Eli Lilly and Company Annual Report 2008

FY2008 Annual Report · Eli Lilly and Company

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Eli Lilly and Company makes medicines that help people
live longer, healthier, and more active lives.

Integrity—Excellence—Respect for People
We promise to operate our business with absolute integrity
and earn the trust of all, set the highest standards for our
performance and for the performance of our products, and
demonstrate caring and respect for all those who share in
our mission and are touched by our work.

Improved Outcomes for Individual Patients
We will make a signiﬁ cant contribution to humanity by
improving global health in the 21st century. Starting with the
work of our scientists, we will place improved outcomes for
individual patients at the center of what we do. We will listen
carefully to understand patient needs and work with health
care partners to provide meaningful beneﬁ ts for the people
who depend on us.

Year in Review
1 Financial Highlights
2 Letter to Shareholders
7 Securing—Then Redeﬁ ning—Lilly’s Future: A Tribute To Sidney Taurel
8

Innovation at Lilly: The Portfolio and the Pipeline

Financials
12 Review of Operations
16 Consolidated Statements of Operations
21 Consolidated Balance Sheets
22 Consolidated Statements of Cash Flows
23 Consolidated Statements of Comprehensive Income (Loss)
33 Segment Information
34 Selected Quarterly Data
35 Selected Financial Data
36 Notes to Consolidated Financial Statements
65 Management’s Reports
66 Report of Independent Registered Public Accounting Firm

Proxy Statement
68 Notice of 2009 Annual Meeting and Proxy Statement
69 General Information
73 Board of Directors
77 Highlights of the Company’s Corporate Governance Guidelines
82 Committees of the Board of Directors
82 Membership and Meetings of the Board and Its Committees
83 Directors’ Compensation
85 Directors and Corporate Governance Committee Matters
86 Audit Committee Matters
88 Compensation Committee Matters
89 Executive Compensation
111 Ownership of Company Stock
113
122 Other Matters
123 Appendix A

Items of Business To Be Acted Upon at the Meeting

Corporate Information
124 Senior Management and Board of Directors
126 Corporate Information
127 Annual Meeting Admission Ticket

On the Cover

Mark Wiley is a manager at Lilly who oversees
the contract manufacturing for several device
products, including an insulin pen called the
HumaPen® Luxura HD.™ Although the majority
of job roles that Mark has held in his 20-year
career at Lilly have, in some way, touched the
diabetes therapeutic area, he never could have
predicted the role that a Lilly insulin product
would one day play in his own life.

Nor could Mark have predicted, as he
packed up his laptop and left the ofﬁ ce to
enjoy the 2008 holiday break with his family,
that the job he would return to a week later
would have such new meaning.

On December 26, one day before her

14th birthday, Mark’s daughter, Paige, was
diagnosed with type 1 diabetes. Paige had
not been feeling well for awhile. She was
often thirsty and had little to no appetite.
Mark and his wife realized it was serious
when they weighed Paige on Christmas Eve
and discovered that she had lost 13 pounds
since October.

Upon learning Paige’s diagnosis, Mark

said they were shocked, but also relieved.
“Finding out that Paige had diabetes—we
knew—was a big deal. But we also saw it
as a blessing because we knew it could be
successfully treated.”

Paige was admitted to a local children’s
hospital, where she and her parents received
what Mark describes as a “crash course on
a completely new lifestyle.” But there was
one particular aspect of Paige’s insulin
treatment that Mark did feel comfortable
about—and that was using the HumaPen
Luxura HD to administer her injections. Given
that Mark oversees the manufacturing of this
device, he was more than familiar with how
the pen worked.

“I guess you could say that my job just

became very personal to me,” Mark said.

As for Paige, she has embraced her new

diagnosis and treatment regimen with a
maturity and courage beyond her years. And
she feels a lot better, too.

She’s also determined not to let diabetes
stand in her way. Just two days after leaving
the hospital, Mark delivered on a promise
he made before Paige’s diagnosis—he took
her rock climbing for her birthday. And
despite a fear of heights, Paige achieved her
goal that day—she successfully scaled her
way to the top.

2008 Financial Highlights

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

Year Ended December 31

2008

2007

Change %

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

$20,378.0

$18,633.5

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

3,840.9

3,486.7

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

18.8%

18.7%

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(2,071.9)

$ 2,953.0

Earnings (loss) per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reconciling items1:
Net impact associated with ImClone acquisition2 . . . . . . . . . . . . . .
Acquired in-process research and development (IPR&D) . . . . . .
Asset impairments, restructuring, and other special charges . . .
Beneﬁ t from resolution of IRS audit . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma adjustment as if the ICOS acquisition was

completed on January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted earnings per share—diluted. . . . . . . . . . . . . . . . . . . . . . . . . .

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

(1.89)

2.71

4.46
.10
1.54
(.19)

—
4.02

1.88

—
.63
.21
—

(.01)
3.54

1.70

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

947.2

1,082.4

Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40,4503

40,600

(12)

—

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

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

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

Sales Grow Across Therapeutic Areas
($ millions, percent growth)

Sales in Neurosciences, led by Zyprexa
and Cymbalta, increased 7 percent as
compared to 2007 and represent
41 percent of our 2008 net sales.
Endocrinology, led by Humalog,
Evista, and Humulin, increased
8 percent and represents 29 percent
of our 2008 net sales. Oncology
was our fastest growing therapeutic
area with growth of 17 percent.

Neuroscience
Endocrinology
Oncology
Cardiovascular
Other Pharmaceutical
Animal Health

$5,890.7
+8%

$2,874.4
+17%

$8,371.5
+7%

$1,882.7
+16%

$1,093.3
+10%

$265.4
+12%

Net Sales Per Employee Continue to Increase
($ thousands, percent growth)

In 2008, we continued our focus on productivity.
Net sales per employee increased 10 percent to
$504,000. Excluding the impact of the businesses
we acquired in 2008, our net sales per employee
would be $525,000, reflecting a 14 percent
increase from 2007.

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To Our Shareholders

For Eli Lilly and Company, 2008 was a year of transition
and transformation.

Our solid ﬁ nancial performance, driven by volume-
based sales growth, improved gross margins, and better
productivity, allowed us to make important investments
to advance our pipeline of promising molecules, to
resolve much of the uncertainty surrounding product liti-
gation, and to complete several strategic business develop-
ment transactions, including the acquisition of ImClone
Systems—the largest acquisition in Lilly history.

Transformation is not optional. The economic down-
turn only added to the challenges facing the pharmaceuti-
cal industry—including pressure on pricing and access,
a drought in research, and regulatory uncertainty. At the
same time, we have unprecedented opportunities to ad-
dress unmet patient needs. Lilly enters 2009 with more
molecules in clinical development than ever before—and
an unwavering commitment to deliver improved out-
comes for individual patients.

This has also been a year of transition. I succeeded
Sidney Taurel as CEO in April and as chairman on Janu-
ary 1, 2009. In my new responsibilities, I retain a pro-
found sense of optimism about Lilly’s future—grounded
in a realistic assessment of the challenges we face and the
difﬁ cult nature of the task ahead.

REVIEW OF 2008

Sales and ﬁ nancial results

As a result of certain signiﬁ cant charges, we reported

a net loss of $2.07 billion, or $1.89 per share, for 2008,
compared with 2007 net income of $2.95 billion and
earnings per share of $2.71. The company recorded total
charges of $4.73 billion related to the acquisition of
ImClone Systems, and $1.42 billion related to Zyprexa®
investigations by the United States Attorney for the East-
ern District of Pennsylvania (EDPA) and multiple states—
which I’ll discuss below. On a pro forma non-GAAP basis,
excluding signiﬁ cant items totaling $5.91 per share, earn-
ings rose 14 percent to $4.02 per share.

Strong volume sales, coupled with discipline on
expenses and continued productivity gains, allowed us
to generate over $7 billion in operating cash ﬂ ow. These
results give us the beneﬁ t of a strong ﬁ nancial position
just when we need it most—to make the necessary invest-
ments in our pipeline and in the company’s broader trans-
formation. We aim to sustain solid operating performance
as we prepare for the full impact of patent expirations
beginning in late 2011, a period we call “Years YZ.”

Commercial and regulatory overview

In 2008, we experienced three quarters of double-digit,

volume-driven sales growth that was broad-based across
many brands and regions. Unfortunately, in the fourth
quarter we saw a slowdown in total sales growth and vol-
ume growth. In addition, as the dollar strengthened late in
the year, exchange rates turned from a beneﬁ t to a drag on
our sales line.

Throughout 2008, we advanced Lilly’s transformation

For the full year, products launched this decade—

by executing on our operational and strategic priorities.

Reported sales grew 9 percent, driven primarily by a

5 percent increase in volume. For the ﬁ rst time, we sur-
passed $20 billion in revenue, with eight products—and
our Elanco animal health business—exceeding $1 billion
in annual sales. According to data from IMS Health, Lilly
has moved into the top 10 companies in worldwide phar-
maceutical sales.

Eight Products Exceed $1 Billion
in Net Sales
($ millions)

Eight products and one product
line—Zyprexa, Cymbalta, Humalog,
Gemzar, Cialis, Alimta, Animal
Health, Evista, and Humulin—
exceeded $1 billion in 2008.
At $1.15 billion in sales, Alimta
reached “blockbuster” status in
its fifth year on the market.

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Alimta®, Byetta®, Cialis®, Cymbalta®, Forteo®, Strattera®,
Symbyax®, Xigris®, and Yentreve™—collectively grew
22 percent on a reported basis, to $7.31 billion, and
accounted for 36 percent of total sales, compared with
32 percent of total sales in 2007. (For individual product
performance, please see page 15.)

In 2008, we set the stage for continued growth in our

marketed products with the approval and launch of new
indications and line extensions. These included: Alimta for
ﬁ rst-line treatment of non-squamous non-small cell lung
cancer in the U.S. and Europe; Cymbalta for ﬁ bromyalgia
in the U.S. and for generalized anxiety disorder in Europe;
Cialis for once-daily use in the U.S.; and the Humalog
KwikPen™ in the U.S., Japan, and select international mar-
kets. Zypadhera™—a long-acting formulation of Zyprexa—
received ﬁ nal approval in Europe late last year, and we are
currently launching in the ﬁ rst several markets.

In addition, we submitted, among others: Alimta for
the maintenance treatment of non-squamous non-small
cell lung cancer in the U.S. and Europe; Cialis for pulmo-
nary arterial hypertension in the U.S., Europe, and Japan;
and Byetta for monotherapy in the U.S.

As this report went to press, we received good
news in Europe on prasugrel, the antiplatelet agent we

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John C. Lechleiter, Ph.D.

Chairman, President, and Chief Executive Ofﬁ cer

During a hospital visit in the fall of 2005, a pediatric endocrinologist approached
John Lechleiter and expressed a need for an insulin pen that could administer
Humalog® doses in small increments for children. Upon returning to the ofﬁ ce,
Dr. Lechleiter relayed this customer feedback to the device development team,
and on April 1, 2007, the HumaPen® Luxura HD™, a reusable insulin pen that doses
in half-unit increments from 1 to 30 units, was launched in the United States.

Pictured with Dr. Lechleiter are Mark Wiley and his daughter, Paige, who are
featured on the cover, as well as members of the team who responded to the
challenge and successfully delivered an answer that matters for patients like
Paige who have diabetes. From left to right: Thomas Wallbank, Keith Johns,
Stuart Garvin, Alison Dodd, Jim Mattler, Chris Mitchener, Tim Kruse, Leeann
Chambers, Jay Harper, Aubrey Lehman, and Tom Gorgol.

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Products Launched This Decade Have Driven
Our Sales Growth
($ millions)
Combined net sales of our products launched this
decade—Alimta, Byetta, Cialis, Cymbalta, Forteo,
Symbyax, Xigris, and Yentreve— increased by
22 percent over 2007, representing $7.3 billion, or
36 percent of total net sales, compared with
$6.0 billion, or 32 percent in 2007. Combined net
sales of Evista, Gemzar, Humalog, and Humulin
increased 9 percent to $5.6 billion and represented
27 percent of sales. Zyprexa sales decreased
1 percent in 2008.

$20,000

$15,000

$10,000

$5,000

Products Launched This Decade
Alimta, Byetta, Cialis, Cymbalta, Forteo, Xigris, Strattera, Symbyax, and Yentreve
Other Established Products Evista, Gemzar, Humalog, and Humulin
Zyprexa
Other

04 05 06 07 08

co-developed with Daiichi Sankyo Company, Limited.
The European Commission (EC) approved prasugrel
for the prevention of atherothrombotic events in
patients with acute coronary syndromes (ACS) under-
going percutaneous coronary intervention (PCI). EC
approval authorizes Lilly and Daiichi Sankyo to co-
promote Eﬁ ent®—the approved European trademark for
prasugrel—in 30 countries, including the 27 members
of the European Union.

In the U.S., on February 3, 2009, an advisory com-
mittee of the Food and Drug Administration (FDA) voted
unanimously that prasugrel should be approved for the
treatment of ACS patients undergoing PCI. The FDA
is not bound by the committee’s recommendation but
takes its advice into consideration when reviewing new
drug applications. We will continue to work closely with
the FDA as the agency moves toward ﬁ nal action on
prasugrel. In addition, we have initiated a Phase III clini-
cal trial for prasugrel in the treatment of ACS patients
who are being medically managed.

Business development

After investing $3 billion in acquisitions and in-li-
censed molecules in 2007, we accelerated the pace of invest-
ment in 2008. This past year, we made three acquisitions:
• Our Elanco animal health business acquired world-

wide rights to the dairy cow supplement Posilac®, as
well as supporting operations, from Monsanto.
• We also acquired SGX Pharmaceuticals, a biotech
company based in San Diego that provides impor-
tant tools for our drug discovery efforts.

• And of course, on November 24, we completed our

purchase of ImClone Systems.

With ImClone, we simultaneously accelerated our
emergence as both a biotech and cancer powerhouse. We
gained ImClone’s pipeline of biotech molecules—includ-
ing three oncology candidates expected to be in Phase III

trials in 2009—as well as its state-of-the-art manufactur-
ing facility.

As part of our ongoing transformation into a leaner,
more ﬂ exible organization, we entered a 10-year service
agreement with Covance, a global drug development ser-
vices ﬁ rm and longtime Lilly partner, to provide preclini-
cal toxicology work and perform additional clinical trials
for Lilly. As part of this agreement, Covance purchased
our Greenﬁ eld Laboratories site, where it serves Lilly and
other clients.

And throughout 2008, we continued to advance Lilly’s

pipeline through external collaborations and in-licensing.
All of these moves strengthen our business and our pipe-
line, and we intend to continue an aggressive pace.

Resolution of Zyprexa investigations

In January 2009, Lilly announced that we had resolved

certain investigations of past Zyprexa marketing and pro-
motional practices. As part of the resolution, Lilly pleaded
guilty to one misdemeanor violation of federal law for the
off-label promotion of Zyprexa between September 1999
and March 2001. In addition, we entered into federal and
state civil settlement agreements and committed to under-
take a set of deﬁ ned corporate integrity obligations. As I
noted earlier, we took a charge in 2008 in connection with
these investigations, and that charge was sufﬁ cient to cover
the payments under the agreements announced in January.
The company deeply regrets the past actions covered

by this misdemeanor plea. We realize that we have a
tremendous responsibility to patients, and we strive to
live up to that responsibility every day in every interac-
tion. Doing the right thing is non-negotiable at Lilly, and I
remain personally committed to seeing that our company
maintains the highest standards of conduct.

Now let me turn to the future.

OUTLOOK

A challenging environment demands value

Today, Lilly is operating from a position of consider-
able strength as we transform our business to succeed in
a very difﬁ cult external environment.

As we deal with the pressures on our industry and
the broader upheaval in the global economy, we also face
our own particular challenges in the advent of Years YZ.
At the same time, we see tremendous opportunities
rooted in recent scientiﬁ c advances that counter many of
the challenges we face. We’ve set our sights on delivering
more of the thing that is in the shortest supply in health
care markets—and the thing that policymakers are often
looking for as well.

In a word, it’s value.
Our customers—patients, physicians, and payers

alike—want to get the economic and therapeutic value
of medicines, without so much trial and error, and waste.
They want to experience the value, in particular, of more

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predictable beneﬁ t and less risk of side effects. This in
turn requires that we deliver more knowledge about the
right dose of the right medicine matched to the right
patient at the right time.

Lilly’s strategy follows from this: We aim to create
value for our stakeholders by accelerating the ﬂ ow of in-
novative medicines that provide improved outcomes for
individual patients.

The pipeline is our top priority

The lifeblood of our business is our pipeline, and our
future success depends, as it always has, upon our ability
to discover and develop innovative new medicines that
help people live longer, healthier, and more active lives.

Owing both to acquisitions and to the increased pro-
ductivity of our own labs, the current list of compounds
in some stage of human testing at Lilly is larger and more
exciting than at any time in the history of the company.
In 2008, Lilly Research Laboratories moved 17 new mol-
ecules into clinical testing. As of January 31, 2009, we had
60 molecules in the clinic—double the number at the end
of 2006—including a record 23 compounds in Phase II
and Phase III.

Our pipeline focuses on a number of important unmet

medical needs:

• We continue to develop potential new medicines for
endocrine and metabolic disorders, including diabe-
tes, obesity, and osteoporosis, as well as cardiovascu-
lar diseases, including acute coronary syndrome and
atherosclerosis.

• In neuroscience, we’re pursuing molecules in
Alzheimer’s disease, schizophrenia, multiple
sclerosis, pain, and alcohol abuse.

• In oncology, we are pursuing therapies for a wide
range of cancers, as well as for supportive care.

• And we have a growing pipeline of emerging oppor-
tunities in chronic inﬂ ammation and autoimmune
diseases.

Of course, attrition is an expected part of drug devel-
opment, an inherently risky endeavor. While our attrition
rates in 2008 were generally low, we terminated our AIR®
Inhaled Insulin program, which was being conducted in
partnership with Alkermes, Inc.

In sum, we continue to build a pipeline that we be-

lieve will meet the challenges of the next decade, provid-
ing a steady ﬂ ow of high-value medicines by 2013.

Elements of our broader strategy

Five key areas of focus will support and enable Lilly’s

strategy.

The ﬁ rst is a commitment to being more patient
centered and customer focused—a commitment that will
leave no part of Lilly untouched. Being patient centered
means, among other things, transforming the work of
our labs to produce what we call “tailored therapies”—an

essential component of personalized medicine. We’re
increasingly able to identify the patients who will—or
won’t—beneﬁ t from a particular medicine.

We’re also changing how we interact with customers.
Last summer, we launched an entirely new sales model in
Ohio and Wisconsin, which we hope to expand soon to the
rest of the U.S. We’re providing our sales representatives
with new training and tools to respond to what doctors tell
us they’re looking for—deeper disease and product knowl-
edge, access to relevant information, meaningful dialogue,
and quick answers to speciﬁ c customer questions.

