Eli Lilly and Company Annual Report 2006

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FY2006 Annual Report · Eli Lilly and Company

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Eli Lilly and Company

Lilly Corporate Center

Indianapolis, Indiana 46285 USA

www.lilly.com

2006 Annual Report, Notice of 2007 Annual Meeting, and Proxy Statement

Eli Lilly and Company

Year in Review
1 Financial Highlights
2 Letter to Shareholders
6
8 Lilly Takes Big Steps to Meet Urgent Medical Needs

Innovation at Lilly: The Portfolio and the Pipeline

Financials
10 Review of Operations
14 Consolidated Statements of Income
19 Consolidated Balance Sheets
20 Consolidated Statements of Cash Flows
21 Consolidated Statements of Comprehensive Income
29 Segment Information
30 Selected Quarterly Data
31 Selected Financial Data
32 Notes to Consolidated Financial Statements
53 Management’s Reports
54 Report of Independent Registered Public

Accounting Firm

Proxy Statement
56 Notice of 2007 Annual Meeting and Proxy

Statement

58 General Information
62 Board of Directors
66 Highlights of the Company’s Corporate Governance

Guidelines

74 Directors and Corporate Governance Committee

Matters

75 Audit Committee Matters
77 Compensation Committee Matters
77 Executive Compensation
95 Ownership of Company Stock
96
106 Other Matters

Items of Business To Be Acted Upon at the Meeting

Corporate Information
108 Board of Directors
109 Senior Management
110 Corporate Information
111 Annual Meeting Admission Ticket

On the Cover

Jackie WiseSpirit, a member of the Cahuilla Band, is president of the Board of
Indian Health, Inc., which offers programs for Native Americans suffering from
diabetes and other diseases in Riverside and San Bernardino counties, in Califor-
nia. She can identify with those she’s working to help; Jackie was diagnosed with
diabetes seven years ago—the sixth of nine family members to have the disease.

In 2006, her doctor recommended Byetta®. Originally reluctant to take shots,
she is delighted with the choice she made. “Now, I have so much more energy;
my blood sugar is under control; I’ve lost weight; and I feel good. In fact, all my
friends say, ‘You look great!’”

Byetta is a ﬁ rst-in-class treatment for type 2 diabetes used in combination with
commonly prescribed oral medications that is a product of a collaboration
between Lilly and Amylin Pharmaceuticals. Its glycemic control and association
with most patients losing weight rather than gaining weight replace the vicious
cycle so common in type 2 diabetes with a virtuous cycle.

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.

Trademarks

Actos®
Alimta®
Arxxant™
Axid®
Byetta®
Ceclor®
Cialis®
Coban®
Cymbalta®
Evista®
Forteo®
Gemzar®
Humalog®
Humatrope®
Humulin®
Paylean®
Permax®
Prozac®
Prozac® Weekly™
ReoPro®
Rumensin®
Sarafem®
Strattera®
Surmax®
Symbyax®
Tylan®
Vancocin®
Xigris®
Yentreve®
Zyprexa®
Zyprexa® Zydis®

(pioglitazone hydrochloride)
(pemetrexed disodium)
(ruboxistaurin mesylate)
(nizatidine)
(exenatide injection)
(cefaclor)
(tadalaﬁ l)
(monensin sodium), Elanco
(duloxetine hydrochloride)
(raloxifene hydrochloride)
(teriparatide of recombinant DNA origin)
(gemcitabine hydrochloride)
(insulin lispro of recombinant DNA origin)
(somatropin of recombinant DNA origin)
(human insulin of recombinant DNA origin)
(ractopamine hydrochloride), Elanco
(pergolide mesylate)
(ﬂ uoxetine hydrochloride)
(ﬂ uoxetine hydrochloride)
(abciximab), Centocor
(monensin sodium), Elanco
(ﬂ uoxetine hydrochloride)
(atomoxetine hydrochloride)
(avilamycin), Elanco
(olanzapine/ﬂ uoxetine hydrochloride)
(tylosin), Elanco
(vancomycin hydrochloride)
(drotrecogin alfa [activated])
(duloxetine hydrochloride)
(olanzapine)
(olanzapine)

Actos® is a trademark of Takeda Chemical Industries, Ltd.
Axid® is a trademark of Reliant Pharmaceuticals, LLC.
Byetta® is a trademark of Amylin Pharmaceuticals, Inc.
Cialis® is a trademark of Lilly ICOS LLC.
EVA® is a trademark of Stern Stewart & Co.
Sarafem® is a trademark of Galen (Chemicals) Limited
Zydis® is a trademark of Cardinal Health.

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

For More Information

Lilly corporate responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lilly.com/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

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

Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,129.3

3,025.5

Research and development as a percent of net sales. . . . . . . . . . . . . .

19.9%

20.7%

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,662.7

$ 1,979.6

Earnings per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reconciling items:1
Product liability charge, primarily related to Zyprexa . . . . . . . . . . .
Asset impairments, restructuring and other special charges. . . . .
Cumulative effect of a change in accounting principle. . . . . . . . . . .
Adjusted earnings per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . .

Dividends paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.45

.42
.31
—
3.18

1.60

1.81

.90
.14
.02
2.87

1.52

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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Letter to Shareholders

The science of drug discovery and development, the
needs of our customers, and the systems in which health
care is delivered and paid for around the world—all are
changing in fundamental ways. Eli Lilly and Company
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
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.

In reviewing Lilly’s performance in 2006, we begin

with our ﬁ nancial and operational results.

Financial Results

For the year as a whole, Lilly’s sales increased 7 per-
cent, to $15.691 billion. Sales of our newer products—
the nine new therapies approved by regulators since
2001—collectively grew by 47 percent for the year.
These products now account for 24 percent of total sales,
up from 18 percent in 2005, which demonstrates reas-
suring progress as Lilly prepares for the expiration of
patents on older products beginning in 2011. Combined
with signiﬁ cant productivity improvements and contin-
ued expense control in 2006, our sales results allowed
us to post 11 percent growth in adjusted net income and
earnings per share, to $3.46 billion and $3.18, respec-
tively. Our major charges against net income were for
the settlement of product liability litigation involving
Zyprexa and for asset impairments and restructuring
primarily related to the closure of several facilities (for
a reconciliation of our adjusted EPS to the reported EPS
of $2.45, please see page 1).

Sales Goals and Outcomes

The interplay of our “transform” and “achieve”
agendas in 2006 was visible particularly in Lilly’s sales
efforts. For example, all of the major sales organizations in
our U.S. afﬁ liate were newly constituted during 2006 into
what we call our “Sales Force of the Future.” We left behind
a system built around individual products and overlapping
coverage of the same doctors. In its place, we built a struc-
ture around our key therapeutic areas and unique customer

Sidney Taurel
Chairman of the Board and Chief Executive Ofﬁ cer

John C. Lechleiter, Ph.D.
President and Chief Operating Ofﬁ cer

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segments. And now we reward the members of our sales
force much more deliberately for providing customers with
the information, expertise, and service they expect. In the
neuroscience area, as a result, physician customers see no
more than two Lilly sales representatives today—compared
with as many as ﬁ ve in previous years. The new structures
and mindsets inherent in our Sales Force of the Future
qualify it as an example of thoroughgoing transformation,
even as it enhanced our ability—almost immediately—to
achieve our current objectives.

We began 2006 with a set of clear sales goals. To

realize our potential for the year, we knew that we had
to accelerate the sales growth of Cymbalta, stabilize our
U.S. sales of Zyprexa while continuing to grow its sales
overseas, and reverse our recent share decline in the
insulin market. Here is how we did in pursuit of these
major goals:

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In 2006, Cymbalta became one of only a handful of
products in our industry ever to reach $1 billion in sales
in its second full year on the market—$1.3 billion, to be
precise, nearly double its 2005 sales. Cymbalta beneﬁ ted
signiﬁ cantly in the U.S. from our direct-to-consumer
advertising campaign, which educated patients about a
range of depression symptoms, including the disease’s
emotional and painful physical symptoms. Cymbalta
outperformed all branded antidepressants in terms of
share-of-market growth in the U.S. during 2006. And
outside the U.S., Cymbalta experienced a series of ever-
more-successful launches, as measured by how quickly
we grew our market shares.

For Zyprexa, our largest product, 2006 marked a
turning point in the U.S. We stabilized prescribing levels,
which had been declining for the past several years. One
key element in our success is a focus on treating schizo-
phrenia and bipolar disorder in patients with the most
urgent needs, for whom Zyprexa’s value proposition is
unmistakable. Our sales representatives seek to provide
very practical assistance to doctors—helping them ﬁ rst
to stabilize patients and then evaluate the tolerability,
safety, and efﬁ cacy of treatment. Available to all patients
with mental illness, our Solutions for Wellness program
helps doctors to use diet and exercise as part of an overall
disease-management plan.

Outside the U.S., the impact of our wellness programs

and our leading share-of-voice among psychiatrists have
allowed Zyprexa to grow, or at least to hold its own, in
most of our major markets. In terms of volume growth
this year, Japan, Spain, and the United Kingdom stand
out with 14, 11, and 12 percent growth respectively—and
Japan in particular still has a lot of upside potential.

Late in 2006, the United States Court of Appeals
upheld an earlier ruling that had afﬁ rmed Lilly’s patent
on Zyprexa. This legal development further increases our
conﬁ dence that Zyprexa will remain a major contributor
to our sales results through 2011, when its patent expires.
We also entered into agreements with plaintiffs’ attorneys
at the start of 2007 to settle the vast majority of remain-
ing product-liability claims against Zyprexa.

Our record in meeting our key sales objectives in
2006 was not unblemished. We did not make the progress
we had hoped for in reaccelerating Lilly’s U.S. insulin
business. Our goal is to make Humalog the preferred
mealtime insulin brand. While its image among doctors
as measured in marketing surveys is moving in the right
direction, we believe we can and must do better. Early
in 2007, therefore, we increased our sales-force capacity
in diabetes care by 40 percent in the U.S., to boost our
market-share growth.

Progress in Diabetes Care

We are conﬁ dent in the long-term success of our
diabetes business for three major reasons. First, Lilly’s
approach to the diabetes business is a global one—and
our investments reﬂ ect that. Humalog sales, for example,
are growing not only in the U.S. but also in other major
markets. In 2006, we added 100 sales representatives to
our diabetes business in China to respond to the enor-
mous unmet need, doubled our diabetes sales force in the
U.K., and tripled our reach in Brazil.

Second, to an extent that we believe is unsurpassed
in the pharmaceutical business, Lilly’s products address
the full spectrum of diabetes care—and we are committed
to helping doctors understand the options. Our portfolio

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extends from early-stage glycemic control to the manage-
ment of complications. We also have an inhaled form of
insulin in late-stage development, in collaboration with
Alkermes. Primary-care doctors who handle an ever-grow-
ing diabetes caseload have told us that they need deep
knowledge of multiple products shared through a single
point of contact—and we are responding. In the U.S., for
example, our Sales Force of the Future now delivers true
portfolio expertise, while allowing our sales representa-
tives to be more productive than they were under the
older system of detailing individual medicines.

Finally, we are centering our diabetes business
squarely on the needs and preferences of patients. For
example, patients clearly are looking for less complicated
and obtrusive ways of managing their medications.
We are responding by launching several new, pen-style
devices for insulin users—based on culturally speciﬁ c
research about patient preferences. Meanwhile, research
and advocacy organizations have called for partnerships
that serve to improve treatment options for patients. Our
global philanthropy responded with dual, $10 million
commitments in 2006 to Indiana University’s research
program on juvenile diabetes and to the International
Diabetes Federation’s BRIDGES program, which translates
clinical ﬁ ndings into real-world treatment applications.

efﬁ cacy of Arxxant in treating diabetic retinopathy—a deci-
sion we are appealing as this document goes to press—and
an independent data-monitoring committee concluded that
Lilly’s Phase III trial of enzastaurin for recurrent glioblas-
toma, a form of brain cancer, would be unlikely to achieve
its primary endpoint of improvement in progression-free
survival over an existing chemotherapy.

Our development of enzastaurin for other forms of
cancer is continuing. We also remain very excited about
the prospects of prasugrel, initially for acute coronary
syndrome in patients undergoing percutaneous coronary
intervention (including coronary stenting), which we are
co-developing with Daiichi Sankyo. Our key Phase III
study—a head-to-head superiority trial of prasugrel against
the current standard of care—will be completed in mid-
2007, and success would put us on track for submission
to the FDA by year’s end. We also plan to submit for an
important new line extension in 2007—a long-acting, depot
formulation of Zyprexa for treatment of schizophrenia—as
well as a new indication for Cymbalta in the treatment of
ﬁ bromyalgia. In addition to inhaled insulin, we are also
targeting arzoxifene, a potential next-generation treatment
for osteoporosis, for submission to regulators in 2009.

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
Lilly-Amylin partnership, this biotechnology product is
meeting an important need among patients who are not
achieving adequate glucose control but are not ready for
insulin. Three studies now demonstrate that Byetta’s abil-
ity to lower blood-glucose levels is comparable to insulin,
the gold standard. And unlike insulin, which often causes
weight gain, Byetta is associated in every study with
weight loss. You can see one of the thousands of satisﬁ ed
Byetta patients on the cover of this report.

By the end of 2006, after less than 18 months on the

market, Byetta already ranked fourth in new prescriptions
among all branded products for type 2 diabetes in the U.S.,
and it will begin to launch globally in 2007. To further tailor
Byetta to the needs of speciﬁ c patient groups, we are devel-
oping a long-acting-release formulation of the drug as well.

Pipeline

In 2006, Lilly Research Laboratories (LRL) submitted

Cymbalta for U.S. regulatory approval to treat general-
ized anxiety disorder, and Evista for a new indication
in breast cancer risk reduction. In Japan, Alimta earned
approval—for malignant pleural mesothelioma, in combi-
nation with cisplatin—only six months after submission,
a nearly unprecedented accomplishment in the tough
Japanese regulatory environment. Byetta was approved
in Europe and gained a new indication in the U.S. for use
with thiazolidinediones (TZDs). On the less positive side
in 2006, the U.S. Food and Drug Administration (FDA)
asked for an additional Phase III trial to demonstrate the

transformation is motivated by profound changes in the
science of drug discovery and development; heightened
demand for effective medicines brought on by the aging
of populations worldwide; and intense pressures to control
health-care costs. And so: transformation cannot consist of
tinkering at the margins of our current business model but
rather of ﬁ nding wholly new ways to realize and deliver
the full value of our products. Above all, we are convinced
that the Lilly of the future must be a patient-centered enter-
prise, dedicated to improving individual patient outcomes.
Becoming a more patient-centered company will involve
many changes—including greatly improved abilities to tailor
medicines to speciﬁ c patient groups; new connections to our
customers and global partners to capture patient insights
and best practices; and major productivity improvements to
restrain costs and improve our overall effectiveness. No part
of Lilly will be exempt from major change.

In R&D, transformation is gathering momentum,
though the challenge is daunting. For decades, the cost
and time required to bring a new drug to market have
increased inexorably—to upwards of $1 billion and at least
12 years per molecule throughout the industry. Our goal is
not simply to stop but to reverse these trends—even as we
produce new medicines more clearly tailored for effective-
ness in speciﬁ c patient groups.

To those ends, LRL is mapping the critical path for
all phases of development and devising more efﬁ cient
alternatives. In many cases, the result will be a more global
approach. In China, for example, we have had particular
success with partnerships for chemical screening and other

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early-stage R&D. And in India, we started a number of
alliances in 2006, including a clinical-data management
agreement; a collaboration to identify new treatments for
substance abuse; and pacts to take candidate molecules
through early-stage development.

Throughout our R&D pipeline and extending to prod-

ucts already on the market, we are ﬁ nding ways to tailor
our therapies to patient groups so as to realize their value
to the greatest extent. For example, at our AME subsidiary,
we have designed a molecule that may help patients who
do not respond optimally to Rituxan, which is used to treat
non-Hodgkin’s lymphoma and rheumatoid arthritis.
In the case of Lilly’s Xigris—on the market since 2001 for
severe sepsis—we have established a partnership with
Biosite to offer a bedside diagnostic tool that may allow doc-
tors to determine which patients might be helped by Xigris
as well as the appropriate dosing throughout treatment.

Leading Indicators

We believe that there are several leading indicators
for the extent and impact of our transformation efforts at
Lilly. One of them is Six Sigma. Through the end of 2006,
we have deployed 400 Six Sigma “Black Belts” and 700
“Green Belts” across the company. We exceeded our goal
of $250 million of beneﬁ t from Six Sigma in 2006—and
that is on track to double in 2007.

Productivity per employee is another key indicator
of change. Our sales per employee have grown by more
than 45 percent since 2002, reﬂ ecting a 10-percent head-
count reduction since our peak in 2004 but also—and
more importantly—concerted efforts to work more
effectively throughout our business.

Thirdly, we have streamlined operations in both R&D

and manufacturing. In 2006, we made difﬁ cult decisions
to close research centers in Belgium and Germany that
duplicated other capabilities. And we closed manufacturing
facilities in the U.K. and northern Virginia due to excess
capacity. These decisions are part of the broader transfor-
mation of our manufacturing base for a new era, which has
included expansions on the biotech side. In 2006, for ex-
ample, we successfully started up our biosynthetic insulin
plant in Puerto Rico; opened a pilot manufacturing facility
for biotech medicines in Indianapolis; and announced
plans to build a new biotech plant in Ireland as well as to
expand our Indianapolis parenteral-products operations.

Finally, Lilly’s returns on assets and equity posted
another year of improvement in 2006, and our capital
expenditures as a percentage of sales reached their lowest
level in ﬁ ve years as we reap the beneﬁ ts of earlier invest-
ments. Our cash ﬂ ow picture also is much improved over
the earlier part of the decade—doubling to $3.975 billion in
2006—providing us the currency to pursue the in-licensing
of new molecules and other business development oppor-
tunities in the years ahead.

In summary, we believe that 2006 at Eli Lilly and
Company will be recalled as a year in which the transfor-

mation of our business took hold on a large scale even as
we delivered strong current results.

Our Environment and Our Future

As leaders of this company, we share an extra measure
of the concern that many of Lilly’s employees, retirees, and
other shareholders felt about a high-proﬁ le series of articles
that appeared in The New York Times and other newspapers
near the end of 2006. The articles dealt with Zyprexa and
contained allegations that Lilly had engaged in inappropri-
ate sales and marketing practices and failed to deal forth-
rightly with Zyprexa adverse events. Based on documents
that were leaked in the course of a product-liability law-
suit—in violation of a judge’s order—the newspaper series
painted a distorted, incomplete, and ultimately misleading
assessment both of Lilly’s conduct and of Zyprexa, a drug
that has brought life-changing beneﬁ ts to millions of peo-
ple with schizophrenia and bipolar disorder.

The months and years ahead may bring other setbacks

in the news media or in the political arena. Ours is an
extraordinarily complex business, often poorly understood
even among many sophisticated opinion leaders. Precisely
for that reason, we believe that every news story, legislative
hearing, or other public discussion—however negative its
initial assumptions—presents an opportunity for us to bring
about a new level of understanding. That is the spirit in
which you can expect to see us engage with our detractors.
Unprecedented changes in our operating environ-
ment—along with continued criticism of our industry in
the public square—sometimes may color the perceptions
of investors. But they do not diminish our resolve or our
optimism at Lilly, or our excitement about the scientiﬁ c
achievements waiting to be realized. As populations age,
medical knowledge expands, and the beneﬁ ts of good
health are more highly valued around the world, there are
few businesses (we humbly submit) that have brighter
prospects than the business of pharmaceutical innovation.
By responding in new and better ways to the needs of our
customers—to improve outcomes for patients—we are
conﬁ dent that Lilly will realize these bright prospects.

For the Board of Directors,

Sidney Taurel
Chairman of the Board and Chief Executive Ofﬁ cer

John C. Lechleiter
President and Chief Operating Ofﬁ cer

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Innovation at Lilly: The Portfolio and the Pipeline

Major Marketed Products

(Dates indicate the year of ﬁ rst global launch)

2005

Byetta®

2004

Cymbalta®

Alimta®

Symbyax®

Yentreve®

2003

Cialis®

for type 2 diabetes
(codeveloped with Amylin Pharmaceuticals, Inc., and copromoted with Amylin
in the U.S.)

for major depressive disorder
for diabetic peripheral neuropathic pain (2004)
(copromoted with Quintiles Transnational Corp. in the U.S., and with Boehringer
Ingelheim elsewhere in the world, except Japan)

for malignant pleural mesothelioma
for second-line treatment of non-small-cell lung cancer (2004)

for bipolar depression

for stress urinary incontinence (approved and launched outside the U.S.)

for erectile dysfunction
(developed by Lilly ICOS in a joint venture with ICOS Corp.; copromoted by
Lilly ICOS in North America and Europe and by Lilly elsewhere)

Strattera®

for attention-deﬁ cit hyperactivity disorder in children, adolescents, and adults

2002

Forteo®

2001

1999

Xigris®

Actos®

1998

Evista®

1996

Zyprexa®

for treatment of men and postmenopausal women with osteoporosis who are at
high risk for a fracture

for adult severe sepsis patients at high risk of death

for type 2 diabetes
(developed by Takeda Chemical Industries, Ltd., and copromoted with Takeda)

for prevention of osteoporosis in postmenopausal women
for treatment of osteoporosis in postmenopausal women (1999)

for schizophrenia
for acute bipolar mania (2000)
Zyprexa® Zydis® tablet (2000)
for schizophrenia maintenance (2001)
as combination therapy with lithium or valproate for acute bipolar mania (2002)
for bipolar maintenance (2003)
Rapid-acting IntraMuscular formulation (2004)
Zyprexa® granules (2004; launched in Japan only)

Humalog®

for treatment of type 1 and type 2 diabetes
Humalog® mixtures (1999)
Humalog® Mix 50/50 (1999)

for non-small-cell lung cancer
for pancreatic cancer (1996)
for bladder cancer (1999; approved and launched outside the U.S.)
for metastatic breast cancer (2003)
for recurrent ovarian cancer (2004)

for prevention of cardiac ischemic complications in patients undergoing
coronary intervention, such as angioplasty
for unstable angina associated with stent procedure (1997)
(developed by Centocor and promoted by Lilly, except in Japan)

1995

Gemzar®

ReoPro®

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1987

Humatrope®

for growth failure caused by pediatric growth hormone deﬁ ciency
for replacement therapy for adult growth hormone deﬁ ciency (1995)
for short stature caused by Turner syndrome (1997)
for idiopathic short stature (2003)

1983

Humulin®

for type 1 and type 2 diabetes

New Drug Application Submitted For Review to the U.S. Food and Drug Administration

Arxxant™ (ruboxistaurin)

for diabetic retinopathy

Select Drug Candidates in Late-Stage Investigation

Prasugrel

Inhaled insulin

Arzoxifene

Enzastaurin

for acute coronary syndromes
(codeveloping with Daiichi Sankyo Company, Ltd.)

for type 1 and type 2 diabetes
(codeveloping with Alkermes, Inc.)

for prevention and treatment of osteoporosis and for reducing the risk of breast
cancer, all in postmenopausal women

for non-Hodgkin’s lymphoma (phase III); for metastatic breast cancer, colorectal
cancer, non-small-cell lung cancer, and ovarian cancer (phase II)

Olanzapine pamoate

for intramuscular delivery for schizophrenia

Select Drug Candidates in Mid-Stage Investigation

Pruvanserin
(5-HT2A antagonist)

PPAR alpha agonist
(LY518674)

for insomnia

for reducing the progression of atherosclerosis

Survivin ASO

for solid tumors

A-beta lowering
(Gamma secretase inhibitor)

for Alzheimer’s disease

A-beta antibody

for Alzheimer’s disease

ASAP

for solid tumors

mGluR3 antagonist

for migraine

NERI IV

mGlu2/3 prodrug

IL-1 beta antibody

for depression (phase II); for ADHD (phase I)

for schizophrenia

for rheumatoid arthritis

Gemcitabine prodrug

for solid tumors

GLP-1 analog

for type 2 diabetes

Glucokinase activator

for type 2 diabetes (recently in-licensed from OSI Pharmaceuticals, Inc.)

Information is current as of January 18, 2007. The search for new drugs is risky and uncertain, and there are no guarantees. Remaining scientiﬁ c and
regulatory hurdles may cause pipeline compounds to be delayed or even to fail to reach the market.

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Lilly Takes Big Steps to Meet Urgent Medical Needs

We know the best medicines can’t help people
unless they have access to them. In the United
States and globally, we are breaking ground
in our innovative approaches to partnerships,
working with governments and non-govern-
ment organizations to ensure that patients have
access to the medicines they need.

In September 2006, Lilly received a favor-
able opinion from the U.S. government for
an innovative “Outside Part D” Medicare Part
D patient assistance program, LillyMedicare-
Answers, which will provide Zyprexa, Forteo
and Humatrope to low-income seniors who
experience gaps in prescription coverage.

The program was designed to provide assis-
tance to low-income Medicare Part D-enrolled
patients most vulnerable to continuity-of-care
issues. LillyMedicareAnswers meshes with
Medicare Part D to provide more sophisticated
medicines to the low-income patients who
need them.

Patients enrolled in LillyMedicareAnswers pay
only a $25 administrative fee for each 30-day
supply of medicines shipped directly to their
home. Enrollment began in December 2006,
with full operations beginning in January
2007.

Lilly undertook several measures in 2006 to
help Medicare patients while awaiting the
government opinion on this new program,
including extending its long-standing Lilly-
Answers® program until Dec. 31, 2006.
Additionally, Lilly extended access to Forteo

and Zyprexa for patients who were previously
enrolled in the program and signed up for a
Medicare Part D Plan.

This was one way Lilly offered seniors and
low-income patients affordable access to drugs.
Additionally, the company donated products
through six patient assistance programs that
last year aided nearly 400,000 people in the
United States. LillyCares, which offers free
medicines to patients who cannot pay for them,
helped more than 158,000 participants, while
LillyAnswers provided low-cost prescriptions to
nearly 235,000 Medicare-enrolled individuals.
Other assistance programs helped patients gain
reimbursement or access to drugs that battle
cancer, severe sepsis, osteoporosis, and diabetes.

Setting the Pace for MDR-TB Partnerships

To halt the spread of one of the most pervasive
and deadly diseases facing the world today,
Lilly continued to partner with the World
Health Organization and other groups to share
expertise, transfer technology, improve treat-
ment—and save lives. Tuberculosis—
speciﬁ cally, multi-drug-resistant (MDR) TB,
is a growing global concern, with more than
2 million people dying of the disease each
year. Even the United States saw a 13 percent
increase in the number of reported cases from
2004 to 2005. Recently, a new deadly strain
was identiﬁ ed in South Africa, called XDR-TB
(extensively drug-resistant TB). In response to
the South African government’s request, Lilly
sent 3,000 vials of the antibiotic capreomycin
to help to contain the outbreak, and provided

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funds to train doctors and nurses on proper
treatment protocols.

Lilly’s government and non-government-or-
ganization partners formally recognized our
company’s approach to getting various groups
to work together against this deadly scourge
during a November 2006 MDR-TB Summit in
Paris. Our plans are moving forward to share
technology so others can, independently, make
our TB medicines: Our South African partner,
Aspen, is producing one of our two antibiotics
used to treat TB, while Hisun, our partner in
China, expects to produce capreomycin by the
end of 2007.

Thanks to a Lilly grant, the World Health
Organization has provided extensive technical
assistance to many countries. In China alone,
several hundred doctors and nurses have been
trained and more than 20,000 MDR-TB patients
have been enrolled. Further, teams from The
Harvard Kennedy School, INSEAD in Paris, and
Indiana University have spent time with Lilly
and its partners to understand the success of
our model partnerships.

A History of Giving

These and other initiatives in 2006 follow the
Lilly commitment to providing Answers that
Matter, as we maintain an honored tradition of
giving back to the communities where we live
and work. The company’s global philanthropy
in 2006 totaled about $420 million. Contribu-
tions included nearly $350 million (net whole-
sale value) worth of product donations for

patient assistance programs and international
humanitarian causes. Lilly and its philanthropic
foundation also gave more than $57 million
in cash donations for several urgent or special
causes, and more than $13 million in other in-
kind contributions.

In the U.S., Lilly employees also donated gener-
ously to United Way charities; their contribu-
tions, combined with matches from the founda-
tion, totaled $9.7 million.

“Whether patients are seeking medicine, medi-
cal expertise, or both, we do our best to ensure
that people in need are not forgotten,” said
Chairman Sidney Taurel. “Our founders estab-
lished these values nearly 130 years ago, and we
live by them today.”

Earning Society’s Trust

The depth and breadth of Lilly’s corporate good
works might surprise you. For a full report on
these initiatives, as well as challenges that lie
ahead, visit www.lilly.com/about/citizenship.

There, you can learn more about how Lilly is
earning society’s trust by establishing the ﬁ rst
online clinical trial registry (www.lillytrials.
com); working to improve the industry’s good
promotional practices and code of ethics;
respecting the environment; partnering with
world health leaders to combat MDR-TB with
the goal of treating 20,000 patients annually by
2010 (www.lillymdr-tb.com); and implementing
a broad range of other programs that improve
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.

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Review of Operations

EXECUTIVE OVERVIEW

This section provides an overview of our ﬁ nancial re-
sults, signiﬁ cant business development, recent product
and late-stage pipeline developments, and legal and
governmental matters affecting our company and the
pharmaceutical industry.

Financial Results
We achieved worldwide sales growth of 7 percent, pri-
marily as a result of strong growth of our newer prod-
ucts. We increased our investment in marketing expens-
es in support of key products, primarily Cymbalta® and
diabetes care products, and continued our commitment
to research and development, investing approximately
20 percent of our sales during 2006. Our results also
beneﬁ ted from continued growth in proﬁ tability of the
Lilly ICOS joint venture as well as cost-containment and
productivity initiatives. Net income was $2.66 billion, or
$2.45 per share, in 2006 as compared with $1.98 billion,
or $1.81 per share, in 2005, representing an increase in
net income and earnings per share of 35 percent. Net in-
come comparisons between 2006 and 2005 are affected
by the impact of the following signiﬁ cant items that are
reﬂ ected in our ﬁ nancial results (see Notes 2, 4, and 13
to the consolidated ﬁ nancial statements for additional
information):

2006
• We recognized asset impairments, restructuring and
other special charges of $450.3 million (pretax) in the
fourth quarter, which decreased earnings per share by
$.31 (Note 4).

• In the fourth quarter, we incurred a charge related to
Zyprexa® product liability litigation matters of $494.9
million (pretax), or $.42 per share (Notes 4 and 13).

2005
• We incurred a charge related to product liability

litigation matters, primarily related to Zyprexa, of $1.07
billion (pretax), which decreased earnings per share by
$.90 in the second quarter of 2005 (Notes 4 and 13).
• We recognized asset impairments and other special

charges of $171.9 million (pretax) in the fourth quarter,
which decreased earnings per share by $.14 (Note 4).

• We adopted Financial Accounting Standards

Board (FASB) Interpretation (FIN) 47, Accounting
for Conditional Asset Retirement Obligations, an
interpretation of FASB Statement No. 143, in the fourth
quarter of 2005. The adoption of FIN 47 resulted in an
adjustment for the cumulative effect of a change in
accounting principle of $22.0 million (after-tax), which
decreased earnings per share by $.02 (Note 2).

FIVE PRODUCTS EXCEEDED
$1 BILLION IN NET SALES
($ millions)

Nine products exceeded $500 million
in net sales during 2006. Five of these
products—Zyprexa, Gemzar,
Cymbalta, Humalog, and Evista—
exceeded $1 billion in 2006. In
addition, the combined efforts of Lilly
and ICOS generated worldwide Cialis
sales of $971 million. At more than
$1.3 billion in sales in 2006, Cymbalta
reached “blockbuster” status in only
its second full year on the market.

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Business Development, and Recent Product and Late-
Stage Pipeline Developments
Our long-term success depends, to a great extent, on
our ability to continue to discover and develop innovative
pharmaceutical products and acquire or collaborate on
compounds currently in development by other biotech-
nology or pharmaceutical companies. We have achieved
a number of successes with recent product launches
and late-stage pipeline developments, including:
• On January 29, 2007, we completed the acquisition

of ICOS Corporation for approximately $2.3 billion in
cash. The acquisition brings the full value of Cialis® to
us and enables us to realize operational efﬁ ciencies in
the further development, marketing and selling of this
product. The allocation of the purchase price has not
yet been completed; however, we anticipate that the
one-time charge to earnings for acquired in-process
research and development (IPR&D) will approximate
$300 million (no tax beneﬁ t) (Note 3).

• In November 2006, we received European Commission
authorization to market Byetta® as a treatment for type
2 diabetes with our partner, Amylin Pharmaceuticals,
Inc. (Amylin). In addition, in December 2006, we
received approval from the U.S. Food and Drug
Administration (FDA) for Byetta as an add-on therapy
to improve blood sugar control in people with type 2
diabetes who have not achieved adequate control on a
thiazolidinedione (TZD).

• We submitted a New Drug Application (NDA) to the FDA
for Evista® for the reduction in risk of invasive breast
cancer in postmenopausal women with osteoporosis and
postmenopausal women at high risk for breast cancer.

• We initiated a Phase III clinical trial to study

enzastaurin as a maintenance therapy to prevent
relapse in patients with non-Hodgkin’s lymphoma.
Additionally, we closed the enrollment of a Phase III
study of enzastaurin for the treatment of recurrent
glioblastoma after an external data monitoring
committee determined the study would likely not meet
its primary efﬁ cacy endpoint.

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GROWTH RATE IN NET SALES PER
EMPLOYEE INCREASES AT A FASTER RATE
THAN SALES GROWTH
($ dollars)

In 2006, we continued our focus on productivity,
led by an expanding team of Six Sigma black
belts. Net sales per employee increased 10
percent to $378,000, exceeding our net sales
growth in 2006 of 7 percent.

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• In July 2006, we received FDA approval for Gemzar®
for the treatment of recurrent ovarian cancer in
combination with carboplatin. Additionally, the United
Kingdom’s National Institute for Health and Clinical
Excellence has recommended Gemzar coverage
under the UK’s National Health Service for the use of
Gemzar, in combination with paclitaxel, within a limited
population of breast cancer patients.

• In September 2006, we received an approvable letter

from the FDA for Arxxant™ for the treatment of diabetic
retinopathy. The FDA has indicated that it will require
efﬁ cacy data from an additional Phase III study before
it will consider approving the molecule. We decided to
appeal the FDA’s decision and began discussions with
the agency. There can be no assurance that our appeal
will be successful.

• We submitted a supplemental NDA to the FDA for
Cymbalta for the treatment of generalized anxiety
disorder. We are also conducting Phase III studies on
Cymbalta for the treatment of ﬁ bromyalgia, a chronic,
often debilitating pain disorder.

• In January 2007, we licensed from OSI Pharmaceuticals,
Inc. (OSI), its glucokinase activator (GKA) program for
the treatment of type 2 diabetes, including the lead
compound PSN010. We received an exclusive license to
develop and market any compounds derived from the
GKA program. Under the terms of the agreement, we
paid an upfront fee of $25.0 million (pretax) (Note 3).

• In January 2007, along with our partner, Daiichi

Sankyo, we announced that we completed enrollment
in the TRITON study, a Phase III head-to-head study
comparing prasugrel to clopidogrel (Plavix®) in
patients with acute coronary syndrome undergoing
percutaneous coronary intervention (PCI).

Legal and Governmental Matters
In December 2006, the U.S. Court of Appeals for the
Federal Circuit afﬁ rmed a district court ruling up-
holding the validity of our Zyprexa patent. We are very
conﬁ dent we will maintain our U.S. patent protection on

Zyprexa until 2011.

We have reached agreements with claimants’ at-
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 of $1.07 billion in the second
quarter of 2005 and $494.9 million in the fourth quarter
of 2006.

In March 2004, we were notiﬁ ed by the U.S. Attor-
ney’s ofﬁ ce for the Eastern District of Pennsylvania that
it had commenced a civil investigation relating to our U.S.
marketing and promotional practices.

In the United States, implementation of the Medicare
Prescription Drug, Improvement, and Modernization Act
of 2003 (MMA), which provides a prescription drug beneﬁ t
under the Medicare program, took effect January 1, 2006.
In 2006, we experienced a one-time sales beneﬁ t as a
result of MMA; however, in the long term there is addi-
tional risk of increased pricing pressures. While the MMA
prohibits the Secretary of Health and Human Services
(HHS) from 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 the importation of products into the U.S. If adopted,
such legislation would likely have a negative 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. We believe the expanded prescription drug
coverage for seniors under the MMA has further allevi-
ated the perceived need for a federal importation scheme.
However, notwithstanding 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.

The successful implementation of the MMA may re-
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. Moreover, under the 2005 federal Deﬁ cit
Reduction Act, states will have greater ﬂ exibility to impose
new cost-sharing requirements on Medicaid beneﬁ ciaries
for non-preferred prescription drugs that will result in

certain beneﬁ ciaries bearing more of the cost. Several
states also are attempting to extend discounted Medicaid
prices to non-Medicaid patients. As a result, we expect
pressures on pharmaceutical pricing to continue.

As it relates to the Medicare program, Lilly has
implemented the LillyMedicareAnswers program. Lilly-
MedicareAnswers is a new patient assistance program
that provides certain eligible Medicare Part D enrolled
patients access to a one month’s-supply of select medi-
cations for a $25 administrative fee per prescription.
Medications available via the program include Zyprexa,
Forteo®, and Humatrope®.

International operations also are generally subject

to extensive price and market regulations, and there
are many proposals for additional cost-containment
measures, including proposals that would directly or
indirectly impose additional price controls or reduce the
value of our intellectual property protection.

OPERATING RESULTS—2006

Sales
Our worldwide sales for 2006 increased 7 percent,
to $15.69 billion, driven primarily by sales growth of

Cymbalta, Forteo, Byetta, Zyprexa, and Alimta®. World-
wide sales volume increased 3 percent and selling
prices increased sales by 4 percent. Foreign exchange
rates did not impact our overall sales growth. Sales in
the U.S. increased 10 percent, to $8.60 billion, driven
primarily by increased sales of Cymbalta, diabetes
care products, Forteo, and Zyprexa. U.S. growth com-
parisons beneﬁ ted from an estimated $170 million of
wholesaler destocking that had occurred in 2005 as a
result of restructuring our arrangements with our U.S.
wholesalers in the ﬁ rst quarter of 2005. Additionally,
we experienced a one-time sales beneﬁ t resulting from
a shift of certain low-income patients from Medicaid to
Medicare and increased access to medical coverage by
certain patients previously covered under our LillyAn-
swers program following the implementation of MMA
in 2006. This contributed part of the increases in U.S.
net effective sales prices of 9 percent. Sales outside
the U.S. increased 4 percent, to $7.09 billion, driven by
growth of Cymbalta, Alimta, and Zyprexa.

Zyprexa, our top-selling product, is a treatment
for schizophrenia, bipolar mania, and bipolar mainte-
nance. Zyprexa sales in the U.S. increased 4 percent
in 2006, driven by higher prices, offset in part by lower

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The following table summarizes our net sales activity in 2006 compared with 2005:

Product

(Dollars in millions)

Zyprexa . . . . . . . . . . . . . . . . . . . . . .
Gemzar . . . . . . . . . . . . . . . . . . . . . .
Cymbalta . . . . . . . . . . . . . . . . . . . . .
Humalog® . . . . . . . . . . . . . . . . . . . .
Evista . . . . . . . . . . . . . . . . . . . . . . . .
Humulin®. . . . . . . . . . . . . . . . . . . . .
Animal health products . . . . . . . . .
Alimta . . . . . . . . . . . . . . . . . . . . . . .
Forteo . . . . . . . . . . . . . . . . . . . . . . .
Strattera® . . . . . . . . . . . . . . . . . . . .
Actos® . . . . . . . . . . . . . . . . . . . . . . .
Humatrope . . . . . . . . . . . . . . . . . . .
Fluoxetine products . . . . . . . . . . . .
ReoPro®. . . . . . . . . . . . . . . . . . . . . .
Anti-infectives . . . . . . . . . . . . . . . . .
Byetta. . . . . . . . . . . . . . . . . . . . . . . .
Cialis2 . . . . . . . . . . . . . . . . . . . . . . .
Xigris® . . . . . . . . . . . . . . . . . . . . . . .
Other pharmaceutical products . .
Total net sales . . . . . . . . . . . . . . .

U.S.1

$ 2,106.2
609.8
1,158.7
811.0
664.0
367.9
405.9
350.1
416.2
509.2
279.1
202.3
152.8
110.4
25.1
219.0
3.7
103.4
104.4
$8,599.2

Year Ended
December 31, 2006
Outside U.S.

$ 2,257.4
798.3
157.7
488.5
381.3
557.4
469.6
261.7
178.1
69.8
169.4
213.3
162.3
170.0
249.5
—
212.1
88.8
206.6
$7,091.8

Total

$ 4,363.6
1,408.1
1,316.4
1,299.5
1,045.3
925.3
875.5
611.8
594.3
579.0
448.5
415.6
315.1
280.4
274.6
219.0
215.8
192.2
311.0
$15,691.0

Year Ended
December 31, 2005
Total

Percent
Change
from 2005

$ 4,202.3
1,334.5
679.7
1,197.7
1,036.1
1,004.7
863.7
463.2
389.3
552.1
493.0
414.4
453.4
296.7
443.9
39.6
169.9
214.6
396.5
$14,645.3

4
6
94
9
1
(8)
1
32
53
5
(9)
0
(31)
(5)
(38)
NM
27
(10)
(22)
7

NM—Not meaningful
1 U.S. sales include sales in Puerto Rico.
2 Cialis had worldwide 2006 sales of $971.0 million, representing an increase of 30 percent compared with 2005. The sales shown in the table above represent
results only in the territories in which we market Cialis exclusively. The remaining sales relate to the joint-venture territories of Lilly ICOS LLC (North America,
excluding Puerto Rico, and Europe). Our share of the joint-venture territory sales, net of expenses and income taxes, is reported in other income—net in our
consolidated statements of income.

F
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KEY CONTRIBUTORS TO 2006 SALES GROWTH
($ in millions represent growth in product
sales; percentages represent changes from
2005)

%
4
9
+

7
3
6
$

Five products—Cymbalta, Forteo, Byetta,
Zyprexa, and Alimta—generated $7.1 billion
in net sales during 2006, an increase of
$1.3 billion over 2005. In addition, global sales
of Cialis, promoted with our partner ICOS,
increased $224 million to $971 million (a
30 percent increase from 2005).

%
3
5
+

5
0
2
$

M
N

9
7
1
$

%
4
+

1
6
1
$

%
2
3
+

9
4
1
$

a
t
l
a
b
m
y
C

o
e
t
r
o
F

a
t
t
e
y
B

a
x
e
r
p
y
Z

a
t
m

i
l

demand. The increase in net 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
demand, offset in part by declining prices.

