate) Axid® (nizatidine) Byetta® (exenatide injection) Financials Ceclor® (cefaclor) Cialis® (tadalafi l) 10 Review of Operations Coban® (monensin sodium), Elanco 14 Consolidated Statements of Income Cymbalta® (duloxetine hydrochloride) 19 Consolidated Balance Sheets Evista® (raloxifene hydrochloride) 20 Consolidated Statements of Cash Flows Forteo® (teriparatide of recombinant DNA origin) 21 Consolidated Statements of Comprehensive Income Gemzar® (gemcitabine hydrochloride) 29 Segment Information Humalog® (insulin lispro of recombinant DNA origin) 30 Selected Quarterly Data Humatrope® (somatropin of recombinant DNA origin) 31 Selected Financial Data Humulin® (human insulin of recombinant DNA origin) 32 Notes to Consolidated Financial Statements Paylean® (ractopamine hydrochloride), Elanco 53 Management’s Reports Permax® (pergolide mesylate) 54 Report of Independent Registered Public Prozac® (fl uoxetine hydrochloride) Accounting Firm Prozac® Weekly™ (fl uoxetine hydrochloride)

ReoPro® (abciximab), Centocor Proxy Statement Rumensin® (monensin sodium), Elanco Sarafem® (fl uoxetine hydrochloride) 56 Notice of 2007 Annual Meeting and Proxy Strattera® (atomoxetine hydrochloride) Statement Surmax® (avilamycin), Elanco 58 General Information On the Cover Symbyax® (olanzapine/fl uoxetine hydrochloride) 62 Board of Directors Tylan® (tylosin), Elanco 66 Highlights of the Company’s Corporate Governance Jackie WiseSpirit, a member of the Cahuilla Band, is president of the Board of Vancocin® (vancomycin hydrochloride) Guidelines Indian Health, Inc., which offers programs for Native Americans suffering from Xigris® (drotrecogin alfa [activated]) 74 Directors and Corporate Governance Committee diabetes and other diseases in Riverside and San Bernardino counties, in Califor- Yentreve® (duloxetine hydrochloride) Matters nia. She can identify with those she’s working to help; Jackie was diagnosed with Zyprexa® (olanzapine) 75 Audit Committee Matters diabetes seven years ago—the sixth of nine family members to have the disease. Zyprexa® Zydis® (olanzapine) 77 Compensation Committee Matters ® 77 Executive Compensation In 2006, her doctor recommended Byetta . Originally reluctant to take shots, Actos® is a trademark of Takeda Chemical Industries, Ltd. 95 Ownership of Company Stock she is delighted with the choice she made. “Now, I have so much more energy; Axid® is a trademark of Reliant Pharmaceuticals, LLC. 96 Items of Business To Be Acted Upon at the Meeting my blood sugar is under control; I’ve lost weight; and I feel good. In fact, all my Byetta® is a trademark of Amylin Pharmaceuticals, Inc. 106 Other Matters friends say, ‘You look great!’” Cialis® is a trademark of Lilly ICOS LLC. EVA® is a trademark of Stern Stewart & Co. Byetta is a fi rst-in-class treatment for type 2 diabetes used in combination with ® Corporate Information Sarafem is a trademark of Galen (Chemicals) Limited commonly prescribed oral medications that is a product of a collaboration Zydis® is a trademark of Cardinal Health. 108 Board of Directors between Lilly and Amylin Pharmaceuticals. Its glycemic control and association 109 Senior Management with most patients losing weight rather than gaining weight replace the vicious All trademarks listed above are trademarks of Eli Lilly and Company unless otherwise noted. 110 Corporate Information cycle so common in type 2 diabetes with a virtuous cycle. 111 Annual Meeting Admission Ticket Because of its effect on people like Jackie, Byetta has become the fourth-most- prescribed branded pharmaceutical used to treat type 2 diabetes, measured by new prescriptions, in its fi rst full year on the market. For More Information

Lilly corporate responsibility ...... www.lilly.com/about/citizenship Lilly clinical trials registry ...... www.lillytrials.com Multi-drug resistant tuberculosis initiative ...... www.lillymdr-tb.com Medicare prescription drug coverage...... www.lillymedicareanswers.com Pharmaceutical industry patient assistance programs ...... www.pparx.org Lilly Cares...... www.lillycares.com or call toll-free 1-800-545-6962

© 2007 Eli Lilly and Company 2006AR Eli Lilly and Company Eli Lilly and Company Lilly Corporate Center Indianapolis, Indiana 46285 USA 2006 Annual Report, Notice of 2007 Annual Meeting, and Proxy Statement

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