A second focus is a more aggressive and deliberate
move into biotechnology. By the measure of sales of our
current bio-products, including our insulins, we’re already
the ﬁ fth-largest biotech company in the world. Our ambi-
tion is to make biotech products an even more prominent
part of our total mix.

While Lilly has had a long and distinguished history
in biotechnology, our more recent strategic investments
in biotech—including our acquisition of ImClone—are
literally transforming our pipeline. Nearly half of our
pipeline in Phase II or Phase III is comprised of biologics.
We’re virtually unique among existing biopharma-
ceutical companies in that we’ve been able to combine
deep, therapeutic knowledge in targeted disease areas
with the capability of generating potential biotech
solutions alongside more traditional, chemistry-based
work. A good example is in the high-stakes ﬁ ght against
Alzheimer’s disease. Lilly currently is developing both a
chemical compound and a biotech antibody targeting this
unmet medical need.

A third set of changes, in support of our strategy, has
to do with reshaping the way we work and operate. In addi-
tion to our Six Sigma efforts, we also completed in 2008 a
company-wide effort to reduce the layers of management
between me and the person on the shop ﬂ oor, and to give
our managers broader spans of control.

But what’s really taking center stage is our transition

from being a fully integrated pharmaceutical company,
or FIPCO, to the model that we’re calling FIPNet—a fully
integrated pharmaceutical network. FIPNet consists of an
increasing number of highly sophisticated partnerships
across all areas of our business. Lilly provides high-level
coordination, investment, and assets to which other orga-
nizations can add value.

We can point to many successful examples of FIPNet
that we are implementing today: our virtual platform for
getting new molecules to proof of concept, called Cho-
rus; a new joint venture, called Vanthys, that extends the
Chorus model in the emerging Indian marketplace; our
systems biology hub in Singapore; our chemistry synthe-
sis work in Shanghai; our risk-sharing deals with Indian
biopharmaceutical companies; and our shift of signiﬁ -
cant, early-stage development work to Covance.

And the examples are multiplying, enabling us to
access critical resources around the globe, and to expand

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the range of opportunities to discover and develop new
medicines.

The fourth plank of our strategy deals with globaliza-

and Humulin. These safety measures help patients, physi-
cians, pharmacists, and other health care professionals
accurately identify prescribed insulin and avoid mix-ups.

Philanthropy: Lilly has consistently ranked among the
nation’s most charitable companies. There’s no better
example of our commitment than our program to ﬁ ght
multidrug-resistant tuberculosis—the Lilly MDR-TB
Partnership created in 2003. We’ve also launched efforts
to improve outcomes for people with diabetes. These
include our donation of life-saving insulin for children in
sub-Saharan Africa, through the International Diabetes
Federation’s “Life for a Child” program, and our “FACE
Diabetes” outreach to African-Americans to help them
manage this potentially devastating disease.

Our company and our employees continue to give
back to the communities in which we have a presence.
In 2008, this commitment led us to start the record-setting
Lilly Global Day of Service—and more than 20,000 em-
ployees participated in service projects around the world.
Our next Global Day of Service is set for May 20, 2009,
and we intend to make it an annual event.

I can offer only a cursory look at our efforts here, but

a full accounting is provided in our 2008 Lilly Corporate
Responsibility Report, available online at www.lilly.com.

In closing, I want to thank my predecessor, Sidney
Taurel, for his 37 years of service to our company, as well
as his wisdom and counsel to me before and during our
seamless leadership transition. He leaves behind a very
strong business that is today transforming itself from a
position of strength.

I also want to express my gratitude to my Lilly col-

leagues. My strength and spirits are sustained, time and
again, by their dedication to this great enterprise and to
those whom we serve. A poignant example of that dedica-
tion is featured in this report. I’m proud to be associated
with the team whose photograph graces this letter—and
the Lilly team around the world. In a time of unprec-
edented challenge and transformation, I have never been
more excited about Lilly’s future.

For the Board of Directors,

John C. Lechleiter
Chairman, President, and Chief Executive Ofﬁ cer

tion, steadily increasing the share of Lilly’s sales derived
in the world’s fastest-growing markets. Going forward, we
aim to expand our presence in China and Russia, along
with Brazil, India, Korea, Mexico, Turkey, and others. Japan
and China, in particular, offer us the possibility of counter-
cyclical growth to offset revenue losses in Years YZ.

And the relationships and market familiarity that we

gain through this sales expansion will further enhance
and support our FIPNet efforts—and vice versa.

The ﬁ fth and ﬁ nal component of Lilly’s strategy is

prudent diversiﬁ cation.

I want to be clear that we do not intend to stray from

our core business of human pharmaceuticals. Within
that rubric, however, it’s in Lilly’s best interests to remain
open to new therapeutic areas as well as new or comple-
mentary technology.

We aim to make the most of our Elanco animal
health business, whose growing sales and expansion into
the companion animal market could not be coming at a
better time. We’ll look to further strengthen our position
in oncology, where Lilly has become a key player very
quickly. And our tailoring efforts mean that we will re-
main alert to business development opportunities arising
from the convergence among pharmaceuticals, medical
devices, and diagnostic medicine.

Earning trust through corporate citizenship

Ultimately, our future depends on the trust of the pa-
tients, physicians, and payers who use, prescribe, and pay
for our products. We have to earn that trust every day. So
no discussion of our future would be complete without ad-
dressing our commitment to strong corporate citizenship.

Transparency: We’ve learned that the best way to build
trust is by letting people see for themselves what we’re
doing. We’ve been leaders in transparency, going back to
the industry’s ﬁ rst voluntary registry of clinical trial data
in 2004. This past September, in another industry ﬁ rst,
we announced plans to voluntarily disclose our payments
to doctors for any speaking and consulting services they
provide, beginning later this year.

Lilly was also actively involved in efforts by the
Pharmaceutical Research and Manufacturers of America
(PhRMA), which resulted in a revised code for company
interactions with health care professionals and strength-
ened PhRMA’s guiding principles for direct-to-consumer
advertising about prescription medicines.

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

Securing—Then Redeﬁ ning—Lilly’s Future

Sidney Taurel took charge of Lilly as
the company anticipated the most
serious challenge in its history—
the U.S. patent expiration of Prozac,
which accounted for some 25 percent
of sales. Up to that point, every
pharmaceutical company that had
suffered a loss of similar magnitude
had lost its independence. Under
Sidney’s leadership, Lilly not only
survived but also laid the groundwork
for future growth. Even with the loss
of Prozac®, sales revenue during
Sidney’s tenure as CEO doubled, from
about $10 billion to nearly $20 billion.

In an era when many pharmaceutical
companies chose to merge or
diversify, Sidney focused Lilly
squarely on delivering breakthrough
innovation—medicines that were
either the ﬁ rst, or the best, in their
therapeutic class. During Sidney’s
tenure as CEO, Lilly launched 10
such medicines, including the ﬁ rst
treatment for severe sepsis, the ﬁ rst
to build healthy bone in humans, and
the ﬁ rst to treat malignant pleural
mesothelioma.

Sidney made sure that Lilly not only
touched the world’s patients but
also tapped the world’s talents. He
built an international and diverse
leadership team and expanded Lilly’s
global presence. Today, about half of
Lilly’s sales come from outside the
United States.

Beyond numbers, Sidney’s legacy
springs from his ability to stay
connected with the past even while
deﬁ ning the future.

He championed the company’s
long-held values of integrity,
excellence, and respect for people
and established a corporate brand,
working to make Lilly a company that
provided customers with answers
that matter.

Those answers extended beyond
medicine. Under Sidney’s leader-
ship, Lilly was a leader in corporate
philanthropy and created a pioneering
partnership to combat multidrug-
resistant tuberculosis that includes
technology transfer to the hardest-hit
countries. Lilly also became a leader
in transparency—the ﬁ rst in the
industry to publish clinical trial data
online, publicly report its educational
grants, and announce it will disclose
payments to U.S. physicians. The
company also earned accolades
for its management practices—
including developing leaders. The
next generation of Lilly leaders will
sharpen their skills in the Sidney
Taurel Executive Leadership Center,
which opens in 2009. Sidney himself
became a leading advocate for the
power of innovative medicines—an
industry statesman sought by major
newspapers and policymakers
around the world.

As new business challenges arose,
Sidney sought to transform the
company to deliver even greater
value. The Lilly he envisioned
would provide tailored therapies
for individual patients, orchestrate
a global network to be faster and
more creative, and be increasingly
productive. Over the past four years,
the company has made tangible
progress toward realizing this vision.

Sidney once said that a leader
“provides direction and supplies
the motive power to change.” He
exempliﬁ ed that. By staying true
to the best from Lilly’s past while
transforming the company to
succeed in the future, Sidney made
a difference to millions of patients
around the world and leaves a Lilly
poised to deliver greater value
in the future.

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Innovation at Lilly: The Portfolio and the Pipeline

Major Marketed Products1 (Dates indicate the year of ﬁ rst global launch)

2005 Byetta®

(exenatide)

2004 Alimta®

(pemetrexed)

2004 Cymbalta®
(duloxetine)

for type 2 diabetes
for use in combination with a thiazolidinedione (2007)
(in collaboration with Amylin Pharmaceuticals, Inc.)

for malignant pleural mesothelioma
for second-line treatment of non-squamous non-small cell lung cancer (NSCLC) (2004)
for ﬁ rst-line treatment of non-squamous NSCLC (2008)

for major depressive disorder
for diabetic peripheral neuropathic pain (2004)
for generalized anxiety disorder (2007)
for the maintenance treatment of major depressive disorder (2007)
for ﬁ bromyalgia (2008)
(in collaboration with Quintiles Transnational Corp. in the U.S., Shionogi & Co. Ltd. in Japan,
and with Boehringer Ingelheim elsewhere in the world)

2004 Erbitux®

(cetuximab)

for later-stage EGFR-expressing metastatic colorectal cancer
for locally or regionally advanced squamous cell head and neck cancer (2006)
for later-stage recurrent or metastatic squamous cell head and neck cancer (2006)
(in collaboration with Bristol-Myers Squibb Co. in North America and Japan, and Merck KGaA

outside of North America and in Japan)

2004 Symbyax®

for bipolar depression

(olanzapine/ﬂ uoxetine)

2004 Yentreve®
(duloxetine)

2003 Cialis®

(tadalaﬁ l)

for stress urinary incontinence (outside the U.S.)

for erectile dysfunction
for once daily use (2007)

2003 Strattera®

(atomoxetine)

for attention-deﬁ cit hyperactivity disorder (ADHD) in children, adolescents, and adults
for maintenance treatment of ADHD in children and adolescents (2008)

2002 Forteo®

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

(teriparatide)

risk for a fracture

for the treatment of glucocorticoid-induced osteoporosis (2008; Europe)

2001 Xigris®

for severe sepsis in adult patients at high risk of death

(drotrecogin alfa
[activated])

1999 Actos®

(pioglitazone)

for type 2 diabetes
(in collaboration with Takeda outside the U.S.)

1998 Evista®

(raloxifene)

for prevention of osteoporosis in postmenopausal women
for treatment of osteoporosis in postmenopausal women (1999)
for reduction in risk of invasive breast cancer in postmenopausal women with osteoporosis (2007)
for reduction in risk of invasive breast cancer in postmenopausal women at high risk for

invasive breast cancer (2007)

(in collaboration with Chugai Pharmaceutical Co., Ltd. in Japan)

1For full prescribing information, please refer to individual product websites, which can be accessed from www.lilly.com.
8

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1996 Zyprexa®

(olanzapine)

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)
Zypadhera™ for maintenance treatment of adult patients with schizophrenia sufﬁ ciently stabilized

during acute treatment with oral olanzapine (2009)

1996 Humalog®

for treatment of type 1 and type 2 diabetes

(lispro recombinant Humalog® Mix 75/25 (1999)
insulin)
Humalog® Mix 50/50 (1999)

1995 Gemzar®

(gemcitabine)

for ﬁ rst-line treatment of non-small cell lung cancer
for pancreatic cancer (1996)
for bladder cancer (1999; outside the U.S.)
for metastatic breast cancer (2003)
for recurrent ovarian cancer (2004)
for biliary tract cancer (2006; Japan)

1995 ReoPro®

(abiciximab)

for prevention of cardiac ischemic complications in patients undergoing coronary

intervention, such as angioplasty

for unstable angina associated with stent procedure (1997)
(in collaboration with Centocor, except in Japan)

1987 Humatrope®
(somatropin of
recombinant
DNA origin)

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

(human insulin
recombinant)

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

Cetuximab

Exenatide

Olanzapine

for ﬁ rst-line recurrent or metastatic squamous cell head and neck cancer

for monotherapy treatment of type 2 diabetes

for adolescent schizophrenia and bipolar disorder

Olanzapine LAI

long-acting injection delivery for schizophrenia

Olanzapine-Fluoxetine

for treatment-resistant depression

Pemetrexed disodium

for maintenance treatment of non-squamous NSCLC

Prasugrel

for prevention/reduction of atherothrombotic events in patients with acute coronary

syndromes who undergo percutaneous coronary intervention (PCI)

(in collaboration with Daiichi Sankyo Company, Ltd.)

Ruboxistaurin mesylate

for diabetic retinopathy

Tadalaﬁ l

for pulmonary arterial hypertension
(in collaboration with United Therapeutics in the U.S.)

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Select Drug Candidates in Late-Stage Investigation

Arzoxifene

Cetuximab

Dirucotide

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

for lung, gastric, esophageal, and adjuvant colorectal cancers

for secondary progressive multiple sclerosis (SPMS)
(in collaboration with BioMS Medical Corp.)

Duloxetine

for chronic pain

Enzastaurin

for diffuse large B-cell lymphoma

Exenatide

IMC-1121B

Prasugrel

for once weekly dosing

for breast cancer

for patients with acute coronary syndromes who are being medically managed

Semagacestat

for Alzheimer’s disease (gamma secretase inhibitor)

Teplizumab

for type 1 diabetes
(in collaboration with Macrogenics Inc.)

Select Drug Candidates in Mid-Stage Investigation

BAFF Antibody

for rheumatoid arthritis

Basal Insulin Analog

for diabetes

CD20 Antibody

for non-Hodgkins lymphoma (NHL)

Eg5 Inhibitor

for solid tumors
(in collaboration with Kyowa Hakko Kirin Co., Ltd)

eIF-4E ASO

for solid tumors

FGF-21 Variant

for type 2 diabetes

Gemcitabine Prodrug

for solid tumors

GLP-1 Analog Fc

for type 2 diabetes

GLP-1 Analog PEG

for type 2 diabetes

Glucokinase Activator

for type 2 diabetes
(in collaboration with OSI Pharmaceuticals, Inc.)

iGluR5 Antagonist

for pain

IL-1 Antibody

for type 2 diabetes

IL-17 Antibody

for rheumatoid arthritis

IL-23 Antibody

for multiple sclerosis

IMC-A12

for solid tumors

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IMC-11F8

IMC-3G3

IMC-18F1

LY2599506

LY2624803

for solid tumors

for type 2 diabetes

for insomnia

mGlu2/3 Prodrug

for schizophrenia

NK-1 Antagonist

for alcohol dependence

NERI IV

OpRA II

for depression and ADHD

for alcohol dependence

Solanezumab

for Alzheimer’s disease

Survivin ASO

for solid tumors

Tasisulam

for solid tumors

TGF beta Antibody

for chronic renal disease and solid tumors

TGF beta Inhibitor

for solid tumors

Information is current as of February 17, 2009. 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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Review of Operations

EXECUTIVE OVERVIEW

This section provides an overview of our ﬁ nancial
results, recent product and late-stage pipeline devel-
opments, signiﬁ cant business development, and legal,
regulatory, and other matters affecting our company
and the pharmaceutical industry.

Financial Results
We achieved worldwide sales growth of 9 percent,
which was primarily driven by volume increases in
several key products. The favorable impact of for-
eign exchange rates on cost of sales contributed to
an improvement in gross margin. Marketing, selling,
and administrative expenses grew at the same rate as
sales, driven by pre-launch activities associated with
prasugrel, marketing costs associated with Cymbalta®
and Evista®, the impact of foreign exchange rates, and
increased litigation-related expenses; while our invest-
ment in research and development grew 10 percent.
We completed our acquisition of ImClone Systems Inc.
(ImClone), resulting in a signiﬁ cant charge of $4.69 bil-
lion for acquired in-process research and development
(IPR&D) and reached resolution on government investi-
gations related to our past U.S. marketing and promo-
tional practices for Zyprexa®, resulting in an additional
charge of $1.48 billion. We incurred tax expense of
$764.3 million, despite a loss before income taxes of
$1.31 billion, primarily caused by the non-deductibility
of the ImClone IPR&D charge and the partial deduct-
ibility of the Zyprexa investigation settlements. Accord-
ingly, earnings decreased $5.02 billion, to a net loss of
$2.07 billion, and earnings per share decreased $4.60,
to a loss of $1.89 per share, in 2008 as compared with
net income of $2.95 billion, or earnings per share of
$2.71 in 2007. Net income comparisons between 2008
and 2007 are affected by the impact of the following sig-
niﬁ cant items (see Notes 3, 5, 12, and 14 to the consoli-
dated ﬁ nancial statements for additional information):

2008
Acquisitions (Note 3)
• We recognized charges totaling $4.73 billion (pretax)
associated with the acquisition of ImClone, which
decreased earnings per share by $4.46. These amounts
include an IPR&D charge of $4.69 billion (pretax).
The remaining net expenses are related to ImClone’s
operating results subsequent to the acquisition,
incremental interest costs, and amortization of the
intangible asset associated with Erbitux®. We also
incurred IPR&D charges of $28.0 million (pretax)
associated with the acquisition of SGX Pharmaceuticals,
Inc. (SGX), which decreased earnings per share by $.03.