Diabetes care products, composed primarily of

Humalog, our insulin analog; Humulin, a biosynthetic
human insulin; Actos, an oral agent for the treatment
of type 2 diabetes; and Byetta, the ﬁ rst in a new class of
medicines known as incretin mimetics for type 2 diabetes
that we market with Amylin, had aggregate worldwide
revenues of $2.96 billion in 2006, an increase of 6 percent.
Diabetes care revenues in the U.S. increased 8 percent,
to $1.73 billion. Diabetes care revenues outside the U.S.
increased 2 percent, to $1.23 billion. Results from our
primary diabetes care products are as follows:
• Humalog sales increased 10 percent in the U.S., due
primarily to higher prices and increased 7 percent
outside the U.S., due primarily to increased volume,
offset partially by lower prices.

• Humulin sales in the U.S. decreased 10 percent due
primarily to decreased volume, offset partially by
increased selling prices. Outside the U.S., Humulin
sales decreased 6 percent due to decreases in demand
and selling prices.

• Actos revenues in the U.S., the majority of which
represent service revenues from a copromotion
agreement in the U.S. with Takeda Pharmaceuticals
North America (Takeda), decreased 22 percent in
2006. Actos is manufactured by Takeda Chemical
Industries, Ltd., and sold in the U.S. by Takeda. Our
U.S. marketing rights with respect to Actos expired in
September 2006; however, we will continue receiving
royalties from Takeda. As a result, our revenues from
Actos will decline each year through September 2009.
Our arrangement outside the U.S. continues. Sales
outside the U.S. increased 23 percent, due primarily to
increased volume in addition to a favorable impact of
foreign exchange rates, offset in part by lower prices.

• Sales of Byetta, launched in the U.S. in June 2005,

were $430.2 million for 2006. We report as revenue our
50 percent share of Byetta’s gross margin and our sales
of Byetta pen delivery devices to Amylin.

Sales of Gemzar, a product approved to ﬁ ght various
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.
Sales of Cymbalta, a product for the treatment

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 ect international launches. Worldwide sales exceeded
$1 billion in 2006, the product’s second full year on the
market.

Sales of Evista, a product for the prevention and treat-
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.
Sales of Alimta, a treatment for malignant pleural
mesothelioma and second-line treatment for non-small-
cell lung cancer (NSCLC), increased 18 percent and 57
percent in the U.S. and outside the U.S., respectively, due
primarily to increased demand.

Sales of Forteo, a treatment for severe osteoporosis,

increased 57 percent in the U.S. In addition to increased
demand, U.S. sales signiﬁ cantly beneﬁ ted from patients’
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 ecting a strong demand.

Sales of Strattera, a treatment for attention-deﬁ -

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 31 percent due primarily to in-
creased demand in addition to a modest favorable impact
of foreign exchange rates, offset partially by lower prices.
Total product sales of Cialis, an erectile dysfunction
treatment, increased 38 percent in the U.S. and 24 percent
outside the U.S. Worldwide Cialis sales growth reﬂ ects
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—
net. All sales of Cialis subsequent to the ICOS acquisition
in 2007 will be included in our revenue.

Animal health product sales in the U.S. increased
10 percent, due primarily to increased demand led by
Rumensin® and Tylan®. Sales outside the U.S. decreased
5 percent, driven primarily by the decrease in the sales of
Surmax® as a result of the European Union’s growth pro-
motion use ban on the product, effective January 1, 2006.

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Consolidated Statements of Income

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)

Year Ended December 31

2006

2005

2004

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$15,691.0

$14,645.3

$13,857.9

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired in-process research and development (Note 3). . . . . . . . . . .
Asset impairments, restructuring, and other special

charges (Note 4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,546.5
3,129.3
4,889.8
—

3,474.2
3,025.5
4,497.0
—

945.2
(237.8)
12,273.0

1,245.3
(314.2)
11,927.8

3,223.9
2,691.1
4,284.2
392.2

603.0
(278.4)
10,916.0

Income before income taxes and cumulative effect
of a change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . .

3,418.0

2,717.5

2,941.9

Income taxes (Note 10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

755.3

715.9

1,131.8

Income before cumulative effect of a change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,662.7

2,001.6

1,810.1

Cumulative effect of a change in accounting principle,
net of tax (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(22.0)

—

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,662.7

$ 1,979.6

$ 1,810.1

Earnings per share—basic (Note 11)

Income before cumulative effect of a change in accounting
principle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of a change in accounting principle. . . . . . . . . . .

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Earnings per share—diluted (Note 11)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

See notes to consolidated ﬁ nancial statements.

$2.45
—

$2.45

$2.45
—

$2.45

$1.84
(0.02)

$1.67
—

$1.82

$1.67

$1.83
(0.02)

$1.66
—

$1.81

$1.66

F
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C
I

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GROSS MARGIN IMPROVES IN 2006
(as a percent of total net sales)

Gross margin as a percent of net sales increased by
1.1 percentage points to 77.4 percent. This increase
was primarily due to increased product prices and
increased production volume, partially offset by higher
manufacturing expenses. We expect our 2007 gross
margin as a percent of net sales to improve slightly
from 2006.

%
4
.
0
8

%
7
.
8
7

%
7
.
6
7

%
4
.
7
% 7
3
.
6
7

02 03 04 05 06

Gross Margin, Costs, and Expenses
The 2006 gross margin increased to 77.4 percent of
sales compared with 76.3 percent for 2005. This in-
crease was primarily due to increased product prices
and increased production volume, partially offset by
higher manufacturing expenses.

Operating expenses (the aggregate of research and
development and marketing and administrative expenses)
increased 7 percent in 2006. Investment in research and
development increased 3 percent, to $3.13 billion, pri-
marily due to increases in 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.
Marketing and administrative expenses increased 9 per-
cent in 2006, to $4.89 billion. This increase was largely
attributable to increased marketing expenses in support
of key products, primarily Cymbalta and the diabetes care
franchise, and an increase in litigation-related costs.
Other income—net decreased $76.4 million, to
$237.8 million, and consists of interest expense, inter-
est income, the after-tax operating results of the Lilly
ICOS joint venture, and all other miscellaneous income
and expense items.

RESEARCH AND DEVELOPMENT INVESTMENT
INCREASING
($ millions, percent of net sales)

Research and development expenditures increased by
3 percent, to $3.1 billion, in 2006 due to increases in
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
best-in-class and first-in-class medicines to provide
answers for the unmet medical needs of our
customers.

%
9
.
9
1

9
2
1
,
3
$

%
%
7
7
.
.
0
0
2
2

6
6
2
2
0
0
,
,
3
3
$
$

%
%
4
4
.
.
9
9
1
1

1
1
9
9
6
6
,
,
2
2
$
$

%
%
7
7
.
.
8
8
1
1

0
0
5
5
3
3
,
,
2
2
$
$

%
%
4
4
.
.
9
9
1
1

9
9
4
4
1
1
,
,
2
2
$
$

02 03 04 05 06

• Interest expense for 2006 increased $132.9 million,
to $238.1 million. This increase is a result of higher
interest rates and less capitalized interest due to
the completion in late 2005 of certain manufacturing
facilities.

• Interest income for 2006 increased $49.8 million, to

$261.9 million, due to higher short-term interest rates.
• The Lilly ICOS joint-venture income was $96.3 million in
2006 as compared to $11.1 million in 2005. The increase
was due to increased Cialis sales and decreased selling
and marketing expenses.

• Net other miscellaneous income items decreased $78.5
million to $117.7 million, primarily as a result of less
income related to the outlicensing of legacy products
and partnered compounds in development.

We incurred tax expense of $755.3 million in 2006,

resulting in an effective tax rate of 22.1 percent, 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 of $494.9 million and $1.07 billion,
respectively. The tax expense of these charges was
less than our effective tax rate, as the tax expense was
calculated based upon existing tax laws in the countries
in which we reasonably expect to deduct the charge. See
Note 10 to the consolidated ﬁ nancial statements for ad-
ditional information.

OPERATING RESULTS—2005

Financial Results
We achieved worldwide sales growth of 6 percent, due
in part to the launch in 2004 of ﬁ ve new products as well
as six new indications or formulations for expanded use
of new and existing products in key markets. 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. We continued 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. We also beneﬁ ted from an increase in other
income—net, due primarily to increased proﬁ tability of the
Lilly ICOS joint venture, and a decrease in the tax rate in
2005. Net income was $1.98 billion, or $1.81 per share, in
2005 as compared with $1.81 billion, or $1.66 per share, in
2004, representing an increase in net income and earn-
ings per share of 9 percent. Certain items, reﬂ ected in our
operating results for 2005 and 2004, should be considered
in comparing the two years. The signiﬁ cant items for 2005
are summarized in the Executive Overview. The 2004

items are summarized as follows (see Notes 1, 3, 4, 7, and
10 to the consolidated ﬁ nancial statements for additional
information):
• In 2005, we began to expense stock options in

accordance with SFAS 123(R). Had we expensed stock
options in 2004, our 2004 net income would have been
lower by $266.4 million, which would have decreased
earnings per share by $.24 per share (Notes 1 and 7).
• We recognized asset impairment charges, streamlined
our infrastructure, and provided for the anticipated
resolution of the government investigation of Evista
marketing and promotional practices, resulting in
charges of $108.9 million (pretax) in the second
quarter of 2004 and $494.1 million (pretax) in the
fourth quarter of 2004, which decreased earnings per
share by $.08 and $.30, respectively (Note 4).

• We incurred charges for acquired in-process research
and development (IPR&D) of $362.3 million (no tax
beneﬁ t) in the ﬁ rst quarter of 2004 related to the
acquisition of Applied Molecular Evolution, Inc. (AME),
and $29.9 million (pretax) in the fourth quarter of 2004
related to our acquisition of a Phase I compound under
development as a potential treatment for insomnia,

which decreased earnings per share by $.33 in the ﬁ rst
quarter of 2004 and $.02 in the fourth quarter of 2004
(Note 3).

• We recognized tax expenses of $465.0 million in the

fourth quarter of 2004 associated with the anticipated
repatriation in 2005 of $8.00 billion of our earnings
reinvested outside the U.S., as a result of the passage
of the American Jobs Creation Act of 2004 (AJCA). This
tax expense decreased earnings per share by $.43 in
that quarter (Note 10).

Sales
Our worldwide sales for 2005 increased 6 percent,
to $14.65 billion, driven primarily by sales growth of
Cymbalta, Alimta, Forteo, and Gemzar. As a result of
restructuring our arrangements with our U.S. whole-
salers in early 2005, reductions occurred in whole-
saler inventory levels for certain products (primarily
Strattera, Prozac®, and Gemzar) that reduced our
sales by approximately $170 million. Sales growth in
2005 was also affected by decreased U.S. demand for
Zyprexa, Strattera, and Prozac. Despite this wholesaler
destocking and decreased demand, sales in the U.S.

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The following table summarizes our net sales activity in 2005 compared with 2004:

Product

(Dollars in millions)

Zyprexa . . . . . . . . . . . . . . . . . . . . . .
Gemzar . . . . . . . . . . . . . . . . . . . . . .
Humalog . . . . . . . . . . . . . . . . . . . . .
Evista . . . . . . . . . . . . . . . . . . . . . . . .
Humulin. . . . . . . . . . . . . . . . . . . . . .
Animal health products . . . . . . . . .
Cymbalta . . . . . . . . . . . . . . . . . . . . .
Strattera . . . . . . . . . . . . . . . . . . . . .
Actos . . . . . . . . . . . . . . . . . . . . . . . .
Alimta . . . . . . . . . . . . . . . . . . . . . . .
Fluoxetine products . . . . . . . . . . . .
Anti-infectives . . . . . . . . . . . . . . . . .
Humatrope . . . . . . . . . . . . . . . . . . .
Forteo . . . . . . . . . . . . . . . . . . . . . . .
ReoPro. . . . . . . . . . . . . . . . . . . . . . .
Xigris . . . . . . . . . . . . . . . . . . . . . . . .
Cialis2 . . . . . . . . . . . . . . . . . . . . . . .
Symbyax® . . . . . . . . . . . . . . . . . . . .
Other pharmaceutical products . .
Total net sales . . . . . . . . . . . . . . .

U.S.1

$2,034.9
586.1
739.6
652.9
410.7
370.3
636.2
498.7
355.7
296.3
249.1
133.3
184.5
264.7
119.8
118.9
2.3
52.6
91.5
$7,798.1

Year Ended
December 31, 2005
Outside U.S.

$ 2,167.4
748.4
458.1
383.2
594.0
493.4
43.5
53.4
137.3
166.9
204.3
310.6
229.9
124.6
176.9
95.7
167.6
1.3
290.7
$6,847.2

Total

$ 4,202.3
1,334.5
1,197.7
1,036.1
1,004.7
863.7
679.7
552.1
493.0
463.2
453.4
443.9
414.4
389.3
296.7
214.6
169.9
53.9
382.2
$14,645.3

Year Ended
December 31, 2004
Total

Percent
Change
from 2004

$ 4,419.8
1,214.4
1,101.6
1,012.7
997.7
798.7
93.9
666.7
452.9
142.6
559.0
478.0
430.3
238.6
362.8
201.8
130.6
70.2
485.6
$13,857.9

(5)
10
9
2
1
8
NM
(17)
9
NM
(19)
(7)
(4)
63
(18)
6
30
(23)
(21)
6

NM—Not meaningful
1 U.S. sales include sales in Puerto Rico.
2 Cialis had worldwide 2005 sales of $746.6 million, representing an increase of 35 percent compared with 2004. The sales shown in the table above represent
results only in the territories in which we market Cialis exclusively. The remaining sales relate to the joint-venture territories of Lilly ICOS LLC (North America,
excluding Puerto Rico, and Europe). Our share of the joint-venture territory sales, net of expenses and income taxes, is reported in other income—net in our
consolidated statements of income.

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increased 2 percent, to $7.80 billion, driven primarily by
increased sales of Cymbalta and Alimta. Sales outside
the U.S. increased 11 percent, to $6.85 billion, driven by
growth of Zyprexa, Alimta, and Gemzar. Worldwide sales
reﬂ ected a volume increase of 3 percent, with global
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.)

Zyprexa sales in the U.S. decreased 16 percent in
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.

and a decline in underlying demand. Sales outside the
U.S. were $53.4 million in 2005, compared with
$10.3 million in 2004, primarily reﬂ ecting launches
in Australia, Canada, Germany, Mexico, and Spain.

Alimta was launched in the U.S. in February 2004
for the treatment of malignant pleural mesothelioma
and in August for second-line treatment of non-small-
cell lung cancer (NSCLC). Alimta was launched in
several European countries in the second half of 2004
and throughout 2005. Alimta generated sales of $463.2
million in 2005.

Forteo increased 34 percent in the U.S. in 2005,

driven by strong growth in underlying demand. Sales
growth was offset, in part, by wholesaler destocking
in the ﬁ rst half of 2005 related to our revised arrange-
ments with U.S. wholesalers.

Diabetes care products had aggregate worldwide

Cialis worldwide sales of $746.6 million in 2005 re-

revenues of $2.80 billion in 2005, an increase of 7
percent. Diabetes care revenues in the U.S. increased
7 percent, to $1.59 billion, 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, to $1.20 billion. Humalog
sales increased 8 percent in the U.S. and 10 percent
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 9 percent in 2005.
Sales of Byetta were $74.6 million following its June
2005 launch. Our reported net sales of Byetta totaled
$39.6 million in 2005.

Sales of Gemzar increased 4 percent in the U.S.
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 15 percent outside the U.S., driven by
strong volume growth in a number of cancer indications.
Sales of Evista decreased 2 percent in the U.S. due

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 11 percent, driven by volume growth in
several markets and the early 2004 launch of the prod-
uct in Japan.

Cymbalta was launched in the U.S. in late August
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 rst quarter of 2005. Cymbalta generated
$679.7 million in sales in 2005.

Sales of Strattera declined 24 percent in the U.S.
in 2005 due to wholesaler destocking resulting from
restructured arrangements with our U.S. wholesalers

ﬂ ected an increase of 35 percent compared to 2004, and
comprises $169.9 million of sales in our territories, and
$576.7 million 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 rst half of the
year as a result of our restructured arrangements with
our U.S. wholesalers.

Animal health product sales in the U.S. increased
9 percent, while sales outside the U.S. increased 7 per-
cent, led by Rumensin and Paylean®.

Gross Margin, Costs, and Expenses
The 2005 gross margin decreased to 76.3 percent of
sales compared with 76.7 percent for 2004. The de-
crease was primarily due to higher manufacturing
expenses, partially offset by favorable product mix and
lower factory inventory losses.

Operating expenses increased 8 percent in 2005.

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 ts expenses. We
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 ts expenses. This comparison also beneﬁ ted
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
been ﬂ at for 2005, if 2004 had been restated as if stock
options had been expensed.

Other income—net increased $35.8 million in 2005,

to $314.2 million, due to the following:

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• Interest expense for 2005 increased $53.6 million, to

$105.2 million, primarily due to increased interest rates.

• Interest income for 2005 increased $55.4 million, to

$212.1 million, due to increased investment balances
and interest rates.

• Our net income from the Lilly ICOS joint venture was

$11.1 million for 2005, compared with a net loss
of $79.0 million in 2004. The joint venture became
proﬁ table for the ﬁ rst time in the third quarter of 2005.

• Net other miscellaneous income items decreased

$56.1 million to $196.2 million, primarily as a result
of less income related to the outlicense of legacy
products and partnered products in development.

The effective tax rate for 2005 was 26.3 percent,

compared with 38.5 percent for 2004. The effective
tax rate for 2005 was affected by the product liability
charge of $1.07 billion. The tax beneﬁ t of this charge
was less than our effective tax rate, as the tax beneﬁ t
was calculated based upon existing tax laws in the
countries in which we reasonably expect to deduct the
charge. The effective tax rate for 2004 was affected
by the tax provision related to the expected repatria-
tion of $8.00 billion of earnings reinvested outside the
U.S. pursuant to the AJCA and the charge for acquired
IPR&D related to the AME acquisition, which is not
deductible for tax purposes. See Note 10 to the consoli-
dated ﬁ nancial statements for additional information.

FINANCIAL CONDITION

As of December 31, 2006, cash, cash equivalents, and
short-term investments totaled $3.89 billion compared
with $5.04 billion at December 31, 2005. Strong cash
ﬂ ow from operations in 2006 of $3.98 billion was more
than offset by repayments of long-term debt of $2.78
billion, dividends paid of $1.74 billion, and capital expen-
ditures of $1.08 billion.

Capital expenditures of $1.08 billion during 2006
were $220.3 million less than in 2005, due primarily to the
management of capital spending and completion of key
projects. We expect near-term capital expenditures to
remain approximately the same as 2006 levels while we
invest in our biotech and research and development initia-
tives, continue to upgrade our manufacturing facilities to
enhance productivity and quality systems, and invest in
the long-term growth of our diabetes care products.

Total debt as of December 31, 2006 was $3.71 bil-
lion, reﬂ ecting a net repayment of $2.78 billion during
2006. In early 2007, we issued approximately $2.5 billion
of debt to ﬁ nance our acquisition of ICOS, including the
acquisition of ICOS stock and reﬁ nancing of ICOS debt.
Our current debt ratings from Standard & Poor’s and
Moody’s remain at AA and Aa3, respectively.

Dividends of $1.60 per share were paid in 2006, an
increase of 5 percent from 2005. In the fourth quarter
of 2006, effective for the ﬁ rst-quarter dividend in 2007,

DECREASING CAPITAL EXPENDITURE
REQUIREMENTS CONTRIBUTE TO CASH FLOW
($ millions)

Capital expenditures decreased to $1.1 billion in 2006.
Our capital expenditures have continued to decline
from a peak of $1.9 billion in 2004. We expect 2007
capital expenditures to remain approximately the
same as 2006 levels by managing our capital spending
while we invest in our biotech and research and
development initiatives, continue to upgrade our
manufacturing facilities to enhance productivity and
quality systems, and invest in the long-term growth of
our diabetes care products.

1
.
8
9
8
,
1
6 $
.
6
0
7
,
1
$

9
.
0
3
1
,
1
$

1
.
8
9
2
,
1
$

8
.
7
7
0
,
1
$

02 03 04 05 06

the quarterly dividend was increased to $.425 per share
(a 6 percent increase), resulting in an indicated annual
rate for 2007 of $1.70 per share. The year 2006 was the
122nd consecutive year in which we made dividend pay-
ments and the 39th consecutive year in which dividends
have been increased.

We believe that cash generated from operations,

along with available cash and cash equivalents, will be
sufﬁ cient to fund our normal operating needs, includ-
ing debt service, capital expenditures, costs associated
with product liability litigation, dividends, and taxes in
2007. We believe that amounts available through our
existing commercial paper program should be adequate
to fund maturities of short-term borrowings, if neces-
sary. We currently have $1.21 billion of unused commit-
ted bank credit facilities, $1.20 billion of which backs
our commercial paper program. Excluding the long-
term debt issued for the ICOS acquisition, we plan to
use available cash to repay approximately $1 billion of
debt outside the U.S. by the end of 2007. Various risks
and uncertainties, including those discussed in the
Financial Expectations for 2007 section, may affect our
operating results and cash generated from operations.

DIVIDENDS PAID PER SHARE CONTINUE TO GROW
(dollars)

Dividends paid during 2006 increased to $1.60 per share.
This constitutes the 39th consecutive increase in annual
dividends. We continued this tradition into 2007 by
declaring a first-quarter 2007 dividend of $.425 per
share, a 6 percent increase over first-quarter 2006.
This record clearly reflects our continued commitment
to delivering outstanding shareholder value.

0
6
.
1
$

2
5
.
1
$

2
4
.
1
4 $
3
.
1
$

4
2
.
1
$

02 03 04 05 06

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Consolidated Balance Sheets

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

December 31

2006

2005

Assets
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowances of $82.5 (2006) and $66.3 (2005) . . . . . . .
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other Assets
Prepaid pension (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sundry (Note 8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Property and Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Liabilities and Shareholders’ Equity
Current Liabilities
Short-term borrowings and current maturities of long-term debt (Note 6). . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales rebates and discounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other Liabilities
Long-term debt (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued retirement beneﬁ t (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitments and contingencies (Note 13)

Shareholders’ Equity (Notes 7 and 9)
Common stock—no par value
Authorized shares: 3,200,000,000

Issued shares: 1,132,578,231 (2006) and 1,131,070,629 (2005). . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee beneﬁ t trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred costs—ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . .

Less cost of common stock in treasury
2006—909,573 shares
2005—933,584 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

See notes to consolidated ﬁ nancial statements.

$ 3,109.3
781.7
2,298.6
395.8
2,270.3
519.2
319.5
9,694.4

1,091.5
1,001.9
2,015.3
4,108.7

$ 3,006.7
2,031.0
2,313.3
448.4
1,878.0
756.4
362.0
10,795.8

2,419.6
1,296.6
2,156.3
5,872.5

8,152.3
$21,955.4

7,912.5
$24,580.8

$ 219.4
789.4
607.7
508.3
463.3
640.6
1,856.8
5,085.5

3,494.4
1,586.9
62.2
745.7
5,889.2

$ 734.7
781.3
548.8
491.2
436.5
884.9
1,838.9
5,716.3

5,763.5
787.9
695.1
826.1
8,072.6

707.9
3,571.9
10,926.7
(2,635.0)
(100.7)
(1,388.7)
11,082.1

706.9
3,323.8
10,027.2
(2,635.0)
(106.3)
(420.6)
10,896.0

101.4
10,980.7
$21,955.4

104.1
10,791.9
$24,580.8

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Consolidated Statements of Cash Flows

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

Year Ended December 31

2006

2005

2004

Cash Flows From Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments To Reconcile Net Income To Cash Flows
From Operating Activities
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . .
Acquired in-process research and development, net of tax . . . . .
Asset impairments, restructuring, and other special charges,

net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in operating assets and liabilities

Receivables—(increase) decrease . . . . . . . . . . . . . . . . . . . . . . . .
Inventories—(increase) decrease. . . . . . . . . . . . . . . . . . . . . . . . .
Other assets—increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and other liabilities—decrease . . . . . . . . . . .

$ 2,662.7

$ 1,979.6

$ 1,810.1

801.8
346.8
359.3
—

797.4
(196.8)
4,771.2

243.9
(60.2)
(43.0)
(936.0)
(795.3)

726.4
(347.5)
403.5
—

1,128.7
(30.0)
3,860.7

(286.4)
72.1
(269.4)
(1,463.4)
(1,947.1)

597.5
772.4
53.0
381.7

374.3
171.5
4,160.5

(240.8)
(111.6)
(765.2)
(173.4)
(1,291.0)

Net Cash Provided by Operating Activities . . . . . . . . . . . . . . . . . . . .

3,975.9

1,913.6

2,869.5

Cash Flows From Investing Activities
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Disposals of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Net changes in short-term investments . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and maturities of noncurrent investments . . .
Purchases of noncurrent investments . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of in-process research and development . . . . . . . . . . . . .
Cash paid for acquisition of Applied Molecular Evolution,
net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by (Used for) Investing Activities . . . . . . . . . . . .

Cash Flows From Financing Activities
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuances of common stock under stock plans . . . . . . . . . . . . . . . . . .
Net changes in short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by (Used for) Financing Activities . . . . . . . . . . .

(1,077.8)
65.2
1,247.5
1,507.7
(1,313.2)
—

—
179.0
608.4

(1,736.3)
(122.1)
59.6
(8.4)
—
(2,781.5)
9.9
(4,578.8)

(1,298.1)
11.1
62.7
545.1
(1,183.1)
—

—
(353.6)
(2,215.9)

(1,654.9)
(377.9)
105.9
(1,988.7)
3,000.0
(1,004.7)
39.8
(1,880.5)

(1,898.1)
20.5
(1,119.0)
14,849.3
(11,967.7)
(29.9)

(71.7)
(468.2)
(684.8)

(1,539.8)
—
117.9
1,478.2
1,000.0
(839.2)
(13.4)
203.7

Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . .

97.1

(175.8)

220.6

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . .

102.6
3,006.7
$ 3,109.3

(2,358.6)
5,365.3
$ 3,006.7

2,609.0
2,756.3
$ 5,365.3

See notes to consolidated ﬁ nancial statements.

—
441.7
(25.9)
(4.4)
(53.7)

357.7

21.0
378.7

Consolidated Statements of Comprehensive Income

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

Year Ended December 31

2006

2005

2004

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss)
Adoption of SFAS 158 (Notes 12 and 14) . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation gains (losses) . . . . . . . . . . . . . . . . . .
Net unrealized gains (losses) on securities . . . . . . . . . . . . . . . . . . .
Minimum pension liability adjustment . . . . . . . . . . . . . . . . . . . . . . .
Effective portion of cash ﬂ ow hedges. . . . . . . . . . . . . . . . . . . . . . . .

(2,366.2)
542.4
(3.2)
(18.8)
143.3

—
(533.4)
0.3
(87.8)
(81.7)

$2,662.7

$1,979.6

$1,810.1

Other comprehensive income (loss) before income taxes . . . . . . . . .
Provision for income taxes related to other comprehensive

(1,702.5)

(702.6)

income (loss) items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) (Note 14) . . . . . . . . . . . . . . . . . . .

734.4
(968.1)

63.4
(639.2)

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Comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,694.6

$1,340.4

$2,188.8

See notes to consolidated ﬁ nancial statements.

In the normal course of business, our operations
are exposed to ﬂ uctuations in interest rates and cur-
rency values. These ﬂ uctuations can vary the costs
of ﬁ nancing, investing, and operating. We address a
portion of these risks through a controlled program of
risk management that includes the use of derivative
ﬁ nancial instruments. The objective of controlling these
risks is to limit the impact on earnings of ﬂ uctuations
in interest and currency exchange rates. All derivative
activities are for purposes other than trading.

Our primary interest rate 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 xed
and ﬂ oating rate debt positions and may enter into
interest rate derivatives to help maintain that balance.
Based on our overall interest rate exposure at Decem-
ber 31, 2006 and 2005, including derivatives and other
interest rate risk-sensitive instruments, a hypothetical
10 percent change in interest rates applied to the fair
value of the instruments as of December 31, 2006 and
2005, respectively, would have no material impact on
earnings, cash ﬂ ows, or fair values of interest rate risk-
sensitive instruments over a one-year period.

Our foreign currency risk exposure results from
ﬂ uctuating currency exchange rates, primarily the U.S.
dollar against the euro and the Japanese yen. We face
transactional currency exposures that arise when we
enter into transactions, generally on an intercompany
basis, denominated in currencies other than the local
currency. We also face currency exposure that arises
from translating the results of our global operations to
the U.S. dollar at exchange rates that have ﬂ uctuated

from the beginning of the period. We use 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 uctuations on the existing assets,
liabilities, commitments, and anticipated revenues. Con-
sidering our derivative ﬁ nancial instruments outstanding
at December 31, 2006 and 2005, a hypothetical 10 per-
cent change in exchange rates (primarily against the U.S.
dollar) as of December 31, 2006 and 2005, respectively,
would have no material impact on earnings, cash ﬂ ows,
or fair values of foreign currency rate risk-sensitive
instruments over a one-year period. These calculations
do not reﬂ ect the impact of the exchange gains or losses
on the underlying positions that would be offset, in part,
by the results of the derivative instruments.

Off-Balance Sheet Arrangements and Contractual
Obligations
We have 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 nancial condition,
changes in ﬁ nancial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or
capital resources. We acquire 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

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Our current noncancelable contractual obligations that will require future cash payments are as follows (in millions):

Long-term debt, including

interest payments1 . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . .
Operating leases. . . . . . . . . . . . . . . . . .
Purchase obligations2 . . . . . . . . . . . . .
Other long-term liabilities
reﬂ ected on our balance sheet3 . . .
Other4 . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

$5,638.1
152.6
412.2
2,105.0

836.8
67.1
$9,211.8

Less Than
1 Year

Payments Due by Period
1–3
Years

3–5
Years

More Than
5 Years

$ 374.0
19.8
92.2
1,879.4

78.6
67.1
$2,511.1

$1,703.5
36.1
136.0
140.9

135.9
—

$2,152.4

$ 265.4
24.2
76.8
68.3

138.2
—
$ 572.9

$3,295.2
72.5
107.2
16.4

484.1
—

$3,975.4

1 Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. We used the interest rate forward
curve at December 31, 2006 to compute the amount of the contractual obligation for interest on the variable rate debt instruments and swaps.
2 We have included the following:

• Purchase obligations, consisting primarily of all open purchase orders at our signiﬁ cant operating locations as of December 31, 2006. Some of these

purchase orders may be cancelable; however, for purposes of this disclosure, we have not distinguished between cancelable and noncancelable purchase
obligations.

• Contractual payment obligations with each of our signiﬁ cant vendors, which are noncancelable and are not contingent.

3 We have included our long-term liabilities consisting primarily of our nonqualiﬁ ed supplemental pension funding requirements and deferred compensation
liabilities.
4 This category comprises primarily minimum pension funding requirements.

life cycle of the pharmaceutical product (e.g., approval
of the product for marketing by the appropriate regula-
tory agency). If required by the arrangement, we may
have to make royalty payments based upon a percentage
of the sales of the pharmaceutical product in the event
that regulatory approval for marketing is obtained.
Because of the contingent nature of these payments,
they are not included in the table of contractual
obligations.

Individually, these arrangements are not material
in any one reporting period. However, if milestones for
multiple products covered by these arrangements would
happen to be reached in the same reporting period, the
aggregate charge to expense could be material to the
results of operations in any one period. The inherent risk
in pharmaceutical development makes it unlikely that this
will occur, as the failure rate for products in development
is very high. In addition, these arrangements often give
us the discretion to unilaterally terminate development
of the product, which would allow us to avoid making the
contingent payments; however, we are unlikely to cease
development if the compound successfully achieves clini-
cal testing objectives. We also note that, from a business
perspective, we view these payments as positive because
they signify that the product is successfully moving
through development and is now generating or is more
likely to generate cash ﬂ ows from sales of products.
The contractual obligations table is current as of
December 31, 2006. The amount of these obligations
can be expected to change materially over time as new
contracts are initiated and existing contracts are com-
pleted, terminated, or modiﬁ ed.

APPLICATION OF CRITICAL ACCOUNTING POLICIES
In preparing our ﬁ nancial statements in accordance
with generally accepted accounting principles (GAAP),
we must often make estimates and assumptions that
affect the reported amounts of assets, liabilities,
revenues, expenses, and related disclosures. Some of
those judgments can be subjective and complex, and
consequently actual results could differ from those
estimates. For any given individual estimate or as-
sumption we make, it is possible that other people
applying reasonable judgment to the same facts and
circumstances could develop different estimates. We
believe that, given current facts and circumstances,
it is unlikely that applying any such other reasonable
judgment would cause a material adverse effect on our
consolidated results of operations, ﬁ nancial position,
or liquidity for the periods presented in this report. Our
most critical accounting policies have been discussed
with our audit committee and are described below.

Revenue Recognition and Sales Rebate and Discount
Accruals
We recognize revenue from sales of products at the
time title of goods passes to the buyer and the buyer
assumes the risks and rewards of ownership. For more
than 90 percent of our sales, this is at the time prod-
ucts are shipped to the customer, typically a wholesale
distributor or a major retail chain. The remaining sales
are recorded at the point of delivery. Provisions for dis-
counts and rebates are established in the same period
the related sales are recorded.

We regularly review the supply levels of our sig-

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niﬁ cant products sold to major wholesalers in the U.S.
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.
We attempt to maintain wholesaler inventory levels at
an average of approximately one month or less on a
consistent basis across our product portfolio. Causes
of unusual wholesaler buying patterns include actual
or anticipated product supply issues, weather patterns,
anticipated changes in the transportation network,
redundant holiday stocking, and changes in wholesaler
business operations. An unusual buying pattern com-
pared with underlying demand of our products outside
the U.S. 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 or decrease in the sales of a major
product compared with underlying demand, we dis-
close this in our product sales discussion if the amount
is believed to be material to the product sales trend;
however, we are not always able to accurately quantify
the amount of stocking or destocking.

As a result of restructuring our arrangements with
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 $170 million. The
modiﬁ ed structure eliminates the incentive for specula-
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 uctuated signiﬁ cantly as a percent of sales.

We establish sales rebate and discount accruals in
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 accrual include
Medicaid, managed care, Medicare, chargebacks, long-
term-care, hospital, discount card programs, and various
other government programs. We base these accruals
primarily upon our historical rebate/discount payments
made to our customer segment groups and the provisions
of current rebate/discount contracts. We calculate these
rebates/discounts based upon a percentage of our sales
for each of our products as deﬁ ned by the statutory rates
and the contracts with our various customer groups.

The largest of our sales rebate/discount amounts
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 later. Due to the time lag, in any particu-

lar period our rebate adjustments may incorporate revi-
sions of accruals for several periods. In determining the
appropriate accrual amount, we consider our historical
Medicaid rebate payments by product as a percentage
of our historical sales as well as any signiﬁ cant changes
in sales trends, an evaluation of the current Medicaid
rebate laws and interpretations, the percentage of our
products that are sold to Medicaid recipients, and our
product pricing and current rebate/discount contracts.

Most of our rebates outside the U.S. are contractual

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 cit
in the country. A best estimate of these rebates, updated
as governmental authorities revise budgeted deﬁ cits, is
recognized in the same period as the related sale. If our
estimates are not reﬂ ective of the actual pharmaceuti-
cal budget deﬁ cit, we adjust our rebate reserves.

We believe that our accruals for sales rebates and

discounts are reasonable and appropriate based on
current facts and circumstances. Federally mandated
Medicaid rebate and state pharmaceutical assistance
programs (Medicaid) and Medicare rebates reduced
sales by $571.7 million, $637.1 million, and $641.0 mil-
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 31, 2006, our Medicaid and Medicare
rebate liability was $259.0 million.

Approximately 85 percent and 90 percent of our
global rebate and discount liability resulted from sales
of our products in the U.S. as of December 31, 2006 and
2005, respectively. The following represents a roll-for-
ward of our most signiﬁ cant U.S. rebate and discount
liability balances, including Medicaid (in millions):

2006

2005

Rebate and discount liability,
beginning of year. . . . . . . . . . . $ 379.4 $ 367.9
Reduction of net sales

due to discounts and

rebates 1 . . . . . . . . . . . . . . . 1,246.1

1,300.1

Cash payments of

discounts and rebates . . . .

(1,242.2)

(1,288.6)

Rebate and discount

liability, end of year. . . . . . . . . $ 383.3 $ 379.4

1 Adjustments of the estimates for these rebates and discounts to actual
results were less than 0.3 percent of net sales for each of the years
presented.

Product Litigation Liabilities and Other Contingencies
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

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and other contingent liability amounts include the
merits and jurisdiction of the litigation, the nature and
the number of other similar current and past litigation
cases, the nature of the product and the current as-
sessment of the science subject to the litigation, and the
likelihood of settlement and current state of settlement
discussions, if any. In addition, we accrue for certain
product liability claims incurred, but not ﬁ led, to the
extent we can formulate a reasonable estimate of their
costs. We estimate these expenses based primarily on
historical claims experience and data regarding product
usage. We accrue legal defense costs expected to be
incurred in connection with signiﬁ cant product liability
contingencies when probable and reasonably estimable.

We also consider the insurance coverage we have
to diminish the exposure for periods covered by insur-
ance. In assessing our insurance coverage, we consider
the policy coverage limits and exclusions, the potential
for denial of coverage by the insurance company, the
ﬁ nancial position of the insurers, and the possibility of
and the length of time for collection.

The litigation accruals and environmental liabilities
and the related estimated insurance recoverables have
been reﬂ ected on a gross basis as liabilities and assets,
respectively, on our consolidated balance sheets.

We believe that the accruals and related insurance
recoveries we have established for product litigation li-
abilities and other contingencies are appropriate based
on current facts and circumstances.

Pension and Retiree Medical Plan Assumptions
Pension beneﬁ t costs include assumptions for the dis-
count rate, retirement age, and expected return on plan
assets. Retiree medical plan costs include assumptions
for the discount rate, retirement age, expected return
on plan assets, and health-care-cost trend rates. These
assumptions have a signiﬁ cant effect on the amounts
reported. In addition to the analysis below, see Note 12
to the consolidated ﬁ nancial statements for additional
information regarding our retirement beneﬁ ts.

Periodically, we evaluate the discount rate and the

expected return on plan assets in our deﬁ ned beneﬁ t
pension and retiree health beneﬁ t plans. In evaluating
these assumptions, we consider many factors, includ-
ing an evaluation of the discount rates, expected return
on plan assets and the health-care-cost trend rates of
other companies; our historical assumptions compared
with actual results; an analysis of current market con-
ditions and asset allocations (approximately 85 percent
to 95 percent of which are growth investments); and the
views of leading ﬁ nancial advisers and economists. We
use an actuarially-determined, company-speciﬁ c yield
curve to determine the discount rate. In evaluating our
expected retirement age assumption, we consider the
retirement ages of our past employees eligible for pen-
sion and medical beneﬁ ts together with our expecta-

tions of future retirement ages.

We believe our pension and retiree medical plan as-

sumptions are appropriate based upon the above factors.
If the health-care-cost trend rates were to be increased
by one percentage point each future year, the aggregate
of the service cost and interest cost components of the
2006 annual expense would increase by approximately
$28 million. A one-percentage-point decrease would
decrease the aggregate of the 2006 service cost and
interest cost by approximately $24 million. If the discount
rate for 2006 were to be changed by a quarter percent-
age point, income before income taxes would change by
approximately $28 million. If the expected return on plan
assets for 2006 were to be changed by a quarter percent-
age point, income before income taxes would change by
approximately $14 million. If our assumption regarding
the expected age of future retirees for 2006 were adjust-
ed by one year, our income before income taxes would be
affected by approximately $29 million.

Impairment of Long-lived Assets
We review the carrying value of long-lived assets for
potential impairment on a periodic basis and when-
ever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable.
Impairment is determined by comparing projected
undiscounted cash ﬂ ows to be generated by the asset to
its carrying value. If an impairment is identiﬁ ed, a loss
is recorded equal to the excess of the asset’s net book
value over its fair value, and the cost basis is adjusted.
The estimated future cash ﬂ ows, based on reasonable
and supportable assumptions and projections, require
management’s judgment. Actual results could vary from
these estimates.

Income Taxes
We prepare and ﬁ le tax returns based on our interpreta-
tion of tax laws and regulations and record estimates
based on these judgments and interpretations. In the
normal course of business, our tax returns are subject
to examination by various taxing authorities, which may
result in future tax and interest assessments by these
authorities. Inherent uncertainties exist in estimates of
tax contingencies due to changes in tax law resulting from
legislation, regulation and/or as concluded through the
various jurisdictions’ tax court systems. We record a liabil-
ity for tax contingencies when we believe it is probable that
we will be assessed and the amount of the contingency
can be reasonably estimated. The tax contingency reserve
is adjusted for changes in facts and circumstances and
additional uncertainties. For example, adjustments could
result from signiﬁ cant amendments to existing tax law and
the issuance of regulations or interpretations by the taxing
authorities, new information obtained during a tax exami-
nation, or resolution of an examination. We believe that our
estimates for tax contingency reserves are appropriate

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and sufﬁ cient to pay assessments that may result from
examinations of our tax returns.

ation of strong cash ﬂ ow trends in 2007, with capital
expenditures of approximately $1.1 billion.

We have 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 income tax expense.

We believe that our estimates for the valuation al-
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.

FINANCIAL EXPECTATIONS FOR 2007

For the full year of 2007, we expect earnings per share
to be in the range of $2.89 to $2.99. This guidance
includes the estimated $.10 per share dilutive impact of
the ICOS acquisition related to the incremental inter-
est expense on debt used to ﬁ nance the acquisition,
the amortization of ICOS intangibles and other integra-
tion costs. A disproportionate amount of this dilution is
expected to be incurred in the ﬁ rst half of the year. This
guidance also includes the IPR&D charges related to
the ICOS acquisition and the in-licensing of a diabetes
compound from OSI, together estimated to be a total
of $.29 per share as discussed in Note 3, as well as
additional restructuring and other special charges as
discussed in Note 4, estimated to be $.07 per share.
We expect 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 support of 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. We also expect other income—net to contribute
less than $100 million, a reduction from 2006 due to the
removal of the Lilly ICOS joint venture after-tax proﬁ t.
Other income will primarily include net interest income
and income from the partnering and out-licensing of
molecules. In terms of cash ﬂ ow, we expect a continu-

Actual results could differ materially and will
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 under development 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. We undertake no
duty to update these forward-looking statements.

LEGAL AND REGULATORY MATTERS

We are a party to various legal actions and govern-
ment investigations. The most signiﬁ cant of these are
described below. While it is not possible to predict or
determine the outcome of these matters, we believe
that, except as speciﬁ cally noted below, the resolution
of all such matters will not have a material adverse
effect on our consolidated ﬁ nancial position or liquid-
ity, but could possibly be material to our consolidated
results of operations in any one accounting period.