• We incurred IPR&D charges associated with licensing

(cid:69)(cid:103)(cid:100)(cid:89)(cid:106)(cid:88)(cid:105)(cid:104)(cid:21)(cid:65)(cid:86)(cid:106)(cid:99)(cid:88)(cid:93)(cid:90)(cid:89)(cid:21)(cid:73)(cid:93)(cid:94)(cid:104)(cid:21)(cid:57)(cid:90)(cid:88)(cid:86)(cid:89)(cid:90)(cid:21)(cid:56)(cid:100)(cid:99)(cid:105)(cid:103)(cid:94)(cid:87)(cid:106)(cid:105)(cid:90)(cid:89)(cid:21)
(cid:25)(cid:44)(cid:35)(cid:40)(cid:21)(cid:55)(cid:94)(cid:97)(cid:97)(cid:94)(cid:100)(cid:99)(cid:21)(cid:94)(cid:99)(cid:21)(cid:72)(cid:86)(cid:97)(cid:90)(cid:104)(cid:21)(cid:57)(cid:106)(cid:103)(cid:94)(cid:99)(cid:92)(cid:21)(cid:39)(cid:37)(cid:37)(cid:45)
(cid:29)(cid:101)(cid:90)(cid:103)(cid:88)(cid:90)(cid:99)(cid:105)(cid:21)(cid:100)(cid:91)(cid:21)(cid:99)(cid:90)(cid:105)(cid:21)(cid:104)(cid:86)(cid:97)(cid:90)(cid:104)(cid:30)

(cid:42)(cid:192)(cid:156)(cid:94)(cid:210)(cid:83)(cid:205)(cid:196)(cid:202)(cid:143)(cid:58)(cid:210)(cid:151)(cid:83)(cid:131)(cid:103)(cid:94)(cid:202)(cid:205)(cid:131)(cid:134)(cid:196)(cid:202)(cid:94)(cid:103)(cid:83)(cid:58)(cid:94)(cid:103)(cid:202)(cid:134)(cid:151)(cid:83)(cid:143)(cid:210)(cid:94)(cid:103)(cid:202)(cid:1)(cid:143)(cid:134)(cid:148)(cid:205)(cid:58)(cid:91)(cid:202)
(cid:9)(cid:219)(cid:103)(cid:205)(cid:205)(cid:58)(cid:91)(cid:202)(cid:10)(cid:134)(cid:58)(cid:143)(cid:134)(cid:196)(cid:91)(cid:202)(cid:10)(cid:219)(cid:148)(cid:74)(cid:58)(cid:143)(cid:205)(cid:58)(cid:91)(cid:202)(cid:19)(cid:156)(cid:192)(cid:205)(cid:103)(cid:156)(cid:91)(cid:202)(cid:45)(cid:205)(cid:192)(cid:58)(cid:205)(cid:205)(cid:103)(cid:192)(cid:58)(cid:91)(cid:202)
(cid:45)(cid:219)(cid:148)(cid:74)(cid:219)(cid:58)(cid:218)(cid:91)(cid:202)(cid:54)(cid:134)(cid:122)(cid:192)(cid:134)(cid:196)(cid:91)(cid:202)(cid:58)(cid:151)(cid:94)(cid:202)(cid:55)(cid:103)(cid:151)(cid:205)(cid:192)(cid:103)(cid:216)(cid:103)(cid:174)(cid:202)(cid:46)(cid:131)(cid:103)(cid:196)(cid:103)(cid:202)(cid:168)(cid:192)(cid:156)(cid:94)(cid:210)(cid:83)(cid:205)(cid:196)(cid:202)
(cid:83)(cid:156)(cid:151)(cid:205)(cid:192)(cid:134)(cid:74)(cid:210)(cid:205)(cid:103)(cid:94)(cid:202)(cid:100)(cid:199)(cid:174)(cid:206)(cid:202)(cid:74)(cid:134)(cid:143)(cid:143)(cid:134)(cid:156)(cid:151)(cid:202)(cid:205)(cid:156)(cid:202)(cid:151)(cid:103)(cid:205)(cid:202)(cid:196)(cid:58)(cid:143)(cid:103)(cid:196)(cid:202)(cid:58)(cid:151)(cid:94)(cid:202)
(cid:83)(cid:156)(cid:151)(cid:205)(cid:134)(cid:151)(cid:210)(cid:103)(cid:94)(cid:202)(cid:205)(cid:156)(cid:202)(cid:94)(cid:134)(cid:216)(cid:103)(cid:192)(cid:196)(cid:134)(cid:115)(cid:219)(cid:202)(cid:156)(cid:210)(cid:192)(cid:202)(cid:168)(cid:156)(cid:192)(cid:205)(cid:115)(cid:156)(cid:143)(cid:134)(cid:156)(cid:202)(cid:58)(cid:151)(cid:94)(cid:202)(cid:143)(cid:103)(cid:196)(cid:196)(cid:103)(cid:151)(cid:202)
(cid:156)(cid:210)(cid:192)(cid:202)(cid:94)(cid:103)(cid:168)(cid:103)(cid:151)(cid:94)(cid:103)(cid:151)(cid:83)(cid:103)(cid:202)(cid:156)(cid:151)(cid:202)(cid:57)(cid:219)(cid:168)(cid:192)(cid:103)(cid:218)(cid:58)(cid:174)

(cid:79)(cid:110)(cid:101)(cid:103)(cid:90)(cid:109)(cid:86)

(cid:54)(cid:97)(cid:97)(cid:21)(cid:68)(cid:105)(cid:93)(cid:90)(cid:103)

(cid:39)(cid:40)(cid:26)

(cid:41)(cid:38)(cid:26)

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(cid:41)(cid:39)(cid:26)

(cid:39)(cid:43)(cid:26)

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(cid:39)(cid:37)(cid:37)(cid:45)

(cid:39)(cid:37)(cid:37)(cid:44)

arrangements with BioMS Medical Corp. (BioMS) and
TransPharma Medical Ltd. totaling $122.0 million
(pretax), which decreased earnings per share by $.07.

Asset Impairments and Related Restructuring and Other
Special Charges (Notes 5 and 14)
• We recognized asset impairments, restructuring, and
other special charges totaling $497.0 million (pretax),
which decreased earnings per share by $.30. A similar
charge of $57.1 million (pretax), which decreased
earnings per share by $.04, was included in cost of
sales. These charges were primarily associated with
the sale of our Greenﬁ eld, Indiana site, the termination
of the AIR® Insulin program, and strategic exit activities
related to manufacturing operations.

• We recorded charges of $1.48 billion (pretax) related to
the federal and state Zyprexa investigations led by the
U.S. Attorney for the Eastern District of Pennsylvania
(EDPA), as well as the resolution of a multi-state
investigation regarding Zyprexa involving 32 states and
the District of Columbia, which decreased earnings per
share by $1.20.

Other (Note 12)
• We recognized a discrete income tax beneﬁ t of
$210.3 million as a result of the resolution of a
substantial portion of the IRS audit of our federal
income tax returns for the years 2001 through 2004,
which increased earnings per share by $.19.

2007
Acquisitions (Note 3)
• We incurred IPR&D charges associated with the

acquisitions of ICOS Corporation (ICOS), Hypnion, Inc.
(Hypnion), and Ivy Animal Health, Inc. (Ivy), totaling
$631.6 million (pretax), which decreased earnings per
share by $.57.

• We incurred IPR&D charges associated with our
licensing arrangements with Glenmark Pharma-

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ceuticals Limited India, MacroGenics, Inc., and OSI
Pharmaceuticals, totaling $114.0 million (pretax),
which decreased earnings per share by $.06.

Asset Impairments and Related Restructuring and Other
Special Charges (Notes 5 and 14)
• We recognized asset impairments, restructuring, and
other special charges of $190.6 million (pretax), which
decreased earnings per share by $.12. These charges
were primarily associated with previously announced
strategic decisions affecting manufacturing and
research facilities.

• We incurred a special charge following a settlement

with one of our insurance carriers over Zyprexa
product liability claims, which led to a reduction of
our expected product liability insurance recoveries,
and other product liability charges. This resulted
in a charge totaling $111.9 million (pretax), which
decreased earnings per share by $.09.

Late-Stage Pipeline Developments and Business
Development Activity
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. There were a num-
ber of late-stage pipeline developments and business
development transactions within the past year, including:

Pipeline
• We, along with our partner Daiichi Sankyo Company
Limited, are seeking from the U.S. Food and Drug
Administration (FDA) approval for prasugrel as a
treatment for patients with acute coronary syndrome
being managed with percutaneous coronary
intervention. The Cardiovascular and Renal Drugs
Advisory Committee of the FDA reviewed prasugrel
during a hearing and unanimously recommended it for
approval. The FDA will consider the recommendation
as it continues its review and makes its ﬁ nal decision.
• The Committee for Medicinal Products for Human Use
(CHMP) of the European Medicines Agency issued a
positive opinion recommending approval of prasugrel
for the prevention of atherothrombotic events in
patients with acute coronary syndromes undergoing
percutaneous coronary intervention. The CHMP
positive opinion has been referred for ﬁ nal action to the
European Commission.

• We received a complete response letter from the FDA
for olanzapine long-acting injection (LAI) for acute and
maintenance treatment of schizophrenia in adults.
We are continuing to work with the agency on the new
drug application (NDA). The FDA does not require any
additional clinical trials for the continued review of
the NDA. Per the agency’s request, we are preparing

a proposed Risk Evaluation and Mitigation Strategy,
which will be submitted in the near future. In addition,
olanzapine long-acting injection was approved by
the European Commission under the trade name
Zypadhera™.

• We withdrew our supplemental NDA from the FDA for

Cymbalta for the management of chronic pain. We plan
to resubmit the application in the ﬁ rst half of 2009,
adding data from a recently completed study in chronic
osteoarthritis pain of the knee.

• The FDA approved Alimta®, in combination with

cisplatin, as a ﬁ rst-line treatment for locally advanced
and metastatic non-small cell lung cancer (NSCLC)
for patients with nonsquamous histology. The
European health authorities also approved Alimta, in
combination with cisplatin, as a ﬁ rst-line treatment for
non-small cell lung cancer patients with other than
predominantly squamous cell histology.

• We submitted tadalaﬁ l as a treatment for pulmonary

arterial hypertension (PAH) to regulatory authorities in
the U.S., Europe, and Japan.

• The FDA approved Cymbalta for the management of
ﬁ bromyalgia, a chronic pain disorder. In addition, the
European Commission approved Cymbalta for the
treatment of generalized anxiety disorder (GAD).

• We, along with our partner Amylin Pharmaceuticals,
Inc. (Amylin), submitted Byetta® as a monotherapy
treatment for type 2 diabetes to the FDA.

• The European Commission approved a new indication

for Forsteo® for the treatment of osteoporosis
associated with sustained, systemic glucocorticoid
therapy in women and men at increased risk for
fracture. We have also received an approvable letter
from the FDA for Forteo® for the same indication.

• We terminated development of our AIR Insulin

program, which was being conducted in collaboration
with Alkermes, Inc. The program had been in Phase III
clinical development as a potential treatment for type
1 and type 2 diabetes. This decision was not a result
of any observations during AIR Insulin trials relating
to the safety of the product, but rather was a result of
increasing uncertainties in the regulatory environment
and a thorough evaluation of the evolving commercial
and clinical potential of the product compared to
existing medical therapies.

Business Development
• We acquired all of the outstanding shares of ImClone

for a total purchase price of approximately $6.5 billion.
This strategic combination will offer both targeted
therapies and oncolytic agents along with an oncology
pipeline spanning all phases of clinical development.
It also expands our biotechnology capabilities.

• We entered into a license and a supply arrangement
with United Therapeutics Corporation related to the
U.S. commercialization rights for the PAH indication

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of tadalaﬁ l. We received an upfront payment of $150.0
million in exchange for exclusive rights to commercial-
ize tadalaﬁ l for PAH in the U.S., as well as for a product
manufacturing and supply arrangement. As part of this
arrangement, we acquired a $150.0 million equity posi-
tion in the company. The indication is currently under
review by the FDA.

• We acquired the worldwide rights to the dairy cow

supplement Posilac®, as well as the product’s support-
ing operations, from Monsanto Company (Monsanto) for
an upfront payment of $300.0 million, as well as contin-
gent consideration based on future Posilac sales. The
acquisition of Posilac provides us with a product that
complements those of our animal health product line.
• We sold our Greenﬁ eld Laboratories site in Greenﬁ eld,

Medicaid-related claims of states which decide to par-
ticipate in the settlement.

Beginning in August 2006, we received civil inves-

tigative demands or subpoenas from the attorneys
general of a number of states under various state con-
sumer protection laws seeking documents pertaining to
Zyprexa. In October 2008, we reached a settlement with
32 states and the District of Columbia, under which we
paid $62.0 million.

In December 2008, the Federal Supreme Court

(BGH) in Germany re-established our Zyprexa patent
that had been declared invalid in 2007 by the German
Federal Patent Court. As a result of this ruling, generic
olanzapine has been withdrawn from the German mar-
ket as of the beginning of 2009.

Indiana, to Covance Inc. We also signed a 10-year
service agreement, under which Covance will assume
responsibility for our toxicology testing and other R&D
support activities at the site.

We continue to reach agreements with claimants’
attorneys involved in U.S. Zyprexa product liability liti-
gation to settle claims against us relating to the medi-
cation. Approximately 120 claims remain.

• We acquired SGX for approximately $64 million in cash.
The acquisition allows us to integrate SGX’s structure-
guided drug discovery platform into our drug discovery
efforts. It also gives us access to FAST™, SGX’s frag-
ment-based, protein structure guided drug discovery
technology, and to a portfolio of preclinical oncology
compounds focused on a number of kinase targets.
• We entered into a licensing and development agree-

ment with TransPharma Medical Ltd. (TransPharma)
to acquire rights to its product and related drug
delivery system for the treatment of osteoporosis. The
product, which is administered transdermally using
TransPharma’s proprietary technology, is currently in
Phase II clinical testing.

• We entered into an agreement with an afﬁ liate of TPG-

Axon Capital (TPG) for the Phase III development of our
two lead molecules for the treatment of Alzheimer’s
disease. This agreement provides TPG with success-
based milestones and royalties in exchange for clinical
trial funding.

• We entered into a licensing and development agree-

ment with BioMS whereby we acquired exclusive world-
wide rights to a multiple sclerosis (MS) compound. The
compound is currently being evaluated in two pivotal
Phase III clinical trials in secondary progressive MS.

Legal, Regulatory, and Other Matters
In March 2004, we were notiﬁ ed by the U.S. Attorney’s
ofﬁ ce for the EDPA that it had commenced an investi-
gation relating to our U.S. marketing and promotional
practices for Zyprexa, Prozac®, and Prozac Weekly™. In
October 2008, we announced that we were in advanced
discussions to resolve the ongoing investigations led
by the EDPA, and we recorded a charge of $1.42 billion.
In January 2009, we announced that the discussions
had been successfully concluded, and that we settled
the Zyprexa-related federal claims, as well as similar

In the third quarter of 2008, we initiated a strate-
gic review of our Tippecanoe manufacturing facility in
Lafayette, Indiana. Options being considered for this
site include continuing operations with a revised site
mission, exploring opportunities to sell the facility, and
ceasing operations altogether. The review is expected to
last six to twelve months. No ﬁ nal decisions have been
made at this time; however, depending on the decision,
we could record signiﬁ cant charges.

In the United States, the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003
(MMA) continues to provide an effective prescription
drug beneﬁ t under the Medicare program (known as
Medicare Part D). Various measures have been dis-
cussed and/or passed in both the U.S. House of Repre-
sentatives and U.S. Senate that would impose additional
pricing pressures on our products, including propos-
als to legalize the importation of prescription drugs
and either allow, or require, the Secretary of Health
and Human Services to negotiate drug prices within
Medicare Part D directly with pharmaceutical manu-
facturers. Additionally, various proposals have been
introduced that would increase the rebates we pay on
sales to Medicaid patients or impose additional rebates
on sales to patients who receive their medicines through
Medicare Part D. Uncertainty exists surrounding the
new administration and Congress and the impact any
government decisions or programs will have on the
pharmaceutical industry. In addition, many states are
facing substantial budget difﬁ culties due to the down-
turn in the economy and are expected to seek aggres-
sive cuts or other offsets in healthcare spending. We
expect pricing pressures at the federal and state levels
to become more severe, which could have a material
adverse effect on our consolidated results of operations.

International operations also are generally subject

to extensive price and market regulations, and there

The following table summarizes our net sales activity in 2008 compared with 2007:

Product

(Dollars in millions)

Zyprexa . . . . . . . . . . . . . . . . . . . . . .
Cymbalta. . . . . . . . . . . . . . . . . . . . .
Humalog . . . . . . . . . . . . . . . . . . . . .
Gemzar . . . . . . . . . . . . . . . . . . . . . .
Cialis2 . . . . . . . . . . . . . . . . . . . . . . .
Alimta . . . . . . . . . . . . . . . . . . . . . . .
Animal health products. . . . . . . . .
Evista . . . . . . . . . . . . . . . . . . . . . . . .
Humulin® . . . . . . . . . . . . . . . . . . . .
Forteo . . . . . . . . . . . . . . . . . . . . . . .
Strattera® . . . . . . . . . . . . . . . . . . . .
Other pharmaceutical products . .
Total net sales . . . . . . . . . . . . . .

U.S.1

$ 2,202.5
2,253.8
1,008.4
734.8
539.0
561.9
537.3
700.5
380.9
489.9
437.8
1,087.6
$10,934.4

Year Ended
December 31, 2008
Outside U.S.

$2,493.6
443.3
727.4
985.0
905.5
592.8
556.0
375.1
682.3
288.8
141.7
1,252.1
$9,443.6

Total

$ 4,696.1
2,697.1
1,735.8
1,719.8
1,444.5
1,154.7
1,093.3
1,075.6
1,063.2
778.7
579.5
2,339.7
$20,378.0

Year Ended
December 31, 2007
Total

Percent
Change
from 2007

$ 4,761.0
2,102.9
1,474.6
1,592.4
1,143.8
854.0
995.8
1,090.7
985.2
709.3
569.4
2,354.4
$18,633.5

(1)
28
18
8
26
35
10
(1)
8
10
2
(1)
9

1U.S. sales include sales in Puerto Rico.
2Prior to the acquisition of ICOS in late January 2007, the Cialis sales shown do not include sales in the joint-venture territories of Lilly
ICOS LLC (North America, excluding Puerto Rico, and Europe). Our share of the joint-venture territory sales for January 2007, net of
expenses and income taxes, is reported in other—net in our consolidated statements of operations. Subsequent to the acquisition, all
Cialis product sales are reported in our net sales. Worldwide 2008 sales for Cialis grew 19 percent from 2007 sales of $1.22 billion.

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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.

marily by increased sales of Cymbalta, Humalog, Cialis,
and Alimta. Sales outside the U.S. increased 11 percent,
to $9.44 billion, driven primarily by the sales growth of
Alimta, Cialis, Cymbalta, and Humalog.

OPERATING RESULTS—2008

Sales
Our worldwide sales for 2008 increased 9 percent, to
$20.38 billion, driven primarily by growth of Cymbalta,
Cialis®, Alimta, Humalog®, and Gemzar®. Worldwide sales
volume increased 5 percent, while foreign exchange rates
contributed 3 percent, and selling prices contributed
2 percent. (Numbers do not add due to rounding.) Sales in
the U.S. increased 8 percent, to $10.93 billion, driven pri-

Key Contributors to 2008 Sales Growth
($ in millions represent growth in product
sales; percentages represent changes
from 2007)

Five products and a product line—
Cymbalta, Alimta, Cialis, Humalog, Gemzar,
and Animal Health—generated $9.8 billion
in net sales during 2008, an increase of
$1.7 billion over 2007, and accounted for
96 percent of our sales growth. The growth
of these products and product line was
primarily driven by volume increases and
the inclusion of U.S. Posilac sales.