Patent Litigation
We are engaged in the following patent litigation mat-
ters brought pursuant to procedures set out in the
Hatch-Waxman Act (the Drug Price Competition and
Patent Term Restoration Act of 1984):
• Dr. Reddy’s Laboratories, Ltd. (Reddy), Teva

Pharmaceuticals, and Zenith Goldline Pharmaceuticals,
Inc., which was subsequently acquired by Teva
Pharmaceuticals (together, Teva), each submitted
Abbreviated New Drug Applications (ANDAs) seeking
permission to market generic versions of Zyprexa prior
to the expiration of our relevant U.S. patent (expiring
in 2011) and alleging that this patent was invalid or not
enforceable. We ﬁ led lawsuits against these companies
in the U.S. District Court for the Southern District
of Indiana, seeking a ruling that the patent is valid,
enforceable and being infringed. The district court
ruled in our favor on all counts on April 14, 2005, and
on December 26, 2006, that ruling was upheld by the
Court of Appeals for the Federal Circuit. Reddy and Teva
are seeking a review of that decision. We are conﬁ dent
Reddy’s and Teva’s claims are without merit and we
expect to prevail. An unfavorable outcome would have a
material adverse impact on our consolidated results of
operations, liquidity, and ﬁ nancial position.

• Barr Laboratories, Inc. (Barr), submitted an ANDA in
2002 seeking permission to market a generic version

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of Evista prior to the expiration of our relevant U.S.
patents (expiring in 2012-2017) and alleging that these
patents are invalid, not enforceable, or not infringed.
In November 2002, we ﬁ led a lawsuit against Barr
in the U.S. District Court for the Southern District of
Indiana, seeking a ruling that these patents are valid,
enforceable, and being infringed by Barr. Teva has also
submitted an ANDA seeking permission to market
a generic version of Evista. In June 2006, we ﬁ led a
lawsuit against Teva in the U.S. District Court for the
Southern District of Indiana, seeking a ruling that our
relevant U.S. patents are valid, enforceable, and being
infringed by Teva. No trial date has been set in either
case. We believe Barr’s and Teva’s claims are without
merit and we expect to prevail. However, it is not
possible to predict or determine the outcome of this
litigation, and accordingly, we can provide no assurance
that we will prevail. An unfavorable outcome could have
a material adverse impact on our consolidated results
of operations, liquidity, and ﬁ nancial position.

• Sicor Pharmaceuticals, Inc. (Sicor), a subsidiary of Teva,
submitted ANDAs in November 2005 seeking permission
to market generic versions of Gemzar prior to the
expiration of our relevant U.S. patents (expiring in 2010
and 2013), and alleging that these patents are invalid.
In February 2006, we ﬁ led a lawsuit against Sicor in the
U.S. District Court for the Southern District of Indiana,
seeking a ruling that these patents are valid and are
being infringed by Sicor. In response to our lawsuit,
Sicor ﬁ led a declaratory judgment action in the U.S.
District Court for the Central District of California. Sicor
also moved to dismiss our lawsuit in Indiana, asserting
the Indiana court lacks jurisdiction. The California action
has been dismissed. In September 2006, we received
notice that Mayne Pharma (USA) Inc. (Mayne) ﬁ led a
similar ANDA for Gemzar. In October 2006, we ﬁ led a
lawsuit against Mayne in the Southern District of Indiana
in response to the ANDA ﬁ ling. In response to our
lawsuit, Mayne ﬁ led a motion to our lawsuit, asserting
the Indiana court lacks jurisdiction. In October 2006,
we received notice that Sun Pharmaceutical Industries
Inc. (Sun) ﬁ led an ANDA for Gemzar, alleging that the
2013 patent is invalid. In December 2006, we ﬁ led a
lawsuit against Sun in the Southern District of Indiana
in response to Sun’s ANDA ﬁ ling. We expect to prevail
in litigation involving our Gemzar patents and believe
that claims made by these generic companies that our
patents are not valid are without merit. However, it is
not possible to predict or determine the outcome of this
litigation, and accordingly, we can provide no assurance
that we will prevail. An unfavorable outcome could have
a material adverse impact on our consolidated results
of operations, liquidity, and ﬁ nancial position.

In June 2002, we were sued by Ariad Pharmaceu-
ticals, Inc., the Massachusetts Institute of Technology,
the 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 dis-
covery of a natural cell signaling phenomenon in the hu-
man body, and seeking royalties on past and future sales
of these products. In June 2005, the United States Patent
and Trademark Ofﬁ ce 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, calcu-
lated by applying a 2.3 percent royalty to all U.S. sales of
Xigris and Evista from the date of issuance of the patent
through the date of trial. We are seeking to have the jury
verdict overturned by the trial court judge, and if unsuc-
cessful, will appeal the decision to the Court of Appeals
for the Federal Circuit. In addition, a separate bench trial
with the U.S. District Court of Massachusetts was held
the week of August 7, 2006, on our contention that the
patent is unenforceable and impermissibly covers natural
processes. No decision has been rendered. We believe
that these allegations are without legal merit, that we will
ultimately prevail on these issues and therefore that the
likelihood of any monetary damages is remote.

Government Investigations
In March 2004, the ofﬁ ce of the U.S. Attorney for the
Eastern District of Pennsylvania advised us that it had
commenced a civil investigation related to our U.S.
marketing and promotional practices, including our
communications with physicians and remuneration of
physician consultants and advisors, with respect to
Zyprexa, Prozac, and Prozac Weekly™. In October 2005,
the U.S. Attorney’s ofﬁ ce advised that it is also conduct-
ing an inquiry regarding certain rebate agreements we
entered into with a pharmacy beneﬁ t manager covering
Axid®, Evista, Humalog, Humulin, Prozac, and Zyprexa.
The inquiry includes a review of Lilly’s Medicaid best
price reporting related to the product sales covered by
the rebate agreements. We are cooperating with the
U.S. Attorney in these investigations, including provid-
ing a broad range of documents and information relat-
ing to the investigations. In June 2005, we received a
subpoena from the ofﬁ ce of the Attorney General, Med-
icaid Fraud Control Unit, of the State of Florida, seeking
production of documents relating to sales of Zyprexa
and our marketing and promotional practices with
respect to Zyprexa. In September 2006, we received a
subpoena from the California Attorney General’s ofﬁ ce
seeking production of documents related to our efforts
to obtain and maintain Zyprexa’s status on California’s
formulary, marketing and promotional practices with
respect to Zyprexa, and remuneration of health care
providers. Beginning in August 2006, we have received

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civil investigative demands or subpoenas from the at-
torneys general of a number of states. Most of these
requests are now part of a multistate investigative
effort being coordinated by an executive committee
of attorneys general. We are aware that 23 states are
participating in this joint effort, and we anticipate that
additional states will join the investigation. These at-
torneys general are seeking a broad range of Zyprexa
documents, including documents relating to sales,
marketing and promotional practices, and remunera-
tion of health care providers.It is possible that other
Lilly products could become subject to investigation
and that the outcome of these matters could include
criminal charges and ﬁ nes, penalties, or other mon-
etary or nonmonetary remedies. We cannot predict or
determine the outcome of these matters or reasonably
estimate the amount or range of amounts of any ﬁ nes
or penalties that might result from an adverse outcome.
It is possible, however, that an adverse outcome could
have a material adverse impact on our consolidated re-
sults of operations, liquidity, and ﬁ nancial position. We
have implemented and continue to review and enhance
a broadly based compliance program that includes
comprehensive compliance-related activities designed
to ensure that our marketing and promotional practic-
es, physician communications, remuneration of health
care professionals, managed care arrangements, and
Medicaid best price reporting comply with applicable
laws and regulations.

Product Liability and Related Litigation
We have been named as a defendant in a large number
of Zyprexa product liability lawsuits in the United States
and have been notiﬁ ed of many other claims of individu-
als who have not ﬁ led suit. The lawsuits and unﬁ led
claims (together the “claims”) allege a variety of inju-
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
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
that we improperly promoted the drug. Almost all of the
federal lawsuits are part of a Multi-District Litigation
(MDL) proceeding before The Honorable Jack Weinstein
in the Federal District Court for the Eastern District of
New York (MDL No. 1596).

Since June 2005, we have entered into agree-

ments with various claimants’ attorneys involved in U.S.
Zyprexa product liability litigation to settle a substantial
majority of the claims. The agreements cover a total
of approximately 28,500 claimants, including a large
number of previously ﬁ led lawsuits and other asserted
claims. The two primary settlements were as follows:
• In June 2005, we reached an agreement in principle
(and in September 2005 a ﬁ nal agreement) to settle

more than 8,000 claims for $690.0 million plus $10.0
million to cover administration of the settlement. That
settlement is being administered by special settlement
masters appointed by Judge Weinstein.

• In January 2007, we reached agreements with a

number of plaintiffs’ attorneys to settle more than
18,000 claims for approximately $500 million.

The 2005 settlement totaling $700.0 million was

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 rst quarter of 2007.

The U.S. Zyprexa product liability claims not subject
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 cation in which the members of the purported class are
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 ed for resi-
dents of Quebec. The allegations in the Canadian actions
are similar to those in the litigation pending in the U.S.
We are prepared to continue our vigorous defense
of Zyprexa in all remaining cases. We currently antici-
pate that trials in seven cases in the Eastern District of
New York will begin in the second quarter of 2007.

We have insurance coverage for a portion of our
Zyprexa product liability claims exposure. The third-
party 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 we will prevail.

In addition, we have been named as a defendant

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.

In the second quarter of 2005, we recorded a net
pretax charge of $1.07 billion 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:
• The cost of the June 2005 Zyprexa settlements

described above; and

• Reserves for product liability exposures and defense

costs regarding the then-known and expected product
liability claims to the extent we could formulate a
reasonable estimate of the probable number and
cost of the claims. A substantial majority of those
exposures and costs were related to then-known and
expected Zyprexa claims.

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As a result of the January 2007 settlements
discussed above, we incurred a pretax charge of
$494.9 million in the fourth quarter of 2006. The charge
covered the following:
• The cost of the January 2007 Zyprexa settlements; and
• Reserves for product liability exposures and defense

costs regarding the then-known and expected
Zyprexa product liability claims to the extent we could
formulate a reasonable estimate of the probable
number and cost of the claims.

In December 2004, we were served with two
lawsuits brought in state court in Louisiana on behalf
of the 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 and are now part of the MDL proceedings
in the Eastern District of New York. In these actions, the
Department of Health and Hospitals seeks to recover
the costs it paid for Zyprexa through Medicaid and other
drug-beneﬁ t programs, as well as the costs the de-
partment alleges it has incurred and will incur to treat
Zyprexa-related illnesses. In 2006, we were served
with similar lawsuits ﬁ led by the states of Alaska, West
Virginia, New Mexico, and Mississippi in the courts of
the respective states.

In 2005, two lawsuits were ﬁ led in the Eastern
District of New York purporting to be nationwide class
actions on behalf of all consumers and third-party pay-
ors, excluding governmental entities, which have made
or will make payments for their members or insured
patients being prescribed Zyprexa. These actions have
now been consolidated into a single lawsuit, which
is brought under certain state consumer protection
statutes, the federal civil RICO statute, and common
law theories, seeking a refund of the cost of Zyprexa,
treble damages, punitive damages, and attorneys’
fees. Two additional lawsuits were ﬁ led in the Eastern
District of New York in 2006 on similar 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.

We cannot predict with certainty the additional
number of lawsuits and claims that may be asserted. In
addition, although we believe it is probable, there can
be no assurance that the January 2007 Zyprexa product
liability settlements 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 nancial position.

Because of the nature of pharmaceutical products,

it is possible that we could become subject to large
numbers of product liability and related claims for
other products in the future. In the past few years, we
have experienced difﬁ culties in obtaining product liabil-
ity insurance due to a very restrictive insurance market.
Therefore, for substantially all of our currently mar-
keted 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.

PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995—A CAUTION CONCERNING FORWARD-LOOKING
STATEMENTS

Under the safe harbor provisions of the Private Securi-
ties Litigation Reform Act of 1995, we caution investors
that any forward-looking statements or projections
made by us, including those made in this document, are
based on management’s expectations at the time they
are made, but they are subject to risks and uncertainties
that may cause actual results to differ materially from
those projected. Economic, competitive, governmental,
technological, legal, and other factors that may affect
our operations and prospects are discussed earlier in
this section and our most recent report on Forms 10-Q
and 10-K ﬁ led with the Securities and Exchange Com-
mission. We undertake no duty to update forward-look-
ing statements.

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Segment Information

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

We operate in one signiﬁ cant business segment—pharmaceutical products. Operations of the animal health busi-
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.

Year Ended December 31

2006

2005

2004

Net sales—to unafﬁ liated customers
Neurosciences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Endocrinology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oncology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Animal health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cardiovascular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti-infectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other pharmaceuticals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Geographic Information
Net sales—to unafﬁ liated customers1
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Long-lived assets
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,728.5
5,014.5
2,020.2
875.5
514.6
274.6
263.1
$15,691.0

$ 8,599.2
3,894.3
3,197.5
$15,691.0

$ 6,207.4
1,733.8
1,718.4
$ 9,659.6

$ 6,080.0
4,636.9
1,801.0
863.7
608.9
443.9
210.9
$14,645.3

$ 7,798.1
3,818.6
3,028.6
$14,645.3

$ 6,524.5
1,554.9
1,748.9
$ 9,828.3

$ 6,052.5
4,290.9
1,366.2
798.7
658.7
478.0
212.9
$13,857.9

$ 7,668.5
3,536.2
2,653.2
$13,857.9

$ 5,874.1
1,619.0
1,565.0
$ 9,058.1

1 Net sales are attributed to the countries based on the location of the customer.

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®, Coban®, and other products for livestock and poultry. Cardiovascular products consist primarily of
ReoPro and Xigris. Anti-infectives include primarily Ceclor® and Vancocin®. The other pharmaceuticals category
includes Cialis, Axid, and other miscellaneous pharmaceutical products and services.

Most of our pharmaceutical products are distributed through wholesalers that serve pharmacies, physicians

and other health care professionals, and hospitals. In 2006, our three largest wholesalers each accounted for
between 12 percent and 17 percent of consolidated net sales. Further, they each accounted for between 10 per-
cent and 14 percent of accounts receivable as of December 31, 2006. Animal health products are sold primarily to
wholesale distributors.

Our business segments are distinguished by the ultimate end user of the product: humans or animals. Perfor-
mance is evaluated based on proﬁ t or loss from operations before income taxes. The accounting policies of the in-
dividual segments are substantially the same as those described in the summary of signiﬁ cant accounting policies
in Note 1 to the consolidated ﬁ nancial statements. Income before income taxes for the animal health business was
approximately $184 million, $215 million, and $223 million in 2006, 2005, and 2004, respectively.

The assets of the animal health business are intermixed with those of the pharmaceutical products business.

Long-lived assets disclosed above consist of property and equipment and certain sundry assets.

We are exposed to the risk of changes in social, political, and economic conditions inherent in foreign opera-
tions, and our results of operations and the value of our foreign assets are affected by ﬂ uctuations in foreign cur-
rency exchange rates.

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Selected Quarterly Data (unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)

2006

Fourth

Third

Second

First

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairments, restructuring, and other special

charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,245.3
1,019.0
2,168.8

$3,864.1
860.4
1,953.9

$3,866.9
860.6
2,012.7

$3,714.7
806.5
1,883.7

945.2
(102.7)
215.0
132.3

—
(56.0)
1,105.8
873.6

—
(46.9)
1,040.5
822.0

—
(32.2)
1,056.7
834.8

Earnings per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Earnings per share—diluted. . . . . . . . . . . . . . . . . . . . . . . . . . .

Dividends paid per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

.12

.40

.80

.40

.76

.40

.77

.40

Common stock closing prices
High. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

58.25
51.35

57.32
54.26

55.27
50.41

58.86
54.98

2005

Fourth

Third

Second

First

charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes and cumulative effect
of a change in accounting principle. . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Earnings (loss) per share—basic . . . . . . . . . . . . . . . . . . . . . . .

Earnings (loss) per share—diluted . . . . . . . . . . . . . . . . . . . . .

Dividends paid per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,879.1
898.2
1,999.5

$3,601.1
845.7
1,821.9

$3,667.7
871.3
1,908.5

$3,497.4
859.0
1,792.6

171.9
(85.2)

—
(85.0)

1,073.4
(45.4)

894.7
700.62,3

1,018.5
794.4

(140.1)
(252.0)1

.64

.38

.73

.38

(.23)

.38

—
(98.6)

944.4
736.6

.68

.38

57.81
49.76

57.26
52.52

60.44
51.19

57.78
51.73

Our common stock is listed on the New York, London, and Swiss stock exchanges.

1 In the second quarter of 2005, we incurred a tax expense of $111.9 million despite reporting a net loss before income taxes for the quarter. The product
liability charge of $1.07 billion (Note 13) in the second quarter resulted in a tax beneﬁ t that was less than our effective tax rate, as the tax beneﬁ t was
calculated based upon existing tax laws in the countries in which we reasonably expected to deduct the charge.
2 A fourth-quarter 2005 analysis, which included the impact of a recently completed IRS examination for tax years 1998 to 2000, led us to conclude that
our tax rate for 2005 should be 26.3 percent. As a result, the fourth-quarter tax rate declined to 19.2 percent.
3 Reﬂ ects the impact of a cumulative effect of a change in accounting principle in the fourth quarter of 2005 of $22.0 million, net of income taxes of
$11.8 million. The diluted earnings per share impact of this cumulative effect of a change in accounting principle was $.02. The net income per diluted
share before the cumulative effect of a change in accounting principle was $.66. See Note 2 for additional information.

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Selected Financial Data (unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except net sales per employee and per-share data)

2006

2005

2004

2003

2002

Operations
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,691.0
3,546.5
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,129.3
Research and development . . . . . . . . . . . . . . . . . . .
4,889.8
Marketing and administrative. . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
707.4
Income before income taxes and cumulative
effect of a change in accounting principle . . . . .
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income as a percent of sales . . . . . . . . . . . . . . .
Net income per share—diluted . . . . . . . . . . . . . . . .
Dividends declared per share. . . . . . . . . . . . . . . . . .
Weighted-average number of shares
outstanding—diluted (thousands) . . . . . . . . . . . .

3,418.0
755.3
2,662.7

1,087,490

17.0%
2.45
1.63

$14,645.3
3,474.2
3,025.5
4,497.0
931.1

$13,857.9 $12,582.5 $11,077.5
2,176.5
2,149.3
3,424.0
(130.0)

3,223.9
2,691.1
4,284.2
716.8

2,675.1
2,350.2
4,055.4
240.1

2,717.5
715.9
1,979.61

2,941.9
1,131.8
1,810.1

3,261.7
700.9
2,560.8

3,457.7
749.8
2,707.9

13.5%
1.81
1.54

13.1%
1.66
1.45

20.4%
2.37
1.36

24.4%
2.50
1.27

1,092,150 1,088,936 1,082,230 1,085,088

Financial Position
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,694.4
5,085.5
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,152.3
Property and equipment—net . . . . . . . . . . . . . . . . .
21,955.4
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,494.4
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,980.7
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .

$10,795.8 $12,835.8 $ 8,768.9 $ 7,804.1
5,063.5
5,293.0
19,042.0
4,358.2
8,273.6

5,716.3
7,912.5
24,580.8
5,763.5
10,791.9

5,560.8
6,539.0
21,688.3
4,687.8
9,764.8

7,593.7
7,550.9
24,867.0
4,491.9
10,919.9

Supplementary Data
Return on shareholders’ equity . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,077.8
801.8
Depreciation and amortization . . . . . . . . . . . . . . . . .
22.1%
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales per employee. . . . . . . . . . . . . . . . . . . . . . . $378,000
41,500
Number of employees . . . . . . . . . . . . . . . . . . . . . . . .
44,800
Number of shareholders of record . . . . . . . . . . . . .

24.5%
11.2%

18.2%
8.2%

17.5%
7.8%

28.4%
12.6%

35.2%
15.2%

$ 1,298.1
726.4

26.3%

$ 1,898.1
597.5
38.5%

$ 1,706.6 $ 1,130.9
493.0

548.5

21.5%

21.7%

$344,000
42,600
50,800

$311,000
44,500
52,400

$280,000 $258,000
42,900
56,200

45,000
54,600

1 Reﬂ ects the impact of a cumulative effect of a change in accounting principle in 2005 of $22.0 million, net of income taxes of $11.8 million. The diluted
earnings per share impact of this cumulative effect of a change in accounting principle was $.02. The net income per diluted share before the cumulative
effect of a change in accounting principle was $1.83. See Note 2 for additional information.

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*

This graph compares the return on Lilly stock with that of the Standard
& 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
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.

Lilly
Peer Group with Amgen
Peer Group without Amgen
S&P 500

$140

$130

$120

$110

$100

$90

$80

$70

Dec. 2001

Dec. 2002

Dec. 2003

Dec. 2004

Dec. 2005

Dec. 2006

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Notes to Consolidated Financial Statements

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)

Note 1: Summary of Signiﬁ cant Accounting Policies

Basis of presentation: The accompanying consolidated ﬁ nancial statements have been prepared in accordance
with accounting practices generally accepted in the United States (GAAP). The accounts of all wholly owned and
majority-owned subsidiaries are included in the consolidated ﬁ nancial statements. Where our ownership of con-
solidated subsidiaries is less than 100 percent, the outside shareholders’ interests are reﬂ ected in other noncur-
rent liabilities. All intercompany balances and transactions have been eliminated.

The preparation of ﬁ nancial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at
the date of the ﬁ nancial statements and during the reporting period. Actual results could differ from those esti-
mates.

All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis, that is,
based on the weighted-average number of outstanding common shares plus the effect of dilutive stock options and
other incremental shares.

Cash equivalents: We consider all highly liquid investments, with a maturity of three months or less, to be cash
equivalents. The cost of these investments approximates fair value. If items meeting this deﬁ nition are part of a
larger investment pool, they are classiﬁ ed consistent with the classiﬁ cation of the pool.

Inventories: We state all inventories at the lower of cost or market. We use the last-in, ﬁ rst-out (LIFO) method for
substantially all our inventories located in the continental United States, or approximately 46 percent of our total
inventories. Other inventories are valued by the ﬁ rst-in, ﬁ rst-out (FIFO) method. FIFO cost approximates current
replacement cost. Inventories at December 31 consisted of the following:

Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reduction to LIFO cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006

2005

$ 644.5
1,551.5
187.0
2,383.0
(112.7)
$2,270.3

$ 471.3
1,272.4
214.7
1,958.4
(80.4)
$1,878.0

Investments: Substantially all debt and marketable equity securities are classiﬁ ed as available-for-sale. Avail-
able-for-sale securities are carried at fair value with the unrealized gains and losses, net of tax, reported in other
comprehensive income. Unrealized losses considered to be other-than-temporary are recognized in earnings. Fac-
tors we consider in making this evaluation include company-speciﬁ c drivers of the decrease in stock price, status
of projects in development, near-term prospects of the issuer, the length of time the value has been depressed, and
the ﬁ nancial condition of the industry. We do not evaluate cost-method investments for impairment unless there is
an indicator of impairment. We review these investments for indicators of impairment on a regular basis. Realized
gains and losses on sales of available-for-sale securities are computed based upon speciﬁ c identiﬁ cation of the ini-
tial cost adjusted for any other-than-temporary declines in fair value. Investments in companies over which we have
signiﬁ cant inﬂ uence but not a controlling interest are accounted for using the equity method with our share of earn-
ings or losses reported in other income—net. We own no investments that are considered to be trading securities.

Risk-management instruments: Our derivative activities are initiated within the guidelines of documented cor-
porate risk-management policies and do not create additional risk because gains and losses on derivative con-
tracts offset losses and gains on the assets, liabilities, and transactions being hedged. As derivative contracts are
initiated, we designate the instruments individually as either a fair value hedge or a cash ﬂ ow hedge. Management
reviews the correlation and effectiveness of our derivatives on a quarterly basis.

For derivative contracts that are designated and qualify as fair value hedges, the derivative instrument is
marked to market with gains and losses recognized currently in income to offset the respective losses and gains

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recognized on the underlying exposure. For derivative contracts that are designated and qualify as cash ﬂ ow hedg-
es, the effective portion of gains and losses on these contracts is reported as a component of other comprehensive
income and reclassiﬁ ed into earnings in the same period the hedged transaction affects earnings. Hedge inef-
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.

We enter into foreign currency forward and option contracts to reduce the effect of ﬂ uctuating currency ex-
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 next year. These contracts are designated as cash ﬂ ow hedges of
those future transactions and the impact on earnings is included in cost of sales. We may enter into foreign curren-
cy forward contracts and currency swaps as fair value hedges of ﬁ rm commitments. Forward and option contracts
generally have maturities not exceeding 12 months.

In the normal course of business, our operations are exposed to ﬂ uctuations in interest rates. These ﬂ uc-

tuations can vary the costs of ﬁ nancing, investing, and operating. We address a portion of these risks through a
controlled program of risk management that includes the use of derivative ﬁ nancial instruments. The objective of
controlling these risks is to limit the impact of ﬂ uctuations in interest rates on earnings. Our primary interest rate
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 xed and ﬂ oating rate debt and investment posi-
tions and may enter into interest rate swaps or collars to help maintain that balance. Interest rate swaps or collars
that convert our ﬁ xed rate debt or investments to a ﬂ oating rate are designated as fair value hedges of the under-
lying instruments. Interest rate swaps or collars that convert ﬂ oating rate debt or investments to a ﬁ xed rate are
designated as cash ﬂ ow hedges. Interest expense on the debt is adjusted to include the payments made or received
under the swap agreements.

Goodwill and other intangibles: Other intangibles with ﬁ nite lives arising from acquisitions and research alliances
are amortized over their estimated useful lives, ranging from 5 to 15 years, 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 nite lives were $130.0
million and $139.6 million, respectively, at December 31, 2006 and 2005, and were included in sundry assets in the
consolidated balance sheets. Goodwill is our only intangible asset with an indeﬁ nite life. No material impairments
occurred with respect to the carrying value of our goodwill or other intangible assets in 2006, 2005, or 2004.

Property and equipment: Property and equipment is stated on the basis of cost. Provisions for depreciation of
buildings and equipment are computed generally by the straight-line method at rates based on their estimated
useful lives (12 to 50 years for buildings and 3 to 18 years for equipment). We review 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 ows to be generated by the asset to its carrying value. If an impairment is identiﬁ ed, a loss is recorded
equal to the excess of the asset’s net book value over its fair value, and the cost basis is adjusted.

At December 31, property and equipment consisted of the following:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less allowances for depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006

2005

$ 168.7
4,852.8
6,718.5
1,976.7
13,716.7
(5,564.4)
$ 8,152.3

$ 166.8
4,584.5
6,314.1
2,070.6
13,136.0
(5,223.5)
$ 7,912.5

Depreciation expense for 2006, 2005, and 2004 was $627.4 million, $577.2 million, and $495.9 million, respec-

tively. Approximately $106.7 million, $140.5 million, and $111.3 million of interest costs were capitalized as part
of property and equipment in 2006, 2005, and 2004, respectively. Total rental expense for all leases, including

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contingent rentals (not material), amounted to approximately $293.6 million, $294.4 million, and $286.8 million for
2006, 2005, and 2004, respectively. Capital leases included in property and equipment in the consolidated balance
sheets, capital lease obligations entered into, and future minimum rental commitments are not material.

Litigation and environmental liabilities: Litigation accruals and environmental liabilities and the related esti-
mated insurance recoverables are reﬂ ected on a gross basis as liabilities and assets, respectively, on our consoli-
dated balance sheets. With respect to the product liability claims currently asserted against us, we have accrued
for our estimated exposures to the extent they are both probable and estimable based on the information available
to us. We accrue for certain product liability claims incurred but not ﬁ led to the extent we can formulate a rea-
sonable estimate of their costs. We estimate these expenses based primarily on historical claims experience and
data regarding product usage. Legal defense costs expected to be incurred in connection with signiﬁ cant product
liability loss contingencies are accrued when probable and reasonably estimable. A portion of the costs associated
with defending and disposing of these suits is covered by insurance. We record receivables for insurance-related
recoveries when it is probable they will be realized. These receivables are classiﬁ ed as a reduction of the litigation
charges on the statement of income. We estimate insurance recoverables based on existing deductibles, cover-
age limits, our assessment of any defenses to coverage that might be raised by the carriers, and the existing and
projected future level of insolvencies among the insurance carriers.

Revenue recognition: We recognize revenue from sales of products at the time title of goods passes to the buyer
and the buyer assumes the risks and rewards of ownership. For more than 90 percent of our sales, this is at the
time products are shipped to the customer, typically a wholesale distributor or a major retail chain. The remaining
sales are recorded at the point of delivery. Provisions for discounts and rebates are established in the same period
the related sales are recorded.

We also generate income as a result of collaboration agreements. Revenue from copromotion services is
based upon net sales reported by our copromotion partners and, if applicable, the number of sales calls we per-
form. Initial fees we receive from the partnering of our compounds under development are amortized through the
expected product approval date. Initial fees received from out-licensing agreements that include both the sale of
marketing rights to our commercialized products and a related commitment to supply the products are gener-
ally recognized as net sales over the term of the supply agreement. We immediately recognize the full amount of
milestone payments due to us upon the achievement of the milestone event if the event is substantive, objectively
determinable, and represents an important point in the development life cycle of the pharmaceutical product.
Milestone payments earned by us are generally recorded in other income—net.

Research and development: We recognize as incurred the cost of directly acquiring assets to be used in the
research and development process that have not yet received regulatory approval for marketing and for which no
alternative future use has been identiﬁ ed. Once the product has obtained regulatory approval, we capitalize the
milestones paid and amortize them over the period beneﬁ ted. Milestones paid prior to regulatory approval of the
product are generally expensed when the event requiring payment of the milestone occurs.

Other income—net: Other income—net, consisted of the following:

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Joint venture (income) loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006

2005

2004

$ 238.1
(261.9)
(96.3)
(117.7)
$(237.8)

$ 105.2
(212.1)
(11.1)
(196.2)
$(314.2)

$ 51.6
(156.7)
79.0
(252.3)
$(278.4)

The joint venture (income) loss represents our share of the Lilly ICOS LLC joint venture results of operations,

net of income taxes. We acquired the complete ownership of the joint venture in January 2007 as a result of our
acquisition of ICOS. See Note 3 for further discussion.

Income taxes: Deferred taxes are recognized for the future tax effects of temporary differences between ﬁ nancial
and income tax reporting based on enacted tax laws and rates. Federal income taxes are provided on the portion of
the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable. We record a
liability for tax contingencies when we believe it is probable that we will be assessed and the amount of the con-

tingency can be reasonably estimated. The tax contingency reserve is adjusted for changes in facts and circum-
stances, and additional uncertainties. See Note 10 regarding the 2004 tax expense associated with the completed
repatriation of earnings reinvested outside the U.S. pursuant to the American Jobs Creations Act.

Earnings per share: We calculate basic earnings per share based on the weighted-average number of outstanding
common shares and incremental shares. We calculate 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.

Stock-based compensation: As discussed further in Note 7, we adopted Statement of Financial Accounting Stan-
dards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), effective January 1, 2005. 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 of 10 years. Performance awards are granted to ofﬁ cers and key employees and are payable in
shares of our common stock. The number of performance award shares actually issued, if any, varies depending
on the achievement of certain earnings-per-share targets. Performance awards fully vest at the end of the ﬁ scal
year of the grant. We recognize the stock-based compensation expense over the requisite service period of the
individual grantees, which generally equals the vesting period. We provide newly issued shares and treasury stock
to satisfy stock option exercises and for the issuance of performance awards.

Under our policy, all stock option awards are approved prior to the date of grant and the exercise price is
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 c grant dates scheduled in advance. With respect to option awards given to new
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 the date of hire.

Prior to January 1, 2005, we followed Accounting Principles Board (APB) Opinion 25, Accounting for Stock
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 of the underlying
stock on the date of grant, no compensation expense was recognized. However, SFAS 123R requires us to present
pro forma information as if we had accounted for our employee stock options and 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.

The following table illustrates the effect on net income and earnings per share if we had applied the fair value

recognition provisions of SFAS 123R to stock-based employee compensation.

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Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2004
$1,810.1

Add: Compensation expense for stock-based performance awards

included in reported net income, net of related tax effects. . . . . . .

34.5

Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards,
net of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(300.9)

Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,543.7

Earnings per share:
Basic, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic, pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted, pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1.67
$1.42

$1.66
$1.42

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Note 2: Implementation of New Financial Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 prescribes a recognition thresh-
old and measurement attribute for the ﬁ nancial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The Interpretation is effective for ﬁ scal years beginning after December
15, 2006; therefore, we are required to adopt this Interpretation in the ﬁ rst quarter of 2007. While we have not yet
completed our analysis, we expect the adoption of FIN 48 will not have a material impact on retained earnings, and
that we will reclassify approximately $900 million to $960 million of income taxes payable from current to noncur-
rent liabilities.

In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Deﬁ ned Beneﬁ t Pension

and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 re-
quires the recognition of the overfunded or underfunded status of a deﬁ ned beneﬁ t postretirement plan as an asset
or liability in its statement of ﬁ nancial position, the measurement of a plan’s assets and its obligations that deter-
mine its funded status as of the end of the employer’s ﬁ scal year, and the recognition of changes in that funded sta-
tus through comprehensive income in the year in which the changes occur. Additional footnote disclosures are also
required. SFAS 158 was effective December 31, 2006. See Note 12 for further discussion of the impact of adopting
this pronouncement.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, which provides interpretive guid-

ance on how the effects of carryover or reversal of prior year misstatements should be considered in quantifying a
current year misstatement. SAB 108 is effective for ﬁ scal years ending after November 15, 2006, and did not have
an impact on our consolidated ﬁ nancial statements.

In 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of

FASB Statement No. 143. FIN 47 requires us to record the fair value of a liability for conditional asset retirement
obligations in the period in which it is incurred, which is adjusted to its present value each subsequent period. In addi-
tion, we are required to capitalize a corresponding amount by increasing the carrying amount of the related long-lived
asset, which is depreciated over the useful life of the related long-lived asset. The adoption of FIN 47 on December 31,
2005 resulted in a cumulative effect of a change in accounting principle of $22.0 million, net of income taxes of
$11.8 million.

Note 3: Acquisitions

ICOS Corporation Acquisition
On January 29, 2007, we acquired all of the outstanding common stock of ICOS Corporation (ICOS), our partner in
the Lilly ICOS LLC joint venture that manufactures, markets and sells Cialis for the treatment of erectile dysfunc-
tion. The acquisition brings the full value of Cialis to us and will enable us to realize operational efﬁ ciencies in the
further development, marketing and selling of this product.

Under the terms of the agreement, each outstanding share of ICOS common stock was redeemed for $34 in
cash for an aggregate purchase price of approximately $2.3 billion, which was ﬁ nanced through borrowings. While
the allocation of the purchase price has not been ﬁ nalized, we anticipate that approximately $1.7 billion of the pur-
chase price will be allocated to the acquired intangible asset related to Cialis and approximately $300 million to ac-
quired in-process research and development (IPR&D). The intangible asset will be amortized over Cialis’ remaining
expected patent lives in each country, which range from 2015 to 2017. A deferred tax liability of approximately $700
million will be established related to the intangible asset. Approximately $800 million will be recorded as goodwill
and is not expected to be deductible for tax purposes. We will include the IPR&D as an expense in the ﬁ rst quarter
of 2007 and will include ICOS’ results of operations subsequent to the acquisition in our 2007 consolidated ﬁ nancial
statements. The IPR&D charge is not deductible for tax purposes.

Applied Molecular Evolution, Inc. Acquisition
On February 12, 2004, we acquired all of the outstanding common stock of Applied Molecular Evolution, Inc. (AME)
in a tax-free merger. Under the terms of the merger agreement, each outstanding share of AME common stock
was exchanged for our common stock or a combination of cash and our stock valued at $18. The aggregate pur-
chase price of approximately $442.8 million consisted of issuance of 4.2 million shares of our common stock val-
ued at $314.8 million, issuance of 0.7 million replacement options to purchase shares of our common stock in ex-
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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 value of $74.14, which was our average closing stock price for February 11 and
12, 2004. 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 nancial statements.

We hired independent third parties to assist in the valuation of assets that were difﬁ cult to value. Of the $442.8
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.

There are several methods that can be used to determine the estimated fair value of the acquired IPR&D. We

utilized the “income method,” which applies a probability weighting to the estimated future net cash ﬂ ows that
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 ows were then discounted to the present value using an appropriate discount rate. This
analysis was performed for each project independently. The discount rate we used in valuing the acquired IPR&D
projects was 18.75 percent.

Product Acquisitions
In January 2007, we entered into an agreement with OSI Pharmaceuticals, Inc. to acquire the rights to its com-
pound for the potential treatment of Type 2 diabetes. At the inception of this agreement, this compound was in the
development stage (Phase I clinical trials) and had no alternative future 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 rst quarter of 2007.

In 2004, we incurred an IPR&D charge of $29.9 million related to a development stage compound acquired

from Merck KGaA for a potential treatment for insomnia. This compound did not have any alternative future use.

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.

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 use, and other charges of $141.5 million, primarily related 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 $125 million (pretax) in the ﬁ rst quarter of 2007. We expect to complete these restructur-
ing activities by December 31, 2007.

In December 2005, management approved, as part of our ongoing efforts to increase productivity and reduce
our cost structure, decisions that resulted in non-cash charges of $154.6 million for the write-down of certain im-
paired assets, and other charges of $17.3 million, primarily 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 research and development equipment. The impairment charges
are necessary to adjust the carrying value of the assets to fair value.

During 2004, management approved actions designed to increase productivity, to address current challenges

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in the marketplace, and to leverage prior investments in our product portfolio. These actions affected primarily
operations in the manufacturing, research and development, and sales and marketing components and resulted
in asset impairments, severance and other related charges. As a result, we recognized asset impairment charges
of $486.3 million. We have ceased using these assets, and have disposed of or destroyed substantially all of the
assets. The impairment charges are necessary to adjust the carrying value of the assets to fair value. Other site
charges, including lease termination payments, were $12.2 million. The restructuring and other charges incurred
and expended related to the elimination of positions as a result of these actions totaled $68.5 million, including
$35.1 million of severance charges related to restructuring activities in our overseas afﬁ liates. The severance
charges consisted primarily of voluntary severance expenses.

Product Liability and Other Special Charges
As discussed further in Note 13, we have reached agreements with claimants’ attorneys 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 of $494.9 million in 2006 and $1.07 billion in 2005.

The other signiﬁ cant component of our 2004 special charges was a provision for $36.0 million for the resolu-
tion of the previously reported Evista marketing and promotional practices investigation. See Note 13 for additional
discussion.

Note 5: Financial Instruments and Investments

Financial instruments that potentially subject us to credit risk consist principally of trade receivables and interest-
bearing investments. Wholesale distributors of life-sciences products and managed care organizations account
for a substantial portion of trade receivables; collateral is generally not required. The risk associated with this
concentration is mitigated by our ongoing credit review procedures. We place substantially all our interest-bearing
investments with major ﬁ nancial institutions, in U.S. government securities, or with top-rated corporate issuers.
At December 31, 2006, our investments in debt securities were comprised of 41 percent asset-backed securities,
29 percent corporate securities, and 30 percent U.S. government securities. In accordance with documented cor-
porate policies, we limit the amount of credit exposure to any one ﬁ nancial institution or corporate issuer. We are
exposed to credit-related losses in the event of nonperformance by counterparties to ﬁ nancial instruments but do
not expect any counterparties to fail to meet their obligations given their high credit ratings.

Fair Value of Financial Instruments
A summary of our outstanding ﬁ nancial instruments and other investments at December 31 follows:

2006

2005

Carrying Amount

Fair Value

Carrying Amount

Fair Value

Short-term investments
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 781.7

Noncurrent investments
Marketable equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79.4
834.1
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88.4
Equity method and other investments . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,001.9

$ 781.7

$ 2,031.0

$ 79.4
834.1
N/A

$ 118.0
1,076.2
102.4
$ 1,296.6

$ 118.0
1,076.2
N/A

Long-term debt, including current portion. . . . . . . . . . $(3,705.2)

$(3,682.7)

$(6,484.8)

$(6,484.2)

Risk-management instruments—assets (liabilities) . .

19.7

(336.0)

We determine fair values based on quoted market values where available or discounted cash ﬂ ow analyses
(principally long-term debt). The fair value of equity method and other investments is not readily available and dis-
closure is not required. Approximately $1.2 billion of our investments in debt securities mature within ﬁ ve years.

A summary of the unrealized gains and losses (pretax) of our available-for-sale securities in other compre-

hensive income at December 31 follows:

Unrealized gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006

$43.7
10.8

2005

$52.0
15.9

The net adjustment to unrealized gains and losses (net of tax) on available-for-sale securities increased (de-
creased) other comprehensive income by $0.3 million, $(4.6) million, and $(18.2) million in 2006, 2005, and 2004,
respectively. Activity related to our available-for-sale investment portfolio was as follows:

Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gross gains on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gross losses on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,848.4
63.5
9.0

$2,048.6
25.6
7.1

$7,774.7
37.3
17.6

2006

2005

2004

During the years ended December 31, 2006, 2005, and 2004, net losses related to ineffectiveness and net loss-
es related to the portion of our risk-management hedging instruments, fair value and cash ﬂ ow hedges, excluded
from the assessment of effectiveness were not material.

We expect to reclassify an estimated $25.5 million of pretax net losses on cash ﬂ ow hedges of anticipated for-

eign currency transactions and the variability in expected future interest payments on ﬂ oating rate debt from ac-
cumulated other comprehensive loss to earnings during 2007. This assumes that short-term interest rates remain
unchanged from the prevailing rates at December 31, 2006.

F
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N
A
N
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I

A
L
S

Note 6: Borrowings

Long-term debt at December 31 consisted of the following:

4.50 to 7.13 percent notes (due 2012–2036). . . . . . . . . . . . . . . . . . . . . .
2.90 percent notes (due 2006–2008) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Floating rate extendible notes (due 2008) . . . . . . . . . . . . . . . . . . . . . .
Floating rate bonds (due 2008 and 2037) . . . . . . . . . . . . . . . . . . . . . . .
Private placement bonds (due 2007–2008) . . . . . . . . . . . . . . . . . . . . . .
6.55 percent ESOP debentures (due 2017) . . . . . . . . . . . . . . . . . . . . . .
Other, including capitalized leases . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SFAS 133 fair value adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006

2005

$1,487.4
300.0
1,000.0
400.0
266.3
91.6
109.9
50.0
3,705.2
(210.8)
$3,494.4

$1,487.4
811.4
1,500.0
1,939.2
460.7
92.6
113.0
80.5
6,484.8
(721.3)
$5,763.5

In August 2005, Eli Lilly Services, Inc. (ELSI), our indirect wholly-owned ﬁ nance subsidiary, issued $1.50 billion

of 13-month ﬂ oating rate extendible notes. The maturity date of these notes is January 1, 2008, but holders of the
notes may extend the maturity of the notes, in monthly increments, until September 1, 2010. These notes pay inter-
est at essentially a rate equivalent to LIBOR (5.34 percent at December 31, 2006). We repaid $500.0 million of the
notes in December 2006. The parent company fully and unconditionally guarantees the ELSI notes.

In September 2005, ELSI issued $1.50 billion of ﬂ oating rate bonds with a maturity date in 2008. We repaid $1.00

billion of the notes in September 2006 and the remaining $500.0 million in December 2006. The remaining $400.0 mil-
lion of ﬂ oating rate bonds outstanding at December 31, 2006 are due in 2037 and have variable interest rates at LIBOR
plus our six-month credit spread, adjusted semiannually (total of 5.46 percent at December 31, 2006). The interest was
to accumulate over the life of the bonds and be payable upon maturity. We had an option to begin periodic interest pay-
ments at any time. We exercised this option in November 2006 and paid all previously accrued interest on the bonds.

Principal and interest on the private placement bonds due in 2007 and 2008 are due semiannually over the
remaining terms of each of these notes. In conjunction with these bonds, we entered into interest rate swap agree-
ments with the same ﬁ nancial institution, which converts the ﬁ xed rate into a variable rate of interest at essentially

S
L
A

I
C
N
A
N

I
F

LIBOR over the term of the bonds.

The 6.55 percent Employee Stock Ownership Plan (ESOP) debentures are obligations of the ESOP but are
shown on the consolidated balance sheet because we guarantee them. The principal and interest on the debt are
funded by contributions from us and by dividends received on certain shares held by the ESOP. Because of the am-
ortizing feature of the ESOP debt, bondholders will receive both interest and principal payments each quarter.

The aggregate amounts of maturities on long-term debt for the next ﬁ ve years are as follows: 2007, $210.8 mil-

lion; 2008, $1.40 billion; 2009, $21.5 million; 2010, $19.4 million; and 2011, $16.0 million.

At December 31, 2006 and 2005, short-term borrowings included $8.6 million and $13.4 million, respectively,

of notes payable to banks and commercial paper. At December 31, 2006, we have $1.21 billion of unused commit-
ted bank credit facilities, $1.20 billion of which backs our commercial paper program. Compensating balances
and commitment fees are not material, and there are no conditions that are probable of occurring under which the
lines may be withdrawn.

We have converted substantially all ﬁ xed-rate debt to ﬂ oating rates through the use of interest rate swaps. The
weighted-average effective borrowing rates based on debt obligations and interest rates at December 31, 2006 and
2005, including the effects of interest rate swaps for hedged debt obligations, were 5.89 percent and 4.75 percent,
respectively.

In 2006 and 2005, cash payments of interest on borrowings totaled $299.6 million and $32.0 million, respec-
tively, net of capitalized interest. In 2004, capitalized interest exceeded cash payments of interest on borrowings,
due in large part to certain debt instruments requiring interest payments only at maturity, as previously noted.

In accordance with the requirements of SFAS 133, the portion of our ﬁ xed-rate debt obligations that is hedged
is reﬂ ected in the consolidated balance sheets as an amount equal to the sum of the debt’s carrying value plus the
fair value adjustment representing changes in fair value of the hedged debt attributable to movements in market
interest rates subsequent to the inception of the hedge.

Note 7: Stock Plans

We adopted SFAS 123 (revised 2004), Share-Based Payment (SFAS 123R), effective January 1, 2005. SFAS 123R
requires the recognition of the fair value of stock-based compensation in net income. Stock-based compensation
primarily 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 of 10 years. Performance awards are granted to ofﬁ cers and key employees and are payable
in shares of our common stock. The number of performance award shares actually issued, if any, varies depending
on the achievement of certain earnings-per-share targets. Performance awards fully vest at the end of the ﬁ scal
year of the grant. We recognize the stock-based compensation expense over the requisite service period of the
individual grantees, which generally equals the vesting period. We provide newly issued shares and treasury stock
to satisfy stock option exercises and for the issuance of performance awards.

Prior to January 1, 2005, we followed Accounting Principles Board (APB) Opinion 25, Accounting for Stock Is-
sued 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 of the underlying stock
on the date of grant, no compensation expense was recognized. See Note 1 for a calculation of our net income and
earnings per share if we had applied the fair value recognition provisions of SFAS 123R to stock-based employee
compensation in 2004.

We elected the modiﬁ ed prospective transition method for adopting SFAS 123R. Under this method, the provi-

sions of SFAS 123R apply to all awards granted or modiﬁ ed after the date of adoption. In addition, the unrecognized
expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS 123,
shall be recognized in net income in the periods after the date of adoption. We recognized stock-based compensa-
tion cost in the amount of $359.3 million, $403.5 million, and $53.0 million, in 2006, 2005, and 2004, respectively,
as well as related tax beneﬁ ts of $115.9 million, $122.9 million, and $18.5 million, respectively. The amounts for
2004 relate only to expenses for performance awards because no expense was recognized for stock options under
APB 25. In addition, after adopting SFAS 123R, we now classify tax beneﬁ ts resulting from tax deductions in excess
of the compensation cost recognized for exercised stock options as a ﬁ nancing cash ﬂ ow in the consolidated state-
ments of cash ﬂ ows rather than an operating cash ﬂ ow as under our previous disclosure.

In connection with the adoption of SFAS 123R, we reassessed the valuation methodology for stock options and
the related input assumptions. As a result, beginning with the 2005 stock option grant, we utilized a lattice-based
option valuation model for estimating the fair value of the stock options. The lattice model allows the use of a range

of assumptions related to volatility, risk-free interest rate, and employee exercise 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.

Prior to 2005, we utilized a Black-Scholes option-pricing model to estimate the fair value of the options. This
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 from the weighted-average yield 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.

The weighted-average fair values of the individual options granted during 2006, 2005, and 2004 were $15.61,

$16.06, and $26.19, respectively, determined using the following assumptions:

2.0%
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25.0%
Weighted-average volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Range of volatilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.8%–27.0%
4.6%–4.8%
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 years
Weighted-average expected life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.0%
27.8%
27.6%–30.7%
2.5%–4.5%
7 years

1.57%
35.2%
—
3.43%
7 years

2006

2005

2004

The fair values of performance awards granted in 2006, 2005, and 2004 were $56.18, $55.65, and $70.33, re-

spectively.

Stock option activity during 2006 is summarized below:

F
I

N
A
N
C
I

A
L
S

Shares of
Common Stock
Attributable to Options
(in thousands)

Weighted-Average
Exercise
Price of Options

Weighted-Average
Remaining
Contractual Term
(in years)

Aggregate
Intrinsic Value

Outstanding at January 1, 2006 . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2006 . . . . . . . . . . . . .
Exercisable at December 31, 2006. . . . . . . . . . . . . .

90,082
4,873
(1,907)
(4,238)
88,810
64,638

$69.37
56.16
34.70
69.67
69.38
70.42

4.93
3.91

$8.6
8.6

A summary of the status of nonvested shares as of December 31, 2006, and changes during the year then ended, is
presented below:

Nonvested at January 1, 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares
(in thousands)

32,539
4,873
(12,007)
(1,233)
24,172

Weighted-Average
Grant Date
Fair Value

$22.75
15.61
20.75
22.46
22.32

The intrinsic value of options exercised during 2006, 2005, and 2004 amounted to $40.8 million, $131.9 mil-
lion, and $163.8 million, respectively. The total grant date fair value of options vested during 2006, 2005, and 2004,
amounted to $249.1 million, $265.5 million, and $337.2 million, respectively. We received cash of $66.2 million,
$105.9 million, and $117.9 million from exercises of stock options during 2006, 2005, and 2004, respectively, and
recognized related tax beneﬁ ts of $11.3 million, $36.8 million, and $36.8 million during those same years.

As of December 31, 2006, the total remaining unrecognized compensation cost related to nonvested stock op-

tions amounted to $83.1 million, which will be amortized over the weighted-average remaining requisite service
period of 17 months. 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 and 1.7 million shares were issued in 2005 and 2006, respectively. Approximately

2.1 million shares are expected to be issued in 2007.

At December 31, 2006, additional options, performance awards, or restricted stock grants may be granted

under the 2002 Lilly Stock Plan for not more than 45.2 million shares.

Note 8: Other Assets and Other Liabilities

Our sundry assets include our capitalized computer software, estimated insurance recoveries from our product
litigation and environmental contingencies (Note 13), deferred tax assets, goodwill and intangible assets (Note
1), and a variety of other items. The decrease in sundry assets is primarily attributable to the decrease in prepaid
retiree health beneﬁ ts as a result of the adoption of SFAS 158 (Note 12).

Our other current liabilities include product litigation and environmental liabilities (Note 13), other taxes, and

a variety of other items. The increase in other current liabilities is caused primarily by an increase in product litiga-
tion liabilities offset by a decrease in interest rate swaps.

Our other noncurrent liabilities include product litigation and environmental liabilities (Note 13), deferred
income from our collaboration and out-licensing arrangements, and a variety of other items. The decrease in other
noncurrent liabilities is primarily attributable to a decrease in product litigation and environmental liabilities,
which is now reﬂ ected in other current liabilities, offset by an increase in deferred income from our collaboration
and out-licensing arrangements.

Note 9: Shareholders’ Equity

Changes in certain components of shareholders’ equity were as follows:

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F

Additional
Paid-in
Capital

(17.4)
110.7
53.0
13.2
349.9
3,119.4

Balance at January 1, 2004. . . . . . . . . . . . . . . . . . . . $2,610.0
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share: $1.45 . . . . . . .
Retirement of treasury shares . . . . . . . . . . . . . . . . .
Issuance of stock under employee stock plans . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . .
ESOP transactions. . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of AME . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2004 . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share: $1.54 . . . . . . .
Retirement of treasury shares . . . . . . . . . . . . . . . . .
Purchase for treasury . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of stock under employee stock plans . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . .
ESOP transactions. . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2005 . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share: $1.63 . . . . . . .
Retirement of treasury shares . . . . . . . . . . . . . . . . .
Purchase for treasury . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of stock under employee stock
6.2
plans—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
359.3
Stock-based compensation . . . . . . . . . . . . . . . . . . .
11.7
ESOP transactions. . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2006 . . . . . . . . . . . . . . . . . $3,571.9

172.9
403.5
9.7
3,323.8

(381.7)

(129.1)

Common Stock in Treasury

Retained
Earnings

Deferred
Costs—ESOP

Shares
(in thousands)

$(118.6)

952

$ 9,470.4
1,810.1
(1,555.9)

Amount

$104.2

9,724.6
1,979.6
(1,677.0)

10,027.2
2,662.7
(1,763.2)

(271)
262

(17.6)
17.2

6.7

(111.9)

943

103.8

(6,874)
6,704
161

(386.0)
377.9
8.4

5.6
(106.3)

934

104.1

(2,297)
2,145

(130.6)
122.1

128

5.8

$10,926.7

5.6
$(100.7)

910

$101.4

As of December 31, 2006, we have purchased $2.58 billion of our announced $3.0 billion share repurchase
program. We acquired approximately 2.1 million and 6.7 million shares in 2006 and 2005, respectively, under this
program.

We have 5 million authorized shares of preferred stock. As of December 31, 2006 and 2005, no preferred stock

has been issued.

We have funded an employee beneﬁ t trust with 40 million shares of Lilly common stock to provide a source of
funds to assist us in meeting our obligations under various employee beneﬁ t plans. The funding had no net impact
on shareholders’ equity as we consolidate the employee beneﬁ t trust. The cost basis of the shares held in the trust
was $2.64 billion and is shown as a reduction in shareholders’ equity, which offsets the 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 t plans in
2006, 2005, or 2004.

We have an ESOP as a funding vehicle for the existing employee savings plan. The ESOP used the proceeds of a

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 6). The 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 2017 as part of our savings plan contribution. The fair value of shares allocated each
period is recognized as compensation expense.

Under a Shareholder Rights Plan adopted in 1998, all shareholders receive, along with each common share

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 of 15 percent or more of our com-
mon stock. We may 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.

The rights plan provides that, if an Acquiring Person acquires 15 percent or more of our outstanding common
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.

Alternatively, if, in a transaction not approved by the board of directors, we are acquired in a business combi-
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 the exercise price the
number of shares of common stock of the acquiring company that have a value of two times the exercise price.
At any time after an Acquiring Person has acquired 15 percent or more but less than 50 percent of our out-
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.

F
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N
A
N
C
I

A
L
S

S
L
A

I
C
N
A
N

I
F

Note 10: Income Taxes

Following is the composition of income taxes attributable to income before cumulative effect of a change in ac-
counting principle:

Current
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted earnings to be repatriated due to change in tax law . .

Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006

2005

2004

$197.7
390.6
(25.2)
563.1

78.3
113.5
.4

—
192.2
$755.3

$ 517.4
649.8
11.6
1,178.8

89.4
(86.8)
(.5)
(465.0)
(462.9)
$ 715.9

$ 47.6
519.9
(10.6)
556.9

175.2
(74.0)
8.7
465.0
574.9
$1,131.8

Signiﬁ cant components of our deferred tax assets and liabilities as of December 31 are as follows:

Deferred tax assets
Compensation and beneﬁ ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforwards and carrybacks . . . . . . . . . . . . . . . . . . . .
Sale of intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006

2005

$ 713.4
504.4
293.2
286.9
161.3
98.0
94.6
83.2
276.2
2,511.2
(493.7)

$ 396.6
637.8
391.5
218.7
235.7
92.4
45.5
166.0
414.8
2,599.0
(455.7)

Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,017.5

2,143.3

Deferred tax liabilities
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid employee beneﬁ ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(701.2)
(485.8)
(237.0)
(1,424.0)

(702.6)
(1,145.6)
(236.8)
(2,085.0)

Deferred tax assets—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 593.5

$ 58.3

At December 31, 2006, we had other carryforwards, including net operating loss carryforwards, for inter-
national and U.S. income tax purposes of $34.7 million: $29.1 million will expire within ﬁ ve years; $5.6 million of
the carryforwards will never expire. The primary component of the remaining portion of the deferred tax asset
for other carryforwards is related to net operating losses for state income tax purposes that are fully reserved.
We also have tax credit carryforwards and carrybacks of $286.9 million available to reduce future income taxes;
$80.7 million will be carried back and $12.0 million of the tax credit carryforwards will never expire. The remain-
ing portion of the tax credit carryforwards is related to state tax credits that are fully reserved. The reduction in
the deferred tax liability for prepaid employee beneﬁ ts was a result of the adoption of SFAS 158 in 2006 (Note 12).
Domestic and Puerto Rican companies contributed approximately 18 percent, 43 percent, and 6 percent in
2006, 2005, and 2004, respectively, to consolidated income before income taxes and cumulative effect of a change

in accounting principle. We have a subsidiary operating in Puerto Rico under a tax incentive grant that begins to
expire at the end of 2007. We have a new tax incentive grant, not yet in effect, that will last for a period of at least
10 years from its inception date.

The American Jobs Creation Act of 2004 (AJCA) created a temporary incentive for U.S. corporations to repa-

triate undistributed income earned abroad by providing an 85 percent dividends received deduction for certain
dividends from controlled foreign corporations in 2005. We recorded a related tax liability of $465.0 million as of
December 31, 2004, and subsequently repatriated $8.00 billion in incentive dividends, as deﬁ ned in the AJCA, dur-
ing 2005. At December 31, 2006, we had an aggregate of $5.7 billion of unremitted earnings of foreign subsidiaries
that have been 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.

Cash payments of income taxes totaled $864.0 million, $1.78 billion, and $487.0 million in 2006, 2005, and 2004,
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.

Following is a reconciliation of the effective income tax rate applicable to income before income taxes and

cumulative effect of a change in accounting principle:

United States federal statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct)

International operations, including Puerto Rico . . . . . . . . . . . . . . .
Additional repatriation due to change in tax law . . . . . . . . . . . . . . .
Non-deductible acquired in-process research and development
General business credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006

35.0%

(6.7)
—
—
(1.4)
(4.8)
22.1%

2005

35.0%

(4.8)
—
—
(1.5)
(2.4)
26.3%

2004

35.0%

(19.1)
15.8
4.3
(1.3)
3.8
38.5%

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Note 11: Earnings Per Share

The following is a reconciliation of the denominators used in computing earnings per share before cumulative ef-
fect of a change in accounting principle:

2006

2005

2004

(Shares in thousands)

Income before cumulative effect of a change in accounting
principle available to common shareholders . . . . . . . . . . . . . . . . .

$2,662.7

$2,001.6

$1,810.1

Basic earnings per share
Weighted-average number of common shares outstanding,

including incremental shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,086,239

1,088,754

1,083,887

Basic earnings per share before cumulative effect of a change

in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2.45

$1.84

$1.67

Diluted earnings per share
Weighted-average number of common shares outstanding . . . . .
Stock options and other incremental shares. . . . . . . . . . . . . . . . . .
Weighted-average number of common shares

1,085,337
2,153

1,088,115
4,035

1,083,677
5,259

outstanding—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,087,490

1,092,150

1,088,936

Diluted earnings per share before cumulative effect of a

change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2.45

$1.83

$1.66

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Note 12: Retirement Beneﬁ ts

On December 31, 2006, we adopted the recognition and disclosure provisions of SFAS 158. SFAS 158 requires that
we recognize the funded status (i.e., the difference between the fair value of plan assets and the projected beneﬁ t
obligation for our deﬁ ned beneﬁ t pension plans and the accumulated postretirement beneﬁ t obligation for our
retiree health beneﬁ t plans) of our deﬁ ned beneﬁ t pension plans and retiree health beneﬁ t plans in the December
31, 2006 balance sheet, with a corresponding adjustment to accumulated other comprehensive loss, net of tax.
The adjustment to accumulated other comprehensive loss at adoption represents the net unrecognized actuarial
losses and unrecognized prior service costs, which were previously netted against the plans’ funded status in our
consolidated balance sheet pursuant to the prior accounting rules. The amounts in other comprehensive loss will
be subsequently recognized as net periodic pension cost pursuant to the prior accounting rules for amortizing
such amounts, which were not changed by SFAS 158. Further, actuarial gains and losses that arise in subsequent
periods and are not recognized as net periodic pension cost in the same period will be recognized as a component
of other comprehensive income (loss). Those amounts will be subsequently recognized as a component of net
periodic cost on the same basis as the amounts recognized in accumulated other comprehensive income (loss) at
adoption of SFAS 158.

The incremental effects of adopting the provisions of SFAS 158 on our consolidated balance sheet at December

31, 2006 are presented in the following table. The adoption of SFAS 158 had no effect on our consolidated state-
ment of income for the year ended December 31, 2006, or for any prior period presented, and it will not affect our
operating results in future periods. Had we not been required to adopt SFAS 158 at December 31, 2006, we would
have recognized an additional minimum liability pursuant to the prior accounting rules. The effect of recognizing
the additional minimum liability is included in the table below in the column labeled “Prior to Adopting SFAS 158.”

Prepaid pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued retirement beneﬁ t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Prior to
Adopting
SFAS 158

$ 2,380.8
2,341.2
23,570.6
1,844.1
905.8
782.5
11,001.2
200.0
12,569.4

Effect of
Adopting
SFAS 158

As Reported at
December 31,
2006

$(1,289.3)
(325.9)
(1,615.2)
12.7
681.1
(720.3)
(26.5)
(1,588.7)
(1,588.7)

$ 1,091.5
2,015.3
21,955.4
1,856.8
1,586.9
62.2
10,974.7
(1,388.7)
10,980.7

The following represents our weighted-average assumptions as of December 31:

(Percents)

Deﬁ ned Beneﬁ t Pension Plans

2006

2005

Retiree Health Beneﬁ t Plans
2005
2006

Weighted-average assumptions as of December 31
Discount rate for beneﬁ t obligation . . . . . . . . . . . . . . . . . .
Discount rate for net beneﬁ t costs . . . . . . . . . . . . . . . . . . .
Rate of compensation increase for beneﬁ t obligation . . .
Rate of compensation increase for net beneﬁ t costs . . . .
Expected return on plan assets for net beneﬁ t costs . . .

5.7
5.8
4.6
4.7
9.0

5.8
5.9
4.7
5.6
9.0

6.0
6.0
—
—
9.0

In evaluating the expected return on plan assets, we have considered our historical assumptions compared

with actual results, an analysis of current market conditions, asset allocations, and the views of leading ﬁ nancial
advisers and economists. Our plan assets in our U.S. deﬁ ned beneﬁ t pension and retiree health plans comprise
approximately 84 percent of our worldwide beneﬁ t plan assets. Including the investment losses due to overall
market conditions in 2001 and 2002, our 10- and 20-year annualized rates of return on our U.S. deﬁ ned beneﬁ t
pension plans and retiree health beneﬁ t plan were approximately 9.4 percent and 10.9 percent, respectively, as of
December 31, 2006. Health-care-cost trend rates were assumed to increase at an annual rate of 8 percent in 2007,
decreasing 1 percent per year to 6 percent in 2009 and thereafter.

We used a measurement date of December 31 to develop the change in beneﬁ t obligation, change in plan as-

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sets, funded status, and amounts recognized in the consolidated balance sheets at December 31 for our deﬁ ned
beneﬁ t pension and retiree health beneﬁ t plans, which were as follows:

Change in beneﬁ t obligation
Beneﬁ t obligation at beginning of year . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beneﬁ ts paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction in discount rate, foreign currency exchange

Deﬁ ned Beneﬁ t Pension Plans

2006

2005

Retiree Health Beneﬁ t Plans
2005
2006

$5,628.4
280.0
343.5
64.9
(291.2)

$5,190.7
297.4
296.2
261.7
(270.4)

$1,673.6
72.2
97.9
(25.0)
(82.5)

$1,388.4
61.5
80.7
64.8
(77.2)

rate changes, and other adjustments . . . . . . . . . . . . . .

454.7
Beneﬁ t obligation at end of year . . . . . . . . . . . . . . . . . . . . . 6,480.3

(147.2)
5,628.4

4.5
1,740.7

155.4
1,673.6

Change in plan assets
Fair value of plan assets at beginning of year . . . . . . . . . . 5,482.4
913.1
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . .
221.3
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beneﬁ ts paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(287.9)
Foreign currency exchange rate changes and other

4,797.8
651.9
375.0
(268.4)

965.7
103.0
171.1
(82.5)

adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year . . . . . . . . . . . . . . .

190.1
6,519.0

(73.9)
5,482.4

—
1,157.3

745.4
102.8
194.7
(77.2)

—
965.7

Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized prior service cost (beneﬁ t) . . . . . . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38.7
1,788.6
63.4
$1,890.7

(146.0)
2,237.9
71.4
$2,163.3

(583.4)
931.8
(85.7)
$ 262.7

(707.9)
1,089.1
(101.3)
$ 279.9

Amounts recognized in the consolidated balance sheet

consisted of

Prepaid pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,091.5
Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued retirement beneﬁ t . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss before

—
(43.4)
(1,009.4)

$2,419.6

—
(36.6)
(530.9)

$ —
—
(5.9)
(577.5)

$ —

377.2
—
(97.3)

income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,852.0
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,890.7

311.2
$2,163.3

846.1
$ 262.7

—

$ 279.9

Included in accumulated other comprehensive loss at December 31, 2006 are the following amounts that have

not yet been recognized in net periodic pension cost: unrecognized net actuarial losses of $1.79 billion and un-
recognized prior service costs of $63.4 million related to our deﬁ ned beneﬁ t pension plans and unrecognized net
actuarial losses of $931.8 million and unrecognized prior service beneﬁ ts of $85.7 million related to our retiree
health beneﬁ t plans. In 2007, we expect to recognize from accumulated other comprehensive loss as components
of net periodic beneﬁ t cost $119.7 million of unrecognized net actuarial loss and $7.7 million of unrecognized prior
service cost related to our deﬁ ned beneﬁ t pension plans and $92.3 million of unrecognized net actuarial loss and
$15.6 million of unrecognized prior service beneﬁ t related to our retiree health beneﬁ t plans. We do not expect any
plan assets to be returned to us in 2007.

The following beneﬁ t payments, which reﬂ ect expected future service, as appropriate, are expected to be paid

as follows:

Deﬁ ned Beneﬁ t
Pension Plans

Retiree Health
Beneﬁ t Plans

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012–2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 292.5
300.3
307.7
316.7
326.7
1,847.0

$ 85.2
90.7
95.9
101.2
107.3
615.8

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The total accumulated beneﬁ t obligation for our deﬁ ned beneﬁ t pension plans was $5.65 billion and $4.88 bil-
lion at December 31, 2006 and 2005, respectively. The projected beneﬁ t obligation and fair value of the plan assets
for the deﬁ ned beneﬁ t pension plans with projected beneﬁ t obligations in excess of plan assets were $2.23 billion
and $1.22 billion, respectively, as of December 31, 2006, and $1.51 billion and $870.3 million, respectively, as of
December 31, 2005.

Net pension and retiree health beneﬁ t expense included the following components:

Deﬁ ned Beneﬁ t
Pension Plans
2005

2006

Retiree Health
Beneﬁ t Plans

2004

2006

2005

2004

Components of net periodic beneﬁ t cost
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . .
Recognized actuarial loss . . . . . . . . . . . . . . . . . .
Net periodic beneﬁ t cost . . . . . . . . . . . . . . . . . . .

$280.0
343.5
(494.8)
8.3
149.6

$297.4 $238.8
286.4
296.2
(402.2)
(445.9)
7.3
7.6
99.7
106.7
$286.6 $262.0 $230.0

$ 72.2
97.9
(89.9)
(15.6)
107.9
$172.5

$ 61.5
80.7
(75.6)
(15.6)
86.6
$137.6

$47.6
62.5
(60.2)
(15.6)
57.8
$92.1

If the health-care-cost trend rates were to be increased by one percentage point each future year, the Decem-

ber 31, 2006, accumulated postretirement beneﬁ t obligation would increase by 11.0 percent and the aggregate of
the service cost and interest cost components of the 2006 annual expense would increase by 16.4 percent. A one-
percentage-point decrease in these rates would decrease the December 31, 2006, accumulated postretirement
beneﬁ t obligation by 9.9 percent and the aggregate of the 2006 service cost and interest cost by 14.1 percent.

We have deﬁ ned contribution savings plans that cover our eligible employees worldwide. The purpose of these

deﬁ ned contribution plans is generally to provide additional ﬁ nancial security during retirement by providing em-
ployees with an incentive to save. Our contributions to the plan are based on employee contributions and the level
of our match. Expenses under the plans totaled $106.5 million, $96.1 million, and $75.5 million for the years 2006,
2005, and 2004, respectively.

We provide certain other postemployment beneﬁ ts primarily related to disability beneﬁ ts and accrue for the
related cost over the service lives of employees. Expenses associated with these beneﬁ t plans in 2006, 2005, and
2004 were not signiﬁ cant.

Our U.S. deﬁ ned beneﬁ t pension and retiree health beneﬁ t plan investment allocation strategy currently com-

prises approximately 85 percent to 95 percent growth investments and 5 percent to 15 percent ﬁ xed-income invest-
ments. Within the growth investment classiﬁ cation, the plan asset strategy encompasses equity and equity-like
instruments that are expected to represent approximately 75 percent of our plan asset portfolio of both public and
private market investments. The largest component of these equity and equity-like instruments is public equity
securities that are well diversiﬁ ed and invested in U.S. and international small-to-large companies. The remaining
portion of the growth investment classiﬁ cation is represented by other alternative growth investments.

Our deﬁ ned beneﬁ t pension plan and retiree health plan asset allocations as of December 31 are as follows:

(Percents)

Percentage of
Pension Plan Assets

2006

2005

Percentage of
Retiree Health Plan Assets
2006

2005

Asset Category
Equity securities and equity-like instruments . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78
9
1
12
100

75
10
1
14
100

80
10
—
10
100

80
11
—
9
100

In 2007, we expect to contribute approximately $80 million to our deﬁ ned beneﬁ t pension plans to satisfy mini-

mum funding requirements for the year. In addition, we expect to contribute approximately $80 million of additional
discretionary funding in 2007 to our deﬁ ned beneﬁ t plans. We also expect to contribute approximately $75 million
of discretionary funding to our postretirement health beneﬁ t plans during 2007.

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Note 13: Contingencies

We are a party to various legal actions, government investigations, and environmental proceedings. The most
signiﬁ cant of these are described below. While it is not possible to predict or determine the outcome of these mat-
ters, we believe that, except as speciﬁ cally noted below, the resolution of all such matters will not have a material
adverse effect on our consolidated ﬁ nancial position or liquidity, but could possibly be material to our consolidated
results of operations in any one accounting period.

Patent Ligitation
We are engaged in the following patent litigation matters brought pursuant to procedures set out in the Hatch-
Waxman Act (the Drug Price Competition and Patent Term Restoration Act of 1984):
• Dr. Reddy’s Laboratories, Ltd. (Reddy), Teva Pharmaceuticals, and Zenith Goldline Pharmaceuticals, Inc., which
was subsequently acquired by Teva Pharmaceuticals (together, Teva), each submitted Abbreviated New Drug
Applications (ANDAs) seeking permission to market generic versions of Zyprexa prior to the expiration of our
relevant U.S. patent (expiring in 2011) and alleging that this patent was invalid or not enforceable. We ﬁ led lawsuits
against these companies in the U.S. District Court for the Southern District of Indiana, seeking a ruling that the
patent is valid, enforceable and being infringed. The district court ruled in our favor on all counts on April 14, 2005,
and on December 26, 2006, that ruling was upheld by the Court of Appeals for the Federal Circuit. Reddy and Teva
are seeking a review of that decision. We are conﬁ dent that Reddy’s and Teva’s claims are without merit and we
expect to prevail. An unfavorable outcome would have a material adverse impact on our consolidated results of
operations, liquidity, and ﬁ nancial position.

• Barr Laboratories, Inc. (Barr), submitted an ANDA in 2002 seeking permission to market a generic version of

Evista prior to the expiration of our relevant U.S. patents (expiring in 2012-2017) and alleging that these patents
are invalid, not enforceable, or not infringed. In November 2002, we ﬁ led a lawsuit against Barr in the U.S. District
Court for the Southern District of Indiana, seeking a ruling that these patents are valid, enforceable, and being
infringed by Barr. Teva has also submitted an ANDA seeking permission to market a generic version of Evista. In
June 2006, we ﬁ led a lawsuit against Teva in the U.S. District Court for the Southern District of Indiana, seeking a
ruling that our relevant U.S. patents are valid, enforceable, and being infringed by Teva. No trial date has been set
in either case. We believe that Barr’s and Teva’s claims are without merit and we expect to prevail. However, it is
not possible to predict or determine the outcome of this litigation, and accordingly, we can provide no assurance
that we will prevail. An unfavorable outcome could have a material adverse impact on our consolidated results of
operations, liquidity, and ﬁ nancial position.

• Sicor Pharmaceuticals, Inc. (Sicor), a subsidiary of Teva, submitted ANDAs in November 2005 seeking permission to
market generic versions of Gemzar prior to the expiration of our relevant U.S. patents (expiring in 2010 and 2013),
and alleging that these patents are invalid. In February 2006, we ﬁ led a lawsuit against Sicor in the U.S. District
Court for the Southern District of Indiana, seeking a ruling that these patents are valid and are being infringed
by Sicor. In response to our lawsuit, Sicor ﬁ led a declaratory judgment action in the U.S. District Court for the
Central District of California. Sicor also moved to dismiss our lawsuit in Indiana, asserting that the Indiana court
lacks jurisdiction. The California action has been dismissed. In September 2006, we received notice that Mayne
Pharma (USA) Inc. (Mayne) ﬁ led a similar ANDA for Gemzar. In October 2006, we ﬁ led a lawsuit against Mayne in
the Southern District of Indiana in response to the ANDA ﬁ ling. In response to our lawsuit, Mayne ﬁ led a motion
to our lawsuit, asserting that the Indiana court lacks jurisdiction. In October 2006, we received notice that Sun
Pharmaceutical Industries Inc. (Sun) ﬁ led an ANDA for Gemzar, alleging that the 2013 patent is invalid. In December
2006, we ﬁ led a lawsuit against Sun in the Southern District of Indiana in response to Sun’s ANDA ﬁ ling. We expect
to prevail in litigation involving our Gemzar patents and believe that claims made by these generic companies that
our patents are not valid are without merit. However, it is not possible to predict or determine the outcome of this
litigation, and accordingly, we can provide no assurance that we will prevail. An unfavorable outcome could have a
material adverse impact on our consolidated results of operations, liquidity, and ﬁ nancial position.

In June 2002, we were sued by Ariad Pharmaceuticals, Inc., the Massachusetts Institute of Technology, the
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 ce
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

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royalty to all U.S. sales of Xigris and Evista from the date of issuance of the patent through the date of trial. We are
seeking to have the jury verdict overturned by the trial court judge, and if unsuccessful, will appeal the decision to
the Court of Appeals for the Federal Circuit. In addition, a separate bench trial with the U.S. District Court of Massa-
chusetts was held the week of August 7, 2006, on our contention that the patent is unenforceable and impermissibly
covers natural processes. No decision has been rendered. We believe that these allegations are without legal merit,
that we will ultimately prevail on these issues and therefore that the likelihood of any monetary damages is remote.

Government Investigations
In March 2004, the ofﬁ ce of the U.S. Attorney for the Eastern District of Pennsylvania advised us that it had com-
menced a civil investigation related to our U.S. marketing and promotional practices, including our communica-
tions with physicians and remuneration of physician consultants and advisors, with respect to Zyprexa, Prozac, and
Prozac Weekly. In October 2005, the U.S. Attorney’s ofﬁ ce advised that it is also conducting an inquiry regarding cer-
tain rebate agreements we entered into with a pharmacy beneﬁ t manager covering Axid, Evista, Humalog, Humulin,
Prozac, and Zyprexa. The inquiry includes a review of Lilly’s Medicaid best price reporting related to the product
sales covered by the rebate agreements. We are cooperating with the U.S. Attorney in these investigations, includ-
ing providing a broad range of documents and information relating to the investigations. In June 2005, we received
a subpoena from the ofﬁ ce of the Attorney General, Medicaid Fraud Control Unit, of the State of Florida, seeking
production of documents relating to sales of Zyprexa and our marketing and promotional practices with respect to
Zyprexa. In September 2006, we received a subpoena from the California Attorney General’s ofﬁ ce seeking produc-
tion of documents related to our efforts to obtain and maintain Zyprexa’s status on California’s formulary, market
ing and promotional practices with respect to Zyprexa, and remuneration of health care providers. Beginning in
August 2006, we have received civil investigative demands or subpoenas from the attorneys general of a number of
states. Most of these requests are now part of a multistate investigative effort being coordinated by an executive
committee of attorneys general. We are aware that 23 states are participating in this joint effort, and we anticipate
that additional states will join the investigation. These attorneys general are seeking a broad range of Zyprexa
documents, including documents relating to sales, marketing and promotional practices, and remuneration of
health care providers. It is possible that other Lilly products could become subject to investigation and that the
outcome of these matters could include criminal charges and ﬁ nes, penalties, or other monetary or nonmonetary
remedies. We cannot predict or determine the outcome of these matters or reasonably estimate the amount or
range of amounts of any ﬁ nes or penalties that might result from an adverse outcome. It is possible, however, that
an adverse outcome could have a material adverse impact on our consolidated results of operations, liquidity, and
ﬁ nancial position. We have implemented and continue to review and enhance a broadly based compliance program
that includes comprehensive compliance-related activities designed to ensure that our marketing and promotional
practices, physician communications, remuneration of health care professionals, managed care arrangements, and
Medicaid best price reporting comply with applicable laws and regulations.

Product Liability and Related Litigation
We have been named as a defendant in a large number of Zyprexa product liability lawsuits in the United States
and have been notiﬁ ed of many other claims of individuals who have not ﬁ led suit. The lawsuits and unﬁ led claims
(together the “claims”) allege a variety of injuries from the use of Zyprexa, with the majority alleging that the
product caused or contributed to diabetes or high blood-glucose levels. The claims seek substantial compensatory
and punitive damages and typically accuse us of inadequately testing for and warning about side effects of Zyprexa.
Many of the claims also allege that we improperly promoted the drug. Almost all of the federal lawsuits are part of
a Multi-District Litigation (MDL) proceeding before The Honorable Jack Weinstein in the Federal District Court for
the Eastern District of New York (MDL No. 1596).

Since June 2005, we have entered into agreements with various claimants’ attorneys involved in U.S. Zyprexa

product liability litigation to settle a substantial majority of the claims. The agreements cover a total of approxi-
mately 28,500 claimants, including a large number of previously ﬁ led lawsuits and other asserted claims. The two
primary settlements were as follows:
• In June 2005, we reached an agreement in principle (and in September 2005 a ﬁ nal agreement) to settle more than

8,000 claims for $690.0 million plus $10.0 million to cover administration of the settlement. That settlement is
being administered by special settlement masters appointed by Judge Weinstein.

• In January 2007, we reached agreements with a number of plaintiffs’ attorneys to settle more than 18,000 claims

for approximately $500 million.

The 2005 settlement totaling $700.0 million was paid during 2005. The January 2007 settlements were re-
corded in other current liabilities in our December 31, 2006 consolidated balance sheet and will be paid in the ﬁ rst

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quarter of 2007.

The U.S. Zyprexa product liability claims not subject 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 certiﬁ cation in which the members of the purported class are
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 ed for residents
of Quebec. The allegations in the Canadian actions are similar to those in the litigation pending in the U.S.

We are prepared to continue our vigorous defense of Zyprexa in all remaining cases. We currently anticipate

that trials in seven cases in the Eastern District of New York will begin in the second quarter of 2007.

We have insurance coverage for a portion of our Zyprexa product liability claims exposure. The third-party
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 we will prevail.

In addition, we have been named as a defendant in numerous other product liability lawsuits involving pri-
marily diethylstilbestrol (DES) and thimerosal. The majority of these claims are covered by insurance, subject to
deductibles and coverage limits.

In the second quarter of 2005, we recorded a net pretax charge of $1.07 billion for product liability matters.
The charge took into account our estimated recoveries from our insurance coverage related to these matters. The
charge covered the following:
• The cost of the June 2005 Zyprexa settlements described above; and
• Reserves for product liability exposures and defense costs regarding the then-known and expected product liability
claims to the extent we could formulate a reasonable estimate of the probable number and cost of the claims. A
substantial majority of those exposures and costs were related to then-known and expected Zyprexa claims.

As a result of the January 2007 settlements discussed above, we incurred a pretax charge of $494.9 million in

the fourth quarter of 2006. The charge covered the following:
• The cost of the January 2007 Zyprexa settlements; and
• Reserves for product liability exposures and defense costs regarding the then-known and expected Zyprexa product

liability claims to the extent we could formulate a reasonable estimate of the probable number and cost of the claims.

In December 2004, we were served with two lawsuits brought in state court in Louisiana on behalf of the

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
and are now part of the MDL proceedings in the Eastern District of New York. In these actions, the Department
of Health and Hospitals seeks to recover the costs it paid for Zyprexa through Medicaid and other drug-beneﬁ t
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 led by the states of Alaska, West Virginia, New Mexico, and
Mississippi in the courts of the respective states.

In 2005, two lawsuits were ﬁ led in the Eastern District of New York purporting to be nationwide class actions

on behalf of all consumers and third-party payors, excluding governmental entities, which have made or will make
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-
ages, and attorneys’ fees. Two additional lawsuits were ﬁ led in the Eastern District of New York in 2006 on similar
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.

We cannot predict with certainty the additional number of lawsuits and claims that may be asserted. 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 nancial position.

Because of the nature of pharmaceutical products, it is possible that we could become subject to large num-
bers of product liability and related claims for other products in the future. In the past few years, we have experi-
enced difﬁ culties in obtaining product liability insurance due to a very restrictive insurance market. Therefore, for
substantially all of our currently marketed products, we have been and expect that we will continue to be 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.

Environmental Matters
Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as
Superfund, we have been designated as one of several potentially responsible parties with respect to fewer than
10 sites. Under Superfund, each responsible party may be jointly and severally liable for the entire amount of
the cleanup. We also continue remediation of certain of our own sites. We have accrued for estimated Superfund
cleanup costs, remediation, and certain other environmental matters. This takes into account, as applicable, avail-
able information regarding site conditions, potential cleanup methods, estimated costs, and the extent to which
other parties can be expected to contribute to payment of those costs. We have reached a settlement with our li-
ability insurance carriers providing for coverage for certain environmental liabilities.

Note 14: Other Comprehensive Income (Loss)

The accumulated balances related to each component of other comprehensive income (loss) were as follows:

Foreign
Currency
Translation
Gains

Unrealized
Gains
on
Securities

Minimum
Pension
Liability
Adjustment

Adoption
of
SFAS 158

Effective
Portion of
Cash Flow
Hedges

Accumulated
Other
Comprehensive
Loss

Beginning balance at January 1, 2006 . . . . $ 18.0
Other comprehensive income (loss) . . . . .
542.4
Balance at December 31, 2006 . . . . . . . . . . $560.4

$19.7
0.3
$20.0

$(202.9) $ —

(11.7)

(1,588.7)
$(214.6) $(1,588.7)

$(255.4) $ (420.6)
(968.1)
$(165.8) $(1,388.7)

89.6

The amounts above are net of income taxes. The income taxes associated with the adoption of SFAS 158 (Note

12) were a beneﬁ t of $777.5 million. The income taxes related to the other components of comprehensive income
were not signiﬁ cant, as income taxes were not provided for foreign currency translation.

The unrealized gains (losses) on securities is net of reclassiﬁ cation adjustments of $16.9 million, $9.1 mil-
lion, and $9.8 million, net of tax, in 2006, 2005, and 2004, respectively, for net realized gains on sales of securities
included in net income. The effective portion of cash ﬂ ow hedges is net of reclassiﬁ cation adjustments of $2.3 mil-
lion, $3.8 million, and $23.1 million, net of tax, in 2006, 2005, and 2004, respectively, for realized losses on foreign
currency options and $17.1 million, $21.4 million, and $15.6 million, net of tax, in 2006, 2005, and 2004, respective-
ly, for interest expense on interest rate swaps designated as cash ﬂ ow hedges.

Generally, the assets and liabilities of foreign operations are translated into U.S. dollars using the current
exchange rate. For those operations, changes in exchange rates generally do not affect cash ﬂ ows; therefore,
resulting translation adjustments are made in shareholders’ equity rather than in income.