600 -

500 -

400 -

300 -

200 -

100 -

0 -

%
8
2
+

4
9
5
$

%
5
3
+

1
0
3
$

%
6
2
+

1
0
3
$

%
8
1
+

1
6
2
$

%
8
+

7
2
1
$

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m

i
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s
i
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o
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a
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u
H

r
a
z
m
e
G

%
0
1
+

8
9
$

h
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a
e
H

l
a
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n
A

Zyprexa, our top-selling product, is a treatment for

schizophrenia, acute mixed or manic episodes associ-
ated with bipolar I disorder, and bipolar maintenance.
Zyprexa sales in the U.S. decreased 1 percent in 2008,
driven by lower demand, partially offset by higher
prices. Sales outside the U.S. decreased 1 percent,
driven by decreased demand and to a lesser extent,
lower prices, partially offset by the favorable impact of
foreign exchange rates. Demand outside the U.S. was
unfavorably impacted by generic competition in Germa-
ny and Canada. As noted previously, generic olanzapine
has been withdrawn from the German market as of the
beginning of 2009.

Sales of Cymbalta, a product for the treatment

of major depressive disorder, diabetic peripheral
neuropathic pain, generalized anxiety disorder, and
ﬁ bromyalgia, increased 23 percent in the U.S., driven
by increased demand and, to a lesser extent, higher
prices. Sales outside the U.S. increased 66 percent,
driven by increased demand and, to a lesser extent,
the favorable impact of foreign exchange rates and
higher prices. Higher demand outside the U.S. reﬂ ects
increased demand in established markets as well as
recent launches in new markets.

Sales of Humalog, our injectable human insulin
analog for the treatment of diabetes, increased 14 per-
cent in the U.S., driven by increased demand and higher

Consolidated Statements of Operations

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

Year Ended December 31

2008

2007

2006

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

$20,378.0

$18,633.5

$15,691.0

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

charges (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—net, expense (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,382.8
3,840.9
6,626.4
4,835.4

1,974.0
26.1
21,685.6

4,248.8
3,486.7
6,095.1
745.6

3,546.5
3,129.3
4,889.8
—

302.5
(122.0)
14,756.7

945.2
(237.8)
12,273.0

Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,307.6)

3,876.8

3,418.0

Income taxes (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

764.3

923.8

755.3

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (2,071.9)

$ 2,953.0

$ 2,662.7

Earnings (loss) per share—basic and diluted (Note 11) . . . . . . . . . . . .

$(1.89)

$2.71

$2.45

See notes to consolidated ﬁ nancial statements.

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prices. Sales outside the U.S. increased 24 percent,
driven by increased demand and, to a lesser extent, the
favorable impact of foreign exchange rates.

Sales of Gemzar, a product approved to ﬁ ght vari-
ous cancers, increased 10 percent in the U.S., driven by
increased demand and higher prices. Sales outside the
U.S. increased 7 percent, driven primarily by the favor-
able impact of foreign exchange rates and, to a lesser
extent, increased demand, partially offset by lower
prices. We will likely face increased generic competition
in certain markets outside the U.S. in 2009.

Our sales of Cialis, a treatment for erectile dys-
function, increased 27 percent in the U.S., driven by
increased demand and higher prices. Sales outside the
U.S. increased 26 percent, driven by increased demand
and, to a lesser extent, the favorable impact of foreign
exchange rates and higher prices. Total worldwide sales
of Cialis increased 19 percent to $1.44 billion in 2008 as
compared to $1.22 billion in 2007. This includes $72.7
million of sales in the Lilly ICOS joint-venture territories
for the 2007 period prior to the acquisition of ICOS.

Sales of Alimta, a treatment for various cancers,
increased 25 percent in the U.S., driven by increased
demand and, to a lesser extent, higher prices. Sales
outside the U.S. increased 46 percent, driven by
increased demand and, to a lesser extent, the favorable
impact of foreign exchange rates.

Sales of Evista, a product for the prevention and

treatment of osteoporosis in postmenopausal women
and for risk reduction of invasive breast cancer in post-
menopausal women with osteoporosis and postmeno-
pausal women at high risk for invasive breast cancer,
decreased 1 percent in the U.S., driven by decreased
demand, partially offset by higher prices. Sales out-
side the U.S. decreased 2 percent, driven by lower
demand and lower prices, partially offset by the favor-
able impact of foreign exchange rates. As described
in Legal and Regulatory Matters, Evista is the subject
of a Hatch-Waxman patent challenge by Teva Pharma-
ceuticals USA, Inc. (Teva), which has received tenta-
tive approval of its Abbreviated New Drug Application
(ANDA) from the FDA. Unless the current stay on Teva’s
approved ANDA remains in force or Teva is preliminarily
enjoined from markets if the stay is lifted, it is possible
that Teva could choose to launch before the current
action against Teva is concluded. Such a launch could
have a material adverse impact on our future consoli-
dated results of operations.

Sales of Humulin, an injectable human insulin for

the treatment of diabetes, increased 4 percent in the
U.S., driven by higher prices. Sales outside the U.S.
increased 10 percent, driven by the favorable impact of
foreign exchange rates and increased demand.

Sales of Forteo, an injectable treatment for osteo-

porosis in postmenopausal women and men at high risk
for fracture, decreased 1 percent in the U.S., driven by

decreased demand, partially offset by higher prices.
Sales outside the U.S. increased 34 percent, driven by
increased demand and, to a lesser extent, the favorable
impact of foreign exchange rates.

Sales of Strattera, a treatment for attention-
deﬁ cit hyperactivity disorder in children, adolescents,
and adults, decreased 6 percent in the U.S., driven by
decreased demand, partially offset by higher prices.
Sales outside the U.S. increased 35 percent, driven
primarily by increased demand.

Worldwide sales of Byetta, an injectable product
for the treatment of type 2 diabetes that we market with
Amylin, increased 16 percent to $751.4 million dur-
ing 2008. We report as revenue our 50 percent share
of Byetta’s gross margin in the U.S., 100 percent of
Byetta sales outside the U.S., and our sales of Byetta
pen delivery devices to Amylin. Our revenues increased
20 percent to $396.1 million in 2008.

Animal health product sales in the U.S. increased

12 percent, driven by the inclusion of U.S. Posilac
sales since the date of acquisition. Sales outside the
U.S. increased 8 percent, driven by increased demand
and, to a lesser extent, the favorable impact of foreign
exchange rates.

Gross Margin, Costs, and Expenses
The 2008 gross margin increased to 78.5 percent
of sales compared with 77.2 percent for 2007. This
increase was primarily due to the favorable impact of
foreign exchange rates.

Gross Margin
(percent of net sales)

Gross margin as a percent of net sales increased
by 1.3 percentage points to 78.5 percent in 2008,
due primarily to the favorable impact of foreign
exchange rates.

%
5
.
8
7

%
4
.
7
7

%
2
.
7
7

%
7
.
6
7

%
3
.
6
7

04 05 06 07 08

Marketing, selling, and administrative expenses

increased 9 percent in 2008, to $6.63 billion. This
increase was due to increased marketing and selling
expenses, including prelaunch expenses for prasugrel
and marketing costs associated with Cymbalta and
Evista; the impact of foreign exchange rates; and
increased litigation-related expenses. Investment in
research and development increased 10 percent, to
$3.84 billion, due to increased late-stage clinical trial
and discovery research costs.

%
8
.
8
1

1
4
8
,
3
$

%
7
.
8
1

7
8
4
,
3
$

%
9
.
9
1

9
2
1
,
3
$

%
7
.
0
2

6
2
0
,
3
$

%
4
.
9
1

1
9
6
,
2
$

deductible, and only a portion of the Zyprexa investiga-
tion settlements was deductible. In addition, we recorded
tax expense associated with the ImClone acquisition, as
well as a discrete income tax beneﬁ t of $210.3 million
for the resolution of the IRS audit. The effective tax rate
was 23.8 percent in 2007. See Note 12 to the consolidated
ﬁ nancial statements for additional information.

Research and Development Investment
Increasing
($ millions, percent of net sales)

Research and development expenditures
increased by 10 percent, to $3.8 billion, in 2008
due to increases in late-stage clinical trial and
discovery research costs. This sustained level of
investment in research and development enabled
us to move 17 drug candidates into human
clinical trials in 2008, unprecedented in Lilly’s
history, supporting our commitment to develop
best-in-class and first-in-class medicines to
provide answers that matter for our customers.

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

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Acquired IPR&D charges related to the acquisitions
of ImClone and SGX, as well as our in-licensing arrange-
ments with BioMS and TransPharma, were $4.84 bil-
lion in 2008 as compared to $745.6 million in 2007. We
recognized asset impairments, restructuring, and other
special charges of $1.97 billion in 2008, as compared to
$302.5 million in 2007. The 2008 charges were primarily
associated with the resolution of Zyprexa investigations
with the U.S. Attorney for the EDPA and multiple states.
See Notes 3, 5 and 14 to the consolidated ﬁ nancial state-
ments for additional information.

Other—net decreased $148.1 million, to a net
expense of $26.1 million. This line item consists of
interest expense, interest income, the after-tax operat-
ing results of the Lilly ICOS joint venture, and all other
miscellaneous income and expense items.
• Interest expense for 2008 was essentially ﬂ at at

$228.3 million. The impact of lower interest rates on
our debt was substantially offset by lower capitalized
interest due to lower construction-in-progress
balances and increased interest expense due to the
ﬁ nancing of the ImClone acquisition.

• Interest income for 2008 decreased $4.6 million, to

$210.7 million, as lower interest rates were partially
offset by higher cash balances.

• The Lilly ICOS joint venture income prior to the 2007
acquisition was $11.0 million. Subsequent to the
acquisition, all activity related to ICOS is included in
our consolidated ﬁ nancial results.

• Net other miscellaneous items decreased $132.5 mil-
lion to a loss of $8.5 million, primarily as a result of
lower outlicensing income and increased net losses
on investment securities in 2008 (the majority of which
consisted of unrealized losses).

We incurred tax expense of $764.3 million in 2008,

despite having a loss before income taxes of $1.31 bil-
lion. Our net loss was driven by the $4.69 billion acquired
IPR&D charge for ImClone and the $1.48 billion Zyprexa
investigation settlements. The IPR&D charge was not tax

OPERATING RESULTS—2007

Financial Results
We achieved worldwide sales growth of 19 percent. This
growth was primarily driven by volume increases in a
number of key products, with a signiﬁ cant portion of
this increase in volume resulting from the acquisition
of ICOS. Our additional investments in marketing and
selling expenses in support of key products, primarily
Cymbalta and the diabetes care products, contributed
to this sales growth and enabled us to increase our
investment in research and development 11 percent
in 2007. While cost of sales and operating expenses in
the aggregate grew at approximately the same rate as
sales, other—net decreased and the effective tax rate
increased. As a result, net income and earnings per
share increased 11 percent, to $2.95 billion, or $2.71 per
share, in 2007 as compared with $2.66 billion, or $2.45
per share, in 2006. Net income comparisons between
2007 and 2006 are affected by the impact of signiﬁ cant
items that are reﬂ ected in our ﬁ nancial results. The sig-
niﬁ cant items for 2007 are summarized in the Executive
Overview. The 2006 items are summarized as follows
(see Notes 5 and 14 to the consolidated ﬁ nancial state-
ments for additional information):
• 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 5).

• In the fourth quarter, we incurred a charge related to

Zyprexa product liability litigation matters of $494.9 mil-
lion (pretax), or $.42 per share (Notes 5 and 14).

Sales
Our worldwide sales for 2007 increased 19 percent,
to $18.63 billion, driven primarily by the inclusion
of Cialis since our January 29, 2007 acquisition of
ICOS and sales growth of Cymbalta, Zyprexa, Alimta,
Gemzar, and Humalog. Worldwide sales volume
increased 12 percent, while selling prices and foreign
exchange rates each increased sales by 3 percent.
(Numbers do not add due to rounding.) Sales in the U.S.
increased 18 percent, to $10.15 billion, driven primar-
ily by increased sales of Cymbalta, Zyprexa, Alimta,
and Byetta, and the inclusion of Cialis. Sales outside
the U.S. increased 20 percent, to $8.49 billion, driven
primarily by the inclusion of Cialis, and sales growth
of Zyprexa, Alimta, Gemzar, and Cymbalta.

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The following table summarizes our net sales activity in 2007 compared with 2006:

Product

(Dollars in millions)

Zyprexa . . . . . . . . . . . . . . . . . . . . . .
Cymbalta. . . . . . . . . . . . . . . . . . . . .
Gemzar . . . . . . . . . . . . . . . . . . . . . .
Humalog . . . . . . . . . . . . . . . . . . . . .
Cialis2 . . . . . . . . . . . . . . . . . . . . . . .
Evista . . . . . . . . . . . . . . . . . . . . . . . .
Animal health products. . . . . . . . .
Humulin. . . . . . . . . . . . . . . . . . . . . .
Alimta . . . . . . . . . . . . . . . . . . . . . . .
Forteo . . . . . . . . . . . . . . . . . . . . . . .
Strattera . . . . . . . . . . . . . . . . . . . . .
Humatrope® . . . . . . . . . . . . . . . . . .
Actos® . . . . . . . . . . . . . . . . . . . . . . .
Byetta . . . . . . . . . . . . . . . . . . . . . . .
Other pharmaceutical products . .
Total net sales . . . . . . . . . . . . . .

U.S.1

$ 2,236.0
1,835.6
670.0
888.0
423.8
706.1
480.9
365.2
448.0
494.1
464.6
213.6
150.8
316.5
452.3
$10,145.5

Year Ended
December 31, 2007
Outside U.S.

$2,525.0
267.3
922.4
586.6
720.0
384.6
514.9
620.0
406.0
215.2
104.8
227.2
219.8
14.2
760.0
$8,488.0

Total

$ 4,761.0
2,102.9
1,592.4
1,474.6
1,143.8
1,090.7
995.8
985.2
854.0
709.3
569.4
440.8
370.6
330.7
1,212.3
$18,633.5

Year Ended
December 31, 2006
Total

Percent
Change
from 2006

$ 4,363.6
1,316.4
1,408.1
1,299.5
215.8
1,045.3
875.5
925.3
611.8
594.3
579.0
415.6
448.5
219.0
1,373.3
$15,691.0

9
60
13
13
NM
4
14
6
40
19
(2)
6
(17)
51
(12)
19

NM—Not meaningful
1U.S. sales include sales in Puerto Rico.
2Prior to the acquisition of ICOS, the Cialis sales shown in the table above represent results only in the territories in which we marketed
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—net in our consoli-
dated statements of operations. Subsequent to the acquisition, all Cialis product sales are reported in our net sales.

Zyprexa sales in the U.S. increased 6 percent in
2007, driven by higher net selling prices, partially offset
by lower demand. Sales outside the U.S. increased
12 percent, driven by the favorable impact of foreign
exchange rates and increased demand.

Sales of Cymbalta increased 58 percent in the U.S.,

driven primarily by strong demand. Sales outside the
U.S. increased 70 percent, driven by increased demand
and the favorable impact of foreign exchange rates.
Sales of Gemzar increased 10 percent in the U.S.,
driven by higher prices and increased demand. Sales
outside the U.S. increased 16 percent, driven by
increased demand and the favorable impact of foreign
exchange rates.

Sales of Humalog increased 9 percent in the
U.S., driven by higher prices and increased demand.
Sales outside the U.S. increased 20 percent, driven by
increased demand and the favorable impact of foreign
exchange rates, partially offset by declining prices.

Total worldwide sales of Cialis were $1.22 billion

and $971.0 million during 2007 and 2006, respectively.
This includes $72.7 million of sales in the Lilly ICOS
joint-venture territories for the 2007 period prior to the
acquisition of ICOS. Worldwide sales grew 25 percent in
2007. U.S. sales increased 20 percent in 2007, driven by
increased demand and higher prices. Sales outside the
U.S. increased 28 percent in 2007, driven by increased

demand, the favorable impact of foreign exchange
rates, and higher prices.

Sales of Evista increased 6 percent in the U.S., driv-

en by higher prices. Sales outside the U.S. increased
1 percent, driven by the favorable impact of foreign
exchange rates, partially offset by lower prices and
lower demand.

Sales of Humulin decreased 1 percent in the U.S.,

driven by lower demand, partially offset by higher
prices. Sales outside the U.S. increased 11 percent,
driven by increased demand and the favorable impact of
foreign exchange rates, partially offset by lower prices.
Sales of Alimta increased 28 percent in the U.S.,
driven by increased demand and, to a lesser extent,
higher prices. Sales outside the U.S. increased 55
percent, driven by increased demand and, to a lesser
extent, the favorable impact of foreign exchange rates.
Sales of Forteo increased 19 percent in the U.S.,
driven by higher net selling prices. U.S. sales growth
beneﬁ ted from access to medical coverage through
the Medicare Part D program and decreased utiliza-
tion of our U.S. patient assistance program and, to a
lesser extent, increased demand. Sales outside the U.S.
increased 21 percent, driven by increased demand and
the favorable impact of foreign exchange rates.

Sales of Strattera decreased 9 percent in the U.S.,

as a result of decreased demand. Sales outside the U.S.

S
L
A

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A
N

I
F

increased 50 percent, driven by increased demand and
the favorable impact of foreign exchange rates.

Our revenues from Actos decreased 46 percent in

the U.S. Sales outside the U.S. increased 30 percent,
driven primarily by increased demand and, to a lesser
extent, the favorable impact of foreign exchange rates.
Worldwide sales of Byetta increased 51 percent
to $650.2 million during 2007. Our revenues increased
51 percent to $330.7 million in 2007.

Animal health product sales in the U.S. increased

18 percent, driven by increased demand, the acquisi-
tion of Ivy Animal Health, and new companion-animal
product launches. Sales outside the U.S. increased
10 percent, driven by the favorable impact of foreign
exchange rates and increased demand.

Gross Margin, Costs, and Expenses
The 2007 gross margin decreased to 77.2 percent
of sales compared with 77.4 percent for 2006. This
decrease was primarily due to the expense resulting
from the amortization of the intangible assets acquired
in the ICOS acquisition, the unfavorable impact of for-
eign exchange rates, and production volumes growing
at a slower rate than sales, offset partially by manufac-
turing expenses growing at a slower rate than sales.

Operating expenses (the aggregate of research and

development and marketing, selling, and administra-
tive expenses) increased 19 percent in 2007. Investment
in research and development increased 11 percent, to
$3.49 billion. In addition to the acquisition of ICOS, this
increase was due to increases in discovery research and
late-stage clinical trial costs. Marketing, selling, and
administrative expenses increased 25 percent in 2007, to
$6.10 billion. This increase was largely due to the impact
of the ICOS acquisition, as well as increased marketing
and selling expenses in support of key products, primar-
ily Cymbalta and the diabetes care products, and the
unfavorable impact of foreign exchange rates.

Acquired IPR&D charges were $745.6 million in

2007 and related to the acquisitions of ICOS, Hypnion,
and Ivy, as well as our licensing arrangements with OSI,
MacroGenics, and Glenmark. We incurred asset impair-
ments, restructuring, and other special charges of
$302.5 million in 2007 as compared to $945.2 million in
2006. See Notes 3, 5 and 14 to the consolidated ﬁ nancial
statements for additional information.

Other—net decreased $115.8 million, to income

of $122.0 million. This line item consists of interest
expense, interest income, the after-tax operating results
of the Lilly ICOS joint venture, and all other miscella-
neous income and expense items.
• Interest expense for 2007 decreased $9.8 million,

to $228.3 million. This decrease is a result of lower
average debt balances in 2007 compared to 2006.
• Interest income for 2007 decreased $46.6 million, to
$215.3 million, due to lower cash balances in 2007

compared to 2006.

• The Lilly ICOS joint-venture income was $11.0 million
in 2007 as compared to $96.3 million in 2006, due to
the acquisition of ICOS on January 29, 2007.

• Net other miscellaneous income items increased

$6.3 million to $124.0 million.

We incurred tax expense of $923.8 million in
2007, resulting in an effective tax rate of 23.8 percent,
compared with 22.1 percent for 2006. The effective tax
rates for 2007 and 2006 were affected primarily by the
nondeductible ICOS and Hypnion IPR&D charges of
$594.6 million in 2007, and the product liability charges
of $494.9 million in 2006. The tax effect of the product
liability 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. See Note 12 to the consolidated
ﬁ nancial statements for additional information.

FINANCIAL CONDITION

As of December 31, 2008, cash, cash equivalents, and
short-term investments totaled $5.93 billion compared
with $4.83 billion at December 31, 2007. Cash ﬂ ow from
operations in 2008 of $7.30 billion and net proceeds
from the issuance of debt of $4.41 billion exceeded the
total of the net cash paid for corporate acquisitions of
$6.08 billion, dividends paid of $2.06 billion, purchases
of property and equipment of $947.2 million, and net
purchases of noncurrent investments of $815.1 million.
Capital expenditures of $947.2 million during

2008 were $135.2 million less than in 2007. We
expect 2009 capital expenditures to be approximately
$1.1 billion as we invest in our biotechnology capa-
bilities, continue to upgrade our manufacturing and
research facilities to enhance productivity and qual-
ity systems, and invest in the long-term growth of our
diabetes care products.

Capital Expenditure Management Contributes
to Cash Flow
($ millions)

Capital expenditures of $947.2 million during
2008 were $135.2 million less than in 2007.
We expect 2009 capital expenditures to be
approximately $1.1 billion as we invest in our
biotechnology capabilities, continue to upgrade
our manufacturing and research facilities
to enhance productivity and quality systems,
and invest in the long-term growth of our
diabetes care products.

8
9
8
,
1
$

$2,000

$1,500

$1,000

$500

8
9
2
,
1
$

8
7
0
,
1
$

2
8
0
,
1
$

7
4
9
$

04 05 06 07 08

F
I

N
A
N
C
I

A
L
S

Consolidated Balance Sheets

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

December 31

2008

2007

Assets
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowances of $97.4 (2008) and $103.1 (2007) . . .
Other receivables (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other Assets
Prepaid pension (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangibles—net (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sundry (Note 9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,496.7
429.4
2,778.8
498.5
2,493.2
382.1
374.6
12,453.3

$ 3,220.5
1,610.7
2,673.9
1,030.9
2,523.7
642.8
613.6
12,316.1

—
1,544.6
4,054.1
2,534.3
8,133.0

1,670.5
577.1
2,455.4
1,280.6
5,983.6

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

8,626.3
$29,212.6

8,575.1
$26,874.8

Liabilities and Shareholders’ Equity
Current Liabilities
Short-term borrowings and current maturities of long-term debt (Note 7). . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales rebates and discounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other Liabilities
Long-term debt (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued retirement beneﬁ t (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term income taxes payable (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,846.3
885.8
771.0
873.4
536.8
229.2
3,967.2
13,109.7

$ 413.7
924.4
823.8
706.8
513.6
238.4
1,816.1
5,436.8

4,615.7
2,387.6
906.2
74.7
1,383.4
9,367.6

4,593.5
1,145.1
1,196.7
287.5
711.3
7,934.1

Commitments and contingencies (Note 14)

Shareholders’ Equity (Notes 8 and 10)
Common stock—no par value
Authorized shares: 3,200,000,000

Issued shares: 1,136,948,610 (2008) and 1,135,212,894 (2007) . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee beneﬁ t trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred costs—ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) (Note 15). . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

711.1
3,976.6
7,654.9
(2,635.0)
(86.3)
(2,786.8)
6,834.5

709.5
3,805.2
11,806.7
(2,635.0)
(95.2)
13.2
13,604.4

Less cost of common stock in treasury
2008—888,998 shares
2007—899,445 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

99.2
6,735.3
$29,212.6

100.5
13,503.9
$26,874.8

See notes to consolidated ﬁ nancial statements.

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N
A
N

I
F

Consolidated Statements of Cash Flows

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

Year Ended December 31

2008

2007

2006

Cash Flows From Operating Activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in operating assets and liabilities, net of acquisitions

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

$(2,071.9)

$ 2,953.0

$ 2,662.7

1,122.6
442.6
255.3
4,792.7
406.5
4,947.8

799.1
84.8
1,648.6
(184.7)
2,347.8

1,047.9
60.7
282.0
692.6
172.1
5,208.3

(842.7)
154.3
(355.8)
990.4
(53.8)

801.8
346.8
359.3
—
600.6
4,771.2

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

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

7,295.6

5,154.5

3,975.9

Cash Flows From Investing Activities
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Disposals of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change 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 acquisitions, net of cash acquired . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by (Used for) Investing Activities . . . . . . . . . . . .

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

(947.2)
25.7
957.6
1,597.3
(2,412.4)
(122.0)
(6,083.0)
(284.8)
(7,268.8)

(2,056.7)
5,060.5
0.1
(649.8)
—
—
(8.1)
2,346.0

(1,082.4)
32.3
(376.9)
800.1
(750.7)
(111.0)
(2,673.2)
(166.3)
(4,328.1)

(1,853.6)
(468.5)
2,512.6
(1,059.5)
—
24.7
(0.6)
(844.9)

(1,077.8)
65.2
1,247.5
1,507.7
(1,313.2)
—
—
179.0
608.4

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

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

(96.6)

129.7

97.1

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

2,276.2
3,220.5
$ 5,496.7

111.2
3,109.3
$ 3,220.5

102.6
3,006.7
$ 3,109.3

See notes to consolidated ﬁ nancial statements.

F
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N
A
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I

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L
S

Consolidated Statements of Comprehensive Income (Loss)

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

Year Ended December 31

2008

2007

2006

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss)
Foreign currency translation gains (losses) . . . . . . . . . . . . . . . . . .
Net unrealized losses on securities . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum pension liability adjustment (Note 13) . . . . . . . . . . . . . . .
Deﬁ ned beneﬁ t pension and retiree health beneﬁ t

(766.1)
(190.6)
—

plans (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective portion of cash ﬂ ow hedges. . . . . . . . . . . . . . . . . . . . . . . .

(2,941.2)
23.2

756.6
(11.4)
—

943.8
(0.1)

$(2,071.9)

$2,953.0

$2,662.7

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

(3,874.7)

1,688.9

income (loss) items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) (Note 15) . . . . . . . . . . . . . . . . . . .

1,074.7
(2,800.0)

(287.0)
1,401.9

542.4
(3.2)
(18.8)

—
143.3

663.7

(43.1)
620.6

Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(4,871.9)

$4,354.9

$3,283.3

See notes to consolidated ﬁ nancial statements.

Total debt as of December 31, 2008 increased
$5.45 billion, to $10.46 billion, reﬂ ecting the commer-
cial paper we issued in November 2008 primarily to
ﬁ nance our acquisition of ImClone, offset by long-term
debt repayments and paydown of commercial paper
with cash and cash equivalents on hand. Our current
debt ratings from Standard & Poor’s and Moody’s are
at AA and A1, respectively.

Dividends of $1.88 per share were paid in 2008, an

increase of 11 percent from 2007. In the fourth quar-
ter of 2008, effective for the ﬁ rst-quarter dividend in
2009, the quarterly dividend was increased to $.49 per
share (a 4.3 percent increase), resulting in an indicated
annual rate for 2009 of $1.96 per share. The year 2008
was the 124th consecutive year in which we made divi-
dend payments and the 41st consecutive year in which
dividends have been increased.

Dividends Paid Per Share Continue to Grow
($ dollars)

Dividends paid during 2008 increased to
$1.88 per share. This constitutes the 41st
consecutive increase in annual dividends.
Our strong 2008 cash flow enabled us to
increase the first-quarter 2009 dividend
by 4.3 percent, to $.49 per share.

2.00

1.50

1.00

0.50

0.0

8
8
.
1
$

0
7
.
1
$

0
6
.
1
$

2
5
.
1
$

2
4
.
1
$

04 05 06 07 08

In recent months, global economic conditions have

deteriorated. Triggered by the liquidity crisis in the
capital markets, the implications have become more
widespread, resulting in higher unemployment and
declines in real consumer spending. In addition, many
ﬁ nancial institutions have tightened lines of credit,
reducing funding available for near-term economic
growth. Pharmaceutical consumption has traditionally
been relatively unaffected by economic downturns; how-
ever, an extended downturn could lead to a decline in
overall prescriptions corresponding with the growth of
the uninsured and underinsured population in the U.S. In
addition, both private and public health care payers are
facing heightened ﬁ scal challenges due to the economic
slowdown and are taking aggressive steps to reduce the
costs of care, including pressures for increased phar-
maceutical discounts and rebates and efforts to drive
greater use of generic drugs. We continue to monitor
the potential near-term impact of prescription trends,
the credit worthiness of our wholesalers and other
customers and suppliers, the decline of health insur-
ance coverage in the overall population, and the federal
government’s involvement in the economic crisis.

We believe that cash generated from operations,

along with available cash and cash equivalents, will be
sufﬁ cient to fund our normal operating needs, including
debt service, capital expenditures, costs associated with
litigation and government investigations, and dividends
in 2009. We believe that amounts accessible through
existing commercial paper markets should be adequate
to fund short-term borrowings. Our access to credit
markets has not been adversely affected by the recent
illiquidity in the market because of the high credit qual-

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Return on Assets and Shareholders’ Equity
(ROA—based on net income divided by
quarterly average asset balance;
ROE—based on net income divided by
average shareholders’ equity)

Net income, ROA, and ROE were affected
by strategic decisions to acquire ImClone
($4.73 billion) and in-license molecules and
technologies, as described in Note 3, settlement
of federal and state investigations related to
Zyprexa ($1.48 billion), as well as asset
impairments, restructuring, and other related
items. These items resulted in negative ROA
and ROE for 2008.

Return on Assets (ROA)
Return on Shareholders’ Equity (ROE)

%
8
.
4
2

%
3
.
4
2

%
1
.
2
1

%
1
.
1
1

25 -

20 -

15 -

%
5
.
8
1

%
8
.
7
1

%
2
.
8

10 -

%
8
.
7

5 -

0 -

-5 -

-10 -

-15 -

-20 -

%
5
.
7
-

%
3
.
6
1
-

ity of our short- and long-term debt. In 2009, we intend
to fund payments required in connection with the EDPA
settlements, and to further reduce outstanding commer-
cial paper with cash and cash equivalents on hand, cash
generated from operations, and the issuance of long-
term debt. We currently have $1.24 billion of unused
committed bank credit facilities, $1.20 billion of which
backs our commercial paper program. Additionally, in
November 2008, we obtained a one-year short-term
revolving credit facility in the amount of $4.00 billion
as back-up, alternative ﬁ nancing. Various risks and
uncertainties, including those discussed in the Financial
Expectations for 2009 section, may affect our operating
results and cash generated from operations.

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, 2008 and 2007, 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, 2008 and
2007, 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, and the
British pound against the euro. We face transactional
currency exposures that arise when we enter into trans-
actions, generally on an intercompany basis, denomi-
nated 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 may use forward contracts and pur-
chased options to manage our foreign currency expo-
sures. 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. Consider-
ing our derivative ﬁ nancial instruments outstanding at
December 31, 2008 and 2007, a hypothetical 10 percent
change in exchange rates (primarily against the U.S.
dollar) as of December 31, 2008 and 2007, 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 and collaborate on assets
still in development and enter into research and develop-
ment arrangements with third parties that often require
milestone and royalty payments to the third party contin-
gent upon the occurrence of certain future events linked
to the success of the asset in development. Milestone
payments may be required contingent upon the success-
ful achievement of an important point in the development
life cycle of the pharmaceutical product (e.g., approval
of the product for marketing by the appropriate regula-
tory agency or upon the achievement of certain sales
levels). 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 annual 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 mate-
rial to the results of operations in any one period. These

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

Total

Less Than
1 Year

Payments Due by Period
1–3
Years

3–5
Years

More Than
5 Years

Long-term debt, including interest
payments1 . . . . . . . . . . . . . . . . . . . . $ 8,205.5
41.3
Capital lease obligations. . . . . . . . . . .
335.3
Operating leases . . . . . . . . . . . . . . . . .
Purchase obligations2 . . . . . . . . . . . . .
7,923.0
Other long-term liabilities

reﬂ ected on our balance sheet3 . .
1,088.8
Other4 . . . . . . . . . . . . . . . . . . . . . . . . . .
157.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . $17,751.0

$ 595.8
13.1
90.8
5,976.3

—
157.1
$6,833.1

$ 387.0
17.0
141.4
723.5

316.7
—

$ 881.2
5.2
73.6
388.5

$6,341.5
6.0
29.5
834.7

185.0
—

587.1
—

$1,585.6

$1,533.5

$7,798.8

1Our 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, 2008 to compute the amount of the contractual obligation for interest on the variable rate
debt instruments and swaps.
2We have included the following:

• Purchase obligations, consisting primarily of all open purchase orders at our signiﬁ cant operating locations as of December 31,
2008. 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.
3We have included long-term liabilities consisting primarily of our nonqualiﬁ ed supplemental pension funding requirements and
deferred compensation liabilities. We excluded liabilities for unrecognized tax beneﬁ ts of $906.2 million, as we cannot reasonably
estimate the timing of future cash outﬂ ows associated with those liabilities.
4This category comprises primarily minimum pension funding requirements.

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The contractual obligations table is current as of December 31, 2008. We expect the amount of these obligations
to change materially over time as new contracts are initiated and existing contracts are completed, terminated,
or modiﬁ ed.

arrangements often give us the discretion to unilater-
ally terminate development of the product, which would
allow us to avoid making the contingent payments; how-
ever, we are unlikely to cease development if the com-
pound successfully achieves clinical 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.

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
assumption we make, it is possible that other people
applying reasonable judgment to the same facts and
circumstances could develop different estimates. We
believe that, given current facts and circumstances,
it is unlikely that applying any such other reasonable

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 Return, 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 products are
shipped to the customer, typically a wholesale distribu-
tor or a major retail chain. The remaining sales, which
are outside the U.S., are recorded at the point of delivery.
Provisions for returns, rebates, and discounts are estab-
lished in the same period the related sales are recorded.
We regularly review the supply levels of our sig-
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

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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. In the U.S., the current structure
of our arrangements eliminates the incentive for specu-
lative wholesaler buying and provides us improved
data on inventory levels at our wholesalers. 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 disclose
this in our product sales discussion if we believe the
amount is material to the product sales trend; how-
ever, we are not always able to accurately quantify the
amount of stocking or destocking. Wholesaler stocking
and destocking activity historically has not caused any
material changes in the rate of actual product returns.
We establish sales return accruals for anticipated

product returns. We record the return amounts as a
deduction to arrive at our net sales. Once the product
is returned, it is destroyed. Consistent with SFAS 48,
Revenue Recognition When Right of Return Exists, we
estimate a reserve when the sales occur for future
product returns related to those sales. This estimate
is primarily based on historical return rates as well as
speciﬁ cally identiﬁ ed anticipated returns due to known
business conditions and product expiry dates. Actual
product returns have been approximately one 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
and discount amounts are recorded as a deduction to
arrive at our net sales. Sales rebates and discounts
that require the use of judgment in the establishment
of the accrual include Medicaid, managed care, Medi-
care, chargebacks, long-term-care, hospital, patient
assistance programs, and various other government
programs. We base these accruals primarily upon our
historical rebate and discount payments made to our
customer segment groups and the provisions of current
rebate and discount contracts.

The largest of our sales rebate and discount
amounts are rebates associated with sales covered
by Medicaid. 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 pric-
ing and current rebate and discount contracts. Although
we accrue a liability for Medicaid rebates at the time we
record the sale (when the product is shipped), the Med-
icaid rebate related to that sale is typically paid up to six
months later. Because of this time lag, in any particular

period our rebate adjustments may incorporate revisions
of accruals for several periods.

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 returns,

rebates, and discounts are reasonable and appropri-
ate based on current facts and circumstances. Sales
returns, federally mandated Medicaid rebate and
state pharmaceutical assistance programs (Medicaid)
and Medicare rebates reduced sales by $1.03 billion,
$738.8 million, and $704.8 million in 2008, 2007, and
2006, respectively. A 5 percent change in the sales
return, Medicaid, and Medicare rebate amounts we
recognized in 2008 would lead to an approximate
$52 million effect on our income before income taxes.
As of December 31, 2008, our sales returns, Medicaid,
and Medicare rebate liability was $618.5 million.

Our global rebate and discount liabilities are includ-

ed in sales rebates and discounts on our consolidated
balance sheet. Our global sales return liability is includ-
ed in other current liabilities and other noncurrent liabil-
ities on our consolidated balance sheet. Approximately
80 percent and 78 percent of our global sales return,
rebate, and discount liability resulted from sales of our
products in the U.S. as of December 31, 2008 and 2007,
respectively. The following represents a roll-forward of
our most signiﬁ cant U.S. returns, rebate, and discount
liability balances, including Medicaid (in millions):

Sales return, rebate, and discount

liabilities, beginning of year . . . . . $ 693.5 $ 614.5

2008

2007

Reduction of net sales due to

sales returns, discounts,

and rebates1 . . . . . . . . . . . . . . . 1,864.9 1,404.0

Cash payments of discounts

and rebates . . . . . . . . . . . . . . . (1,751.8) (1,325.0)

Sales return, rebate, and discount

liabilities, end of year . . . . . . . . . . $ 806.5 $ 693.5

1Adjustments of the estimates for these returns, rebates, and dis-
counts to actual results were less than 0.1 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 and

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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 assessment of
the science subject to the litigation, and the likelihood
of settlement and current state of settlement discus-
sions, 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 contingen-
cies 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 condition of the insurers, and the possibility of
and length of time for collection. In the past few years,
we have experienced 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 completely self-insured for future
product liability losses. In addition, there is no assur-
ance that we will be able to fully collect from our insur-
ance carriers in the future.