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Management’s Reports

Management’s Report for Financial Statements—Eli Lilly and Company and Subsidiaries
Management of Eli Lilly and Company and subsidiaries is responsible for the accuracy, integrity, and fair presentation
of the ﬁ nancial statements. The statements have been prepared in accordance with generally accepted accounting prin-
ciples in the United States and include amounts based on judgments and estimates by management. In management’s
opinion, the consolidated ﬁ nancial statements present fairly our ﬁ nancial position, results of operations, and cash ﬂ ows.
In addition to the system of internal accounting controls, we maintain a code of conduct (known as The Red
Book) that applies to all employees worldwide, requiring proper overall business conduct, avoidance of conﬂ icts of
interest, compliance with laws, and conﬁ dentiality of proprietary information. The Red Book is reviewed on a periodic
basis with employees worldwide, and all employees are required to report suspected violations. A hotline number is
published in The Red Book to enable employees to report suspected violations anonymously. Employees who report
suspected violations are protected from discrimination or retaliation by the company. In addition to The Red Book,
the CEO, the COO, and all ﬁ nancial management must sign a ﬁ nancial code of ethics, which further reinforces their
ﬁ duciary responsibilities.

The ﬁ nancial statements have been audited by Ernst & Young LLP, an independent registered public accounting
ﬁ rm. Their responsibility is to examine our consolidated ﬁ nancial statements in accordance with generally accepted
auditing standards of the Public Company Accounting Oversight Board (United States). Ernst & Young’s opinion with
respect to the fairness of the presentation of the statements (see opinion on page 54) is included in our annual re-
port. Ernst & Young reports directly to the audit committee of the board of directors.

Our audit committee includes four nonemployee members of the board of directors, all of whom are indepen-
dent from our company. The committee charter, which is published in the proxy statement, outlines the members’
roles and responsibilities and is consistent with enacted corporate reform laws and regulations. It is the audit com-
mittee’s responsibility to appoint an independent registered public accounting ﬁ rm subject to shareholder ratiﬁ ca-
tion, approve both audit and nonaudit services performed by the independent registered public accounting ﬁ rm, and
review the reports submitted by the ﬁ rm. The audit committee meets several times during the year with manage-
ment, the internal auditors, and the independent public accounting ﬁ rm to discuss audit activities, internal controls,
and ﬁ nancial reporting matters, including reviews of our externally published ﬁ nancial results. The internal auditors
and the independent registered public accounting ﬁ rm have full and free access to the committee.

We are dedicated to ensuring that we maintain the high standards of ﬁ nancial accounting and reporting that we

have established. We are committed to providing ﬁ nancial information that is transparent, timely, complete, rel-
evant, and accurate. Our culture demands integrity and an unyielding commitment to strong internal practices and
policies. Finally, we have the highest conﬁ dence in our ﬁ nancial reporting, our underlying system of internal con-
trols, and our people, who are objective in their responsibilities and operate under a code of conduct and the highest
level of ethical standards.

Management’s Report on Internal Control Over Financial Reporting—Eli Lilly and Company and Subsidiaries
Management of Eli Lilly and Company and subsidiaries is responsible for establishing and maintaining adequate in-
ternal control over ﬁ nancial reporting as deﬁ ned in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934. We have global ﬁ nancial policies that govern critical areas, including internal controls, ﬁ nancial account-
ing and reporting, ﬁ duciary accountability, and safeguarding of corporate assets. Our internal accounting control
systems are designed to provide reasonable assurance that assets are safeguarded, that transactions are executed
in accordance with management’s authorization and are properly recorded, and that accounting records are ad-
equate for preparation of ﬁ nancial statements and other ﬁ nancial information. A staff of internal auditors regularly
monitors, on a worldwide basis, the adequacy and effectiveness of internal accounting controls. The general auditor
reports directly to the audit committee of the board of directors.

We conducted an evaluation of the effectiveness of our internal control over ﬁ nancial reporting based on the
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
ﬁ nancial reporting were effective as of December 31, 2006. However, because of its inherent limitations, internal
control over ﬁ nancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The internal control over ﬁ nancial reporting has been assessed by Ernst & Young LLP. Their responsibility is
to evaluate management’s assessment and evidence about whether internal control over ﬁ nancial reporting was
designed and operating effectively. Ernst & Young’s report with respect to the effectiveness of internal control over
ﬁ nancial reporting is included on page 55 of our annual report.

Sidney Taurel
Chairman of the Board and Chief Executive Ofﬁ cer

John C. Lechleiter, Ph.D.
President and Chief Operating Ofﬁ cer

Derica W. Rice
Senior Vice President and Chief Financial Ofﬁ cer

February 9, 2007

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Eli Lilly and Company

We have audited the accompanying consolidated balance sheets of Eli Lilly and Company and subsidiaries as of
December 31, 2006 and 2005, and the related consolidated statements of income, cash ﬂ ows, and comprehensive
income for each of the three years in the period ended December 31, 2006. These ﬁ nancial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these ﬁ nancial state-
ments based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the ﬁ nancial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the ﬁ nancial statements. An audit also includes assessing the
accounting principles used and signiﬁ cant estimates made by management, as well as evaluating the overall ﬁ nan-
cial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the ﬁ nancial statements referred to above present fairly, in all material respects, the consoli-
dated ﬁ nancial position of Eli Lilly and Company and subsidiaries at December 31, 2006 and 2005, and the consoli-
dated results of their operations and their cash ﬂ ows for each of the three years in the period ended December 31,
2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Eli Lilly and Company and subsidiaries’ internal control over ﬁ nancial report-
ing as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 9, 2007
expressed an unqualiﬁ ed opinion thereon.

As discussed in Notes 2 and 7 to the ﬁ nancial statements, in 2005 Eli Lilly and Company and subsidiaries
adopted new accounting pronouncements for asset retirement obligations and stock-based compensation. As
discussed in Note 12 to the ﬁ nancial statements, in 2006 Eli Lilly and Company and subsidiaries adopted a new ac-
counting pronouncement for deﬁ ned beneﬁ t pension and other postretirement plans.

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Indianapolis, Indiana
February 9, 2007

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Eli Lilly and Company

We have audited management’s assessment, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting, that Eli Lilly and Company and subsidiaries maintained effective internal control
over ﬁ nancial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated
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 effective internal control
over ﬁ nancial reporting and for its assessment of the effectiveness of internal control over ﬁ nancial reporting. Our
responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the
company’s internal control over ﬁ nancial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over ﬁ nancial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over ﬁ nancial reporting, evaluating management’s assess-
ment, testing and evaluating the design and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A company’s internal control over ﬁ nancial reporting is a process designed to provide reasonable assurance
regarding the reliability of ﬁ nancial reporting and the preparation of ﬁ nancial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over ﬁ nancial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reﬂ ect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of ﬁ nancial statements in accor-
dance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide rea-
sonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the ﬁ nancial statements.

Because of its inherent limitations, internal control over ﬁ nancial reporting may not prevent or detect mis-

statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that con-
trols may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.

In our opinion, management’s assessment that Eli Lilly and Company and subsidiaries maintained effective
internal control over ﬁ nancial reporting as of December 31, 2006, is fairly stated, in all material respects, based on
the COSO criteria. Also, in our opinion, Eli Lilly and Company and subsidiaries maintained, in all material respects,
effective internal control over ﬁ nancial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the 2006 consolidated ﬁ nancial statements of Eli Lilly and Company and subsidiaries and our re-
port dated February 9, 2007, expressed an unqualiﬁ ed opinion thereon.

Indianapolis, Indiana
February 9, 2007

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Notice of 2007 Annual Meeting and Proxy Statement

March 5, 2007

Dear Shareholder:

You are cordially invited to attend our annual meeting of shareholders on Monday, April 16, 2007, at the Lilly Center
Auditorium, Lilly Corporate Center, Indianapolis, Indiana, at 11:00 a.m. EDT.

The notice of meeting and proxy statement that follow describe the business we will consider at the meeting.

Your vote is very important. I urge you to vote by mail, by telephone, or on the Internet in order to be certain your
shares are represented at the meeting, even if you plan to attend.

Please note our procedures for admission to the meeting described on page 60.
I look forward to seeing you at the meeting.

Sidney Taurel
Chairman of the Board and Chief Executive Ofﬁ cer

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5656

Notice of Annual Meeting of Shareholders

April 16, 2007

The annual meeting of shareholders of Eli Lilly and Company will be held at the Lilly Center Auditorium, Lilly Cor-
porate Center, Indianapolis, Indiana, on Monday, April 16, 2007, at 11:00 a.m. EDT for the following purposes:

• to elect four directors of the company to serve three-year terms
• to ratify the appointment by the audit committee of Ernst & Young LLP as principal independent auditors for the

year 2007

• to approve amendments to the articles of incorporation to provide for the annual election of directors
• to reapprove performance goals for the company’s 2002 Lilly Stock Plan
• to consider and vote on a shareholder proposal requesting that the board of directors report on the feasibility of

extending the company’s animal care and use policy to contract laboratories

• to consider and vote on a shareholder proposal requesting that the board of directors report on international

outsourcing of animal research

• to consider and vote on a shareholder proposal requesting that the board of directors establish a policy

separating the roles of chairman and chief executive ofﬁ cer

• to consider and vote on a shareholder proposal requesting that the company amend its articles of incorporation

to allow shareholders to amend the company’s bylaws by majority vote

• to consider and vote on a shareholder proposal requesting that the board of directors adopt a simple majority

vote standard for certain matters other than the election of directors.

Shareholders of record at the close of business on February 15, 2007, will be entitled to vote at the meeting

and at any adjournment of the meeting.

Attendance at the meeting will be limited to shareholders, those holding proxies from shareholders, and
invited guests from the media and ﬁ nancial community. A page at the back of this proxy statement contains an
admission ticket. If you plan to attend the meeting, please bring this ticket with you.

This combined proxy statement and annual report to shareholders and the proxy are being mailed on or about

March 5, 2007.

By order of the board of directors,

James B. Lootens
Secretary

March 5, 2007

Indianapolis, Indiana

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General Information

Why did I receive this proxy statement?
The board of directors of Eli Lilly and Company is soliciting proxies to be voted at the annual meeting of sharehold-
ers (the annual meeting) to be held on Monday, April 16, 2007, and at any adjournment of the annual meeting. When
the company asks for your proxy, we must provide you with a proxy statement that contains certain information
speciﬁ ed by law.

What will the shareholders vote on at the annual meeting?
Nine items:

• election of directors
• ratiﬁ cation of the appointment of principal independent auditors
• amending the company’s articles of incorporation to allow for annual election of directors
• reapproving performance goals for the company’s stock plan
• a shareholder proposal on extending the company’s animal care and use policy to contract laboratories
• a shareholder proposal on international outsourcing of animal research
• a shareholder proposal on separating the roles of chairman and chief executive ofﬁ cer
• a shareholder proposal on amending the company’s articles of incorporation
• a shareholder proposal on adopting a simple majority vote standard for matters other than election of directors.

Will there be any other items of business on the agenda?
We do not expect any other items of business because the deadline for shareholder proposals and nominations
has already passed. Nonetheless, in case there is an unforeseen need, the accompanying proxy gives discretion-
ary authority to the persons named on the proxy with respect to any other matters that might be brought before the
meeting. Those persons intend to vote that proxy in accordance with their best judgment.

Who is entitled to vote?
Shareholders as of the close of business on February 15, 2007 (the record date) may vote at the annual meeting.
You have one vote for each share of common stock you held on the record date, including shares:

• held directly in your name as the shareholder of record
• held for you in an account with a broker, bank, or other nominee
• attributed to your account in the Lilly Employee 401(k) Plan (the 401(k) plan).

What constitutes a quorum?
A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the annual meet-
ing. As of the record date, 1,134,034,234 shares of company common stock were issued and outstanding.

How many votes are required for the approval of each item?
There are differing vote requirements for the various proposals.

• The four nominees for director receiving the most votes will be elected. Abstentions and instructions to withhold
authority to vote for one or more of the nominees will result in those nominees receiving fewer votes but will not
count as votes against a nominee.

• The appointment of principal independent auditors, the management proposal regarding performance goals,

and the shareholder proposals will be approved if the votes cast for the proposal exceed those cast against the
proposal. Abstentions will not be counted either for or against the proposal.

• The management proposal to amend the articles of incorporation requires the vote of 80 percent of the

outstanding shares. For this item, abstentions and broker nonvotes have the same effect as a vote against the
proposal.

Broker nonvotes. If your shares are held by a broker, the broker will ask you how you want your shares to be voted.
If you give the broker instructions, your shares will be voted as you direct. If you do not give instructions, one of two
things can happen, depending on the type of proposal. For the election of directors and the ratiﬁ cation of auditors,
the broker may vote your shares in its discretion. For all other proposals, the broker may not vote your shares at
all. When that happens, it is called a “broker nonvote.”

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How do I vote by proxy?
If you are a shareholder of record, you may vote your proxy by any one of the following methods.

By mail. Sign and date each proxy card you receive and return it in the prepaid envelope. Sign your name exactly as
it appears on the proxy. If you are signing in a representative capacity (for example, as an attorney-in-fact, execu-
tor, administrator, guardian, trustee, or the ofﬁ cer or agent of a corporation or partnership), please indicate your
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, not the minor. If the stock 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 cation of the appointment
of the independent auditors, for the management proposals on amending the articles of incorporation and reap-
proving performance goals for the company’s stock plan, and against the shareholder proposals.

Note that if you previously elected to receive these materials electronically, you did not receive a proxy card.
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 calling 317-433-5112. Please make sure 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 telephone. Shareholders in the United States, Puerto Rico, and Canada may vote by telephone by following the
instructions on the enclosed proxy card or, if you received these materials electronically, by following the instruc-
tions in the e-mail message that notiﬁ ed you of their availability. Voting by telephone has the same effect as voting
by mail. If you vote by telephone, do not return your proxy card. Telephone voting will be available until 11:59 p.m.
EDT April 15, 2007.

By Internet. You may vote online at www.proxyvote.com. Follow the instructions on the enclosed proxy card or, if
you received these materials electronically, the instructions in the e-mail message that notiﬁ ed you of their avail-
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 available until 11:59 p.m. EDT April 15, 2007.

You have the right to revoke your proxy at any time before the meeting by (1) notifying the company’s secretary

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.

How do I vote in person?
If you are a shareholder of record, you may vote your shares in person at the meeting. However, we encourage you
to vote by proxy card, by telephone, or on the Internet even if you plan to attend the meeting.

How do I vote my shares in the 401(k) plan?
You may instruct 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 many shares in the 401(k) plan can I vote?
You may vote all 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:

• shares credited to the accounts of participants who do not return their voting instructions (except for a

small number of shares from a prior stock ownership plan, which can be voted only on the directions of the
participants to whose accounts the shares are credited)

• shares held in the plan that are not yet credited to individual participants’ accounts.

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All participants are named ﬁ duciaries under the terms of the 401(k) plan and under the Employee Retirement
Income Security Act (ERISA) for the limited purpose of voting shares credited to their accounts and the portion of
undirected shares to which their vote applies. Under ERISA, ﬁ duciaries are required to act prudently in making vot-
ing decisions.

If you do not want to have your vote applied to the undirected shares, you should check the box marked “I de-

cline.” Otherwise, the trustee will automatically apply your voting preferences to the undirected shares proportion-
ally with all other participants who elected to have their votes applied in this manner.

What happens if I do not vote my 401(k) plan shares?
Your shares will be voted by other plan participants who have elected to have their voting preferences applied pro-
portionally to all shares for which voting instructions are not otherwise received.

What does it mean if I receive more than one proxy card?
It means that you hold shares in more than one account. To ensure that all your shares are voted, sign and return
each card. Alternatively, if you vote by telephone or on the Internet, you will need to vote once for each proxy card
and voting instruction card you receive.

Who tabulates the votes?
The votes are tabulated by an independent inspector of election, IVS Associates, Inc.

What should I do if I want to attend the annual meeting?
All shareholders as of the record date may attend by presenting the admission ticket that appears at the end of this
proxy statement. Please ﬁ ll it out and bring it with you to the meeting. The meeting will be held at the Lilly Cen-
ter Auditorium. Please use the Lilly Center entrance to the south of the fountain at the intersection of Delaware
and McCarty streets. You will need to pass through security, including a metal detector. Present your ticket to the
usher at the meeting.

Parking will be available on a ﬁ rst-come, ﬁ rst-served basis in the garage indicated on the map on page 111.
If you have questions about admittance or parking, you may call 317-433-5112.

How do I contact the board of directors?

You can send written communications to one or more members of the board, addressed to:

Presiding Director, Board of Directors
Eli Lilly and Company
c/o Corporate Secretary
Lilly Corporate Center
Indianapolis, Indiana 46285

All such communications will be forwarded to the relevant director(s), except for solicitations or other matters

unrelated to the company.

How do I submit a shareholder proposal for the 2008 annual meeting?
The company’s 2008 annual meeting is scheduled for April 21, 2008. If a shareholder wishes to have a proposal
considered for inclusion in next year’s proxy statement, he or she must submit the proposal in writing so that we
receive it by November 6, 2007. Proposals should be addressed to the company’s corporate secretary, Lilly Corpo-
rate Center, Indianapolis, Indiana 46285. In addition, the company’s bylaws provide that any shareholder wishing to
propose any other business at the annual meeting must give the company written notice by November 6, 2007. That
notice must provide certain other information as described in the bylaws. Copies of the bylaws are available online
at http://investor.lilly.com/bylaws.cfm.

Does the company offer an opportunity to receive future proxy materials electronically?
Yes. If you are a shareholder of record or a member of the 401(k) plan, you may, if you wish, receive future proxy
statements and annual reports online. If you elect this feature, you will receive an e-mail message notifying you
when the materials are available along with a web address for viewing the materials and instructions for voting by
telephone or on the Internet. If you have more than one account, you may receive separate e-mail notiﬁ cations for
each account.

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You may sign up for electronic delivery in two ways:

• If you vote online as described above, you may sign up for electronic delivery at that time.
• You may sign up at any time by visiting http://proxyonline.lilly.com.

If you received these materials electronically, you do not need to do anything to continue receiving materials

electronically in the future.

If you hold your shares in a brokerage account, you may also have the opportunity to receive proxy materials

electronically. Please follow the instructions of your broker.

What are the beneﬁ ts of electronic delivery?
Electronic delivery reduces the company’s printing and mailing costs. It is 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 of proxy materials.

What are the costs of electronic delivery?
The company charges nothing for electronic delivery. You may, of course, incur the usual expenses associated with
Internet access, such as telephone charges or charges from your Internet service provider.

May I change my mind later?
Yes. You may discontinue electronic delivery at any time. For more information, call 317-433-5112.

What is “householding”?
We have 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 of these shareholders notiﬁ es us that they wish to continue receiving individu-
al copies. This procedure saves printing and postage costs by reducing duplicative mailings.

Shareholders who participate in householding will continue to receive separate proxy cards. Householding

will not affect dividend check mailings.

Beneﬁ cial shareholders can request information about householding from their banks, brokers, or other hold-

ers of record.

What if I want to receive a separate copy of the annual report and proxy statement?
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
us at 317-433-5112 or write to: Householding Department, 51 Mercedes Way, Edgewood, New York 11717. We will
deliver the requested documents to you promptly upon your request.

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Board of Directors

Directors’ Biographies

Class of 2007
The following four directors’ terms will expire at this year’s annual meeting. Each of these directors has been
nominated and is standing for election to serve another term that will expire in 2010. See page 96 of this proxy
statement for more information.

Age 65

Sir Winfried Bischoff
Chairman, Citigroup Europe
Sir Winfried Bischoff has served as chairman, Citigroup Europe, since April 2000. From 1995
to 2000, he was chairman of Schroders, plc. He joined the Schroder Group in 1966 and held
a number of positions there, including chairman of J. Henry Schroder Co. and group chief ex-
ecutive of Schroders, plc. He is a nonexecutive director of The McGraw-Hill Companies, Inc.,
and Land Securities plc.

Director since 2000

Age 64

Director since 2005

J. Michael Cook
Retired Chairman and Chief Executive Ofﬁ cer, Deloitte and Touche LLP
Mr. Cook served as chairman and chief executive ofﬁ cer of Deloitte and Touche LLP from
1989 until his retirement in 1999. He joined Deloitte, Haskins & Sells in 1964 and served as
chairman and chief executive ofﬁ cer from 1986 through 1989. Mr. Cook is a member of the
Advisory Council of the Public Company Accounting Oversight Board and is a trustee of The
Scripps Research Institute. He serves on the boards of Comcast Corporation and Interna-
tional Flavors & Fragrances Inc. He is chairman of the Accountability Advisory Council to
the Comptroller General of the United States. He was a member of the National Association
of Corporate Directors Blue Ribbon Panel on Corporate Governance and was named the
62nd member of the Accounting Hall of Fame in 1999. He is past president of the Institute of
Outstanding Directors.

Director since 1995

Age 61
Franklyn G. Prendergast, M.D., Ph.D.
Edmond and Marion Guggenheim Professor of Biochemistry and Molecular Biology and
Professor of Molecular Pharmacology and Experimental Therapeutics, Mayo Medical
School; Director, Mayo Clinic Center for Individualized Medicine; and Director Emeritus,
Mayo Clinic Cancer Center
Dr. Prendergast is the Edmond and Marion Guggenheim Professor of Biochemistry and
Molecular Biology and Professor of Molecular Pharmacology and Experimental Thera-
peutics at Mayo Medical School and the director of the Center for Individualized Medicine.
He has held several other teaching positions at the Mayo Medical School since 1975. Dr.
Prendergast serves on the board of trustees of the Mayo Foundation and the Mayo Clinic
Board of Governors.

Age 57

Director since 1995

Kathi P. Seifert
Retired Executive Vice President, Kimberly-Clark Corporation
Ms. Seifert served as executive vice president for Kimberly-Clark Corporation until June
2004. She joined Kimberly-Clark in 1978 and served in several capacities in connection with
both the domestic and international consumer products businesses, most recently leading
the team that develops and manages global plans for branding and product positioning, R&D
programs, and capital investment for personal care products. She also oversaw Kimberly-
Clark’s U.S. and Canadian sales forces. Prior to joining Kimberly-Clark, Ms. Seifert held
management positions at Procter & Gamble, Beatrice Foods, and Fort Howard Paper Com-
pany. She is chair of Pinnacle Perspectives, LLC. Ms. Seifert serves on the boards of Super-
valu Inc.; Revlon Consumer Products Corporation; Lexmark International, Inc.; Appleton
Papers Inc.; the U.S. Fund for UNICEF; and the Fox Cities Performing Arts Center.

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Class of 2008
The following four directors will continue in ofﬁ ce until 2008.

Age 66

Director since 2000

George M.C. Fisher
Retired Chairman of the Board and Chief Executive Ofﬁ cer, Eastman Kodak Company
Mr. Fisher served as chairman of the board of Eastman Kodak Company from 1993 to Decem-
ber 2000. He also served as chief executive ofﬁ cer from 1993 to January 2000 and as presi-
dent from 1993 until 1996. Prior to joining Kodak, he was an executive ofﬁ cer of Motorola, Inc.,
serving as chairman and chief executive ofﬁ cer from 1990 to October 1993, and president and
chief executive ofﬁ cer from 1988 to 1990. Mr. Fisher is a senior advisor for Kohlberg Kravis
Roberts & Company, and a director of General 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.

Age 65

Director since 1995

Alfred G. Gilman, M.D., Ph.D.
Executive Vice President for Academic Affairs and Provost, The University of Texas Southwest-
ern Medical Center; Dean, The University of Texas Southwestern Medical School; and Regental
Professor of Pharmacology, The University of Texas Southwestern Medical Center
Dr. Gilman has served as executive vice president for academic affairs and provost of The
University of Texas Southwestern Medical Center and dean of The University of Texas South-
western Medical School since 2005 and professor of pharmacology at The University of Texas
Southwestern Medical Center since 1981. He holds the Raymond and Ellen Willie Distinguished
Chair in Molecular Neuropharmacology, the Nadine and Tom Craddick 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 in 1995. Dr. Gilman was on the faculty of the University
of Virginia School of Medicine from 1971 to 1981 and was named a professor of pharmacology
there in 1977. He is a director of Regeneron Pharmaceuticals, Inc. Dr. Gilman was a recipient of
the Nobel Prize in Physiology or Medicine in 1994.

Age 63

Director since 1987

Karen N. Horn, Ph.D.
Retired President, Private Client Services, and Managing Director, Marsh, Inc.
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 Trust Company;
chair and chief executive ofﬁ cer of Bank One, Cleveland, N.A.; president of the Federal Reserve
Bank of Cleveland; treasurer of Bell of Pennsylvania; and vice president of First National Bank
of Boston. Ms. Horn serves as director of T. Rowe Price 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.

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Age 53

Director since 2005

John C. Lechleiter, Ph.D.
President and Chief Operating Ofﬁ cer
Dr. Lechleiter has served as president and chief operating ofﬁ cer of the company since October
2005. He joined Lilly in 1979 as 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 in 1994. In 1996, he was named vice president for
development and regulatory affairs. Dr. Lechleiter 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, Dr. Lechleiter 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
Children’s Museum of Indianapolis and as a member of the Dean’s External Advisory Board at the
Indiana University School of Medicine.

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Class of 2009
The following four directors will continue in ofﬁ ce until 2009.

Age 67

Director since 2002

Martin S. Feldstein, Ph.D.
President and Chief Executive Ofﬁ cer, National Bureau of Economic Research, and George
F. Baker Professor of Economics, Harvard University
Dr. Feldstein is president and chief executive ofﬁ cer of the National Bureau of Economic Re-
search and the George F. Baker Professor of Economics at Harvard University. He became
an assistant professor at Harvard in 1967 and an associate professor in 1968. From 1982
through 1984, he served as chairman of the Council of Economic Advisers and President
Ronald Reagan’s chief economic adviser. He is a member of the American Philosophical
Society, a corresponding fellow of the British Academy, a fellow of the Econometric Society,
and a fellow of the National Association for Business Economics. Dr. Feldstein is a member
of the executive committee of the Trilateral Commission and a director of the Council on
Foreign Relations; American International Group, Inc.; and Economic Studies, Inc. He is a
member of the American Academy of Arts and Sciences and past president of the American
Economic Association.

Age 47

Director since 2005

J. Erik Fyrwald
Group Vice President, DuPont Agriculture & Nutrition
Mr. Fyrwald has been group vice president of DuPont Agriculture & Nutrition since 2003.
He was previously vice president and general manager of DuPont’s nutrition and health
businesses, which included The Solae Company, DuPont Qualicon, Liqui-Box, and DuPont
Food Industry Solutions. Mr. Fyrwald joined DuPont in 1981 as a production engineer, and
held a variety of sales and management positions in a number of areas. In 1990, he became
the leader of the DuPont Engineering Polymers and DuPont™ Butacite® businesses for the
Asia Paciﬁ c region, a position he held until 1994. He was named leader of the DuPont Nylon
Plastics business for the Americas until 1996, when he became head of global sales and
marketing for engineering polymers. In 1998, he was appointed vice president of corpo-
rate plans and business development and then vice president of e-commerce. Mr. Fyrwald
serves on the boards of the Biotechnology Industry Organization (BIO); CropLife Internation-
al President’s Advisory Group; Des Moines Art Center; 8th Continent L.L.C.; and The Solae
Company.

Age 60

Director since 2002

Ellen R. Marram
President, The Barnegat Group LLC
Ms. Marram is president of The Barnegat Group LLC, a ﬁ rm that provides business advisory
services. She was a managing director at North Castle Partners, LLC from 2000 to 2005
and is currently an advisor to the ﬁ rm. Prior to joining North Castle, she served as the chief
executive ofﬁ cer of a start-up B2B exchange for the food and beverage industry. From 1993
through 1998, Ms. Marram was president and chief executive ofﬁ cer of Tropicana and the
Tropicana Beverage Group. From 1988 to 1993, she was president and chief executive of-
ﬁ cer of the Nabisco Biscuit Company, an operating unit of Nabisco, Inc.; from 1987 to 1988,
she was president of Nabisco’s Grocery Division; and from 1970 to 1986, she held a series
of marketing positions at Nabisco/Standard Brands, Johnson & Johnson, and Lever Broth-
ers. Ms. Marram is a member of the board of directors of Ford Motor Company and The New
York Times Company as well as several private companies. She serves on the boards of The
New York-Presbyterian Hospital, Lincoln Center Theater, Families and Work Institute, and
Citymeals-on-Wheels.

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Age 58

Director since 1991

Sidney Taurel
Chairman of the Board and Chief Executive Ofﬁ cer
Mr. Taurel has been the company’s chief executive ofﬁ cer since July 1998 and chairman of
the board since January 1999. He also served as president from February 1996 through
September 2005. He joined the company in 1971 and has held management positions in
the company’s international operations based in São Paulo, Vienna, Paris, and London. Mr.
Taurel served as president of Eli Lilly International Corporation from 1986 to 1991, executive
vice president of the pharmaceutical division from 1991 to 1993, and executive vice president
of the company from 1993 to 1996. He is a member 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 of the board of overseers of the Columbia Business School, a trustee at the Indianapolis
Museum of Art, a director of the RCA Tennis Championships, 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 cer of the French
Legion of Honor.

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Highlights of the Company’s Corporate Governance Guidelines

The board of directors has established guidelines that it follows in matters of corporate governance. The following
summary provides highlights of those guidelines. A complete copy of the guidelines is available online at http://
investor.lilly.com/guidelines.cfm or in paper form upon request to the company’s corporate secretary.

I. Role of the Board
The directors are elected by the shareholders to oversee the actions and results of the company’s management.
Their responsibilities include:

• providing general oversight of the business
• approving corporate strategy
• approving major management initiatives
• providing oversight of legal and ethical conduct
• overseeing the company’s management of signiﬁ cant business risks
• selecting, compensating, and evaluating directors
• evaluating board processes and performance
• selecting, compensating, evaluating, and, when necessary, replacing the chief executive ofﬁ cer, and

compensating other executive ofﬁ cers

• ensuring that a succession plan is in place for all senior executives.

II. Composition of the Board
Mix of Independent Directors and Ofﬁ cer-Directors
There should always be a substantial majority (75 percent or more) of independent directors. The chief executive
ofﬁ cer should be a board member. Other ofﬁ cers may, from time to time, be board members, but no ofﬁ cer other
than the chief executive ofﬁ cer should expect to be elected to the board by virtue of his or her ofﬁ ce.

Selection of Director Candidates
The board is responsible for selecting candidates for board membership and for establishing the criteria to be
used in identifying potential candidates. The board delegates the screening process to the directors and corporate
governance committee. For more information on the director nomination process, including the current selection
criteria, see Directors and Corporate Governance Committee Matters on pages 74–75.

Independence Determinations
The board annually determines the independence of directors based on a review by the directors and corporate
governance committee. No director is considered independent unless the board has determined that he or she has
no material relationship with the company, either directly or as a partner, shareholder, or ofﬁ cer of an organization
that has a material relationship with the company. Material relationships can include commercial, industrial, bank-
ing, consulting, legal, accounting, charitable, and familial relationships, among others. To evaluate the materiality
of any such relationship, the board has adopted categorical independence standards consistent with the New York
Stock Exchange listing guidelines.

Speciﬁ cally, a director is not considered independent if (i) the director or an immediate family member is a
current partner of Lilly’s independent auditor (currently Ernst & Young LLP); (ii) the director is a current employee
of such ﬁ rm; (iii) the director has an immediate family member who is a current employee of such ﬁ rm and who
participates in the ﬁ rm’s audit, assurance, or tax compliance (but not tax planning) practice; or (iv) the director or
immediate family member was within the last three years (but is no longer) a partner or employee of such ﬁ rm and
personally worked on the listed company’s audit within that time.

In addition, a director is not considered independent if any of the following relationships existed within the

previous three years:

• a director who is an employee of Lilly, or whose immediate family member is an executive ofﬁ cer of Lilly.

Temporary service by an independent director as interim chairman or chief executive ofﬁ cer will not disqualify
the director from being independent following completion of that service.

• a director who receives any direct compensation from Lilly other than the director’s normal director
compensation, or whose immediate family member receives more than $100,000 per year in direct
compensation from Lilly other than for service as a non-executive employee.

• a director who is employed (or whose immediate family member is employed as an executive ofﬁ cer) by another

company where any Lilly executive ofﬁ cer serves on that company’s compensation committee.

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• a director who is employed by, who is a 10 percent shareholder of, or whose immediate family member is an

executive ofﬁ cer of a company that makes payments to or receives payments from Lilly for property or services
that exceed the greater of $1 million or 2 percent of that company’s gross revenues in a single ﬁ scal year.

• a director who is an executive ofﬁ cer of a nonproﬁ t organization that receives grants or contributions from Lilly
in a single ﬁ scal year exceeding the greater of $1 million or 2 percent of that organization’s gross revenues in a
single ﬁ scal year.

Members of the audit, compensation, and directors and corporate governance committees must meet all ap-
plicable independence tests of the New York Stock Exchange, Securities and Exchange Commission, and Internal
Revenue Service.

In February 2007, the directors and corporate governance committee reviewed directors’ responses to a
questionnaire asking about their relationships with the company (and those of their immediate family members)
and other potential conﬂ icts of interest, as well as material provided by management related to transactions,
relationships, or arrangements between the company and the directors or parties related to the directors. The
committee determined that all 10 non-employee directors listed below are independent, and that the members of
the audit, compensation, and directors and corporate governance committees also meet the independence tests
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 none of the
10 directors listed below has had during the last three years (i) any of the relationships listed above or (ii) any other
material relationship with the company that would compromise his or her independence. The table below includes
a description of categories or types of transactions, relationships, or arrangements considered by the board (in ad-
dition to those listed above) in reaching its determination that the directors are independent.

Name

Independent

Transactions/Relationships/Arrangements

Sir Winfried Bischoff

Mr. Cook

Dr. Feldstein

Mr. Fisher

Mr. Fyrwald

Dr. Gilman

Ms. Horn

Ms. Marram

Dr. Prendergast

Ms. Seifert

Yes

Commercial banking, capital markets, and indenture trustee relationships between Lilly and various Citigroup
banks—immaterial

None

Lilly grants and contributions to Harvard University and the National Bureau of Economic Research—immaterial

None

Lilly’s purchase of DuPont chemicals—immaterial

Lilly’s grants and contributions to the University of Texas Southwestern Medical Center—immaterial

None

Lilly grants and contributions to Mayo Clinic, Mayo Medical School, and Mayo Foundation—immaterial

None

Director Tenure
Subject to the company’s charter documents, the governance guidelines establish the following expectations for
director tenure:

• A company ofﬁ cer-director, including the chief executive ofﬁ cer, will resign from the board at the time he or she

retires or otherwise ceases to be an active employee of the company.

• Nonemployee directors will retire from the board not later than the annual meeting of shareholders that follows

their seventy-second birthday.

• Directors may stand for reelection even though the board’s retirement policy would prevent them from

completing a full three-year term.

• A nonemployee director who retires or changes principal job responsibilities will offer to resign from the board.

The directors and corporate governance committee will assess the situation and recommend to the board
whether to accept the resignation.

Voting for Directors
votes “withheld” from his or
In an uncontested election, any nominee for director who receives a greater number of
her election than votes “for” such election (a “majority withheld vote”) shall promptly tender his or her resignation
following certiﬁ cation of the shareholder vote. The directors and corporate governance committee will consider
the resignation offer and recommend to the board whether to accept it. The board will act on the committee’s rec-
ommendation within 90 days following certiﬁ cation of the shareholder vote. Board action on the matter will require
the approval of a majority of the independent directors.

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The company will disclose the board’s decision on a Form 8-K furnished to the Securities and Exchange
Commission within four business days after the decision, including a full explanation of the process by which the
decision was reached and, if applicable, the reasons why the board rejected the directors’ resignation. If the resig-
nation is accepted, the directors and corporate governance committee will recommend to the board whether to ﬁ ll
the vacancy or reduce the size of the board.

Any director who tenders his or her resignation under this provision will not participate in the committee or
board deliberations regarding whether to accept the resignation offer. If each member of the directors and corporate
governance committee receives a majority withheld vote at the same election, then the independent directors who did
not receive a majority withheld vote will appoint a committee amongst themselves to consider the resignation offers
and recommend to the board whether to accept them.

III. Director Compensation and Equity Ownership
The directors and corporate governance committee annually reviews board compensation. Any recommendations
for changes are made to the full board by the committee.

Directors should hold meaningful equity ownership positions in the company; accordingly, a signiﬁ cant portion

of overall director compensation is in the form of company equity.

IV. Key Responsibilities of the Board
Selection of Chairman and Chief Executive Ofﬁ cer; Succession Planning
The board customarily combines the roles of chairman and chief executive ofﬁ cer, believing this generally provides
the most efﬁ cient and effective leadership model for the company. The board anticipates that, in certain occasional
circumstances, and particularly during relatively short periods of leadership transition, these roles could be as-
signed to two different persons for a period of time. The presiding director recommends to the board an appropri-
ate process by which a new chairman and chief executive ofﬁ cer will be selected.

The independent directors are responsible for overseeing succession and management development pro-
grams for senior leadership. The chief executive ofﬁ cer develops and maintains a process for advising the board on
succession planning for the chief executive ofﬁ cer and other key leadership positions. He or she reviews this plan
with the independent directors at least annually.

Evaluation of Chief Executive Ofﬁ cer
The presiding director leads the independent directors annually in assessing the performance of the chief execu-
tive ofﬁ cer. The results of this review are discussed with the chief executive ofﬁ cer and considered by the compen-
sation committee in establishing his or her compensation for the next year.

Corporate Strategy
Once each year, the board devotes an extended meeting to an update from management regarding the strategic is-
sues and opportunities facing the company, allowing the board an opportunity to provide direction for the corporate
strategic plan. Throughout the year, signiﬁ cant corporate strategy decisions are brought to the board for approval.

Code of Ethics
The board approved the company’s code of ethics, which complies with the requirements of the New York Stock
Exchange and Securities and Exchange Commission. This code is set out in:

• The Red Book, a comprehensive code of ethical and legal business conduct applicable to all employees

worldwide and to our board of directors

• the company’s Code of Ethical Conduct for Lilly Financial Management, a supplemental code for our chief

executive ofﬁ cer, chief operating ofﬁ cer, and all members of ﬁ nancial management that recognizes the unique
responsibilities of those individuals in assuring proper accounting, ﬁ nancial reporting, internal controls, and
ﬁ nancial stewardship.

Both documents are available online at http://investor.lilly.com/code_business_conduct.cfm or in paper form

upon request to the company’s corporate secretary.

The audit committee and public policy and compliance committee assist in the board’s oversight of compliance

programs with respect to matters covered in the code of ethics.

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V. Functioning of the Board
Executive Session of Directors
The independent directors meet alone in executive session at every regularly scheduled board meeting. In addition,
at least twice a year, the independent directors meet in executive session with the chief executive ofﬁ cer.

Presiding Director
The board appoints a presiding director from among the independent directors (currently Ms. Horn). The presiding
director:

• leads the board’s process for selecting and evaluating the chief executive ofﬁ cer;
• presides at all meetings of the board at which the chairman is not present, including executive sessions of

the independent directors unless the directors decide that, due to the subject matter of the session, another
independent director should preside;

• serves as a liaison between the chairman and the independent directors;
• generally approves information sent to the board and meeting agendas and schedules; and
• has the authority to call meetings of the independent directors.

Conﬂ icts of Interest
Occasionally a director’s business or personal relationships may give rise to an interest that conﬂ icts, or appears
to conﬂ ict, with the interests of the company. Directors must disclose to the company all relationships that create a
conﬂ ict or an appearance of a conﬂ ict. The board, after consultation with counsel, takes appropriate steps to ensure
that all directors voting on an issue are disinterested. In appropriate cases, the affected director will be excused
from discussions on the issue.

To avoid any conﬂ ict or appearance of a conﬂ ict, board decisions on certain matters of corporate governance

are made solely by the independent directors. These include executive compensation and the selection, evaluation,
and removal of the chief executive ofﬁ cer.

Review and Approval of Transactions with Related Persons
The board has adopted a policy and procedures for review, approval and monitoring of transactions involving the com-
pany and “related persons” (directors and executive ofﬁ cers or their immediate family members, or shareholders own-
ing ﬁ ve percent or greater of the company’s outstanding stock). The policy covers any related person transaction that
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).

Policy

• Related person transactions must be approved by the board or by a committee of the board consisting solely of

independent directors, who will approve the transaction only if they determine that it is in the best interests of the
company. In considering the transaction, the board or committee will consider all relevant factors, including as
applicable (i) the company’s business rationale for entering into the transaction; (ii) the alternatives to entering
into a related person transaction; (iii) whether the transaction is on terms comparable to those available to third
parties, or in the case of employment relationships, to employees generally; (iv) the potential for the transaction
to lead to an actual or apparent conﬂ ict of interest and any safeguards imposed to prevent such actual or apparent
conﬂ icts; and (v) the overall fairness of the transaction to the company.

• The board or relevant committee will periodically monitor the transaction to ensure that there are no changed

circumstances that would render it advisable for the company to amend or terminate the transaction.

Procedures

• Management or the affected director or executive ofﬁ cer will bring the matter to the attention of the chairman, the

presiding director, the chair of the directors and corporate governance committee, or the secretary.

• The chairman and the presiding director shall jointly determine (or if either is involved in the transaction, the
other shall determine in consultation with the chair of the directors and corporate governance committee)
whether the matter should be considered by the board or by one of its existing committees consisting only of
independent directors.

• If a director is involved in the transaction, he or she will be recused from all discussions and decisions about the

transaction.

• The transaction must be approved in advance whenever practicable, and if not practicable, must be ratiﬁ ed as

promptly as practicable.

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• The board or relevant committee will review the transactions annually to determine whether it continues to be in

the company’s best interests.

Currently the only related person transaction is the time-share arrangement for Mr. Taurel’s personal use of
the corporate aircraft, as described on page 94. The compensation committee approved and continues to monitor
this arrangement consistent with the above policy.

Orientation and Continuing Education
A comprehensive orientation process is in place for new directors. In addition, directors receive ongoing continuing
education through educational sessions at meetings, the annual strategy retreat, and periodic mailings between
meetings. We hold periodic mandatory training sessions for the audit committee, to which other directors and ex-
ecutive ofﬁ cers are invited. We also afford directors the opportunity to attend external director education programs.

Director Access to Management and Independent Advisers
Independent directors have direct access to members of management whenever they deem it necessary. The inde-
pendent directors and the committees are also free to retain their own independent advisers, at company expense,
whenever they feel it would be desirable to do so. In accordance with New York Stock Exchange listing standards,
the audit, compensation, and directors and corporate governance committees have sole authority to retain inde-
pendent advisers to their respective committees.

Assessment of Board Processes and Performance
The directors and corporate governance committee annually assesses the performance of the board, its commit-
tees, and board processes based on inputs from all directors. The committee also considers the contributions of
individual directors at least every three years when considering whether to recommend nominating the director to
a new three-year term.