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
liabilities 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 13
to the consolidated ﬁ nancial statements for additional
information regarding our retirement beneﬁ ts.

Periodically, we evaluate the discount rate and the

tions and asset allocations (approximately 88 percent
to 92 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

assumptions are appropriate based upon the above
factors. If the health-care-cost trend rates were to be
increased by one percentage point each future year, the
aggregate of the service cost and interest cost com-
ponents of the 2008 annual expense would increase
by approximately $27 million. A one-percentage-point
decrease would lower the aggregate of the 2008 service
cost and interest cost by approximately $21 million. If
the 2008 discount rate for the U.S. deﬁ ned beneﬁ t pen-
sion and retiree health beneﬁ t plans (U.S. plans) were
to be changed by a quarter percentage point, income
before income taxes would change by approximately
$26 million. If the 2008 expected return on plan assets
for U.S. plans were to be changed by a quarter percent-
age point, income before income taxes would change by
approximately $17 million. If our assumption regarding
the 2008 expected age of future retirees for U.S. plans
were adjusted by one year, our income before income
taxes would be affected by approximately $28 million.
The U.S. plans represent approximately 83 percent of
the total accumulated postretirement beneﬁ t obligation
and approximately 84 percent of total plan assets at
December 31, 2008.

Impairment of Long-Lived Assets
We review the carrying value of long-lived assets (both
intangible and tangible) for potential impairment on
a periodic basis and whenever events or changes in
circumstances indicate the carrying value of an asset
may not be recoverable. We determine impairment by
comparing the projected undiscounted cash ﬂ ows to be
generated by the asset to its carrying value. If an impair-
ment 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.

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, including
an evaluation of the discount rates, expected return on
plan assets, and health-care-cost trend rates of other
companies; our historical assumptions compared with
actual results; an analysis of current market condi-

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, interest, and penalty assessments

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by these authorities. Inherent uncertainties exist in
estimates of many tax positions due to changes in tax
law resulting from legislation, regulation, and/or as
concluded through the various jurisdictions’ tax court
systems. We recognize the tax beneﬁ t from an uncertain
tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing
authorities, based on the technical merits of the position.
The tax beneﬁ ts recognized in the ﬁ nancial statements
from such a position are measured based on the largest
beneﬁ t that has a greater than 50 percent likelihood of
being realized upon ultimate resolution. The amount of
unrecognized tax beneﬁ ts is adjusted for changes in facts
and circumstances. 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
examination, or resolution of an examination. We believe
that our estimates for uncertain tax positions are appro-
priate and sufﬁ cient to pay assessments that may result
from examinations of our tax returns. We recognize both
accrued interest and penalties related to unrecognized
tax beneﬁ ts in income tax expense.

We have recorded valuation allowances against cer-
tain of our deferred tax assets, primarily those that have
been generated from net operating losses and tax credit
carryforwards in certain taxing jurisdictions. In evaluat-
ing 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 jurisdic-
tions associated 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 uncertain tax
positions and valuation allowances against the deferred
tax assets are appropriate based on current facts and
circumstances. A 5 percent change in the amount of
the uncertain tax positions and the valuation allowance
would result in a change in net income of approximately
$43.2 million and $42.3 million, respectively.

FINANCIAL EXPECTATIONS FOR 2009

For the full year of 2009, we expect earnings per share
to be in the range of $4.00 to $4.25. We expect volume
growth in sales again in 2009, driven by Cymbalta,
Alimta, Cialis, Humalog, and the anticipated launches of
prasugrel, as well as by the Elanco animal health divi-
sion. However, the negative impact of weaker foreign
currencies, worldwide pricing pressures, and the impact
of generic competition in certain markets for Gemzar
are anticipated to partially offset these positive impacts.
As a result, we expect mid-single digit sales growth. We

expect gross margin as a percent of net sales to increase,
driven by the strengthening dollar. This increase could be
more pronounced in the ﬁ rst half of 2009. Marketing, sell-
ing, and administrative expenses are expected to show
ﬂ at to low-single digit growth. Research and develop-
ment expenses are projected to grow in the low-double
digits. Other—net is expected to be a net loss of between
$200 million and $250 million. Capital expenditures are
expected to be approximately $1.1 billion, and we expect
continued strong operating cash ﬂ ow.

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 regulatory
approvals and the success of our new product launches;
asset impairments, restructurings, and acquisitions of
compounds under development resulting in acquired
in-process research and development charges; foreign
exchange rates and global macroeconomic conditions;
changes in effective tax rates; wholesaler inventory
changes; other regulatory developments, litigation, and
government investigations; and the impact of govern-
mental actions regarding pricing, importation, and reim-
bursement 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 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 liquidity, 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):
• Cymbalta: Sixteen generic drug manufacturers have

submitted ANDAs seeking permission to market generic
versions of Cymbalta prior to the expiration of our
relevant U.S. patents (the earliest of which expires in
2013). Of these challengers, all allege non-infringement
of the patent claims directed to the commercial
formulation, and eight allege invalidity of the patent
claims directed to the active ingredient duloxetine. Of
the eight challengers to the compound patent claims,
one further alleges invalidity of the claims directed to
the use of Cymbalta for treating ﬁ bromyalgia, and one
alleges the patent having claims directed to the active
ingredient is unenforceable. Lawsuits have been ﬁ led in

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U.S. District Court for the Southern District of Indiana
against Activis Elizabeth LLC; Aurobindo Pharma Ltd.;
Cobalt Laboratories, Inc.; Impax Laboratories, Inc.;
Lupin Limited; Sandoz Inc.; Sun Pharma Global, Inc.;
and Wockhardt Limited, seeking rulings that the patents
are valid, infringed, and enforceable. Answers to the
complaints are pending.

• Gemzar: Sicor Pharmaceuticals, Inc. (Sicor), Mayne

Pharma (USA) Inc. (Mayne), and Sun Pharmaceutical
Industries Inc. (Sun) each submitted an ANDA seeking
permission to market generic versions of Gemzar
prior to the expiration of our relevant U.S. patents
(compound patent expiring in 2010 and method-of-
use patent expiring in 2013), and alleging that these
patents are invalid. We ﬁ led lawsuits in the U.S. District
Court for the Southern District of Indiana against Sicor
(February 2006) and Mayne (October 2006 and January
2008), seeking rulings that these patents are valid
and are being infringed. The suit against Sicor has
been scheduled for trial in July 2009. Sicor’s ANDAs
have been approved by the FDA; however, Sicor must
provide 90 days notice prior to marketing generic
Gemzar to allow time for us to seek a preliminary
injunction. Both suits against Mayne have been
administratively closed, and the parties have agreed to
be bound by the results of the Sicor suit. In November
2007, Sun ﬁ led a declaratory judgment action in the
United States District Court for the Eastern District
of Michigan, seeking rulings that our method-of-use
and compound patents are invalid or unenforceable,
or would not be infringed by the sale of Sun’s generic
product. This trial is scheduled for December 2009.
• Alimta: Teva Parenteral Medicines, Inc. (Teva) and APP
Pharmaceuticals, LLC (APP) each submitted ANDAs
seeking approval to market generic versions of Alimta
prior to the expiration of the relevant U.S. patent
(licensed from the Trustees of Princeton University and
expiring in 2016), and alleging the patent is invalid. We,
along with Princeton, ﬁ led lawsuits in the U.S. District
Court for the District of Delaware against Teva and
APP, seeking rulings that the compound patent is valid
and infringed. Trial is scheduled for November 8, 2010.

• Evista: 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
Pharmaceuticals USA, Inc. (Teva) has also submitted an
ANDA seeking permission to market a generic version
of Evista. In June 2006, we ﬁ led a similar lawsuit
against Teva in the U.S. District Court for the Southern
District of Indiana. The lawsuit against Teva is currently

scheduled for trial beginning March 9, 2009, while no
trial date has been set in the lawsuit against Barr. In
April 2008, the FDA granted Teva tentative approval of
its ANDA, but Teva’s ability to market a generic product
is subject to a statutory stay, which has been extended
to expire on March 9, 2009. Teva has appealed the
extension of the statutory stay. If the stay expires and
the company cannot obtain preliminary relief from the
court, Teva can launch its generic product, regardless
of the status of the current litigation, but subject to our
right to recover damages, should we prevail at trial.

We believe each of these Hatch-Waxman challenges

is without merit and expect to prevail in this litigation.
However, it is not possible to determine the outcome of
this litigation, and accordingly, we can provide no assur-
ance that we will prevail. An unfavorable outcome in any
of these cases could have a material adverse impact on
our future consolidated results of operations, liquidity,
and ﬁ nancial position.

We have received challenges to Zyprexa patents in a

number of countries outside the U.S.:
• In Canada, several generic pharmaceutical

manufacturers have challenged the validity of our
Zyprexa compound and method-of-use patent (expiring
in 2011). In April 2007, the Canadian Federal Court
ruled against the ﬁ rst challenger, Apotex Inc. (Apotex),
and that ruling was afﬁ rmed on appeal in February
2008. In June 2007, the Canadian Federal Court held
that an invalidity allegation of a second challenger,
Novopharm Ltd. (Novopharm), was justiﬁ ed and
denied our request that Novopharm be prohibited from
receiving marketing approval for generic olanzapine in
Canada. Novopharm began selling generic olanzapine
in Canada in the third quarter of 2007. We sued
Novopharm for patent infringement, and the trial began
in November 2008. We expect the trial to run through
the ﬁ rst quarter of 2009, with a decision in the second
half of 2009. In November 2007, Apotex ﬁ led an action
seeking a declaration of the invalidity of our Zyprexa
compound and method-of-use patents, and no trial
date has been set. We have brought similar actions
against Pharmascience (August 2007), Sandoz (July
2007), Nu-Pharm (June 2008), Genpharm (June 2008)
and Cobalt (January 2009); none of these suits has
been scheduled for trial. Pharmascience has agreed to
be bound by the outcome of the Novopharm suit, and,
pending the outcome of the lawsuit, we have agreed
not to take any further steps to prevent the company
from coming to market with generic olanzapine tablets,
subject to a contingent damages obligation should we
be successful against Novopharm.

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Federal Patent Court held that our patent is invalid.
Generic olanzapine was launched by competitors in
Germany in the fourth quarter of 2007. We appealed
the decision to the German Federal Supreme Court
and following a hearing in December 2008, the
Supreme Court reversed the Federal Patent Court and
found the patent to be valid. Following the decision
of the Supreme Court, the generic companies either
agreed to withdraw from the market or were subject
to preliminary injunction. We are pursuing these
companies for damages arising from infringement.

• We have received challenges in a number of other

countries, including Spain, the United Kingdom (U.K.),
France, and several smaller European countries.
In Spain, we have been successful at both the trial
and appellate court levels in defeating the generic
manufacturers’ challenges, but further legal challenge
is now pending before the Commercial Court in Madrid.
In the U.K., the generic pharmaceutical manufacturer
Dr. Reddy’s Laboratories (UK) Limited has challenged
the validity of our Zyprexa compound and method-
of-use patent (expiring in 2011). In October 2008, the
Patents Court in the High Court, London ruled that our
patent was valid. Dr. Reddy’s appealed this decision,
and a hearing date for the appeal has not been set.

We are vigorously contesting the various legal chal-
lenges to our Zyprexa patents on a country-by-country
basis. We cannot determine the outcome of this litiga-
tion. The availability of generic olanzapine in additional
markets could have a material adverse impact on our
consolidated results of operations.

Xigris® and Evista: In June 2002, 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
sued us, alleging that sales of two of our products,
Xigris and Evista, were inducing the infringement of a
patent related to the discovery of a natural cell signal-
ing phenomenon in the human body, and seeking royal-
ties on past and future sales of these products. On May 4,
2006, a jury in Boston issued an initial decision in the
case that Xigris and Evista sales infringe the patent. The
jury awarded the plaintiffs approximately $65 million in
damages, calculated by applying a 2.3 percent royalty to
all U.S. sales of Xigris and Evista from the date of issu-
ance of the patent through the date of trial. In addition,
a separate bench trial with the U.S. District Court of
Massachusetts was held in August 2006, on our conten-
tion that the patent is unenforceable and impermissibly
covers natural processes. In June 2005, the United
States Patent and Trademark Ofﬁ ce (USPTO) com-
menced a reexamination of the patent, and in August
2007 took the position that the Ariad claims at issue are
unpatentable, a position that Ariad continues to contest.

In September 2007, the Court entered a ﬁ nal judgment
indicating that Ariad’s claims are patentable, valid,
and enforceable, and ﬁ nding damages in the amount of
$65 million plus a 2.3 percent royalty on net U.S. sales
of Xigris and Evista since the time of the jury decision.
However, the Court deferred the requirement to pay
any damages until after all rights to appeal have been
exhausted. We have appealed this judgment. The Court
of Appeals for the Federal Circuit heard oral arguments
on the appeal on February 6, 2009. 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 and Related Litigation
In March 2004, the Ofﬁ ce of the U.S. Attorney for the
EDPA advised us that it had commenced an investigation
related to our U.S. marketing and promotional prac-
tices, including our communications with physicians and
remuneration of physician consultants and advisors,
with respect to Zyprexa, Prozac, and Prozac Weekly. In
addition, the State Medicaid Fraud Control Units of more
than 30 states coordinated with the EDPA in its inves-
tigation of any Medicaid-related claims relating to our
marketing and promotion of Zyprexa. In January 2009, we
announced that we reached resolution of this matter. As
part of the resolution, we pled guilty to one misdemeanor
violation of the Food, Drug, and Cosmetic Act and agreed
to pay $615.0 million. The misdemeanor plea is for the
off-label promotion of Zyprexa in elderly populations as
treatment for dementia, including Alzheimer’s demen-
tia, between September 1999 and March 2001. We have
also entered into a settlement agreement resolving the
federal civil claims, under which we will pay approxi-
mately $438.0 million, although we do not admit to the
allegations. We have also agreed to settle the civil inves-
tigations brought by the State Medicaid Fraud Control
Units of the states that have coordinated with the EDPA
in its investigation, and will make available a maximum
amount of approximately $362.0 million for payment to
those states that agree to settle. The charge we recorded
for this matter in the third quarter of $1.42 billion will be
sufﬁ cient to cover these payments. Also, as part of the
settlement, we have entered into a corporate integrity
agreement with the Ofﬁ ce of Inspector General (OIG)
of the U.S. Department of Health and Human Services
(HHS). This agreement will require us to maintain our
compliance program and to undertake a set of deﬁ ned
corporate integrity obligations for ﬁ ve years. The agree-
ment also provides for an independent third-party review
organization to assess and report on the company’s sys-
tems, processes, policies, procedures and practices.
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 docu-
ments relating to sales of Zyprexa and our marketing

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and promotional practices with respect to Zyprexa. In
September 2006, we received a subpoena from the Cali-
fornia 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. We expect these
matters to be resolved if Florida and California partici-
pate in the state component of the EDPA resolution.

Beginning in August 2006, we received civil investi-
gative demands or subpoenas from the attorneys general
of a number of states under various state consumer
protection laws. Most of these requests became part of
a multistate investigative effort coordinated by an execu-
tive committee of attorneys general. In October 2008, we
reached a settlement with 32 states and the District of
Columbia. While there is no ﬁ nding that we have violated
any provision of the state laws under which the investiga-
tions were conducted, we paid $62.0 million and agreed
to undertake certain commitments regarding Zyprexa
for a period of six years, through consent decrees ﬁ led
in the settling states. The 32 states participating in the
settlement are: Alabama, Arizona, California, Delaware,
Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Maine,
Maryland, Massachusetts, Michigan, Missouri, Nebras-
ka, Nevada, New Jersey, New York, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania,
Rhode Island, South Dakota, Tennessee, Texas, Vermont,
Washington, and Wisconsin.

Product Liability and Related Litigation
We have been named as a defendant in a large number
of Zyprexa product liability lawsuits in the U.S. 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 substan-
tial 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 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 32,670 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.

• 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
paid during 2007.

We are prepared to continue our vigorous defense

of Zyprexa in all remaining claims. The U.S. Zyprexa
product liability claims not subject to these agreements
include approximately 105 lawsuits in the U.S. covering
approximately 120 plaintiffs, of which about 80 cases
covering about 90 plaintiffs are part of the MDL. No
trials have been scheduled related to these claims.

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, and a second
has been certiﬁ ed in Ontario and includes all Canadian
residents except for residents of Quebec and British
Columbia. The allegations in the Canadian actions are
similar to those in the litigation pending in the U.S.
Since the beginning of 2005, we have recorded

aggregate net pretax charges of $1.61 billion for
Zyprexa product liability matters. The net charges,
which take into account our actual insurance recover-
ies, covered the following:
• The cost of the Zyprexa product liability settlements to

date; and

• Reserves for product liability exposures and defense
costs regarding the known Zyprexa product liability
claims and expected future 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 proceed-
ings in the Eastern District of New York (EDNY). 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 illnesses. We have been served
with similar lawsuits ﬁ led by the states of Alaska,
Arkansas, Connecticut, Idaho, Minnesota, Mississippi,
Montana, New Mexico, Pennsylvania, South Carolina,
Utah, and West Virginia in the courts of the respective
states. The Connecticut, Louisiana, Minnesota, Missis-
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part of the MDL proceedings in the EDNY. The Alaska
case was settled in March 2008 for a payment of $15.0
million, plus terms designed to ensure, subject to cer-
tain limitations and conditions, that Alaska is treated as
favorably as certain other states that may settle with us
in the future over similar claims. The following cases
have been set for trial in 2009: Connecticut in the EDNY
in June, Pennsylvania in November, and South Carolina
in August, in their respective states.

In 2005, two lawsuits were ﬁ led in the EDNY pur-
porting to be nationwide class actions on behalf of all
consumers and third-party payors, excluding govern-
mental 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 EDNY in 2006 on similar grounds. In September
2008, Judge Weinstein certiﬁ ed a class consisting of
third-party payors, excluding governmental entities and
individual consumers. We appealed the certiﬁ cation
order, and Judge Weinstein’s order denying our motion
for summary judgment, in September 2008. In 2007, The
Pennsylvania Employees Trust Fund brought claims in
state court in Pennsylvania as insurer of Pennsylvania
state employees, who were prescribed Zyprexa on simi-
lar grounds as described in the New York cases. As with
the product liability suits, these lawsuits allege that we
inadequately tested for and warned about side effects of
Zyprexa and improperly promoted the drug. The Penn-
sylvania case is set for trial in October 2009.