VI. Board Committees
Number, Structure, and Independence
The duties and membership of the six board-appointed committees are described below. Only independent direc-
tors may serve on the audit, compensation, directors and corporate governance, and public policy and compliance
committees. Only independent directors may chair any committee.
Committee membership and selection of committee chairs are recommended to the board by the directors and
corporate governance committee after consulting the chairman of the board and after considering the desires of
the board members.

Functioning of Committees
Each committee reviews and approves its own charter annually, and the directors and corporate governance com-
mittee reviews and approves all committee charters annually. The board may form new committees or disband
a current committee (except the audit, compensation, and directors and corporate governance committees) as it
deems appropriate. The chair of each committee determines the frequency and agenda of committee meetings.
In addition, the audit and compensation committees meet alone in executive session on a regular basis; all other
committees meet in executive session as needed.

All six committee charters are available online at http://investor.lilly.com/board-committees.cfm or in paper

form upon request to the company’s corporate secretary.

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Committees of the Board of Directors

Audit Committee
The duties of the audit committee are described in the audit committee report found on pages 75–76.

Directors and Corporate Governance Committee
The duties of the directors and corporate governance committee are described on page 74.

Compensation Committee
The duties of the compensation committee are described on page 77, and the compensation committee report is
shown on page 85.

Public Policy and Compliance Committee

• oversees the processes by which the company conducts its business so that the company will do so in a manner

that complies with laws and regulations and reﬂ ects the highest standards of integrity

• reviews and makes recommendations regarding policies, practices, and procedures of the company that relate

to public policy and social, political, and economic issues that may affect the company.

Finance Committee

• reviews and makes recommendations regarding capital structure and strategies, including dividends, stock

repurchases, capital expenditures, ﬁ nancings and borrowings, and signiﬁ cant business development projects.

Science and Technology Committee

• reviews and makes recommendations regarding the company’s strategic research goals and objectives
• reviews new developments, technologies, and trends in pharmaceutical research and development.

Membership and Meetings of the Board and Its Committees

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 members are 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 in 2006 are shown in the table below.

Sir Winfried Bischoff

Mr. Cook

Dr. Feldstein

Mr. Fisher

Mr. Fyrwald

Dr. Gilman

Mr. Golden1

Ms. Horn

Dr. Lechleiter

Ms. Marram

Dr. Prendergast

Ms. Seifert

Mr. Taurel

Number of 2006 Meetings

Board

Member

Chair

Member

Audit

Compensation

Public Policy and
Compliance

Science and
Technology

Directors and
Corporate
Governance

Member

Finance

Member

Chair

Member

Chair

Member

Chair

Member

Chair

1 Mr. Golden retired from the board of directors as of April 24, 2006.

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Directors’ Compensation

Directors who are employees receive no additional compensation for serving on the board or its committees.
In 2006, we provided the following annual compensation to directors who are not employees:

Name

Sir Winfried Bischoff

Mr. Cook

Dr. Feldstein

Mr. Fisher

Mr. Fyrwald

Dr. Gilman

Ms. Horn

Ms. Marram

Dr. Prendergast

Ms. Seifert

Fees Earned
or Paid in Cash
($) 1

Stock Awards
($) 2

Stock Option Awards
($) 3

$97,000

$108,000

$103,000

$102,000

$91,000

$96,000

$122,000

$92,000

$102,000

$109,000

$139,228

$27,647

All Other
Compensation
($) 4

$18,823 6

$663

$641

$1,253

$1,044

$743

Total
($) 5

$282,698

$247,228

$269,875

$269,538

$230,869

$264,128

$289,919

$259,618

$268,875

$275,875

1 The following directors deferred 2006 cash compensation into their deferred share account under the Lilly Direc-
tors’ Deferral Plan (further described below):

Name

Mr. Cook

Mr. Fisher

2006 Cash Deferred

$108,000

$51,000

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2 Each nonemployee director received an award of stock with a grant date fair value of $145,000 (2,672 shares). This
stock award and all prior stock awards are fully vested in that they are not subject to forfeiture; however the shares
are not issued until the director ends his or her service on the board, as further described below under Lilly Direc-
tors’ Deferral Plan. The table shows the expense recognized by the company for each director’s stock award.
3 No stock options were granted in 2006, as the stock option program for directors was discontinued in 2005.
The amounts in this column reﬂ ect the expenses related to options granted in 2003 and 2004 recognized in our
2006 ﬁ nancial statements. Aggregate total numbers of stock option awards outstanding are shown below. All out-
standing options were vested as of February 17, 2007. Stock option grants were established using the same pro-
cedure for timing and price as is used for employees. Please see the description under “Equity Incentives—Stock
Options—Grant Timing and Price” on page 82.

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Name

Sir Winfried Bischoff

Mr. Cook

Dr. Feldstein

Mr. Fisher

Mr. Fyrwald

Dr. Gilman

Ms. Horn

Ms. Marram

Dr. Prendergast

Ms. Seifert

Grant Date

2/20/2001
2/19/2002
2/18/2003
2/17/2004

—

2/19/2002
2/18/2003
2/17/2004

2/20/2001
2/19/2002
2/18/2003
2/17/2004

—

4/20/2000
2/20/2001
2/19/2002
2/18/2003
2/17/2004

2/18/2003
2/17/2004

4/20/2000
2/20/2001
2/19/2002
2/18/2003
2/17/2004

Expiration Date

Exercise Price

Outstanding Stock Options
(Exercisable)

2/18/2011
2/17/2012
2/18/2013
2/17/2014

—

2/17/2012
2/18/2013
2/17/2014

2/18/2011
2/17/2012
2/18/2013
2/17/2014

—

4/19/2010
2/18/2011
2/17/2012
2/18/2013
2/17/2014

2/18/2013
2/17/2014

4/19/2010
2/18/2011
2/17/2012
2/18/2013
2/17/2014

$73.98
$75.92
$57.85
$73.11

—

$75.92
$57.85
$73.11

$73.98
$75.92
$57.85
$73.11

—

$75.94
$73.98
$75.92
$57.85
$73.11

$57.85
$73.11

$75.94
$73.98
$75.92
$57.85
$73.11

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

4 For all directors other than Sir Winfried Bischoff, these amounts consist of tax reimbursements for income im-
puted to him or her for use of the corporate aircraft, or commercial ﬂ ights, by his or her spouse to attend board
functions that included spouse participation.
5 Directors do not participate in a Lilly pension plan or non-equity incentive plan.
6 This amount includes expenses for Sir Winfried Bischoff’s spouse to travel to and participate in board functions
that included spouse participation.

Cash Compensation
The company provides directors the following cash compensation:

• retainer of $80,000 per year (payable monthly)
• $1,000 for each committee meeting attended
• $2,000 to the committee chairpersons for each committee meeting conducted as compensation for the

chairperson’s preparation time

• retainer of $20,000 per year to the presiding director
• reimbursement for customary and usual travel expenses.

Stock Compensation
Stock compensation for directors consists of:

• Shares of Lilly stock equaling $145,000, deposited annually in a deferred stock account in the Lilly Directors’

Deferral Plan (as described below), payable after service on the board has ended.

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. Each director can choose to invest the funds in either of two accounts:

• Deferred Share Account. This account allows the director, in effect, to invest his or her deferred cash

compensation in Lilly stock. In addition, the annual award of shares to each director noted above (2,672 shares

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in 2006) is credited to this account on a pre-set annual date. Funds in this account are credited as hypothetical
shares of Lilly stock based on the market price of the stock at the time the compensation would otherwise have
been earned. Hypothetical dividends are “reinvested” in additional shares based on the market price of the stock
on the date dividends are paid. All shares in the deferred share accounts are hypothetical and are not issued or
transferred until the director ends his or her service on the board.

• Deferred Compensation Account. Funds in this account earn interest each year at a rate of 120 percent of the

applicable federal long-term rate, compounded monthly, as established the preceding December by the U.S. Treasury
Department under Section 1274(d) of the Internal Revenue Code. The rate for 2007 is 5.7 percent. The aggregate
amount of interest that accrued in 2006 for the participating directors was $182,102, at a rate of 5.6 percent.

Both accounts may be paid in a lump sum or in annual installments for up to 10 years. Amounts in the deferred

share account are paid in shares of Lilly stock.

Lilly Matching Gift Program
Directors are eligible to participate in the Eli Lilly and Company Foundation, Inc. matching gift program, which is
generally available to U.S. employees. Under this program, the foundation matches 100 percent of charitable dona-
tions over $25 made to eligible charities up to a maximum of $90,000 per year for each individual. These limits apply
to active employees and directors.

Directors and Corporate Governance Committee Matters

Overview
The directors and corporate governance committee recommends candidates for membership on the board and
board committees. The committee also oversees matters of corporate governance, director independence, director
compensation, and board performance. The committee’s charter is available online at http://investor.lilly.com/
board-committees.cfm or in paper form upon request to the company’s corporate secretary.

All committee members are independent as deﬁ ned in the New York Stock Exchange listing requirements.

Director Nomination Process
The board seeks independent directors who represent a mix of backgrounds and experiences that will enhance the
quality of the board’s deliberations and decisions. Candidates shall have substantial experience with one or more pub-
licly traded national or multinational companies or shall have achieved a high level of distinction in their chosen ﬁ elds.
Board membership should reﬂ ect diversity in its broadest sense, including persons diverse in geography, gen-
der, and ethnicity. The board is particularly interested in maintaining a mix that includes the following backgrounds:
• active or retired chief executive ofﬁ cers and senior executives, particularly those with experience in operations,

ﬁ nance or banking, and marketing or sales

• international business
• medicine and science
• government and public policy
• information technology.

The board delegates the screening process to the directors and corporate governance committee, which re-
ceives direct input from other board members. Potential candidates are identiﬁ ed by recommendations from several
sources, including:

• incumbent directors
• management
• shareholders
• an independent executive search ﬁ rm retained by the committee to assist in locating candidates meeting the

board’s selection criteria.

The committee employs the same process for evaluating all candidates, including those submitted by share-

holders. The committee initially evaluates the candidate based on publicly available information and any additional
information supplied by the party recommending the candidate. If the candidate appears to satisfy the selection cri-
teria and the committee’s initial evaluation is favorable, the committee, assisted by management, gathers additional
data on the candidate’s qualiﬁ cations, availability, probable level of interest, and any potential conﬂ icts of interest. If
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the committee’s subsequent evaluation continues to be favorable, the candidate is contacted by the chairman of the
board and one or more of the independent directors for direct discussions to determine the mutual levels of inter-
est in pursuing the candidacy. If these discussions are favorable, the committee makes a ﬁ nal recommendation to
the board to nominate the candidate for election by the shareholders (or to select the candidate to ﬁ ll a vacancy, as
applicable).

Process for Submitting Recommendations and Nominations
A shareholder who wishes to recommend a director candidate for evaluation by the committee pursuant to this
process should forward the candidate’s name and information about the candidate’s qualiﬁ cations to the chairman
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.

Under Section 1.9 of the company’s bylaws, a shareholder who wishes to directly nominate a director candidate

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 Center, Indianapolis, 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 1.9 of the bylaws. 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.

Audit Committee Matters

Audit Committee Membership
All members of the audit committee are independent as deﬁ ned in the New York Stock Exchange listing standards
applicable to audit committee members. The board of directors has determined that Mr. J. Michael Cook is an audit
committee ﬁ nancial expert as deﬁ ned in the rules of the Securities and Exchange Commission.

Audit Committee Report
The audit committee (“we” or “the committee”) reviews the company’s ﬁ nancial reporting process on behalf of the
board. Management has the primary responsibility for the ﬁ nancial statements and the reporting process, includ-
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 nancial
statements were prepared in accordance with generally accepted accounting principles, and we have reviewed and
discussed the audited ﬁ nancial statements and related disclosures with management and the independent auditors,
including a review of the signiﬁ cant management judgments underlying the ﬁ nancial statements and disclosures.

The independent auditors report to us. We have sole authority to appoint (subject to shareholder ratiﬁ cation)

and to terminate the engagement of the independent auditors.

We have discussed with the independent auditors matters required to be discussed by Statement on Auditing

Standards No. 61 (Communication with Audit Committees), including the quality, not just the acceptability, of the ac-
counting principles, the reasonableness of signiﬁ cant judgments, and the clarity of the disclosures in the ﬁ nancial
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 (Independence Discussions 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 & Young LLP (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.

We discussed with the company’s internal and independent auditors the overall scope and plans for their
respective audits including internal control testing under Section 404 of the Sarbanes-Oxley Act. We periodically
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 nancial ofﬁ cer, the chief accounting ofﬁ cer, and the gen-
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 nancial reporting. We also periodically meet in executive session.

In reliance on the reviews and discussions referred to above, we recommended to the board (and the board
subsequently approved the recommendation) that the audited ﬁ nancial statements be included in the company’s

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annual report on Form 10-K for the year ended December 31, 2006, for ﬁ ling with the Securities and Exchange Com-
mission. We have also appointed the company’s independent auditors, subject to shareholder ratiﬁ cation, for 2007.

Audit Committee
J. Michael Cook, Chair
Martin S. Feldstein, Ph.D.
Franklyn G. Prendergast, M.D., Ph.D.
Kathi P. Seifert

Services Performed by the Independent Auditor
The audit committee preapproves all services performed by the independent auditor, in part to assess whether the
provision of such services might impair the auditor’s independence. The committee’s policy and procedures are as
follows:

• The committee approves the annual audit services engagement and, if necessary, any changes in terms,

conditions, and fees resulting from changes in audit scope, company structure, or other matters. The committee
may also preapprove other audit services, which are those services that only the independent auditor reasonably
can provide. Since 2004, audit services have included internal controls attestation work under Section 404 of the
Sarbanes-Oxley Act.

• Audit-related services are assurance and related services that are reasonably related to the performance of the
audit, and that are traditionally performed by the independent auditor. The committee believes that the provision
of these services does not impair the independence of the auditor.

• Tax services. The committee believes that, in appropriate cases, the independent auditor can provide tax

compliance services, tax planning, and tax advice without impairing the auditor’s independence.

• The committee may approve other services to be provided by the independent auditor if (i) the services are

permissible under SEC and Public Company Accounting Oversight Board rules, (ii) the committee believes the
provision of the services would not impair the independence of the auditor, and (iii) management believes that
the auditor is the best choice to provide the service.

• Process. At the beginning of each audit year, management requests prior committee approval of the annual
audit, statutory audits, and quarterly reviews for the upcoming audit year as well as any other engagements
known at that time. Management will also present at that time an estimate of all fees for the upcoming audit
year. As speciﬁ c engagements are identiﬁ ed thereafter, they are brought forward to the committee for approval.
To the extent approvals are required between regularly scheduled committee meetings, preapproval authority is
delegated to the committee chair.

For each engagement, management provides the committee with information about the services and fees suf-
ﬁ ciently detailed to allow the committee to make an informed judgment about the nature and scope of the services
and the potential for the services to impair the independence of the auditor.

After the end of the audit year, management provides the committee with a summary of the actual fees in-

curred for the completed audit year.

Independent Auditor Fees
The following table shows the fees incurred for services rendered on a worldwide basis by Ernst & Young LLP, the
company’s independent auditor, in 2006 and 2005. All such services were preapproved by the committee in accor-
dance with the preapproval policy.

Audit Fees

• Annual audit of consolidated and subsidiary ﬁ nancial statements, including Sarbanes-Oxley 404 attestation
• Reviews of quarterly ﬁ nancial statements
• Other services normally provided by the auditor in connection with statutory and regulatory ﬁ lings

Audit-Related Fees

• Assurance and related services reasonably related to the performance of the audit or reviews of the ﬁ nancial statements
—2006 and 2005: primarily related to employee beneﬁ t plan and other ancillary audits, and accounting consultations

Tax Fees

• 2006: primarily related to compliance services outside the U.S.
• 2005: primarily related to tax planning and various compliance services

All Other Fees

• 2006: primarily related to compliance services outside the U.S.
• 2005: primarily related to upgrading and maintaining on-line training programs

Total

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2006
(millions)

2005
(millions)

$5.8

$0.4

$1.0

$1.5

$1.8

$0.1

$7.8

$8.7

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Compensation Committee Matters

Scope of Authority
The compensation committee acts on behalf of the board of directors and by extension the shareholders to estab-
lish the compensation of executive ofﬁ cers of the company and provides oversight of the company’s global com-
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 cers and other senior
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 cers of the company. However, the committee may not delegate any
authority under those plans for matters affecting the compensation and beneﬁ ts of the executive ofﬁ cers.

The Committee’s Processes and Procedures
The committee’s primary processes for establishing and overseeing executive compensation can be found in the
Compensation Discussion and Analysis section under “The Committee’s Processes” on page 78. Additional pro-
cesses and procedures include:

• Meetings. The committee meets several times each year (5 times in 2006). Committee agendas are established

in consultation with the committee chair and the committee’s independent compensation consultant. The
committee meets in executive session following each regular meeting.

• Role of Independent Consultant. The committee has retained Frederic W. Cook and his ﬁ rm, Frederic W. Cook & Co.,

as its independent compensation consultant to assist the committee in evaluating executive compensation programs
and in setting executive ofﬁ cers’ compensation. The use of an independent consultant provides additional assurance
that the company’s executive compensation programs are reasonable and consistent with company objectives. The
consultant reports directly to the committee and does not perform any services for management. The consultant
regularly participates in committee meetings and advises the committee with respect to compensation trends and
best practices, plan design, and the reasonableness of individual compensation awards. In addition, with respect to
the chief executive ofﬁ cer, the consultant prepares the speciﬁ c compensation recommendations for the committee’s
consideration; the CEO does not participate in the development of the recommendations and has no knowledge of
the recommendations when they are presented to the committee.

• Role of Executive Ofﬁ cers and Management. With the oversight of the CEO, chief operating ofﬁ cer, and the senior
vice president of human resources, the company’s global compensation group formulates recommendations on
matters of compensation philosophy, plan design, and the speciﬁ c compensation recommendations for executive
ofﬁ cers (other than the CEO as noted above). The CEO gives the committee a performance assessment and
compensation recommendation for each of the other named executive ofﬁ cers. Those recommendations are
then considered by the committee with the assistance of its compensation consultant. The CEO and the senior
vice president of human resources generally attend committee meetings but are not present for the executive
sessions or for any discussion of their own compensation.

Directors’ compensation is established by the board of directors upon the recommendation of the directors

and corporate governance committee.

Compensation Committee Interlocks and Insider Participation
None of the compensation committee members

• has ever been an ofﬁ cer or employee of the company
• is or was a participant in a “related person” transaction in 2006 (see pages 69–70 for a description of our policy

on related person transactions)

• is an executive ofﬁ cer of another entity, at which one of our executive ofﬁ cers serves on the board of directors.

Executive Compensation

Compensation Discussion and Analysis
Executive Compensation Policy
As a research-based pharmaceutical company, our long-term success depends on our ability to discover, develop,
and market a stream of innovative medicines that address important medical needs. In addition, the intense global

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pressures on health care costs require us to continually improve productivity in all that we do. To achieve these
goals, it is critical that we be able to attract, motivate, and retain highly talented individuals at all levels of the or-
ganization who are committed to the company’s core values of excellence, integrity, and respect for people.

The compensation committee bases its executive compensation programs on the same objectives that guide

the company in establishing all its compensation programs:

• Compensation should be based on the level of job responsibility, individual performance, and company

performance. As employees progress to higher levels in the organization, an increasing proportion of their pay
should be linked to company performance and shareholder returns, because they are more able to affect the
company’s results.

• Compensation should reﬂ ect the value of the job in the marketplace. To attract and retain a highly skilled work
force, we must remain competitive with the pay of other premier employers who compete with us for talent.
• Compensation should reward performance. Our programs should deliver top-tier compensation given top-tier

individual and company performance; likewise, where individual performance falls short of expectations and/or
company performance lags the industry, the programs should deliver lower-tier compensation. In addition, the
objectives of pay-for-performance and retention must be balanced. Even in periods of temporary downturns in
company performance, the programs should continue to ensure that successful, high-achieving employees will
remain motivated and committed to Lilly.

• Compensation should foster the long-term focus required for success in the pharmaceutical industry. While
all employees receive a mix of both annual and longer-term incentives, employees at higher levels have an
increasing proportion of their compensation tied to longer-term performance because they are in a position to
have greater inﬂ uence on longer-term results.

• To be effective, performance-based compensation programs should enable employees to easily understand how
their efforts can affect their pay, both directly through individual performance accomplishments and indirectly
through contributing to the company’s achievement of its strategic and operational goals. No matter how elegant
a performance measure may be in theory, if in practice employees cannot easily understand how it works or how
it relates to their daily jobs, it will not be an effective motivator.

• Compensation and beneﬁ t programs should be egalitarian. While the programs and individual pay levels will
always reﬂ ect differences in job responsibilities, geographies, and marketplace considerations, the overall
structure of compensation and beneﬁ t programs should be broadly similar across the organization. Perquisites
for executives should be rare and limited to those that are important to the executive’s ability to safely and
effectively carry out his or her responsibilities.

• Compensation and beneﬁ t programs should attract employees who are interested in a career at Lilly. The

company’s nationally recognized beneﬁ t programs provide a competitive advantage by helping the company
attract and retain highly talented employees who are looking for the opportunity to build a career. These
programs include a strong retirement program, ﬂ exible health care coverage options for active employees and
retirees, and leading-edge work/life programs to help employees manage the sometimes conﬂ icting demands of
career and family.

The Committee’s Processes
The compensation committee has established a number of processes to assist it in ensuring that the company’s
executive compensation program is achieving its objectives. Among those are:

• Assessment of Company Performance. The committee uses company performance measures in two ways. First,

in establishing total compensation ranges, the committee considers various measures of company and industry
performance, including sales, earnings per share, return on assets, return on equity, and total shareholder
return. The committee does not apply a formula or assign these performance measures relative weights.
Instead, it makes a subjective determination after considering such measures collectively. Second, as described
in more detail below, the committee has established speciﬁ c company performance measures that determine
the size of payouts under the company’s three formula-based incentive programs—the Eli Lilly and Company
Bonus Plan, the performance award program and, beginning in 2007, the shareholder value award which
replaces the stock option program (the shareholder value award is discussed on pages 84–85.)

• Assessment of Individual Performance. Individual performance has a strong impact on the compensation of

all employees, including the CEO and the other executive ofﬁ cers. With respect to the CEO, the independent
directors, under the direction of the presiding director, meet with the CEO in executive session annually at the
beginning of the year to agree upon the CEO’s performance objectives (both individual and company objectives)
for the year. At the end of the year, the independent directors meet in executive session under the direction
of the presiding director to conduct a performance review of the CEO based on his or her achievement of the

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agreed-upon objectives, contribution to the company’s performance, and other leadership accomplishments.
This evaluation is shared with the CEO by the presiding director and is provided to the compensation committee
for its consideration in setting the CEO’s compensation.

For the other named executive ofﬁ cers, the committee receives a performance assessment and

compensation recommendation from the CEO and also exercises its judgment based on the board’s interactions
with the executive ofﬁ cer. As with the CEO, the performance evaluation of these executives is based on
achievement of pre-agreed objectives by the executive and his or her organization, his or her contribution to the
company’s performance, and other leadership accomplishments.

• Benchmarking. The committee benchmarks the company’s programs with a peer group of global pharmaceutical

companies. Pharmaceutical companies’ needs for scientiﬁ c and sales/marketing talent are unique to the
industry and as such, Lilly must compete with these companies for talent: Abbott Laboratories; Amgen; Bristol-
Myers Squibb Company; GlaxoSmithKline; Johnson & Johnson; Merck & Co.; Pﬁ zer, Inc.; Schering-Plough
Corporation; and Wyeth Laboratories. The committee compares the companies’ executive compensation
programs as a whole, and also compares the pay of individual executives if the jobs are sufﬁ ciently similar
to make the comparison meaningful. The committee uses the peer group data primarily to ensure that the
executive compensation program as a whole is competitive, meaning generally within the broad middle range of
comparative pay of the peer group companies when the company achieves the targeted performance levels. The
individual’s relative position is driven by individual and company performance.

• Total Compensation Review. The committee reviews each executive’s base pay, bonus, and equity incentives

annually with the guidance of the committee’s independent consultant. In addition to these primary
compensation elements, the committee reviews the deferred compensation program, perquisites and other
compensation, and payments that would be required under various severance and change-in-control scenarios.
Following the 2006 review, the committee determined that these elements of compensation were reasonable in
the aggregate. In response to evolving corporate governance trends, the committee recommended to the board,
and it approved, amendments to the change-in-control severance pay programs in 2006 to reduce the severance
beneﬁ t for executive ofﬁ cers from three times to two times annual base salary plus bonus. This change aligns
the executive ofﬁ cers’ beneﬁ t with that of all other executives. See “Severance Beneﬁ ts” on pages 83–84.

Components of Executive Compensation for 2006
For 2006, the compensation of executives consisted of the same four primary components as were provided to
other levels of management—base salary, a cash incentive bonus award under the Eli Lilly and Company Bonus
Plan, equity grants of a performance award (a performance-based stock incentive award under the 2002 Lilly
Stock Plan) and stock options, and a beneﬁ ts package. The committee believes that this program balances both the
mix of cash and equity compensation, the mix of currently-paid and longer-term compensation, and the security of
foundational beneﬁ ts in a way that furthers the compensation objectives discussed above. Following is a discussion
of the committee’s considerations in establishing each of the components for the executive ofﬁ cers.

Base Salary
Base salary is the guaranteed element of employees’ annual cash compensation. The value of base salary reﬂ ects
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:

• The corporate “merit budget,” meaning the company’s overall budget for base salary increases. The aggregate
increases for the executive ofﬁ cers were within the corporate merit budget. The corporate merit budget was
established based on company performance for 2005, planned performance for 2006, and peer group data. The
objective of the merit budget is to allow salary increases to retain and motivate successful performers while
maintaining affordability within the company’s business plan.

• Internal relativity, meaning the relative pay differences for different job levels.
• Individual performance. As described above under “The Committee’s Processes,” base salary increases were

driven by individual performance assessments.

In establishing Mr. Taurel’s base salary 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 assessed Mr. Taurel’s 2005 performance. They considered the company’s and Mr. Taurel’s accomplish-
ment of objectives that had been established at the beginning of the year and its own subjective assessment
of his performance. They noted that under Mr. Taurel’s leadership, in 2005 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 rst year,

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as did other productivity initiatives. Through strict headcount control, the company was able to reduce its
headcount through attrition by nearly 2,000 employees. Improved productivity led to a 9 percent increase in
reported earnings per share and an 11 percent increase in adjusted earnings per share. The company also
made signiﬁ cant strides in brand equity and customer satisfaction, compliance and enterprise risk manage-
ment, and diversity. In recognition of his continued strong leadership in 2005, the committee increased Mr.
Taurel’s annual salary by 4.4 percent effective March 2006.

The committee reviewed similar considerations for each of the other named executives. In addition, with

regard to Dr. Lechleiter’s performance, the committee considered his leadership in increasing the productivity
of the sales and marketing, manufacturing, and other operational functional areas of the company. The com-
mittee had increased Dr. Lechleiter’s annual salary by 18 percent in recognition of his promotion to president
and chief operating ofﬁ cer in October 2005, and therefore did not increase his annual salary in 2006.

With regard to Dr. Paul’s performance, the committee gave particular weight to his leadership of the
company’s research and development efforts, noting that Lilly Research Laboratories improved productivity
in all phases of discovery and development, increasing the number and success of early phase candidates, and
more quickly identifying compounds likely to be unsuccessful. The committee increased Dr. Paul’s annual sal-
ary by 4 percent effective March 2006.

In establishing Mr. Armitage’s annual salary (an 8 percent increase), the committee noted his leadership
in implementing successful litigation strategies, enhancing the company’s compliance programs, and improv-
ing productivity within the law division.

Mr. Rice’s base salary was raised upon his promotion to chief ﬁ nancial ofﬁ cer in May 2006.

• Peer group data speciﬁ c to the executive’s position, where applicable. As noted above, we used the peer group

data to test for reasonableness and competitiveness of base salaries, but we also exercised subjective judgment
in view of our compensation objectives.

• Consideration of the mix of overall compensation. Consistent with our compensation objectives, as employees

progress to higher levels in the organization, a greater proportion of overall compensation is directly linked to
company performance and shareholder returns. Thus, for example, Mr. Taurel’s overall compensation is more
heavily weighted toward incentive compensation and equity compensation than that of the other executive ofﬁ cers.

Cash Incentive Bonuses
The company has established an annual cash bonus program in order to align employees’ goals with the company’s
sales and earnings growth objectives for the current year. Cash incentive bonuses for all management employees
worldwide, as well as all non-management employees in the U.S. other than sales representatives, were deter-
mined under the Eli Lilly and Company Bonus Plan, a shareholder-approved formula-based incentive plan adopted
in 2004. The bonuses paid for 2006 appear in the Summary Compensation Table under the “Non-equity Incentive
Plan Compensation” column. Under the plan, bonus target amounts, expressed as a percentage of base salary, are
established for participants at the beginning of each year. Bonus payouts for the year are then determined by the
company’s ﬁ nancial results for the year relative to predetermined performance measures. Satisfactory individual
performance is a condition to payment. At the end of the performance period, the committee has discretion to ad-
just an award payout downward, but not upward, from the amount yielded by the formula. The committee consid-
ered the following when establishing the awards for 2006:

• Bonus Targets. Bonus targets were based on job responsibilities, internal relativity, and peer group data. Our

objective was to set bonus targets such that total annual cash compensation was within the broad middle range
of peer group companies and a substantial portion of that compensation was linked to company performance.
Consistent with our executive compensation policy, individuals with greater job responsibilities had a greater
proportion of their total cash compensation tied to company performance through the bonus plan. Thus, the
committee established the following bonus targets for 2006 (expressed as a percentage of base salary): Mr.
Taurel, 125 percent; Dr. Lechleiter, 100 percent; Dr. Paul, 85 percent; Mr. Golden, 85 percent; Mr. Rice, 75
percent; and Mr. Armitage, 75 percent.

• Company performance measures. For all participants in the plan, including the executive ofﬁ cers, the committee

established 2006 company performance measures based 25 percent on sales growth (target of 5 percent
growth) and 75 percent on earnings per share (EPS) growth adjusted for certain items as described below
under “Adjustments for Certain Items” (target of 7 percent growth). The measures were determined in January
2006. The committee believes that this mix of performance measures will encourage employees to focus
appropriately on improving both top-line sales and bottom-line earnings. Special emphasis is given to bottom
line earnings so that employees can be directly rewarded for their productivity improvements. The measures
are also effective motivators because they are easy to track and clearly understood by employees. Under the

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plan formula, payouts can range from zero to 200 percent of target depending on company performance. In
establishing the target growth rates for both sales and EPS (that is, the growth rates at which the payouts would
be 100 percent of target), the committee considered the expected 2006 performance of companies in our peer
group, based on published investment analyst estimates. Consistent with the compensation objectives discussed
above, the target growth percentages represented approximately the median expected growth for our peer
group; accordingly, Lilly performance exceeding the peer group would result in above-target payouts and Lilly
performance lagging the peer group would result in below-target payouts. The bonuses paid to executive ofﬁ cers
for 2006 were 134 percent of target as a result of above-target growth in both sales (7 percent) and adjusted
earnings per share (11 percent). (Adjustments for certain items are discussed on page 84.)

Equity Incentives—Total Equity Program
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 (expressed in U.S. dollars) prior to the pre-established grant date. The commit-
tee’s process 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.

For 2005, the committee had lowered grant values signiﬁ cantly at all levels consistent with marketplace

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 cers’ equity grants from 40 percent to 50 percent of the total grant value. In making this determination, the
committee reviewed available peer group data 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:

Name

Current

Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Armitage

Mr. Rice 1

Retired

Mr. Golden 2

Stock Options

Performance Awards

$3,600,000

$2,340,000

$1,200,000

$900,000

$450,000

$3,600,000

$2,340,000

$1,200,000

$900,000

$450,000

$1,100,000

1 Mr. Rice’s grants were made before he was promoted to chief ﬁ nancial ofﬁ cer. Mr. Rice received an additional
grant of stock options valued at $471,900 in May 2006 upon his promotion to chief ﬁ nancial ofﬁ cer.
2 Mr. Golden retired in April 2006, and his 2006 stock option grant was forfeited in accordance with its terms. His
2006 performance award was prorated based on the portion of the year worked.

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
achievement of speciﬁ c earnings-per-share (EPS) levels over speciﬁ ed time periods of one or more years. We
granted performance awards for 2006 to executive ofﬁ cers with possible payouts ranging from zero to 200 percent
of the target amount, depending on 2006 EPS 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

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discretion to adjust an award payout downward, but not upward, from the amount yielded by the formula. For ex-
ecutive ofﬁ cers, the payout was in the form of restricted stock, as noted below. The committee approved the terms
of the 2006 performance awards in January 2006, and took into consideration the following:

• Target grant size. As noted above, following a substantial reduction in total equity grant values in 2005, the

committee decided to maintain the same grant values in 2006 but increased the performance award portion of
the total grant value from 40 to 50 percent.

• Company performance measure. As in previous years, the committee established the performance measure

as EPS growth (adjusted as described below under “Adjustments for Certain Items”) over a one-year period.
The committee believes EPS growth is an effective motivator because it is closely linked to shareholder
value and it is easily understood by employees. In setting the target growth percentage of 7 percent, the
committee considered the expected earnings performance of companies in our peer group. Consistent with the
compensation objectives discussed above, the target growth percentage represented approximately the median
expected growth for our peer group; accordingly, Lilly performance exceeding the peer group would result in
above-target payouts and Lilly performance lagging the peer group would result in below-target payouts. Above-
target growth in adjusted earnings per share (11 percent) resulted in a 2006 performance award payout at 150
percent of target.

• Longer-term focus and retention considerations. To enhance the performance awards’ incentives for longer-term

focus and retention, the awards to executive ofﬁ cers for 2006 are payable in restricted stock that is subject
to forfeiture if the executive leaves the company prior to February 2008, except by reason of death, disability,
retirement, or by consent of the committee. The additional one-year restriction period is consistent with our
share retention guidelines discussed on page 84.

Equity Incentives—Stock Options
Stock options align employee incentives with shareholders because options have value only if the stock price in-
creases over time. The company’s 10-year options, granted at the market price on the date of grant, help focus em-
ployees on long-term growth. In addition, options are intended to help retain key employees because they typically
cannot be exercised for three years and, if not exercised, are forfeited if the employee leaves the company before
retirement. The three-year vesting also helps keep employees focused on long-term performance. The company
does not reprice options; likewise, if the stock price declines after the grant date, we do not replace options.
The committee considered the following in establishing the 2006 option grants to executive ofﬁ cers:

• Grant size. As noted above under “Equity Incentives—Total Equity Program,” stock option grants were 50 percent
of the total equity grant values (measured in accordance with SFAS 123R) established by the committee. The
total equity grant values were unchanged from 2005; however, we decreased the stock option portion of the total
grant value from 60 to 50 percent.

• Grant Timing and Price. The committee’s procedure for timing of equity grants (performance awards and stock
options) provides assurance that grant timing is not being manipulated to result in a price that is favorable to
employees. The annual equity grant date for all eligible employees, including executive ofﬁ cers (more than 4,900
employees), is in mid-February. This date is established by the committee well in advance – typically at the
committee’s October meeting or in December when there is no meeting in October. The mid-February grant date
timing is driven by three considerations:

—It coincides with the company’s calendar-year-based performance management cycle, allowing supervisors

to deliver the equity awards close in time to performance appraisals, which increases the impact of the
awards by strengthening the link between pay and performance.

—It is within about two weeks after release of quarterly earnings, so that the stock price at that time can
reasonably be expected to fairly represent the market’s collective view of our then-current results and
prospects.

—To take advantage of favorable local tax laws for stock options in certain jurisdictions outside the U.S.,

options may not be granted within a speciﬁ ed number of days before or after announcing earnings or ﬁ ling
ﬁ nancial reports.

In the event of grants to new hires, the grants are effective on the ﬁ rst trading day of the month following hire.
Our process for establishing the grant date well in advance provides assurance that grant timing is not being

manipulated for employee gain.

Employee and Post-Employment Beneﬁ ts
The company offers core employee beneﬁ ts coverage in order to:

• provide our global workforce with a reasonable level of ﬁ nancial support in the event of illness or injury, and

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• enhance productivity and job satisfaction through programs that focus on work/life balance.

The beneﬁ ts available are the same for all U.S. employees and executive ofﬁ cers and include medical and
dental coverage, disability insurance, and life insurance. In addition, the Lilly 401(k) Plan and the Lilly Retirement
Plan provide a reasonable level of retirement income reﬂ ecting employees’ careers with the company. All U.S.
employees, including executive ofﬁ cers, participate in these plans. To the extent that any employee’s retirement
beneﬁ t exceeds IRS limits for amounts that can be paid through a qualiﬁ ed plan, Lilly also offers a non-qualiﬁ ed
retirement plan and savings plan. These plans provide only the difference between the calculated beneﬁ ts and the
IRS limits.

The cost of both employee and post-employment beneﬁ ts is partially borne by the employee, including each

executive ofﬁ cer.

Perquisites
The company does not provide signiﬁ cant perquisites or personal beneﬁ ts to executive ofﬁ cers, except that the
company aircraft is made available for the personal use of Mr. Taurel and Dr. Lechleiter, where the committee be-
lieves the security and efﬁ ciency beneﬁ ts to the company clearly outweigh the expense. Mr. Taurel’s only use of the
corporate aircraft for personal ﬂ ights in 2006 was to attend outside board meetings for the two public companies
at which he serves as an independent director. The compensation committee believes that Mr. Taurel’s service on
these boards, and his ability to conduct company business while traveling to board meetings, provides clear beneﬁ ts
to the company. As described on page 94, Mr. Taurel has entered into a time share arrangement for the corporate
aircraft under which he pays the company a lease fee for personal use. This amount offsets part of the company’s
incremental cost of providing the aircraft. Dr. Lechleiter did not use the corporate aircraft for personal ﬂ ights. In
addition, depending on seat availability, family members of executive ofﬁ cers may travel on the company aircraft to
accompany executives who are traveling on business. There is no incremental cost to the company for these trips.

Deferred Compensation Program
Executives may defer receipt of part or all of their cash compensation under the company’s deferred compensa-
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 ed Deferred
Compensation in 2006 Table on page 91.

Severance Beneﬁ ts
Except in the case of a change in control of the company, the company is not obligated to pay severance or other
enhanced beneﬁ ts to named executive ofﬁ cers upon termination of their employment.

The company has adopted a change-in-control severance pay program for nearly all employees of the com-

pany, including the executive ofﬁ cers. The program is intended to preserve employee morale and productivity and
encourage retention in the face of the disruptive impact of an actual or rumored change in control of the company. In
addition, for executives, the program is intended 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
company without undue concern over whether the transactions may jeopardize the executives’ own employment.

Although there are some differences in beneﬁ t levels depending on the employee’s job level and seniority, the

basic elements of the program are comparable for all employees:

• Double trigger. Unlike “single trigger” plans that pay out immediately upon a change in control, the Lilly program
requires a “double trigger”—a change in control followed by an involuntary loss of employment within two years
thereafter. This is consistent with the purpose of the program, which is to provide employees with a guaranteed
level of ﬁ nancial protection upon loss of employment. The only exception is performance awards, a portion of
which would be paid out upon change in control, based on time worked prior to the change in control and the
target or forecasted payout level at the time of the change in control. The committee believes this partial payment
is appropriate because of the difﬁ culties in converting the Lilly EPS targets into an award based on the surviving
company’s EPS.

• Covered terminations. Employees are eligible for payments if, within two years of the change in control, their

employment is terminated (i) without cause by the company or (ii) for good reason by the employee, each as is
deﬁ ned in the program. See pages 93–94 for a more detailed discussion.

• Severance payment. Eligible terminated employees would receive a severance payment ranging from six months’ to
two years’ base salary. Executives are all eligible for two years’ base salary plus cash bonus (with bonus established
as the higher of the then-current year’s target bonus or the last bonus paid prior to the change in control).

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• Beneﬁ t continuation. Basic employee beneﬁ ts such as health and life insurance would be continued for up to two
years following termination of employment. All executives, including named executive ofﬁ cers are entitled to two
years’ beneﬁ t continuation.

• Pension supplement. Under the portion of the program covering executives, a terminated employee would be
entitled to a supplement of two years of age credit and two years of service credit for purposes of calculating
eligibility and beneﬁ t levels under the company’s deﬁ ned beneﬁ t pension plan.

• Accelerated vesting of equity awards. Any unvested equity awards at the time of termination of employment would

become vested.

• Excise tax. In the event the payments made to the employee, or the value of other beneﬁ ts received by the

employee, in connection with a change in control exceed certain limits, Section 280G of the Internal Revenue
Code imposes an excise tax on the employee. The costs of this excise tax, including related tax gross-ups, would
be borne by the company.

Share Retention Guidelines; Hedging Prohibition
Share retention guidelines help to foster a focus on long-term growth. We expect our executive ofﬁ cers to retain all net
shares received from stock options and performance awards, net of taxes, for at least one year. Consistent with this
objective, performance award shares earned for 2006 performance were issued in the form of restricted stock that is
subject to forfeiture if the executive leaves the company prior to February 2008, except by reason of death, disability,
or retirement. Employees are not permitted to hedge their economic exposures to the Lilly stock that they own.

Adjustments for Certain Items
Consistent with past practice and based on criteria established at the beginning of the performance period, the
committee adjusted the earnings results on which 2006 bonuses and performance awards were determined to
eliminate the effect of certain items. The adjustments are intended to ensure that award payments represent the
underlying growth of the core business and are not artiﬁ cially inﬂ ated or deﬂ ated due to such items either in the
award year or the previous (comparator) year. For the 2006 awards calculation, the committee adjusted EPS to
eliminate the effect in both 2005 and 2006 of product liability charges, major asset impairments, restructuring and
other special charges. In addition, the committee eliminated the 2005 cumulative effect of an accounting change
relating to the adoption of FIN 47 (conditional asset retirement obligations).

Deductibility Cap on Executive Compensation
U.S. federal income tax law prohibits the company from taking a tax deduction for certain compensation paid in
excess of $1,000,000 to the named executive ofﬁ cers listed in the summary compensation table below. However,
performance-based compensation, as deﬁ ned in the tax law, is fully deductible if the programs are approved by
shareholders and meet other requirements. Our policy is to qualify our incentive compensation programs for full
corporate deductibility to the extent feasible and consistent with our overall compensation goals as reﬂ ected in the
summary compensation table below.

The company has taken steps to qualify compensation under the Eli Lilly and Company Bonus Plan, as well as
stock options and performance awards under its management stock plans, for full deductibility as “performance-
based compensation.” The committee may make payments that are not fully deductible if, in its judgment, such
payments are necessary to achieve the company’s compensation objectives and to protect shareholder interests.
For 2006, the non-deductible compensation under this law was essentially the portion of Mr. Taurel’s and Dr.
Lechleiter’s base salary that exceeded $1,000,000 as shown in the Summary Compensation Table.