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

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.

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
liability insurance due to a very restrictive insurance
market. Therefore, for substantially all of our currently
marketed products, we have been and expect that
we will continue to be completely self-insured for
future product liability losses. In addition, there is no
assurance that we will be able to fully collect from our
insurance carriers in the future.

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 uncertain-
ties that may cause actual results to differ materially
from those projected. Economic, competitive, govern-
mental, 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 Commission. We undertake no duty to update
forward-looking statements.

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Segment Information

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

We operate in one signiﬁ cant business segment—human pharmaceutical products. Operations of the animal
health business segment are not material and share many of the same economic and operating characteristics
as human pharmaceutical products. Therefore, they are included with pharmaceutical products for purposes of
segment reporting.

Year Ended December 31

2008

2007

2006

Net sales—to unafﬁ liated customers
Neurosciences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Endocrinology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oncology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cardiovascular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Animal health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

$ 8,371.5
5,890.7
2,874.5
1,882.7
1,093.3
265.3
$20,378.0

$10,934.4
5,334.9
4,108.7
$20,378.0

$ 5,750.0
2,119.0
1,753.0
$ 9,622.0

$ 7,851.0
5,479.6
2,446.4
1,624.1
995.8
236.6
$18,633.5

$10,145.5
4,731.8
3,756.2
$18,633.5

$ 5,905.4
2,057.7
1,768.6
$ 9,731.7

$ 6,728.5
5,014.5
2,020.2
730.4
875.5
321.9
$15,691.0

$ 8,599.2
3,804.0
3,287.8
$15,691.0

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

The largest category of products is the neurosciences group, which includes Zyprexa, Cymbalta, Strattera,
and Prozac. Endocrinology products consist primarily of Humalog, Humulin, Byetta, Actos, Evista, Forteo, and
Humatrope. Oncology products consist primarily of Gemzar and Alimta. Cardiovascular products consist primarily
of Cialis, ReoPro®, and Xigris. Animal health products include Posilac, Tylan®, Rumensin®, Coban®, and other prod-
ucts for livestock and poultry, and Comfortis® and other products for companion animals. The other pharmaceuti-
cals category includes anti-infectives, primarily Ceclor® and Vancocin®, 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 2008, our three largest wholesalers each accounted for
between 12 percent and 16 percent of consolidated net sales. Further, they each accounted for between 10 per-
cent and 15 percent of accounts receivable as of December 31, 2008. 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. Per-
formance is evaluated based on proﬁ t or loss from operations before income taxes. The accounting policies of the
individual segments are substantially the same as those described in the summary of signiﬁ cant accounting poli-
cies in Note 1 to the consolidated ﬁ nancial statements. Income before income taxes for the animal health business
was approximately $192 million, $173 million, and $184 million in 2008, 2007, and 2006, 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 operations,

and our results of operations and the value of our foreign assets are affected by ﬂ uctuations in foreign currency
exchange rates.

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Selected Quarterly Data (unaudited)

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

2008

Fourth

Third

Second

First

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired in-process research and development . . . . . . . . . .
Asset impairments, restructuring, and other

special charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—net, expense (income) . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . .
Net income (loss)1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,210.5
915.4
2,785.9
4,685.4

80.0
81.2
(3,337.4)
(3,629.4)

$5,209.5
1,155.2
2,602.2
28.0

$5,150.4
1,200.9
2,651.6
35.0

$4,807.6
1,111.3
2,427.6
87.0

1,659.4
(2.5)
(232.8)
(465.6)

88.9
(32.3)
1,206.3
958.8

145.7
(20.3)
1,056.3
1,064.3

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

(3.31)

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

.47

(.43)

.47

.88

.47

.97

.47

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

43.69
29.91

49.25
43.92

53.06
45.61

57.18
47.81

2007

Fourth

Third

Second

First

special charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—net, expense (income) . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,189.6
1,272.8
2,709.4
89.0

98.2
(32.1)
1,052.3
854.4

$4,586.8
1,054.6
2,322.3
—

$4,631.0
998.9
2,379.1
328.1

$4,226.1
922.5
2,171.0
328.5

81.3
(49.8)
1,178.4
926.3

—
(1.8)
926.7
663.6

123.0
(38.3)
719.4
508.7

Earnings per share – basic and diluted . . . . . . . . . . . . . . . . . .

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

.78

.425

.85

.425

.61

.425

.47

.425

59.47
49.09

58.44
54.09

60.56
54.39

54.99
51.63

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

1We incurred tax expense of $764.3 million in 2008, despite having a loss before income taxes of $1.31 billion. Our net loss was driven
by the $4.69 billion acquired IPR&D charge for ImClone in the fourth quarter and the $1.48 billion Zyprexa investigation settlements
recorded in the third quarter. The IPR&D charge was not tax deductible, and only a portion of the Zyprexa investigation settlements
was deductible. In addition, we recorded tax expense associated with the ImClone acquisition in the fourth quarter, as well as a dis-
crete income tax beneﬁ t of $210.3 million in the ﬁ rst quarter for the resolution of the IRS audit.

Selected Financial Data (unaudited)

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

2008

20072

2006

2005

2004

4,382.8
3,840.9
6,626.4
6,835.54

Operations
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,378.0 $18,633.5 $15,691.0 $14,645.3 $13,857.9
3,223.9
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,691.1
Research and development . . . . . . . . . . . . . . . . . . . .
4,284.2
Marketing, selling, and administrative . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
716.8
Income (loss) before income taxes and cumulative
effect of a change in accounting principle . . . . . .
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income as a percent of sales . . . . . . . . . . . . . . . .
Net income (loss) per share—diluted . . . . . . . . . . . .
Dividends declared per share. . . . . . . . . . . . . . . . . . .
Weighted-average number of shares
outstanding—diluted (thousands) . . . . . . . . . . . . . 1,094,499

(1,307.6)
764.3
(2,071.9)
NM
(1.89)
1.90

4,248.8
3,486.7
6,095.1
926.1

3,546.5
3,129.3
4,889.8
707.4

3,474.2
3,025.5
4,497.0
931.1

2,717.5
715.9
1,979.61

3,876.8
923.8
2,953.0

3,418.0
755.3
2,662.7

2,941.9
1,131.8
1,810.1

17.0%
2.45
1.63

13.5%
1.81
1.54

15.8%
2.71
1.75

1,090,750

1,087,490

1,092,150

1,088,936

13.1%
1.66
1.45

Financial Position
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,453.3
13,109.7
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,626.3
Property and equipment—net . . . . . . . . . . . . . . . . . .
29,212.6
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,615.7
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,735.3
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,316.1
5,436.8
8,575.1
26,874.8
4,593.5
13,503.9

$ 9,753.6 $10,855.0 $12,895.0
7,762.2
7,550.9
24,954.0
4,491.9
10,759.4

5,254.0
8,152.3
22,042.4
3,494.4
10,820.2

5,884.8
7,912.5
24,667.8
5,763.5
10,631.4

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Supplementary Data
Return on shareholders’ equity . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . $ 947.2 $ 1,082.4 $ 1,077.8
Depreciation and amortization . . . . . . . . . . . . . . . . . .
801.8
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales per employee. . . . . . . . . . . . . . . . . . . . . . . . $ 504,000 $ 459,000 $378,000
41,500
Number of employees . . . . . . . . . . . . . . . . . . . . . . . . .
44,800
Number of shareholders of record . . . . . . . . . . . . . .

1,122.6
NM3

(16.3)%
(7.5)%

40,450
39,800

40,600
41,700

24.3%
12.1%

1,047.9

23.8%

24.8%
11.1%

22.1%

18.5%
8.2%

17.8%
7.8%

$ 1,298.1 $ 1,898.1
597.5
38.5%

26.3%

726.4

$344,000
42,600
50,800

$311,000
44,500
52,400

NM—Not Meaningful
1Reﬂ 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 mil-
lion. 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.
2Reﬂ ects the ICOS acquisition, effective January 29, 2007. See Note 3 for additional information.
3We incurred tax expense of $764.3 million in 2008, despite having a loss before income taxes of $1.31 billion. Our net loss was driven by
the $4.69 billion acquired IPR&D charge for ImClone and the $1.48 billion Zyprexa investigation settlements. The IPR&D charge was not
tax deductible, and only a portion of the Zyprexa investigation settlements was deductible. In addition, we recorded tax expense associ-
ated with the ImClone acquisition, as well as a discrete income tax beneﬁ t of $210.3 million for the resolution of the IRS audit.
4The increase reﬂ ects the in-process research and development expense of $4.69 billion associated with the ImClone acquisition and
$1.48 billion associated with the Zyprexa investigation settlements.

Value of $100 Invested on Last Business Day of 2003
Comparison of Five-Year Cumulative Total Return Among Lilly, S&P 500 Stock Index, and Peer Group*

This graph compares the return on Lilly stock with that of the
Standard & Poor’s 500 Stock Index and our peer group* for the years
2004 through 2008. The graph assumes that, on December 31, 2003,
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 2008 compensation of executive officers:
Abbott Laboratories; Amgen Inc.; Bristol-Myers Squibb Company;
GlaxoSmithKline Plc; Johnson & Johnson; Merck & Co., Inc.; Pfizer
Inc.; Schering-Plough Corporation; and Wyeth.

Lilly

S&P 500

Peer Group

$150

$140

$130

$120

$110

$100

$90

$80

$70

$60

12/03

12/04

12/05

12/06

12/07

12/08

Date

Lilly

Peer
Group

S&P
500

12/03

$100.00 $100.00 $100.00

12/04

$ 82.53 $ 96.91 $110.85

12/05

$ 84.62 $ 96.99 $116.28

12/06

$ 80.20 $109.85 $134.61

12/07

$ 84.76 $111.60 $141.99

12/08

$ 66.63 $ 93.90 $ 89.54

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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 estimates.
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 from the date
of purchase to be cash equivalents. The cost of these investments approximates fair value. Included in cash equiv-
alents at December 31, 2008, is restricted cash of $339.0 million related to the debt assumed with the ImClone
acquisition, which is expected to be paid in the ﬁ rst quarter of 2009.

Inventories: We state all inventories at the lower of cost or market. We use the last-in, ﬁ rst-out (LIFO) method for
the majority of our inventories located in the continental United States, or approximately 45 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 771.0
1,657.1
236.3
2,664.4
(171.2)
$2,493.2

$ 653.4
1,803.0
202.7
2,659.1
(135.4)
$2,523.7

2008

2007

Investments: Substantially all of our investments in debt and marketable equity securities are classiﬁ ed as avail-
able-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains and losses, net of tax,
reported in other comprehensive income. Unrealized losses considered to be other-than-temporary are recognized in
earnings. Factors we consider in making this evaluation include company-speciﬁ c drivers of the decrease in fair value,
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 initial
cost adjusted for any other-than-temporary declines in fair value. Investments in companies over which we have sig-
niﬁ cant inﬂ uence but not a controlling interest are accounted for using the equity method with our share of earnings or
losses reported in other—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 recognized

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on the underlying exposure. For derivative contracts that are designated and qualify as cash ﬂ ow hedges, 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 ineffectiveness
is immediately recognized in earnings. Derivative contracts that are not designated as hedging instruments are
recorded at fair value with the gain or loss recognized in current earnings during the period of change.

We may enter into foreign currency forward and option contracts to reduce the effect of ﬂ uctuating currency

exchange rates (principally the euro, the British pound, 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 principally used to manage exposures arising from subsidiary trade and loan payables
and receivables denominated in foreign currencies. These contracts are recorded at fair value with the gain or
loss recognized in other—net. The purchased option contracts are used to hedge anticipated foreign currency
transactions, primarily intercompany inventory activities expected to occur within the 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 currency 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 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 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 positions 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 underlying 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 hedg-
es. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements.

Goodwill and other intangibles: Goodwill is not amortized. All other intangibles arising from acquisitions and
research alliances have ﬁ nite lives and are amortized over their estimated useful lives, ranging from 5 to 20 years,
using the straight-line method. The weighted-average amortization period for developed product technology is
approximately 12 years. Amortization expense for 2008, 2007, and 2006 was $193.4 million, $172.8 million, and
$7.6 million before tax, respectively. The estimated amortization expense for each of the ﬁ ve succeeding years
approximates $280 million before tax, per year. Substantially all of the amortization expense is included in cost of
sales. See Note 3 for further discussion of goodwill and other intangibles acquired in 2008 and 2007.

Goodwill and other intangible assets at December 31 were as follows:

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,167.5

$ 745.7

2008

2007

Developed product technology—gross . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed product technology—net . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other intangibles—gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,035.4
(346.6)
2,688.8

243.2
(45.4)
197.8

1,767.5
(162.6)
1,604.9

142.8
(38.0)
104.8

Total intangibles—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,054.1

$2,455.4

Goodwill and net other intangibles are reviewed to assess recoverability at least annually and when certain

impairment indicators are present. No signiﬁ cant impairments occurred with respect to the carrying value of our
goodwill or other intangible assets in 2008, 2007, or 2006.

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

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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.

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

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowances for depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 219.0
5,953.4
8,045.2
1,098.3
15,315.9
(6,689.6)
$ 8,626.3

$ 180.0
5,543.7
7,454.9
1,662.7
14,841.3
(6,266.2)
$ 8,575.1

2008

2007

Depreciation expense for 2008, 2007, and 2006 was $731.7 million, $682.3 million, and $627.4 million, respec-

tively. Approximately $48.2 million, $95.3 million, and $106.7 million of interest costs were capitalized as part of
property and equipment in 2008, 2007, and 2006, respectively. Total rental expense for all leases, including contin-
gent rentals (not material), amounted to approximately $327.4 million, $294.2 million, and $293.6 million for 2008,
2007, and 2006, respectively. Assets under capital leases included in property and equipment in the consolidated
balance sheets, capital lease obligations entered into, and future minimum rental commitments are not material.

Litigation and environmental liabilities: Litigation accruals and environmental liabilities and the related estimated
insurance recoverables are reﬂ ected on a gross basis as liabilities and assets, respectively, on our consolidated
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 reason-
able 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. However, for substantially all of our currently
marketed products, we are completely self-insured for future product liability losses.

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 remain-
ing sales are recorded at the point of delivery. Provisions for returns, 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 co-promotion services is

based upon net sales reported by our co-promotion partners and, if applicable, the number of sales calls we
perform. 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—net.

Royalty revenue from licensees, which are based on third-party sales of licensed products and technology, are

recorded as earned in accordance with the contract terms when third-party sales can be reasonably measured
and collection of the funds is reasonably assured. This royalty revenue is included in net sales.

Acquired 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

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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—net: Other—net consisted of the following:

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Joint venture income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$228.3
(210.7)
—
8.5
$ 26.1

$ 228.3
(215.3)
(11.0)
(124.0)
$(122.0)

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

2008

2007

2006

The joint venture income represents our share of the Lilly ICOS LLC joint venture results of operations, net of
income taxes. We acquired the outstanding ownership of the joint venture in January 2007 as a result of our acqui-
sition 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 recognize the tax beneﬁ t from an uncertain tax position only if it is more likely than not that the tax posi-
tion will be sustained on examination by the taxing authorities, based on the technical merits of the position. The
tax beneﬁ ts recognized in the ﬁ nancial statements from such a position are measured based on the largest beneﬁ t
that has a greater than 50 percent likelihood of being realized upon ultimate resolution.

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. See
Note 11 for further discussion.

Stock-based compensation: We recognize the fair value of stock-based compensation as expense over the requi-
site service period of the individual grantees, which generally equals the vesting period. Under our policy all stock-
based awards are approved prior to the date of grant. The Compensation Committee of the Board of Directors
approves the value of the award and date of grant. Stock-based compensation that is awarded as part of our annual
equity grant is made on a speciﬁ c grant date scheduled in advance.

Reclassiﬁ cations: Certain reclassiﬁ cations have been made to the December 31, 2007 and 2006 consolidated
ﬁ nancial statements and accompanying notes to conform with the December 31, 2008 presentation.

Note 2: Implementation of New Financial Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161
applies to all derivative instruments and related hedged items accounted for under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. This Statement requires entities to provide enhanced
disclosures about how and why an entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under Statement 133 and its related interpretations, and how derivative instru-
ments and related hedged items affect an entity’s ﬁ nancial position, results of operations, and cash ﬂ ows. This
Statement is effective for us January 1, 2009.

We adopted the provisions of Emerging Issues Task Force (EITF) Issue No. 07-3 (EITF 07-3), Accounting for

Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development
Activities, on January 1, 2008. Pursuant to EITF 07-3, nonrefundable advance payments for goods or services that
will be used or rendered for future research and development activities should be deferred and capitalized. Such
amounts should be recognized as an expense when the related goods are delivered or services are performed,
or when the goods or services are no longer expected to be received. This Issue is to be applied prospectively for

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contracts entered into on or after the effective date.

We adopted the provisions of FASB Statement No. 157 (SFAS 157), Fair Value Measurements, on January 1,
2008. SFAS 157 deﬁ nes fair value, establishes a framework for measuring fair value in GAAP, and expands disclo-
sures about fair value measurements. The implementation of this Statement was not material to our consolidated
ﬁ nancial position or results of operations.

In December 2007, the FASB revised and issued Statement No. 141, Business Combinations (SFAS 141(R)).

SFAS 141(R) changes how the acquisition method is applied in accordance with SFAS 141. The primary revisions
to this Statement require an acquirer in a business combination to measure assets acquired, liabilities assumed,
and any noncontrolling interest in the acquiree at the acquisition date, at their fair values as of that date, with
limited exceptions speciﬁ ed in the Statement. This Statement also requires the acquirer in a business combination
achieved in stages to recognize the identiﬁ able assets and liabilities, as well as the noncontrolling interest in the
acquiree, at the full amounts of their fair values (or other amounts determined in accordance with the Statement).
Assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date are to be
measured at their acquisition-date fair values, and assets or liabilities arising from all other contingencies as of
the acquisition date are to be measured at their acquisition-date fair value, only if it is more likely than not that they
meet the deﬁ nition of an asset or a liability in FASB Concepts Statement No. 6, Elements of Financial Statements.
This Statement signiﬁ cantly amends other Statements and authoritative guidance, including FASB Interpretation
No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method,
and now requires the capitalization of research and development assets acquired in a business combination at
their acquisition-date fair values, separately from goodwill. SFAS No. 109, Accounting for Income Taxes, was also
amended by this Statement to require the acquirer to recognize changes in the amount of its deferred tax beneﬁ ts
that are recognizable because of a business combination either in income from continuing operations in the period
of the combination or directly in contributed capital, depending on the circumstances. This Statement is effective
for us for business combinations for which the acquisition date is on or after January 1, 2009.