Executive Compensation Recovery Policy
The committee has adopted an executive compensation recovery policy applicable to executive ofﬁ cers. Under this pol-
icy, the company may recover incentive compensation (cash or equity) that was based on achievement of ﬁ nancial re-
sults that were subsequently the subject of a restatement if an executive ofﬁ cer engaged in intentional misconduct that
caused or partially caused the need for the restatement and the effect of the wrongdoing was to increase the amount
of bonus or incentive compensation. This policy covers income related to cash bonuses and performance awards.

2007 Compensation Decisions
Beginning in 2007, the company is implementing a new equity program, the shareholder value award (SVA), which
replaces our stock option program going forward. The SVA pays out shares of stock based on the growth of the
company’s stock price over a three-year performance period. Payouts are based on individual target grids, and
range from 60 percent of target (zero for executive ofﬁ cers) to 140 percent of target. Targets are set based on an

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expected investment return for large cap companies. Because the SVA pays in shares, it has stronger retention
power.

The performance award program remains in place, and executive ofﬁ cers received 50 percent of their total
equity grant value for 2007 in performance award shares and 50 percent in SVA shares. All other compensation
programs are unchanged from 2006.

The following table summarizes the compensation committee’s 2007 equity compensation decisions for

named executive ofﬁ cers:

Name

Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Armitage

Mr. Rice

Shareholder Value Awards

Performance Awards

$3,060,000

$1,989,000

$1,200,000

$855,000

$3,060,000

$1,989,000

$1,200,000

$855,000

Compensation Committee Report
The compensation committee (“we” or “the committee”) evaluates and establishes compensation for executive
ofﬁ cers and oversees the deferred compensation plan, the company’s management stock plans, and other man-
agement incentive, beneﬁ t and perquisite programs. Management has the primary responsibility for the company’s
ﬁ nancial statements and reporting process, including the disclosure of executive compensation. With this in mind,
we have reviewed and discussed with management the Compensation Discussion and Analysis found on pages
77–85 of this report. The committee is satisﬁ ed that the Compensation Discussion and Analysis fairly and com-
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 ling with the Securities and Exchange Commission.

Karen N. Horn, Ph.D., Chair
George M.C. Fisher
J. Erik Fyrwald
Ellen R. Marram

Summary Compensation Table 1

Name and Principal Position
Current

Sidney Taurel
Chairman of the Board and Chief
Executive Ofﬁ cer

John C. Lechleiter, Ph.D.
President and Chief Operating
Ofﬁ cer

Steven M. Paul, M.D.
Executive Vice President,
Science and Technology

Robert A. Armitage
Senior Vice President and
General Counsel

Derica W. Rice
Senior Vice President and
Chief Financial Ofﬁ cer

Retired

Charles E. Golden
Retired Executive Vice President
and Chief Financial Ofﬁ cer

Year

Salary ($)

Stock Awards2
($)

Option Awards2
($)

Non-equity
Incentive Plan
Compensation3
($)

Change in
Pension Value4
($)

All Other
Compensation5
($)

Total
Compensation
($)

2006

$1,650,333

$5,400,000

$3,805,333

$2,764,308

$1,417,434

$192,409

$15,229,817

2006

$1,112,000

$3,510,000

$3,967,976

$1,490,080

$1,156,247

$68,790

$11,305,093

2006

$916,167

$1,864,460

$1,240,000

$1,043,514

$607,463

$55,789

$5,727,393

2006

$701,657

$1,394,053

$1,339,911

$705,165

$231,862

$42,691

$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 6

$325,640

$134,878

$475,494

$2,391,079

1 No bonus was paid to a named executive ofﬁ cer except as part of a non-equity incentive plan.
2 A discussion of the assumptions used in calculating these values may be found in Note 7 to our 2006 audited
ﬁ nancial statements on pages 40–41 of our annual report.

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3 Payment for 2006 performance made in March 2007 under the Lilly Bonus Plan.
4 The amounts in this column are the change in pension value for each individual. No named executive ofﬁ cer re-
ceived preferential or above-market earnings on deferred compensation.
5 The table below shows the components of this column, which include the company match for each individual’s
401(k) plan contributions, tax gross-ups, perquisites, and the cost of Mr. Golden’s retiree medical and dental
coverage. We calculate the incremental cost to the company of any personal use of the corporate aircraft based
on the cost of fuel, trip-related maintenance, crew travel expenses, on-board catering, landing fees, trip-related
hangar and parking costs, and smaller variable costs, offset by any time share lease payments by the executive.
Since the company-owned aircraft are used primarily for business travel, we do not include the ﬁ xed costs that do
not change based on usage, such as pilots’ salaries, the purchase costs of the company-owned aircraft, and the
cost of maintenance not related to trips.

Name

Mr. Taurel
Dr. Lechleiter
Dr. Paul
Mr. Armitage
Mr. Rice
Mr. Golden

401(k) Match

Tax Gross-ups

Perquisites

Retiree Medical Expense

$99,020
$66,720
$54,970
$42,099
$36,900
$17,154

$1,382 (a)
$2,070 (b)
$819 (b)
$592 (b)
$822 (b)
$361,916 (c)

$92,007 (d)

0
0
0
0
0

0
0
0
0
0
$96,424

Total “All Other
Compensation”

$192,409
$68,790
$55,789
$42,691
$37,722
$475,494

(a) Tax reimbursements on income imputed to Mr. Taurel for his use of the corporate aircraft to attend outside
board meetings and for travel by his wife on the corporate aircraft to attend certain company functions involv-
ing spouse participation.
(b) Tax reimbursements for travel by the executives’ spouses on the corporate aircraft to attend certain com-
pany functions involving spouse participation.
(c) Tax reimbursements on income imputed to Mr. Golden for FICA tax payments made by the company on his
beneﬁ ts accrued under the company’s non-qualiﬁ ed pension plan. All participants in the non-qualiﬁ ed pension
plan are eligible for this one-time reimbursement upon retirement.
(d) Includes $91,069, representing the incremental cost to the company of use of the corporate aircraft to at-
tend outside board meetings. The amount in this column also includes Mrs. Taurel’s expenses to attend board
functions that included spouse participation. In addition, Mr. Taurel’s family members have occasionally ac-
companied him on business trips, at no incremental cost to the company.

6 This amount reﬂ ects expense to the company for options granted to Mr. Golden in 2004 and 2005. There was no
expense for Mr. Golden’s 2006 stock option award, which was forfeited on his retirement according to its terms.

We have no employment agreements with our named executive ofﬁ cers.

The compensation plans under which the grants in the following table were made are generally described in

the Compensation Discussion and Analysis, beginning on page 77, and include the Eli Lilly and Company Bonus
Plan, a non-equity incentive plan, and the 2002 Lilly Stock Plan, which provides for performance awards, stock op-
tions, restricted stock grants, and restricted stock units.

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Grants of Plan-Based Awards During 2006

Name

Current

Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Armitage

Mr. Rice

Retired

Mr. Golden

Compensation
Committee
Action Date

Grant Date

—
2/10/2006
2/10/2006

—
12/19/2005
12/19/2005

—
2/10/2006
2/10/2006
5/1/2006 5

—
—4
—4
1/20/2006

—
2/10/2006
2/10/2006

—
12/19/2005
12/19/2005

Estimated
Possible Payouts
Under Non-Equity
Incentive Plan Awards 1

Estimated
Possible Payouts
Under Equity
Incentive Plan Awards 2

Threshold
($)

Target
($)

Maximum
($)

Threshold
(# shares)

Target
(# shares)

Maximum
(# shares)

All Other
Option
Awards:
Number of
Securities
Underlying
Options 3

Exercise or
Base Price
of Option
Awards
($/share)

Grant Date
Fair Value
of Equity
Awards

$2,062,917

$4,125,834

$1,112,000

$2,224,000

$778,742

$1,557,484

$526,243

$1,052,486

$433,183

$866,366

$729,045 6

$1,458,090 6

64,080

128,160

216,867

$56.18

41,652

83,304

21,360

42,720

16,020

32,040

8,010

16,020

140,964

$56.18

72,289

$56.18

54,217

$56.18

27,108
30,000

$56.18
$52.54

$3,600,000
$3,600,000

$2,340,000
$2,340,000

$1,200,000
$1,200,000

$900,000
$900,000

$450,000
$450,000
$471,900

19,580 7

39,160 7

66,265 8

$56.18

$1,100,000 9
$1,100,000

1 These columns show the range of payouts targeted for 2006 performance under the Eli Lilly and Company Bonus
Plan as described in the section titled “Cash Incentive Bonuses” in the Compensation Discussion and Analysis. The
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 Table in the column titled “Non-equity Incentive Plan Compensation.”
2 These columns show the range of payouts targeted for 2006 performance under the 2002 Lilly Stock Plan as
described in the section titled “Equity Incentives—Performance Awards” in the Compensation Discussion and
Analysis. The dollar amount recognized by the company for these performance awards is shown in the Summary
Compensation Table in the column titled “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.
3 Stock options granted under the 2002 Lilly Stock Plan are described in the Outstanding Equity Awards at Fiscal
Year-End Table below.
4 Mr. Rice’s stock award and stock option award granted in February 2006 were not approved by the compensation
committee because he was not an executive ofﬁ cer at the time they were granted.
5 Mr. Rice became an executive ofﬁ cer when he was promoted to his current position effective May 1, 2006, and
received a special grant of stock options at that time.
6 Mr. Golden’s bonus payment was prorated, based on the amount of base salary he earned prior to his retirement
and is shown in the Summary Compensation Table on page 85.
7 Mr. Golden’s equity incentive grant payout was prorated, based on his retirement date. His actual stock award is
listed in the table below.
8 Mr. Golden’s 2006 stock option award was forfeited on his retirement according to its terms.
9 The value shown is the grant date fair value of the full award; however, Mr. Golden’s equity incentive grant was
prorated based on his retirement date.

Our performance awards granted in 2006 paid out in January 2007, and the named executive ofﬁ cers received

the following shares:

Name
Mr. Taurel
Dr. Lechleiter
Dr. Paul
Mr. Armitage
Mr. Rice
Mr. Golden

Performance Awards

96,120
62,478
32,040
24,030
12,015
9,656

Value on December 31, 2006
$5,007,852
$3,255,104
$1,669,284
$1,251,963
$625,982
$503,078

For 2006 performance, payouts were 150 percent of target. In order to receive a performance award payout,
a participant must have remained employed with the company through December 31, 2006 (except in the case of
death, disability, or retirement). In addition, an executive who was an executive ofﬁ cer at the time of grant and at
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 ed above, and except for Mr. Rice and

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Mr. Golden, these shares will remain restricted (and subject to forfeiture if the executive resigns) until February
2008. Mr. Rice’s shares are not restricted because he was not an executive ofﬁ cer at the time of grant, and Mr.
Golden’s shares are not restricted because he retired prior to payment.

Options are granted at 100 percent of fair market value on the date of grant; they vest after three years and

expire after 10 years. We do not pay dividend equivalents on stock options. More discussion of our equity compen-
sation programs can be found in the Compensation Discussion and Analysis on pages 77–85.

Outstanding Equity Awards at December 31, 2006 1

Option Awards

Name
Current
Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Armitage

Mr. Rice

Retired
Mr. Golden

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Number of Securities
Underlying
Unexercised Options
(#) 3
Exercisable

Number of Securities
Underlying
Unexercised Options
(#) 3
Unexercisable

Option Exercise
Price ($)

Option Expiration
Date

216,867 4
255,621
400,000

140,964 4
127,811
200,000

72,289 4
85,207
120,000

50,000 9
25,000 9

54,217 4
53,254
80,000

30,000 10
27,108
23,077
25,000

350,000
350,000 7
175,000
350,000
350,000
240,000
50,000
125,000

120,000
120,000 8
60,000
10,000
100,000
80,000
50,000
20,000

50,000
46,000
75,900
23,000
25,000 9

46,000
25,000
20,000
100,000

80,000
23,800
7,000
23,100
14,000

11,200
10,000
5,000
12,000
10,000
7,300
5,700

78,107 11
120,000 11
120,000
120,000 12
60,000
120,000
120,000
80,000
60,000

$56.18
55.65
73.11
57.85
75.92
79.28
88.41
66.38
74.28
61.22
64.06

$56.18
55.65
73.11
57.85
75.92
79.28
88.41
88.41
66.38
74.28
64.06

$56.18
55.65
73.11
57.85
75.92
73.98
79.28
88.41
88.41
88.41
66.38
74.28
64.06
54.80

$56.18
55.65
73.11
57.85
75.92
79.28
73.98
66.38
$52.54
56.18
55.65
73.11
57.85
75.92
79.28
73.98
66.38
74.28
64.06

$55.65
73.11
57.85
75.92
79.28
88.41
66.38
74.28
64.06

2/09/2016
2/10/2015
2/14/2014
2/15/2013
2/17/2012
10/04/2011
12/17/2010
10/16/2009
10/17/2008
5/30/2008
10/19/2007

2/09/2016
2/10/2015
2/14/2014
2/15/2013
2/17/2012
10/04/2011
12/17/2010
12/17/2010
10/16/2009
10/17/2008
10/19/2007

2/09/2016
2/10/2015
12/14/2014
2/15/2013
2/17/2012
2/18/2011
10/04/2011
12/17/2010
12/17/2010
12/17/2010
10/16/2009
10/17/2008
10/19/2007
7/18/2007

2/09/2016
2/10/2015
2/14/2014
2/15/2013
2/17/2012
10/04/2011
2/18/2011
10/16/2009
4/29/2016
2/09/2016
2/10/2015
2/14/2014
2/15/2013
2/17/2012
10/04/2011
2/18/2011
10/16/2009
10/17/2008
10/19/2007

4/30/2011 13
4/30/2011 13
4/30/2011 13
4/30/2011 13
4/30/2011 13

12/17/2010
10/16/2009
10/17/2008
10/19/2007

Stock Awards 2

Number of Shares
or Units That
Have Not Vested
(#)

Market Value
of Shares or Units
of Stock That
Have Not Vested
($)

92,120 5
64,690 6

$5,007,852
$3,370,349

62,478 5
32,345 6

$3,255,104
$1,685,174

32,040 5
5,000
3,000
21,564 6

$1,669,284
$260,500
$156,300
$1,123,484

24,030 5
13,478 6

$1,251,963
$702,204

1 No executive ofﬁ cer had any unearned equity awards outstanding as of December 31, 2006.

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2 These two columns show performance award shares paid in restricted shares with a holding period of one year.
The restricted stock shares pay dividends during the restriction period, but the dividends are not preferential. For
Dr. Paul this also reﬂ ects additional restricted stock grants totaling 8,000 shares.
3 The vesting date of each option is listed in the table below by expiration date:

Expiration Date

Vesting Date

Expiration Date

Vesting Date

04/29/2016

02/09/2016

02/10/2015

02/14/2014

02/15/2013

02/17/2012

10/04/2011

05/01/2009

02/10/2009

02/11/2008

02/19/2007

02/17/2006

02/18/2005

10/03/2003

02/18/2011

02/20/2004

12/17/2010

10/16/2009

10/17/2008

05/30/2008

10/19/2007

07/18/2007

12/18/2003

10/18/2002

10/19/2001

06/04/2001

10/20/2000

07/21/2000

4 Options were granted on February 10, 2006 and expire on February 9, 2016.
5 Shares paid out in January 2007 for 2006 performance. These shares are restricted until February 2008.
6 Shares paid out in January 2006 for 2005 performance. These shares vested in February 2007.
7 Mr. Taurel transferred 348,683 shares of this option to an irrevocable trust for the beneﬁ t of his children, and
these shares vested on April 30, 2002.
8 Dr. Lechleiter transferred 118,683 shares of his option to an irrevocable trust for the beneﬁ t of his children, and
these shares vested on April 30, 2002.
9 These options were granted outside of the normal annual cycle and vest in three installments, as follows: 25 per-
cent on December 19, 2005; 25 percent on December 18, 2008; and 50 percent on November 2, 2009.
10 Options were granted on May 1, 2006 and expire on April 29, 2016.
11 Mr. Golden’s two most recent options’ vesting dates were accelerated due to his retirement on April 30, 2006.
12 Mr. Golden transferred 118,683 shares of this option to an irrevocable trust for the beneﬁ t of his children, and
these shares vested on April 30, 2002.
13 The exercise period for the ﬁ rst ﬁ ve option grants shown were shortened to correspond with the ﬁ fth anniversary
of Mr. Golden’s retirement. Since Mr. Golden retired within 12 months of receiving the 2006 stock option, it did not
vest, and it was forfeited.

Options Exercised and Stock Vested in 2006

Name

Current

Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Armitage

Mr. Rice

Retired

Mr. Golden

Option Awards

Stock Awards 2

Number of Shares Acquired
on Exercise (#)

Value Realized
on Exercise ($) 1

Number of Shares Acquired
on Vesting (#)

Value Realized
on Vesting ($)

147,110

13,110

2,890

2,800

$3,189,738

$269,072

$59,664

$57,246

28,000

14,000

9,000

10,600

$1,585,360

$792,680

$509,580

$588,572

109,170

$2,443,373

28,766 3

$1,552,236

1 Amounts reﬂ ect the difference between the exercise price of the option and the market price at the time of
exercise.
2 Amounts reﬂ ect the market value of the stock on the day the stock vested. These shares represent performance
awards issued in January 2005 for company performance in 2004, which were subject to forfeiture for one year
following issuance.
3 In addition to the January 2005 performance award, for Mr. Golden this number includes performance awards
paid out in restricted stock in January 2006 for 2005 performance, which vested on his retirement.

Retirement Beneﬁ ts
We maintain two programs to provide retirement income to all eligible U.S. employees, including executive ofﬁ cers:
• The Lilly Employee 401(k) Plan, a deﬁ ned contribution plan qualiﬁ ed under sections 401(a) and 401(k) of the
Internal Revenue Code. Eligible employees may elect to contribute a portion of their salary to the plan, and
the company provides matching contributions on the employees’ contributions up to 6 percent of base salary.

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The matching contributions are in the form of Lilly stock. The employee contributions, company contributions,
and earnings thereon are paid out in accordance with elections made by the participant. See the Summary
Compensation Table on page 85 for information about company contributions to the named executive ofﬁ cers.

• The Lilly Retirement Plan (the retirement plan), a tax-qualiﬁ ed deﬁ ned beneﬁ t plan that provides monthly

retirement beneﬁ ts to eligible employees. See the Summary Compensation Table on page 85 for additional
information about the value of these pension beneﬁ ts.
Section 415 of the Internal Revenue Code generally places a limit on the amount of annual pension that can be
paid from a tax-qualiﬁ ed plan ($175,000) as well as on the amount of annual earnings that can be used to calculate
a pension beneﬁ t ($220,000). However, since 1975 the company has maintained a non-tax-qualiﬁ ed plan that pays
eligible employees the difference between the amount payable under the tax-qualiﬁ ed plan and the amount they
would have received without the qualiﬁ ed plan’s limit. The non-qualiﬁ ed plan is unfunded and subject to forfeiture
in the event of bankruptcy.

The following table shows beneﬁ ts that named executive ofﬁ cers are entitled to under the retirement plan.

Pension Beneﬁ ts in 2006

Name
Current
Mr. Taurel 2

Dr. Lechleiter 3

Dr. Paul 4

Mr. Armitage

Mr. Rice

Retired
Mr. Golden

Plan Name

Number of Years of Credited
Service

Present Value of
Accumulated Beneﬁ t ($) 1

Payments During
Last Fiscal year ($)

tax-qualiﬁ ed plan
non-qualiﬁ ed plan
total
tax-qualiﬁ ed plan
non-qualiﬁ ed plan
total
tax-qualiﬁ ed plan
non-qualiﬁ ed plan
total
tax-qualiﬁ ed plan
non-qualiﬁ ed plan
total
tax-qualiﬁ ed plan
non-qualiﬁ ed plan
total

tax-qualiﬁ ed plan
non-qualiﬁ ed plan
total

35
35

27
27

14
14 5

8
8 6

17
17

10
35 7

$1,203,846
$30,103,284
$31,307,130
$693,969
$5,682,282
$6,376,251
$242,446
$2,650,529
$2,892,975
$165,003
$581,787
$746,790
$230,177
$378,739
$608,916

$237,299
$14,909,762
$15,147,061

—
—
—
—
—
—
—
—
—
—
—
—
—
—
—

$13,486
$850,758
$864,244

1 The calculation of present value of accumulated beneﬁ t assumes a discount rate of 6 percent, mortality RP
2000CH (post-retirement decrement only), and joint and survivor beneﬁ t of 25 percent.
2 Mr. Taurel is currently eligible for full retirement beneﬁ ts.
3 Dr. Lechleiter is currently eligible for early retirement. He qualiﬁ es for approximately 13 percent less than his full
retirement beneﬁ t. Early retirement beneﬁ ts are further described below.
4 Dr. Paul is currently eligible for early retirement because he is over 55 years old and has more than 10 years of
service. He qualiﬁ es for approximately 32 percent less than his full retirement beneﬁ t. Early retirement beneﬁ ts
are further described below.
5 Dr. Paul will be eligible for an additional 10 years of service, should he still be employed by the company past age
60. This additional service credit increased the present value of his non-qualiﬁ ed pension beneﬁ t shown above by
$1,033,206.
6 Mr. Armitage will be credited with approximately one year of service when he reaches age 60, making him eligible to
receive a reduced retirement beneﬁ t under the company’s retirement program. Since this arrangement only applies
towards his eligibility for a beneﬁ t, it does not change the present value of his non-qualiﬁ ed pension beneﬁ t.
7 Mr. Golden’s additional years of service credit increased the present value of his non-qualiﬁ ed pension beneﬁ t by
$11,615,578.

The retirement plan beneﬁ ts shown in the table are net present values. The beneﬁ ts are not payable as a lump

sum; they are generally paid as a monthly annuity for the life of the retiree. The annual beneﬁ t under the plan is
calculated using the average of the annual earnings for the highest ﬁ ve out of the last 10 years of service (average
annual earnings). Annual earnings covered by the retirement plan consist of salary and bonus (amounts disclosed
in the company’s proxy statements for the relevant years) calculated for the amount of bonus paid (rather than
credited) and for the year in which earnings are paid (rather than earned or credited). In addition, for years prior to
2003, the calculation includes performance award payouts. The amount of the beneﬁ t also depends on the retiree’s
age and years of service at the time of retirement. Beneﬁ t calculations are based on “points,” with an employee’s

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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

Named Executive
Current
Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Armitage

Mr. Rice

Retired
Mr. Golden

Plan

Executive
Contributions in Last
Fiscal Year ($) 1

Registrant
Contributions in Last
Fiscal Year ($) 2

Aggregate
Earnings in
Last Fiscal Year ($)

Aggregate
Distributions in
Last Fiscal Year ($)

Aggregate
Balance at Last
Fiscal Year End ($) 3

non-qualiﬁ ed savings
deferred compensation
total
non-qualiﬁ ed savings
deferred compensation
total
non-qualiﬁ ed savings
deferred compensation
total
non-qualiﬁ ed savings
deferred compensation
total
non-qualiﬁ ed savings
deferred compensation
total

non-qualiﬁ ed savings
deferred compensation
total

85,820
0
85,820
53,520
259,884
313,404
41,770
0
41,770
28,899
527,858
556,757
23,700
0
23,700

3,954
0
3,954

85,820
0
85,820
53,520
0
53,520
41,770
0
41,770
28,899
0
28,899
23,700
0
23,700

3,954
0
3,954

79,063
433,657
512,720
30,424
125,752
156,176
25,454
0
25,454
14,670
80,027
94,697
4,002
0
4,002

36,969
131,934
168,903

10,405
0
10,405

2,517,012
8,086,877
10,603,889
677,192
2,390,033
3,067,225
621,447
0
621,447
271,672
1,583,742
1,855,414
101,584
0
101,584

622,345
2,460,323
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
Mr. Taurel
Dr. Lechleiter
Dr. Paul
Mr. Armitage
Mr. Rice
Mr. Golden

2006 ($)
$171,640
$366,924
$83,540
$585,657
$47,400
$7,908

Previous Years ($)
$3,170,235
$1,815,963
$135,171
$1,281,715
0
$1,995,961

Total ($)
$3,341,875
$2,182,887
$218,711
$1,867,372
$47,400
$2,003,869

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The Nonqualiﬁ ed Deferred Compensation in 2006 Table above shows information about two company programs:

a non-qualiﬁ ed savings plan and a deferred compensation plan. The non-qualiﬁ ed savings plan is designed to
allow each executive to contribute a percentage of his or her base salary, and receive a company match, beyond the
contribution limits prescribed by the IRS with regard to 401(k) plans. This plan is administered in the same manner
as the company 401(k) Plan, with the same participation and investment elections, and all employees are eligible to
participate. Executive ofﬁ cers and other executives may also defer receipt of all or part of their cash compensation
under the company’s deferred compensation plan. Amounts deferred by executives under this program are credited
with interest at 120 percent of the applicable federal long-term rate as established for the preceding December by
the U.S. Treasury Department under Section 1274(d) of the Internal Revenue Code with monthly compounding, which
was 5.6 percent for 2006 and is 5.7 percent for 2007. Participants may elect to receive the funds in a lump sum or in
up to 10 annual installments following retirement, but may not make withdrawals during their employment, except in
the event of hardship as approved by the compensation committee. All deferral elections and associated distribution
schedules are irrevocable. Both plans are unfunded and subject to forfeiture in the event of bankruptcy.

Potential Payments Upon Termination or Change in Control
The following table describes the potential payments and beneﬁ ts under the company’s compensation and beneﬁ t
plans and arrangements to which the named executive ofﬁ cers would be entitled upon termination of employment.
Except for (i) certain terminations following a change in control of the company, as described below, and (ii) certain
pension arrangements as described under “Pension Beneﬁ ts” above, there are no agreements, arrangements or
plans that entitle executive ofﬁ cers to severance, perquisites, or other enhanced beneﬁ ts upon termination of their
employment. Any agreement to provide such payments or beneﬁ ts to a terminating executive ofﬁ cer (other than
following a change in control) would be in the discretion of the compensation committee.

Potential Payments Upon Termination of Employment

Cash Severance
Payment

Incremental
Pension Beneﬁ t
(present value)

Continuation of
Medical / Welfare
Beneﬁ ts (present
value)

Acceleration and
Continuation of Equity
Awards (unamortized
expense as of
12/31/06)

Excise Tax
Gross-up

Total
Termination
Beneﬁ ts

T
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X
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Current

Mr. Taurel

• Voluntary retirement

• Involuntary termination
• Involuntary or good reason
termination after change in
control (CIC)
Dr. Lechleiter

• Voluntary retirement

• Involuntary termination

• Involuntary or good reason

termination after CIC

Dr. Paul

• Voluntary retirement

• Involuntary termination
• Involuntary or good reason

termination after CIC

Mr. Armitage

• Voluntary termination

• Involuntary termination
• Involuntary or good reason

termination after CIC

Mr. Rice

• Voluntary termination

• Involuntary termination
• Involuntary or good reason

termination after CIC

Retired

Mr. Golden

$8,853,216

0 1

$24,000 2

$600,000

$9,477,216

$5,204,160

$1,254,031

$24,000 2

$390,000

$2,699,273

$9,571,464

$3,931,028

$3,999,724

$116,360

$264,460

$3,470,583

$11,782,155

$2,834,330

$1,146,757

$255,584

$1,160,453

$2,114,798

$7,511,922

$2,561,850

$70,796

$24,000

$880,075

$974,403

$4,511,124

• Voluntary retirement (4/30/06)

$14,909,762 3

$96,424 4

$15,006,186

1 See “Change-in-Control Severance Pay Program—Incremental Pension Beneﬁ t” below.
2 See “Accrued Pay and Regular Retirement Beneﬁ ts” and “Change-in-Control Severance Pay Program—
Continuation of Medical and Welfare Beneﬁ ts” below.
3 See the Pension Beneﬁ ts in 2006 Table on page 90.
4 See the footnote 5 to the Summary Compensation Table on page 86.

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Accrued Pay and Regular Retirement Beneﬁ ts. The amounts shown in the table above do not include payments
and beneﬁ ts to the extent they are provided on a non-discriminatory basis to salaried employees generally upon
termination of employment. These include:

• Accrued salary and vacation pay
• Regular pension beneﬁ ts under the Lilly Retirement Plan and the non-qualiﬁ ed retirement plan. See “Retirement
Beneﬁ ts” on page 89. The amounts shown in the table above as Incremental Pension Beneﬁ ts are explained below.

• Welfare beneﬁ ts provided to all U.S. retirees, including retiree medical and dental insurance. The amounts

shown in the table above as Continuation of Medical / Welfare Beneﬁ ts are explained below.

• Distributions of plan balances under the Lilly 401(k) plan and the non-qualiﬁ ed savings plan. See the narrative

following the Nonqualiﬁ ed Deferred Compensation in 2006 Table for information about the 401(k) plan and “Non-
qualiﬁ ed Deferred Compensation” on pages 91–92 for information about the non-qualiﬁ ed savings plan.

• The value of accelerated vesting of certain unvested equity grants upon retirement. Under the company’s stock
plans, employees who terminate employment while retirement-eligible receive accelerated vesting of unvested
stock options (except for options granted in the 12 months before retirement, which are forfeited), outstanding
performance awards (which are paid on a reduced basis for time worked during the award period), and restricted
stock awarded in payment of previous performance awards.

• The value of option continuation upon retirement. When an employee terminates prior to retirement, his or her

stock options are terminated 30 days thereafter. However, when a retirement-eligible employee terminates, his or
her options remain in force until the earlier of ﬁ ve years after retirement or the option’s normal expiration date.

Deferred Compensation. The amounts shown in the table do not include distributions of plan balances under the
Lilly deferred compensation plan. Those amounts are shown in the Non-qualiﬁ ed Deferred Compensation in 2006
Table on page 91.

Death and Disability. A termination of employment due to death or disability does not entitle the named executive
ofﬁ cers to any payments or beneﬁ ts that are not available to salaried employees generally.

Change-in-Control Severance Pay Program. As described in the Compensation Discussion and Analysis under
“Severance Pay” on pages 83–84, the company maintains a change-in-control severance pay program for nearly
all employees, including the named executive ofﬁ cers (the “CIC Program”). The amounts shown in the table for
“involuntary or good reason termination” following a change in control are based on the following assumptions and
plan provisions:

• Covered terminations. The table assumes a termination of employment that is eligible for severance under the
terms of the current plan, based on the named executive’s compensation, beneﬁ ts, age, and service credit at
December 31, 2006. Eligible terminations include an involuntary termination for reasons other than cause, or a
voluntary termination by the executive for good reason, within two years following the change in control.

—A termination of an executive ofﬁ cer by the company is for cause if it is for any of the following reasons:
(i) the employee’s willful and continued refusal to perform, without legal cause, his/her material duties,
resulting in demonstrable economic harm to the company; (ii) any act of fraud, dishonesty or gross
misconduct resulting in signiﬁ cant economic harm or other signiﬁ cant harm to the business reputation of
the company; or (iii) conviction of or the entering of a plea of guilty or nolo contendere to a felony.

—A termination by the executive ofﬁ cer is for good reason if it results from (i) a material diminution in the

nature or status of the executive’s position, title, reporting relationship, duties, responsibilities or authority,
or the assignment to him/her of additional responsibilities that materially increase his/her workload;
(ii) any reduction in the executive’s then-current base salary; (iii) a material reduction in the executive’s
opportunities to earn incentive bonuses below those in effect for the year prior to the change in control; (iv) a
material reduction in the executive’s employee beneﬁ ts from the beneﬁ t levels in effect immediately prior to
the change in control; (v) the failure to grant to the executive stock options, stock units, performance shares
or similar incentive rights during each twelve (12) month period following the change in control on the basis
of a number of shares or units and all other material terms at least as favorable to the executive as those
rights granted to him/her on an annualized average basis for the three (3) year period immediately prior to
the change in control; or (vi) relocation of the executive by more than ﬁ fty (50) miles.

• Cash severance payment. Represents the CIC Program beneﬁ t of two times the 2006 annual base salary plus two

times cash bonus for 2006 under the Eli Lilly and Company Bonus Plan.

• Incremental pension beneﬁ t. Represents the present value of an incremental non-qualiﬁ ed pension beneﬁ t of
two years of age credit and two years of service credit that is provided under the CIC Program. The following

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standard actuarial assumptions were used to calculate each individual’s incremental pension beneﬁ t:

Discount rate:

6 percent

Mortality (post-retirement only):

RP 2000CH

Joint & survivor beneﬁ t:

25% of pension

Because Mr. Taurel already qualiﬁ es for a full pension beneﬁ t, the additional age credit and service credit do

not increase his beneﬁ t.

• Continuation of medical and welfare beneﬁ ts. Represents the present value of the CIC Plan’s guarantee for

two years following a covered termination of continued coverage equivalent to the company’s current active
employee medical, dental, life, and long-term disability insurance. For the three retirement-eligible employees,
Mr. Taurel and Drs. Lechleiter and Paul, there is limited incremental beneﬁ t under the CIC Plan because they
would be entitled to equivalent medical and dental coverage in the ordinary course as retirees regardless of the
reason for termination. The same actuarial assumptions were used to calculate continuation of medical and
welfare beneﬁ ts as were used to calculate incremental pension beneﬁ ts, with the addition of an assumed COBRA
rate of $12,000 per year.

• Acceleration and continuation of equity awards. Under the CIC Plan, upon a covered termination, any unvested
stock options, restricted stock, or other equity awards would vest, and options would be exercisable for up to
three years following termination. For the three retirement-eligible employees, Mr. Taurel and Drs. Lechleiter
and Paul, the only equity award receiving accelerated vesting and term extension because of the CIC Plan would
be 8,000 shares of restricted stock held by Dr. Paul; all other unvested equity awards automatically vest upon
retirement regardless of reason. The amounts in this column represent the previously unamortized expense that
would be recognized in connection with the acceleration of unvested equity grants. In addition, the two named
executive ofﬁ cers who are not retirement-eligible, Messrs. Armitage and Rice, would receive the beneﬁ t under
the CIC Plan of continuation of their outstanding stock options for up to three years following termination of
employment. There would be no incremental expense to the company for this continuation because the option
would already have been fully expensed.

• Excise tax gross-up. Upon a change in control, employees may be subject to certain excise taxes under Section
280G of the Internal Revenue Code. The company has agreed to reimburse the affected employees for those
excise taxes as well as any income and excise taxes payable by the executive as a result of any reimbursements
for the 280G excise taxes. The amounts in the table are based on a 280G excise tax rate of 20 percent, a statutory
25 percent federal income tax rate, a 1.45 percent Medicare tax rate and a 3.4 percent state income tax rate.

Payments Upon Change in Control Alone. The CIC Program is a “double trigger” program, meaning payments are
made only if the employee suffers a covered termination of employment within two years following the change in
control. Employees do not receive payments upon a change in control alone, except that upon consummation of
a change in control a partial payment of outstanding performance awards would be made, reduced to reﬂ ect the
portion of the year prior to the change in control. For example, if a change in control occurred on June 30, the em-
ployee would receive one-half of the value of the performance award, calculated based on the company’s then-cur-
rent ﬁ nancial forecast for the year.

Related Person Transaction
As noted above, under board policy, for security reasons the company aircraft is made available to Mr. Taurel for
all travel. The company has entered into a time-share arrangement with Mr. Taurel in connection with his personal
use of company aircraft. Under the time-share agreement, Mr. Taurel leases the company aircraft, including crew
and ﬂ ight services, for personal ﬂ ights. He pays a time-share fee based on the company’s cost of the ﬂ ight but
capped at the greater of (i) an amount equivalent to ﬁ rst-class airfare for the relevant ﬂ ight (if commercially avail-
able), and (ii) the Standard Industry Fare Levels as established by the Internal Revenue Service for purposes of
determining taxable fringe beneﬁ ts.

Ownership of Company Stock

Common Stock Ownership by Directors and Executive Ofﬁ cers
The following table sets forth the number of shares of company common stock beneﬁ cially owned by the directors,
the named executive ofﬁ cers, and all directors and executive ofﬁ cers as a group, as of February 5, 2007.
The table shows shares held by named executives in the Lilly Employee 401(k) Plan, shares credited to the ac-

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counts of outside directors in the Directors’ Deferral Plan, and total shares beneﬁ cially owned by each individual,
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.

Name of Individual or Identity of Group

401(k) Plan Shares

Directors’ Deferral
Plan Shares 1

Total Shares Owned
Beneﬁ cially 2

Stock Options Exercisable
Within 60 Days
of February 5, 2007

Robert A. Armitage

Sir Winfried Bischoff

J. Michael Cook

Martin S. Feldstein, Ph.D.

George M.C. Fisher

J. Erik Fyrwald

Alfred G. Gilman, M.D., Ph.D.

Charles E. Golden

Karen N. Horn, Ph.D.

John C. Lechleiter, Ph.D.

Ellen R. Marram

Steven M. Paul, M.D.

Franklyn G. Prendergast, M.D., Ph.D.

Kathi P. Seifert

Derica W. Rice

Sidney Taurel

1,218

—

1,716

—

12,538

—

3,036

—

4,585

16,366

—

8,115

7,601

6,528

14,383

4,391

13,861

—

26,258

—

6,528

—

19,335

15,489

—

49,701

10,115

9,401

7,528

24,383

4,491

13,861

127,778 3

26,258

201,258 3

7,528

69,396

19,335

19,022

37,410

227,900

11,200

—

8,400

11,200

—

14,000

878,107

14,000

760,000

5,600

530,900

14,000

86,200

1,114,992

2,390,000

All directors and executive ofﬁ cers as a group (21 people): 2,071,697

1 See description of the Directors’ Deferral Plan, pages 73–74.
2 Unless otherwise indicated in a footnote, each person listed in the table possesses sole voting and sole invest-
ment power with respect to the shares shown in the table to be owned by that person. No person listed in the
table owns more than 0.10 percent of the outstanding common stock of the company. All directors and executive
ofﬁ cers as a group own 0.18 percent of the outstanding common stock of the company. 24,349 of Mr. Golden’s
shares were pledged and 1,800 of Mr. Cook’s shares were on deposit in a margin account as of February 5, 2007.
3 The shares shown for Dr. Lechleiter include 10,698 shares that are owned by a family foundation for which he is a di-
rector. Dr. Lechleiter has shared voting power and shared investment power over the shares held by the foundation.

Principal Holders of Stock
To the best of the company’s knowledge, the only beneﬁ cial owners of more than 5 percent of the outstanding
shares of the company’s common stock are the shareholders listed below:

Name and Address

Lilly Endowment, Inc. (the “Endowment”)
2801 North Meridian Street
Indianapolis, Indiana 46208

Number of Shares
Beneﬁ cially Owned

140,350,804
(as of 2/5/07)

Capital Research and Management Company
333 South Hope Street
Los Angeles, California 90071

108,167,000
(as of 12/29/06)

Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109

66,929,125
(as of 12/31/06)

Percent of
Class

12.4%

9.6%

5.9%

The Endowment has sole voting and sole investment power with respect to its shares. The board of directors of the
Endowment is composed of Mr. Thomas M. Lofton, chairman; Mr. N. Clay Robbins, president; Mrs. Mary K. Lisher;
Drs. Otis R. Bowen and William G. Enright; and Messrs. Daniel P. Carmichael, Eli Lilly II, and Eugene F. Ratliff
(Emeritus Director). Each of the directors is, either directly or indirectly, a shareholder of the company.

Capital Research and Management Company acts as investment advisor to various investment companies. It

has sole voting power with respect to 17,450,000 shares (approximately 1.5 percent of shares outstanding) and sole

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investment power with respect to all of its shares.

Wellington Management Company, LLP, acts as investment advisor to various clients. It has shared voting
power with respect to 26,252,339 shares (approximately 2.3 percent of shares outstanding) and shared investment
power with respect to all of its shares.

Items of Business to Be Acted Upon at the Meeting

Item 1. Election of Directors

Under the company’s articles of incorporation, the board is divided into three classes with approximately one-third
of the directors standing for election each year. The term for directors elected this year will expire at the annual
meeting of shareholders held in 2010. Each of the nominees listed below has agreed to serve that term. If any
director is unable to stand for election, the board may, by resolution, provide for a lesser number of directors or
designate a substitute. In the latter event, shares represented by proxies may be voted for a substitute director.

The board recommends that you vote FOR each of the following nominees:

• Sir Winfried Bischoff
• J. Michael Cook
• Franklyn G. Prendergast, M.D., Ph.D.
• Kathi P. Seifert

Biographical information about these nominees may be found on page 62 of this proxy statement.

Item 2. Proposal to Ratify the Appointment of Principal Independent Auditors

The audit committee has appointed the ﬁ rm of Ernst & Young LLP as principal independent auditors for the com-
pany for the year 2007. In accordance with the bylaws, this appointment is being submitted to the shareholders for
ratiﬁ cation. Ernst & Young served as the principal independent auditors for the company in 2006. Representatives
of Ernst & Young are expected to be present at the annual meeting and will be available to respond to appropriate
questions. Those representatives will have the opportunity to make a statement if they wish to do so.

The board recommends that you vote FOR ratifying the appointment of Ernst & Young LLP as principal indepen-
dent auditors for 2007.

Item 3. Proposal to Amend the Company’s Articles of Incorporation to Provide for Annual Election of Directors

The company’s Amended Articles of Incorporation currently provide that the board of directors is divided into three
classes, with each class elected every three years. In December 2006, on the recommendation of the directors and
corporate governance committee, the board unanimously adopted resolutions approving, and recommending to the
shareholders for approval, amendments to provide for the annual election of directors.

If approved, this proposal will become effective upon the ﬁ ling of Amended Articles of Incorporation containing
these amendments with the Secretary of State of Indiana, which the company intends to do promptly after shareholder
approval is obtained. Directors elected prior to the effectiveness of the amendments will stand for election for one-
year terms once their then-current terms expire. This means that directors whose terms expire at the 2008 and 2009
annual meetings of shareholders would be elected for one-year terms, and beginning with the 2010 annual meeting,
all directors would be elected for one-year terms at each annual meeting. In addition, in the case of any vacancy on the
board occurring after the 2007 annual meeting, including a vacancy created by an increase in the number of directors,
the vacancy would be ﬁ lled by interim election of the board, with the new director to serve a term ending at the next
annual meeting. At all times, directors are elected to serve for their respective terms and until their successors have
been elected and qualiﬁ ed. This proposal would not change the present number of directors, and it would not change
the board’s authority to change that number and to ﬁ ll any vacancies or newly created directorships.

Article 9(b) of the company’s Amended Articles of Incorporation contains the provisions that will be affected if
this proposal is adopted. This article, set forth in Appendix A to this proxy statement, shows the proposed changes
with deletions indicated by strike-outs and additions indicated by underlining. The board has also adopted con-
forming amendments to the company’s bylaws, to be effective immediately upon the effectiveness of the amend-
ments to the Amended Articles of Incorporation.
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Background of Proposal
The proposal is a 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 ed board structure. The board considered the view of some shareholders who believe that classiﬁ ed
boards have the effect of reducing the accountability of directors to shareholders because classiﬁ ed boards limit
the ability of shareholders to evaluate and elect all directors on an annual basis. The election of directors is the
primary means for shareholders to inﬂ uence corporate governance policies. The board gave considerable weight
to the approval at the 2006 annual meeting of a shareholder proposal requesting that the board take all necessary
steps to elect the directors annually.

The board also considered beneﬁ ts of retaining the classiﬁ ed board structure, which has a long history in
corporate law. Proponents of a classiﬁ ed structure believe it provides continuity and stability in the management
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 ed boards may enhance shareholder value by forcing an entity
seeking control of a target company to initiate arms-length discussions with the board of that company, because
the entity cannot replace the entire board in a single election. While the board generally concurred with that view,
it also took note that even without a classiﬁ ed board, the company has other means to compel a takeover bidder
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 105–106), and cer-
tain provisions of Indiana law.

The directors and corporate governance committee and the board heard advice from outside governance and

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 the directors are accountable to shareholders while
maintaining appropriate defenses to respond to inadequate takeover bids.

Vote Required
The afﬁ rmative vote of at least 80 percent of the outstanding common shares is needed to pass this proposal.

The board recommends that you vote FOR amending the company’s articles of incorporation.

Item 4. Reapproval of Material Terms of Performance Goals for the 2002 Lilly Stock Plan

Section 162(m) of the Internal 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, a public corporation cannot deduct
compensation in excess of $1 million paid to any of the named executive ofﬁ cers in the proxy statement. However,
compensation that qualiﬁ es as “performance-based” is not subject to this deduction limitation.

The 2002 Lilly Stock Plan (“2002 Plan”) allows the grant of performance awards that qualify as performance-

based compensation under Section 162(m). One of the conditions to qualify as performance-based is that the
material terms of the performance goals must be approved by the shareholders at least every ﬁ ve years. The
last such approval for the 2002 Plan was when the plan itself was approved in 2002. To preserve 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. We are 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 cers would no longer be fully
tax deductible by the company.

Shares Subject to Plan
The maximum number of shares of Lilly stock that may be issued or transferred for grants under the 2002 Plan is
the sum of:

• 80,000,000 shares;
• 5,243,448 shares that were available under the previous shareholder-approved plan (the 1998 Lilly Stock Plan)

at the time that plan terminated in April 2002;

• any shares subject to grants under the 2002 Plan or prior shareholder approved stock plans (the 1989, 1994 and
1998 Lilly Stock Plans) that are not issued or transferred due to termination, lapse, or forfeiture of the grant; and

• any shares exchanged by grantees as payment to the company of the exercise price of stock options granted

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under the 2002 Plan or prior shareholder approved stock plans.
The maximum number is subject to adjustment for stock splits, stock dividends, spin offs, reclassiﬁ cations or

other relevant changes affecting Lilly stock.

Grants Under the Plan
Under the 2002 Plan all employees of the company, including ofﬁ cers, are eligible to participate. Currently approxi-
mately 41,500 employees, including all 10 executive ofﬁ cers, are eligible to participate. The compensation com-
mittee (the “committee”) may make grants to ofﬁ cers and employees in its discretion. The board may grant stock
options under the 2002 Plan to nonemployee directors. There are currently 10 nonemployee directors.

Stock Options and Stock Appreciation Rights. The committee may grant nonqualiﬁ ed options, incentive stock
options, or other tax favored stock options under the Code. The committee establishes the option price, which may
not be less than 100 percent of the fair market value of the stock on the date of grant. Options may not be repriced.
The committee also establishes the vesting date and the term of the option.

The committee may also grant stock appreciation rights (“SARs”) – the right to receive an amount based on
appreciation in the fair market value of shares of Lilly stock over a base price. If granted without a related stock
option, the committee establishes the base price of the SARs, which may not be less than 100 percent of the fair
market value of the stock on the date of grant, and the settlement or exercise date, which may not be more than
eleven years after the grant date. If granted in connection with a stock option, the holder of SARs may, upon exer-
cise, surrender the related options and receive payment, in the form of Lilly stock, equal to the excess of the the
fair market value of Lilly stock over the exercise price in the date of exercise multiplied by the number of shares
exercised. The price and term of the SARs mirror those of the related stock option, and the SARs automatically
terminate to the extent the related options are exercised. Effectively, these awards give the holder the beneﬁ t of
the related stock options (in the form of shares of Lilly stock) without requiring payment of the exercise price.

No grantee may receive options and SARs, considered together, for more than 2,500,000 shares under the

2002 Plan in any period of three consecutive calendar years.

Performance Awards. The committee may grant performance awards under which payment is made in shares

of Lilly stock, cash, or both if the ﬁ nancial performance of the company or a subsidiary, division, or other business
unit of the company selected by the committee meets certain performance goals during an award period. A maxi-
mum of 18,000,000 shares may be issued under the 2002 Plan in the form of performance awards.
The committee establishes the performance goals at the beginning of the award period based on one or more per-
formance goals speciﬁ ed in the 2002 Plan. The material terms of those performance goals are:

• earnings per share
• net income
• divisional income
• corporate or divisional net sales
• EVA® (after tax operating proﬁ t less the annual total cost of capital)
• Market Value Added (MVA—the difference between a company’s fair market value, as reﬂ ected primarily in its

stock price, and the economic book value of capital employed)

• any of the foregoing goals before the effect of acquisitions, divestitures, accounting changes, and restructuring

and special charges

• total shareholder return
• other Lilly stock price goals.

The committee also establishes the award period (four or more consecutive ﬁ scal quarters), the threshold,
target and maximum performance levels, and the number of shares or dollar amounts payable at various perfor-
mance levels from the threshold to the maximum.

Awards may be denominated either in shares of Lilly stock (“Stock Performance Awards”) or in dollar amounts

(“Dollar Performance Awards”). The maximum number of shares that may be received by an individual in payment
of Stock Performance Awards in any calendar year is 100,000. As to Dollar Performance Awards, the maximum
payment to an individual in any calendar year is $8,000,000. The committee can elect to pay cash in lieu of part or
all of the shares of Lilly stock payable under a Stock Performance Award, and such cash payment is counted as a
payment of shares (based on the market value of Lilly stock on the payment date) for purposes of determining com-
pliance with the 100,000 share limit for Stock Performance Awards. In order to receive payment, a grantee must
generally remain employed by the company to the end of the award period. The committee may impose additional
conditions on a grantee’s entitlement to receive payment under a performance award.

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At any time prior to payment, the committee can adjust awards for the effect of unforeseen events that have

a substantial effect on the performance goals and would otherwise make application of the performance goals
unfair. However, the committee may not increase the amount that would otherwise be payable to individuals who
are subject to Section 162(m) of the Code.

Restricted Stock Grants or Stock Units. The committee may also issue or transfer shares under a restricted

stock grant. The grant will set forth a restriction period during which the shares may not be transferred. If the
grantee’s employment terminates during the restriction period, the grant terminates and the shares are returned
to the company. However, the committee 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.

The committee may grant stock unit awards subject to vesting and transfer restrictions and conditions of payment

determined by the committee. The value of each stock unit equals the fair market value of Lilly stock and may include
the right to receive the equivalent of dividends on the shares granted. Payment is made in the form of Lilly stock.

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 unit awards, considered together.

Authority of Committee
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 162(m) of the Code. As to grants to employees, the committee selects persons to receive grants
from among the eligible employees, determines the type of grants and number of shares to be awarded, and sets the
terms and conditions of the grants. The committee may establish rules for administration of the 2002 Plan and may
delegate authority to others for plan administration, subject to limitations imposed by SEC and IRS rules and state law.

Other Information
The 2002 Plan remains effective until April 14, 2012, unless 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 (i) allow the
repricing of stock options below the original option price, (ii) allow the grant of stock options at an option price below fair
market value of Lilly stock on the date of grant, (iii) increase 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.

The Committee may provide in the grant agreement, or by subsequent action, that the following shall occur in

the event of a change in control (as deﬁ ned in Article 12 of the 2002 Plan), in order to preserve all of the grantee’s
rights: (i) any outstanding stock option not already vested shall become immediately exercisable; (ii) any restriction
periods on restricted stock grants shall immediately lapse; and (iii) outstanding performance awards will be vested
and paid out on a prorated basis, based on the maximum award opportunity and the number of months elapsed
compared to the total number of months in the award period.

The future amounts that will be received by grantees under the 2002 Plan are not determinable. In 2006, the

named executive ofﬁ cers received stock option grants as set forth on page 87 in the Grants of Plan-Based Awards
During 2006 Table, and in connection 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 Table. Also in 2006, the executive
ofﬁ cers as a group (10 ofﬁ cers) received stock option grants for 755,302 shares and all other employees (3,854 em-
ployees) received options grants for 4,804,932 shares. With respect to the 2006 award year, the executive ofﬁ cers
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 units totaling 2,357,195 shares.

Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents information as of December 31, 2006, regarding our compensation plans under which
shares of Lilly common stock have been authorized for issuance.

Plan category

Equity compensation plans approved by security
holders
Equity compensation plan not approved by security
holders 1
Total

(a) Number of securities to be issued
upon exercise of outstanding options,
warrants, and rights

(b) Weighted-average exercise
price of outstanding options,
warrants, and rights

(c) Number of securities remaining
available for future issuance under
equity compensation plans (exclud-
ing securities reﬂ ected in column (a))

79,012,219

9,797,960

88,810,179

$68.59

$75.74

$69.38

45,157,699

320,555

45,478,254

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1 Represents shares in the Lilly GlobalShares Stock Plan, which permits the company to grant stock options to
nonmanagement employees worldwide. The plan is administered by the senior vice president responsible for human
resources. The stock options are nonqualiﬁ ed for U.S. tax purposes. The option price cannot be less than the fair
market value at the time of grant. The options shall not exceed 11 years in duration and shall be subject to vesting
schedules established by the plan administrator. There are provisions for early vesting and early termination of the
options in the event of retirement, disability, and death. In the event of stock splits or other recapitalizations, the ad-
ministrator may adjust the number of shares available for grant, the number of shares subject to outstanding grants,
and the exercise price of outstanding grants.

The board recommends that you vote FOR reapproval of the performance goals for the 2002 Lilly Stock Plan.

Item 5. Shareholder Proposal Regarding Care and Use of Animals

Jamie Moran, P.O. Box 15889, Seattle, Washington 98115 and Meredith Page, on behalf of People for the Ethical
Treatment of Animals (PETA), 501 Front Street, Norfolk, Virginia 23510, beneﬁ cial owner of approximately 675 and
100 shares, respectively, have submitted the following proposal.

Resolved, that the Board issue a report to shareholders on the feasibility of amending the Company’s Animal Care
and Use Policy to ensure that: i) it extends to all contract laboratories and is reviewed with such outside labo-
ratories on a regular basis, and ii) it addresses animals’ social and behavioral needs. Further, the shareholders
request that the report include information on the extent to which in-house and contract laboratories are adhering
to the Policy, including the implementation of enrichment measures.

Supporting Statement: Our Company conducts tests on animals as part of its product research and development,
as well as retaining independent laboratories to conduct such tests. Abuses in independent laboratories are not
uncommon and have recently been exposed by the media. Eli Lilly has posted on its Web site an Animal Care and
Use Policy. The Company, as an industry leader, is commended for its stated commitment to an “ethical and scien-
tiﬁ c obligation to ensure the appropriate treatment of animals used in research…” 1

However, the disclosure of atrocities recorded at Covance, Inc., an independent laboratory headquartered in
Princeton, New Jersey,2 has made the need for a formalized, publicly available animal welfare policy that extends
to all outside contractors all the more relevant, indeed urgent.3 Filmed footage showed primates being subjected
to such gross physical abuses and psychological torments that Covance sued to enjoin People for the Ethical Treat-
ment of Animals in Europe from publicizing it. The Honorable Judge Peter Langan in the United Kingdom refused
to stop PETA from publicizing the ﬁ lm and instead ruled in PETA’s favor. The Judge stated in his opinion that the
“rough manner in which the animals are handled and the bleakness of the surroundings in which they are kept …
even to a viewer with no particular interest in animal welfare, at least cry out for explanation.” 4

Shareholders cannot monitor what goes on behind the closed doors of the animal testing laboratories, so the
Company must. Accordingly, we urge the Board to commit to promoting basic animal welfare measures as an inte-
gral part of our Company’s corporate stewardship.

We urge shareholders to support this Resolution.

Statement in Opposition to Animal Care and Use Proposal and International Outsourcing of Animal Research
Proposal
The public policy and compliance committee of the board has reviewed both proposals submitted on PETA’s behalf (this
Item 5 and Item 6 below) and believes that additional reporting is an unnecessary use of company resources. Lilly’s cur-
rent report on our use of animals can be found in our Corporate Citizenship Report on our website at www.lilly.com.
Lilly is dedicated to the discovery and development of medicines that improve the health and well-being of
people worldwide. This entails careful and thorough evaluation of our products. While efforts to minimize the use of
animal testing have been underway for some time, the appropriate use of animals in research is essential to ensure
that safe and efﬁ cacious medicines become available to patients. Furthermore, it is a requirement dictated by regu-
latory agencies around the world. Lilly fully recognizes the fundamental ethical obligation to treat animals used in

1 http://www.lilly.com/about/policies/#animal
2 PETA’s undercover investigator videotaped the systematic abuse of animals at Covance’s laboratory in Vienna, VA over a six month investigation.
3 In October 2005, Covance’s Director of Early Development stated that “We’ve worked with just about every major company around the world” (http://www.
azcentral.com/arizonarepublic/eastvalleyopinions/articles/1021credit21.html)
4 The case captioned Covance Laboratories Limited v. PETA Europe Limited was ﬁ led in the High Court of Justice, Chancery Division, Leeds District Registry,
Claim No. 5C-00295. In addition to ruling in PETA’s favor, the Court ordered Covance to pay PETA Ł50,000 in costs and fees.
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research responsibly. We have both an ethical and a scientiﬁ c interest in ensuring that appropriate standards are in
place at company and third party facilities to ensure appropriate standards of animal care yield valid study results.
Lilly maintains the highest standards of animal care and use in all our facilities. In the United States, Lilly
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
complies with local, state, and national laws and regulations on the use of animals in research, 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
national authorities regularly inspect all animal facilities.

As a global company, Lilly develops contractual relationships with select laboratory animal research and
animal supply companies inside and outside the United States. Animal research and animal supply companies
throughout the world are subject to local laws, which may vary from country to country. 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 animals in a humane manner. To ensure
animal welfare, Lilly has increased oversight of these companies to assess their adherence to these expectations.
In addition, we continue to work to harmonize global animal welfare standards.

The board recommends that you vote AGAINST this proposal and Item 6 below.

Item 6. Shareholder Proposal Regarding International Outsourcing of Animal Research

Gloria J. Eddie, 1060 Cambridge Avenue, Menlo Park, California 94025, on behalf of People for the Ethical Treat-
ment of Animals (PETA), beneﬁ cial owner of approximately 281 shares, has submitted the following proposal.

Resolved, that the Board report to shareholders on the rationale for increasingly exporting the Company’s animal
experimentation to countries which have either non-existent or substandard animal welfare regulations and little
or no enforcement. Further, the shareholders request that the report include information on the extent to which
Lilly requires—at a minimum—adherence to U.S. animal welfare standards at its facilities in foreign countries.

Supporting Statement: Eli Lilly has publicly committed to an “ethical and scientiﬁ c obligation to ensure the ap-
propriate treatment of animals used in research, to minimize the number of animals involved, and to pursue the
development of alternative test systems.” 5 However, many of the countries to which the Company is re-locating its
animal research and testing are known for having no or poor animal welfare standards and negligible oversight.

In January 2006, Business Week reported that “Increasingly, Lilly is moving its research and development…to
China, India, and the former Soviet bloc.” 6 The November 13, 2006, issue of Forbes magazine also reported that Eli
Lilly had “announced plans recently to set up research units in China.” The Forbes article noted that the rationale
for shifting animal testing to China is that “scientists are cheap, lab animals plentiful and pesky protesters held
at bay” and quoted a pharmaceutical industry executive who “admits that Chinese testing companies lack quality
control and high standards on treatment.” 7

Our Company now conducts a signiﬁ cant portion of its research in foreign laboratories, with 20% of its scien-
tists based in China (its largest non-U.S.-based Research & Development team)8. Purposely re-locating research
to regions with lower animal costs, easy animal availability, and lower welfare standards is in direct conﬂ ict with
Lilly’s stated commitment to reducing, reﬁ ning, and replacing animal use.

Shareholders deserve to know whether animal testing is being moved to foreign countries in order to circum-
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.

5 http://www.lilly.com/about/policies/#animal
6 “Lilly’s Labs Go Global”; Business Week (Jan. 30, 2006)
7 “Comparative Advantage”; Forbes, p. 76 Vol. 178 No. 10 (Nov. 13, 2006)
8 “Lilly Eyes R&D for Sales Rise”; China Daily, p.10 (Aug. 18, 2005)

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Statement in Opposition to Animal Care and Use Proposal and International Outsourcing of Animal Research
Proposal

Please see the “Statement in Opposition” following Item 5 above.

The board recommends that you vote AGAINST this proposal.

Item 7. Shareholder Proposal Regarding Separating the Roles of Chairman and Chief Executive Ofﬁ cer

The Adrian Dominican Sisters, 1257 East Siena Heights Drive, Adrian, Michigan, 49221-1793, beneﬁ cial owner of
approximately 50 shares, has submitted the following proposal.

Resolved: The shareholders of Eli Lilly & Company request the Board of Directors establish a policy of whenever
possible, separating the roles of Chairman and Chief Executive Ofﬁ cer, so that an independent director who has not
served as an executive ofﬁ cer of the Company serves as Chair of the Board of Directors.

This proposal shall not apply to the extent that complying would necessarily breach any contractual obliga-

tions in effect at the time of the 2007 shareholder meeting.

Supporting Statement: We believe in the principle of the separation of the roles of Chairman and Chief Executive
Ofﬁ cer. This is a basic element of sound corporate governance practice.

We believe an Independent Board Chair—separated from the CEO—is the preferable form of corporate gover-

nance. This primary purpose of the Board of Directors is to protect shareholder’s interests by providing indepen-
dent oversight of management and the CEO. The Board gives strategic direction and guidance to our Company.

The Board will likely accomplish both roles more effectively by separating the roles of Chair and CEO. An Inde-
pendent Chair will enhance Investor conﬁ dence in our Company and strengthen the Integrity of the Board of Directors.
A Number of respected Institutions recommend such separation. CalPER’s Corporate Core Principles and
Guidelines state: “the Independence of a majority of the Board is not enough” and that “the leadership of the board
must embrace independence, and it must ultimately change the way in which directors interact with management.”

An independent board structure will also help the board address complex policy issues facing our company,

foremost among them the crisis in access to pharmaceutical products.

Millions of Americans and others around the world have limited or no access to our company’s life-saving
medicines. We believe an independent Chair and vigorous Board will bring greater focus to this ethical imperative,
and be better able to forge solutions to address the crisis.

The current business model of the pharmaceutical sector is undergoing signiﬁ cant challenges. The industry

has generated substantial revenue from American purchasers, who pay higher prices for medicines than those
in other developed countries. Pressure on drug pricing and dependence on this business model may impact our
company’s long-term value. We believe Independent Board leadership will better position our company to respond
to these enduring challenges.

A similar resolution voted on in 2006 was supported by 27.15 percent of shareholders.
In order to ensure that our Board can provide the proper strategic direction for our Company with Indepen-

dence and accountability, we urge a vote FOR this resolution.

Statement in Opposition to the Proposal Regarding Separating the Roles of Chairman and Chief Executive Ofﬁ cer
The board of directors, the directors and corporate governance committee, and the public policy and compliance
committee of the board have reviewed this proposal and recommend a vote against it. We believe that Lilly already
has a strong, independent board operating under sound principles of corporate governance. (See pages 66–70 for
a description of the board’s governance principles.) These principles are designed to ensure board independence,
whether or not the chairman and chief executive ofﬁ cer (CEO) roles are separated, through a counterbalancing
governance structure.

The board is composed of a majority of independent board members, currently 10 out of 12 directors; under
our governance principles, 75 percent of the board must be independent, non-employee members. Additionally,
the presiding director, an independent director who is appointed by the board, presides at all meetings of the board
at which the chairman is not present (unless another independent director is chosen based on the subject matter),
including an executive session after each regular board meeting and an annual review of the CEO’s performance.
In addition, the presiding director:

• leads the board process for selecting and evaluating the CEO

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• serves as a liaison between the chairman and the independent directors
• generally approves information sent to the board and meeting agendas and schedules, and
• has authority to call meetings of the independent directors.

A recent Wharton School of Business article entitled “Splitting Up the Roles of CEO and Chairman: Reform or Red
Herring?,” 9 points out that there is a lack of hard evidence to show that separating the roles boosts returns for share-
holders. A majority (315) of the top 500 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. We agree, and believe that combining the
roles of board chair and CEO generally provides the most efﬁ cient and effective leadership model for the company.

We agree that the current business model of the pharmaceutical sector is undergoing signiﬁ cant challenges.

The company has adopted a strategy, approved by the board, to transform the cost structure through a variety of
productivity initiatives and to provide customers with a signiﬁ cantly enhanced value proposition that improves pa-
tient outcomes through tailoring drug, dose, timing of treatment, and relevant information.

We also agree that access to medicine continues to be a serious concern; however, the board’s corporate gov-
ernance principles ensure effective independent oversight of the company’s responses to this problem. 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.

Guided by the active oversight of our independent directors, our company will continue to be a strong advocate for
reforms that improve access to needed medicines 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.

The board recommends that you vote AGAINST this proposal.

Item 8. Shareholder Proposal Regarding Amending the Company’s Bylaws

California Public Employees’ Retirement System (CalPERS), P.O. Box 942707, Sacramento, California 94229-2707,
beneﬁ cial owner of approximately 5.4 million shares, has submitted the following proposal.

Resolved, that the shareowners of Eli Lilly & Company (“Company”) urge the Company to take all steps necessary,
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.

Supporting Statement: The Company is one of the very few companies in the S&P 500 that does not allow shareown-
ers to amend the Company’s bylaws. Approximately 96% of companies 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, however, has chosen not to allow shareowners to amend
the bylaws even though approximately 96 percent of corporations do so, as noted above.

The primary tool for directly impacting the Company’s governance practice is by amending the Company’s
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 1.4 million 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.

This proposal asks for a majority vote standard to amend the bylaws since a supermajority vote can be almost
impossible to obtain because of abstentions and broker non-votes. For example, a proposal to declassify the board
of directors ﬁ led at Goodyear Tire & Rubber Company failed to passes even though approximately 90 percent of
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.

CalPERS believes that corporate governance procedures and practices, and the level of accountability they

9 “Splitting up the Roles of CEO and Chairman: Reform or Red Herring?”, June 2, 2004, Knowledge @Wharton, http://knowledge.wharton.upenn.edu

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impose, are closely related to ﬁ nancial performance. CalPERS also believes that shareholders are willing to pay a
premium for shares of corporations that have excellent corporate governance, as illustrated by a recent study by
McKinsey & Co. If the Company were to take steps to implement this proposal, it would be a strong statement that
this Company is committed to good corporate governance and its long-term ﬁ nancial performance. Considering the
Company’s ﬁ ve, three, and one year stock performances were -16%, -13%, and 2%, respectively, action is warranted.

We urge your support FOR this proposal.

Statement in Opposition to the Proposal Regarding Amending the Company’s Bylaws
The board of directors believes that this proposal is not in the best long-term interests of the shareholders and
recommends that you vote against it.

The company’s bylaws establish a number of fundamental corporate governance operating principles, includ-

ing rules for meetings of directors and shareholders, election and duties of directors and ofﬁ cers, authority to
approve transactions, and procedures for stock issuance. Like many other Indiana corporations, Lilly has adopted
the default provision under Indiana law, which states that unless the articles of incorporation provide otherwise,
the bylaws may be amended only by the directors.

The board of directors has ﬁ duciary obligations to the company and all its shareholders, including large insti-
tutions, small institutions, and individual investors. The board believes that allowing the bylaws to be amended by
a majority shareholder vote would expose the shareholders to the risk that a few large shareholders who wish to
advance their own special interests—and who have no duties to the other shareholders—could adopt changes in
these operating principles that could be detrimental to minority shareholders. Under the majority vote standard
endorsed by the proponent (requiring only a majority of shares voted at the meeting), shareholders holding signiﬁ -
cantly less than half of the outstanding shares could adopt bylaw amendments to further their own special inter-
ests. The board, on the other hand, has ﬁ duciary duties to consider and balance the interests of all shareholders
when considering bylaw provisions, and is better positioned to ensure that any bylaw amendments are prudent and
are designed to protect and maximize long-term value for all shareholders.

The proponent suggests this proposal is necessary to foster good governance principles at the company and

make the directors more accountable to the shareholders. On the contrary, the board has been for many years,
and intends to remain, a leader in corporate governance. The company has adopted comprehensive corporate
governance principles, consistent with best practices, that ensure the company remains fully transparent and ac-
countable to shareholders. Last year, our leadership in this area was recognized when we were named the most
“shareholder-friendly” company in our industry in a survey of institutional investors. 10 Further, in 2007, the board
has taken two major steps to demonstrate its continuing leadership in corporate governance and accountability to
shareholders: (1) seeking shareholder approval to eliminate the classiﬁ ed board (see Item 3), and (2) agreeing to
seek shareholder approval to adopt a majority voting standard for directors beginning in 2008.

The proponent also suggests that adopting this proposal will enhance company performance because compa-
nies with good corporate governance are more highly valued. We certainly agree that strong corporate governance
practices beneﬁ t shareholders, but we do not believe that this particular proposal will improve the company’s
corporate governance or lead to better performance. In fact, a 2004 study by Lawrence D. Brown and Marcus L.
Caylor of Georgia State University 11 found that companies that permit shareholders to amend the bylaws performed
no better or worse than those who reserve that power to the directors. This is consistent with our view that adopt-
ing this proposal would not enhance our already strong corporate governance practices and instead would expose
minority shareholders to actions detrimental to their best interests.

The Board of Directors recommends that you vote AGAINST this proposal.

Item 9. Shareholder Proposal Regarding Adopting a Simple Majority Vote Standard

William Steiner, 112 Abbottsford Gate, Piermont, NY 10968, beneﬁ cial owner of approximately 1,400 shares, has
submitted the following proposal.

9—Adopt Simple Majority Vote

Resolved: Shareholders recommend that our Board take each step necessary to adopt a simple majority vote to
apply to the greatest extent possible.

10 Institutional Investor, February 2006
11 “Corporate Governance and Firm Performance”, Georgia State University, December 7, 2004
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This proposal is not intended to unnecessarily limit our Board’s judgment in crafting the requested change to

the fullest extent feasible in accordance with applicable laws and existing governance documents.

This topic won a 66% yes-vote average at 20 major companies in 2006. The Council of Institutional Investors

www.cii.org formally recommends adoption of this proposal topic.

Our current rule allows a small minority to frustrate the will of our shareholder majority. For example, in re-

quiring an 80%-vote on a number of key governance issues, if our vote is an overwhelming 79%-yes and only
1%-no—only 1% could force their will on our 79%-majority.

When one considers abstentions and broker non-votes, a supermajority vote can be almost impossible to ob-
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 to protect 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.

Corporate governance procedures and practices, and the level of accountability they impose, are arguable

closely related to ﬁ nancial performance. It is intuitive that, when directors are accountable for their actions, they
perform better. Shareholders are willing to pay a premium for shares of corporations that have excellent corporate
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 nancial performance.

Adopt Simple Majority Vote
Yes on 9

Statement in Opposition to the Proposal Regarding Adopting a Simple Majority Vote Standard
This proposal, which does 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 board of directors believes that this would not be in the best long-term interest of the shareholders and recom-
mends that you vote against it.

Most proposals submitted to a vote of the company’s shareholders can already be adopted by a simple majority
vote. However, in 1985 the 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:

• Removal of directors
• The amendment of the articles of incorporation’s provisions relating to the terms of ofﬁ ce and removal of directors 12
• Merger, consolidation, recapitalization or certain other business combinations involving the company that are not

approved by the board of directors

• The amendment of the articles of incorporation’s provisions relating to such mergers and other business

combinations.
The board believes that in adopting these supermajority voting provisions, shareholders intended to preserve

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.

The board has a ﬁ duciary duty under the law to act in a manner it believes to be in the best interests of the
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.

The board believes that these supermajority voting provisions protect all shareholders by making it more difﬁ -
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.

While the supermajority provision does require a clear mandate by shareholders, it is by no means an insur-

12 Under Item 3, the board is recommending that shareholders approve amendments to these provisions establishing annual election of directors.

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mountable hurdle. The company commonly obtains favorable votes of well over 80 percent of the outstanding
shares for management proposals. Looking beyond Lilly, the proponent cites Goodyear’s failure to achieve the
necessary 80 percent vote in 2005 for a management proposal to declassify the board. However, he fails to point
out that Goodyear successfully adopted the same proposal in 2006 with an 86.2 percent vote. Further, according to
Georgeson Shareholder Communications Co. survey of the 2006 proxy season, of the 12 management proposals
for board declassiﬁ cation requiring an 80 percent vote, 11 were approved by the requisite vote. This reinforces the
board’s view that supermajority provisions do not serve to nullify shareholder will, but instead help ensure that
crucial decisions are supported by the vast majority of shareholders.

The board recommends that you vote AGAINST this proposal.

Other Matters

Section 16(a) Beneﬁ cial Ownership Reporting Compliance
Under Securities and Exchange Commission rules, our directors and executive ofﬁ cers are required to ﬁ le with the
Securities and Exchange Commission reports of holdings and changes in beneﬁ cial ownership of company stock. We
have reviewed copies of reports provided to the company, as well as other records and information. Based on that
review, we concluded that all reports were timely ﬁ led except that, due to administrative error, Dr. John Lechleiter
was late in reporting a sale of stock under his 10b5-1 trading plan, Mr. Gino Santini was late in reporting charitable
donations and transfers of shares to his wife and minor children, and Mr. Derica Rice incorrectly reported the total
number of shares he held at the time he became an ofﬁ cer. Upon discovery, these matters were promptly reported.

Other Information Regarding the Company’s Proxy Solicitation
We will pay all expenses in connection with our solicitation of proxies. We will pay brokers, nominees, ﬁ ducia-
ries, or other custodians their reasonable expenses for sending proxy material to and obtaining instructions from
persons for whom they hold stock of the company. We expect to solicit proxies primarily by mail, but directors,
ofﬁ cers, and other employees of the company may also solicit in person or by telephone, telefax, or electronic mail.
We have retained Georgeson Shareholder Communications Inc. to assist in the distribution and solicitation of prox-
ies. Georgeson may solicit proxies by personal interview, telephone, telefax, mail, and electronic mail. We expect
that the fee for those services will not exceed $17,000 plus reimbursement of customary out-of-pocket expenses.

By order of the board of directors,

James B. Lootens
Secretary

March 5, 2007

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Appendix A

Amendments to Article 9 of the Company’s Articles of Incorporation
9. The following 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:

(a) The number of directors of the Corporation, exclusive of directors who may be elected by the holders of any
one or more series of Preferred Stock pursuant to Article 7(b) (the “Preferred Stock Directors”), shall not be
less than nine, the exact number to be ﬁ xed from time to time solely by resolution of the Board of Directors,
acting by not less than a majority of the directors then in ofﬁ ce.

(b) The Prior to the 2008 annual meeting of shareholders, the Board of Directors (exclusive of Preferred Stock
Directors) shall be is divided into three classes, with the term of ofﬁ ce of one class expiring each year. At Com-
mencing with the annual meeting of shareholders in 1985, ﬁ ve 2008, each class of directors of the ﬁ rst class
whose term shall then or thereafter expire shall be elected to hold ofﬁ ce for a one-year term expiring at the
1986 next annual meeting of, ﬁ ve directors of the second class shall be elected to hold ofﬁ ce for a term expiring
at the 1987 annual meeting, and six directors of the third class shall be elected to hold ofﬁ ce for a term expir-
ing at shareholders. 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 ce for a three year term. In the case of any vacancy on the Board of
Directors, including a vacancy created by an increase in the number of directors, the vacancy shall be ﬁ lled by
election of the Board of Directors with the director so elected to serve for the remainder of the term the direc-
tor being replaced or, in the case of an 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 ce until the election and qualiﬁ cation of their respective successors in ofﬁ ce. When the number of directors
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 ce, though less than a quorum, as to make all classes as nearly
equal in number 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.

(c) Any director or directors (exclusive of Preferred Stock Directors) may be removed from ofﬁ ce at any time,
but only for cause and only by the afﬁ rmative vote of at least 80% of the votes entitled to be cast by holders of
all the outstanding shares of Voting Stock (as deﬁ ned in Article 13 hereof), voting together as a single class.

(d) Notwithstanding 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 rmative vote of the holders of any particu-
lar class of Voting Stock required by law or these Amended Articles of Incorporation, the afﬁ rmative vote of
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 to alter, amend or repeal this Article 9.

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Board of Directors

Sidney Taurel
Chairman of the Board and Chief Executive Ofﬁ cer

John C. Lechleiter, Ph.D.
President and Chief Operating Ofﬁ cer

Sir Winfried Bischoff
Chairman, Citigroup Europe

J. Michael Cook
Retired Chairman and Chief Executive Ofﬁ cer, Deloitte & Touche LLP

Martin S. Feldstein, Ph.D.
President and Chief Executive Ofﬁ cer, National Bureau of Economic Research
and George F. Baker Professor of Economics, Harvard University

George M.C. Fisher
Retired Chairman of the Board and Chief Executive Ofﬁ cer, Eastman Kodak Company

J. Erik Fyrwald
Group Vice President, DuPont Agriculture & Nutrition

Karen N. Horn, Ph.D.
Retired President, Private Client Services, and Managing Director, Marsh, Inc.

Alfred G. Gilman, M.D., Ph.D.
Executive Vice President for Academic Affairs and Provost, The University of Texas Southwestern
Medical Center; Dean, The University of Texas Southwestern Medical School; and Regental
Professor of Pharmacology, The University of Texas Southwestern Medical Center

Ellen R. Marram
President, The Barnegat Group LLC

Franklyn G. Prendergast, M.D., Ph.D.
Edmond and Marion Guggenheim Professor of Biochemistry and Molecular Biology,
Professor of Molecular Pharmacology and Experimental Therapeutics, Mayo Medical School;
Director, Mayo Clinic Center for Individualized Medicine; and Director Emeritus, Mayo Clinic
Cancer Center

Kathi P. Seifert
Retired Executive Vice President, Kimberly-Clark Corporation

108

Senior Management

Sidney Taurel*†
Chairman of the Board and Chief
Executive Ofﬁ cer

E. Paul Ahern, Ph.D.
Vice President, Global API
Manufacturing

John C. Lechleiter, Ph.D.*†
President and Chief Operating Ofﬁ cer

Robert A. Armitage*†
Senior Vice President and General
Counsel

Scott A. Canute*†
President, Manufacturing Operations

Steven M. Paul, M.D.*†
Executive Vice President, Science
and Technology, and President,
Lilly Research Laboratories

Anthony J. Murphy, Ph.D.*†
Senior Vice President, Human
Resources

Derica W. Rice*†
Senior Vice President and Chief
Financial Ofﬁ cer

Gino Santini*†
Senior Vice President, Corporate
Strategy and Policy

Bryce D. Carmine†
President, Global Brand Development

Deirdre P. Connelly†
President, U.S. Operations

Frank M. Deane, Ph.D.†
Vice President, Quality

Robert W. Armstrong, Ph.D.
Vice President, Global External
Research and Development

Alan Breier, M.D.
Vice President, Medical, and Chief
Medical Ofﬁ cer

William W. Chin, M.D.
Vice President, Discovery Research
and Clinical Investigation

Robert A. Cole
Vice President, Global Parenteral
Operations, Engineering, and
Environmental Health and Safety

Newton F. Crenshaw
President and General Manager,
Lilly Japan

Andrew M. Dahlem, Ph.D.
Vice President, LRL Operations, and
Lilly Research Laboratories, Europe

Alecia A. DeCoudreaux
Vice President and General Counsel,
Lilly USA

J. Carmel Egan, Ph.D.
Vice President, Project Management

Timothy R. Franson, M.D.
Vice President, Global Regulatory
Affairs

Elizabeth H. Klimes†
Vice President, Six Sigma

Thomas W. Grein
Vice President and Treasurer

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Abbas S. Hussain
President, European Operations

Patrick C. James
President, Elanco Animal Health

Peter J. Johnson
Executive Director, Corporate Strategy

Patricia A. Martin‡
Vice President, Global Diversity

Anne Nobles
Vice President, Corporate Affairs

Sharon L. Sullivan
Vice President, Human Resources,
Global Compensation, and HR
Services

Jacques Tapiero
President, Intercontinental Operations

Albertus J. van den Bergh
Vice President, Global Customer
Solutions

Thomas R. Verhoeven, Ph.D.
Vice President, Product Research and
Development

James A. Ward
Vice President and Chief Procurement
Ofﬁ cer

Richard D. Pilnik†
Group Vice President and Chief
Marketing Ofﬁ cer

Lorenzo Tallarigo, M.D.†
President, International Operations

Simon N. R. Harford
Vice President and Controller

Michael C. Heim
Vice President and Chief Information
Ofﬁ cer

* Policy and Strategy Committee
† Operations Committee
‡ Ad hoc member of both committees

109

Corporate Information

Annual meeting
The annual meeting of shareholders will be held at Lilly
Center Auditorium, Eli Lilly and Company, Indianapolis,
Indiana, on Monday, April 16, 2007, at 11:00 a.m. EDT.
For more information, see the proxy statement section of
this report, beginning on page 56.

10-K and 10-Q reports
Paper copies of the company’s annual report to the
Securities and Exchange Commission on Form 10-K and
quarterly reports on Form 10-Q are available upon written
request to:

Eli Lilly and Company
P.O. Box 88665
Indianapolis, Indiana 46208-0665

To access these reports more quickly, you can ﬁ nd all of
our SEC ﬁ lings online at: http://investor.lilly.com/edgar.
cfm

Stock listings
Eli Lilly and Company common stock is listed on the New
York, London, and Swiss stock exchanges. NYSE ticker
symbol: LLY. Most newspapers list the stock as “Lilly (Eli)
and Co.”

CEO and CFO certiﬁ cations
The company’s chief executive ofﬁ cer and chief ﬁ nancial
ofﬁ cer have provided all certiﬁ cations required under
Securities and Exchange Commission regulations with
respect to the ﬁ nancial information and disclosures in
this report. The certiﬁ cations are available as exhibits to
the company’s Form 10-K and 10-Q reports.

In addition, the company’s chief executive ofﬁ cer has
ﬁ led with the New York Stock Exchange a certiﬁ cation to
the effect that, to the best of his knowledge, the company
is in compliance with all corporate governance listing
standards of the Exchange.

Transfer agent and registrar
Wells Fargo Shareowner Services
Mailing address:

Shareowner Relations Department
P.O. Box 64854
St. Paul, Minnesota 55164-0854

Overnight address:

161 North Concord Exchange
South St. Paul, Minnesota 55075
Telephone: 1-800-833-8699

E-mail: stocktransfer@wellsfargo.com
Internet: http://www.wellsfargo.com/com/shareowner_

services

Dividend reinvestment and stock purchase plan
Wells Fargo Shareowner Services administers the Share-
owner Service Plus Plan, which allows registered share-
holders to purchase additional shares of Lilly common
stock through the automatic investment of dividends.
The plan also allows registered shareholders and new
investors to purchase shares with cash payments, either
by check or by automatic deductions from checking or
savings accounts. The minimum initial investment for
new investors is $1,000. Subsequent investments must be
at least $50. The maximum cash investment during any
calendar year is $150,000. Please direct inquiries concern-
ing the Shareowner Service Plus Plan to:
Wells Fargo Shareowner Services
Shareowner Relations Department
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone: 1-800-833-8699

Online delivery of proxy materials
Shareholders may elect to receive annual reports and
proxy materials online. This reduces paper mailed to the
shareholder’s home and saves the company printing and
mailing costs. To enroll, go to http://proxyonline.lilly.com
and follow the directions provided.

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110

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

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

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

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

Name

Address

City, State, and Zip Code

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Detach here

Directions and Parking

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

111

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

Detach here

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Eli Lilly and Company
Annual Meeting of Shareholders
April 16, 2007

Complimentary Parking
Lilly Corporate Center

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

112

Year in Review

1 Financial Highlights

2 Letter to Shareholders

Innovation at Lilly: The Portfolio and the Pipeline

8 Lilly Takes Big Steps to Meet Urgent Medical Needs

Financials

10 Review of Operations

14 Consolidated Statements of Income

19 Consolidated Balance Sheets

20 Consolidated Statements of Cash Flows

21 Consolidated Statements of Comprehensive Income

29 Segment Information

30 Selected Quarterly Data

31 Selected Financial Data

32 Notes to Consolidated Financial Statements

53 Management’s Reports

54 Report of Independent Registered Public

Accounting Firm

Proxy Statement

56 Notice of 2007 Annual Meeting and Proxy

Statement

58 General Information

62 Board of Directors

Guidelines

Matters

75 Audit Committee Matters

77 Compensation Committee Matters

77 Executive Compensation

95 Ownership of Company Stock

Corporate Information

108 Board of Directors

109 Senior Management

110 Corporate Information

111 Annual Meeting Admission Ticket

66 Highlights of the Company’s Corporate Governance

Jackie WiseSpirit, a member of the Cahuilla Band, is president of the Board of

Indian Health, Inc., which offers programs for Native Americans suffering from

74 Directors and Corporate Governance Committee

diabetes and other diseases in Riverside and San Bernardino counties, in Califor-

On the Cover

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

106 Other Matters

friends say, ‘You look great!’”

nia. She can identify with those she’s working to help; Jackie was diagnosed with

diabetes seven years ago—the sixth of nine family members to have the disease.

In 2006, her doctor recommended Byetta®. Originally reluctant to take shots,

she is delighted with the choice she made. “Now, I have so much more energy;

Byetta is a ﬁ rst-in-class treatment for type 2 diabetes used in combination with

commonly prescribed oral medications that is a product of a collaboration

between Lilly and Amylin Pharmaceuticals. Its glycemic control and association

with most patients losing weight rather than gaining weight replace the vicious

cycle so common in type 2 diabetes with a virtuous cycle.

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.

Trademarks

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

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

2006AR

Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285 USA

www.lilly.com

2006 Annual Report, Notice of 2007 Annual Meeting, and Proxy Statement

Eli Lilly and Company