In December 2007, in conjunction with SFAS 141(R), the FASB issued Statement No. 160, Accounting for
Noncontrolling Interests. This Statement amends Accounting Research Bulletin No. 51, Consolidated Financial
Statements (ARB 51), by requiring companies to report a noncontrolling interest in a subsidiary as equity in its con-
solidated ﬁ nancial statements. Disclosure of the amounts of consolidated net income attributable to the parent and
the noncontrolling interest will be required. This Statement also clariﬁ es that transactions that result in a change
in a parent’s ownership interest in a subsidiary that do not result in deconsolidation will be treated as equity trans-
actions, while a gain or loss will be recognized by the parent when a subsidiary is deconsolidated. This Statement
is effective for us January 1, 2009, and we do not anticipate the implementation will be material to our consolidated
ﬁ nancial position or results of operations.

In December 2007, the FASB ratiﬁ ed the consensus reached by the EITF on Issue No. 07-1 (EITF 07-1), Account-

ing for Collaborative Arrangements. EITF 07-1 deﬁ nes collaborative arrangements and establishes reporting
requirements for transactions between participants in a collaborative arrangement and between participants in
the arrangement and third parties. This Issue is effective for us beginning January 1, 2009 and will be applied
retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date.
The implementation of this Issue will not be material to our consolidated ﬁ nancial position or results of operations.
We adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes,
on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the ﬁ nancial state-
ment recognition and measurement of a tax position taken or expected to be taken in a tax return. See Note 12 for
further discussion of the impact of adopting this Interpretation.

Note 3: Acquisitions

During 2008 and 2007, we acquired several businesses. These acquisitions were accounted for as business combi-
nations under the purchase method of accounting. Under the purchase method of accounting, the assets acquired
and liabilities assumed were recorded at their respective fair values as of the acquisition date in our consolidated
ﬁ nancial statements. The determination of estimated fair value required management to make signiﬁ cant esti-
mates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where
applicable, has been recorded as goodwill. The results of operations of these acquisitions are included in our
consolidated ﬁ nancial statements from the date of acquisition.

Most of these acquisitions included in-process research and development (IPR&D), which represented

compounds, new indications, or line extensions under development that had not yet achieved regulatory approval

for marketing. There are several methods that can be used to determine the estimated fair value of the IPR&D
acquired in a business combination. 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 projec-
tions are based on factors such as relevant market size, patent protection, historical pricing of similar products,
and expected industry trends. The estimated future net cash ﬂ ows are then discounted to the present value using
an appropriate discount rate. This analysis is performed for each project independently. In accordance with
FIN 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method,
these acquired IPR&D intangible assets totaling $4.71 billion and $340.5 million in 2008 and 2007, respectively,
were expensed immediately subsequent to the acquisition because the products had no alternative future use.
The ongoing activities with respect to each of these products in development are not material to our research and
development expenses.

In addition to the acquisitions of businesses, we also acquired several products in development. The acquired
IPR&D related to these products of $122.0 million and $405.1 million in 2008 and 2007, respectively, was also writ-
ten off by a charge to income immediately upon acquisition because the products had no alternative future use.

ImClone Acquisition
On November 24, 2008, we acquired all of the outstanding shares of ImClone Systems Inc. (ImClone), a biopharma-
ceutical company focused on advancing oncology care, for a total purchase price of approximately $6.5 billion,
which was ﬁ nanced through borrowings. This strategic combination will offer both targeted therapies and oncolytic
agents along with a pipeline spanning all phases of clinical development. The combination also expands our bio-
technology capabilities.

The acquisition has been accounted for as a business combination under the purchase method of accounting,

resulting in goodwill of $419.5 million. No portion of this goodwill is expected to be deductible for tax purposes.

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Allocation of Purchase Price
We are currently determining the fair values of a signiﬁ cant portion of these net assets. The purchase price has
been preliminarily allocated based on an estimate of the fair value of assets acquired and liabilities assumed as
of the date of acquisition. The ﬁ nal determination of these fair values will be completed as soon as possible but no
later than one year from the acquisition date. Although the ﬁ nal determination may result in asset and liability fair
values that are different than the preliminary estimates of these amounts included herein, it is not expected that
those differences will be material to our ﬁ nancial results.

Estimated Fair Value at November 24, 2008

Cash and short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed product technology (Erbitux)1 . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired in-process research and development . . . . . . . . . . . . . . . . .
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 982.9
136.2
1,057.9
419.5
339.8
(600.0)
(315.0)
(127.7)
(72.1)
4,685.4
$6,506.9

1This intangible asset will be amortized on a straight-line basis through 2023 in the U.S. and 2018 in the rest of the world.

All of the estimated fair value of the acquired IPR&D is attributable to oncology-related products in develop-
ment, including $1.33 billion to line extensions for Erbitux. A signiﬁ cant portion (81 percent) of the remaining value
of acquired IPR&D is attributable to two compounds in Phase III clinical testing and one compound in Phase II clini-
cal testing, all targeted to treat various forms of cancers. The discount rate we used in valuing the acquired IPR&D
projects was 13.5 percent, and the charge for acquired IPR&D of $4.69 billion recorded in the fourth quarter of
2008, was not deductible for tax purposes.

Pro Forma Financial Information
The following unaudited pro forma ﬁ nancial information presents the combined results of our operations with

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ImClone as if the acquisition and the ﬁ nancing for the acquisition had occurred as of the beginning of each of the
years presented. We have adjusted the historical consolidated ﬁ nancial information to give effect to pro forma
events that are directly attributable to the acquisition. The unaudited pro forma ﬁ nancial information is not
necessarily indicative of what our consolidated results of operations actually would have been had we completed
the acquisition at the beginning of each year. In addition, the unaudited pro forma ﬁ nancial information does not
attempt to project the future results of operations of our combined company.

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
Basic and diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2008

$20,801.8
2,356.2

2007

$19,051.4
2,704.1

2.15

2.48

1The unaudited pro forma ﬁ nancial information above excludes the non-recurring charge incurred for acquired IPR&D of $4.69 billion
and other merger-related costs.

The unaudited pro forma ﬁ nancial information above reﬂ ects the following:

• a reduction of the amortization of ImClone’s deferred income of $86.2 million (2008) and $98.4 million (2007);
• the increase of amortization expense of $78.8 million in 2008 and 2007 related to the estimated fair value of

identiﬁ able intangible assets from the purchase price allocation which are being amortized over their estimated
useful lives through 2023 in the U.S. and through 2018 in the rest of the world. The change in depreciation expense
related to the change in the estimated fair value of property and equipment from the book value at the time of the
acquisition was not material;

• the adjustment to increase interest expense related to the debt incurred to ﬁ nance the acquisition and the

adjustment to decrease interest income related to the lost interest income on the cash used to purchase ImClone
by a total of $301.0 million in 2008 and 2007;

• the reduction of ImClone’s income tax expense to provide for income taxes at the statutory tax rate and the

adjustment to income taxes for pro forma adjustments at the statutory tax rate, totaling $139.3 million (2008) and
$189.5 million (2007). This excludes the acquired IPR&D charge of $4.69 billion, which was not tax deductible;

• certain reclassiﬁ cations to conform to accounting policies and classiﬁ cations that are consistent with our practices

(e.g., ImClone’s license fees and milestones were classiﬁ ed as other—net, rather than net sales).

Posilac
On October 1, 2008, we acquired the worldwide rights to the dairy cow supplement Posilac, as well as the product’s
supporting operations, from Monsanto Company (Monsanto). The acquisition of Posilac provides us with a product
that complements those of our animal health business. Under the terms of the agreement, we acquired the rights
to the Posilac brand, as well as the product’s U.S. sales force and manufacturing facility, for an aggregate pur-
chase price of $403.9 million, which includes a $300.0 million upfront payment, transaction costs, and an accrual
for contingent consideration to Monsanto based on estimated future Posilac sales for which payment is considered
likely beyond a reasonable doubt.

This acquisition has been accounted for as a business combination under the purchase method of accounting.

We allocated $204.3 million to identiﬁ able intangible assets related to Posilac, $167.6 million to inventories, and
$99.5 million of the purchase price to property and equipment. We also assumed $67.5 million of liabilities. Sub-
stantially all of the identiﬁ able intangible assets are being amortized over their estimated remaining useful lives of
20 years. The amount allocated to each of the intangible assets acquired is deductible for tax purposes.

SGX Pharmaceuticals, Inc.
On August 20, 2008, we acquired all of the outstanding common stock of SGX Pharmaceuticals, Inc. (SGX), a collab-
oration partner since 2003. The acquisition allows us to integrate SGX’s structure-guided drug discovery platform
into our drug discovery efforts. It also gives us access to FAST ™, SGX’s fragment-based, protein structure guided
drug discovery technology, and to a portfolio of preclinical oncology compounds focused on a number of kinase
targets. Under the terms of the agreement, the outstanding shares of SGX common stock were redeemed for an
aggregate purchase price, including transaction costs, of $66.8 million.

The acquisition has been accounted for as a business combination under the purchase method of accounting. We

allocated $29.6 million of the purchase price to deferred tax assets and $28.0 million to acquired IPR&D. The acquired
IPR&D charge of $28.0 million was recorded in the third quarter of 2008 and was not deductible for tax purposes.

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ICOS Corporation
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 for the manufacture and sale of Cialis for the treatment of erectile dysfunction.
The acquisition brought the full value of Cialis to us and enabled us to realize operational efﬁ ciencies in the further
development, marketing, and selling of this product. The aggregate cash purchase price of approximately $2.3 bil-
lion was ﬁ nanced through borrowings.

The acquisition has been accounted for as a business combination under the purchase method of accounting,

resulting in goodwill of $646.7 million. No portion of this goodwill was deductible for tax purposes.

We determined the following estimated fair values for the assets acquired and liabilities assumed as of the

date of acquisition.

Estimated Fair Value at January 29, 2007

Cash and short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed product technology (Cialis)1 . . . . . . . . . . . . . . . . . . . . . . . .
Tax beneﬁ t of net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired in-process research and development . . . . . . . . . . . . . . . . .
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 197.7
1,659.9
404.1
646.7
(275.6)
(583.5)
(32.1)
303.5
$2,320.7

1This intangible asset will be amortized over the remaining expected patent lives of Cialis in each country; patent expiry dates range
from 2015 to 2017.

New indications for and formulations of the Cialis compound in clinical testing at the time of the acquisition
represented approximately 48 percent of the estimated fair value of the acquired IPR&D. The remaining value of
acquired IPR&D represented several other products in development, with no one asset comprising a signiﬁ cant por-
tion of this value. The discount rate we used in valuing the acquired IPR&D projects was 20 percent, and the charge
for acquired IPR&D of $303.5 million recorded in the ﬁ rst quarter of 2007 was not deductible for tax purposes.

Other Acquisitions
During the second quarter of 2007, we acquired all of the outstanding stock of both Hypnion, Inc. (Hypnion), a
privately held neuroscience drug discovery company focused on sleep disorders, and Ivy Animal Health, Inc. (Ivy),
a privately held applied research and pharmaceutical product development company focused on the animal health
industry, for $445.0 million in cash.

The acquisition of Hypnion provided us with a broader and more substantive presence in the area of sleep
disorder research and ownership of HY10275, a novel Phase II compound with a dual mechanism of action aimed
at promoting better sleep onset and sleep maintenance. This was Hypnion’s only signiﬁ cant asset. For this acquisi-
tion, we recorded an acquired IPR&D charge of $291.1 million, which was not deductible for tax purposes. Because
Hypnion was a development-stage company, the transaction was accounted for as an acquisition of assets rather
than as a business combination and, therefore, goodwill was not recorded.

The acquisition of Ivy provides us with products that complement those of our animal health business. This

acquisition has been accounted for as a business combination under the purchase method of accounting. We
allocated $88.7 million of the purchase price to other identiﬁ able intangible assets, primarily related to marketed
products, $37.0 million to acquired IPR&D, and $25.0 million to goodwill. The other identiﬁ able intangible assets are
being amortized over their estimated remaining useful lives of 10 to 20 years. The $37.0 million allocated to acquired
IPR&D was charged to expense in the second quarter of 2007. Goodwill resulting from this acquisition was fully
allocated to the animal health business segment. The amount allocated to each of the intangible assets acquired,
including goodwill of $25.0 million and the acquired IPR&D of $37.0 million, was deductible for tax purposes.

Product Acquisitions
In June 2008, we entered into a licensing and development agreement with TransPharma Medical Ltd. (Trans-
Pharma) to acquire rights to its product and related drug delivery system for the treatment of osteoporosis. The
product, which is administered transdermally using TransPharma’s proprietary technology, was in Phase II clinical
testing, and had no alternative future use. Under the arrangement, we also gained non-exclusive access to Trans-
Pharma’s ViaDerm drug delivery system for the product. As with many development-phase products, launch of the

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product, if approved, was not expected in the near term. The charge of $35.0 million for acquired IPR&D related to
this arrangement was included as expense in the second quarter of 2008 and is deductible for tax purposes.

In January 2008, our agreement with BioMS Medical Corp. to acquire the rights to its compound for the treat-

ment of multiple sclerosis became effective. At the inception of this agreement, this compound was in the develop-
ment stage (Phase III clinical trials) and had no alternative future use. As with many development-phase compounds,
launch of the product, if approved, was not expected in the near term. The charge of $87.0 million for acquired IPR&D
related to this arrangement was included as expense in the ﬁ rst quarter of 2008 and is deductible for tax purposes.
In October 2007, we entered into an agreement with Glenmark Pharmaceuticals Limited India to acquire the
rights to a portfolio of transient receptor potential vanilloid sub-family 1 (TRPV1) antagonist molecules, including
a clinical-phase compound. The compound was in early clinical phase development as a potential next-generation
treatment for various pain conditions, including osteoarthritic pain, and had no alternative future use. As with
many development-phase compounds, launch of the product, if approved, was not expected in the near term. The
charge of $45.0 million for acquired IPR&D was deductible for tax purposes and was included as expense in the
fourth quarter of 2007. Development of this compound has been suspended.

In October 2007, we entered into a global strategic alliance with MacroGenics, Inc. (MacroGenics) to develop

and commercialize teplizumab, a humanized anti-CD3 monoclonal antibody, as well as other potential next-
generation anti-CD3 molecules for use in the treatment of autoimmune diseases. As part of the arrangement, we
acquired the exclusive rights to the molecule, which was in the development stage (Phase II/III clinical trial for
individuals with recent-onset type 1 diabetes) and had no alternative future use. As with many development-phase
compounds, launch of the product, if approved, was not expected in the near term. The charge of $44.0 million for
acquired IPR&D was deductible for tax purposes and was included as expense in the fourth quarter of 2007.

In January 2007, we entered into an agreement with OSI Pharmaceuticals, Inc. to acquire the rights to its com-
pound for the treatment of type 2 diabetes. At the inception of this agreement, this compound was in the development
stage (Phase I clinical trials) and had no alternative future use. As with many development-phase compounds, launch
of the product, if approved, was not expected in the near term. The charge of $25.0 million for acquired IPR&D related
to this arrangement was included as expense in the ﬁ rst quarter of 2007 and was deductible for tax purposes.

In connection with these arrangements, our partners are generally entitled to future milestones and royalties

based on sales should these products be approved for commercialization.

Note 4: Collaborations

We often enter into collaborative arrangements to develop and commercialize drug candidates. Collaborative
activities might include research and development, marketing and selling (including promotional activities and
physician detailing), manufacturing, and distribution. These collaborations often require milestone and royalty or
proﬁ t share payments, contingent upon the occurrence of certain future events linked to the success of the asset
in development, as well as expense reimbursements or payments to the third party. Each collaboration is unique in
nature and our more signiﬁ cant arrangements are discussed below.

Erbitux
Prior to our acquisition, ImClone entered into several collaborations with respect to Erbitux, a product approved to
ﬁ ght cancer, while still in its development phase. The most signiﬁ cant collaborations operate in these geographic
territories: the U.S., Japan, and Canada (Bristol-Myers Squibb); and worldwide except the U.S. and Canada (Merck
KGaA). The agreements are expected to expire in 2018, upon which all of the rights with respect to Erbitux in the
U.S. and Canada return to us.

Bristol-Myers Squibb Company
Pursuant to a commercial agreement with Bristol-Myers Squibb Company and E.R. Squibb (collectively, BMS),
relating to Erbitux, ImClone is co-developing and co-promoting Erbitux in North America with BMS, and is co-devel-
oping and co-promoting Erbitux in Japan with BMS. The companies had jointly agreed to expand the investment in
the ongoing clinical development plan for Erbitux to further explore its use in additional tumor types. Under this
arrangement, Erbitux research and development and other costs, up to threshold amounts, are the sole responsi-
bility of BMS, with costs in excess of the thresholds shared by both companies according to a predetermined ratio.
Responsibilities associated with clinical and other ongoing studies are apportioned between the parties as
determined pursuant to the agreement. Collaborative reimbursements received by ImClone for supply of product for
research and development, for a portion of royalty expenses, and for a portion of marketing, selling, and adminis-

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trative expenses, are recorded as a reduction to the respective expense line items on the consolidated statement of
operations. Royalty expense paid to third parties is included in costs of sales. We receive a distribution fee in the form
of a royalty from BMS, based on a percentage of net sales in the U.S. and Canada, which is recorded in net sales.

We are responsible for the manufacture and supply of all requirements of Erbitux in bulk-form active pharma-
ceutical ingredient (API) for clinical and commercial use in the territory, and BMS will purchase all of its require-
ments of API for commercial use from us, subject to certain stipulations per the agreement. Sales of Erbitux to
BMS for commercial use are reported in net sales.

Merck KGaA
A development and license agreement between ImClone and Merck KGaA (Merck) with respect to Erbitux granted
Merck exclusive rights to market Erbitux outside of North America and co-exclusive rights with BMS in Japan. Merck
also has rights to manufacture Erbitux for supply in its territory. We manufacture and provide a portion of Merck’s
requirements for API; we also receive a royalty on the sales of Erbitux outside of the U.S. and Canada, both of which
are included in net sales as earned. Collaborative reimbursements received for supply of product for research and
development, reimbursement of a portion of royalty expense, and marketing, selling, and administrative expenses
are recorded as a reduction to the respective expense line items on the consolidated statement of operations. Royalty
expense paid to third parties is included in cost of sales.

Exenatide
We are in a collaborative arrangement with Amylin Pharmaceuticals (Amylin) for the joint development, market-
ing, and selling of Byetta and other forms of exenatide such as exenatide once weekly. Byetta (exenatide injection)
is presently approved as an adjunctive therapy to improve glycemic control in patients with type 2 diabetes who
have not achieved adequate glycemic control using metformin, a sulfonylurea and/or a thiazolidinediene (U.S. only),
three common oral therapies for type 2 diabetes. Lilly and Amylin are co-promoting exenatide in the U.S. Amylin
is responsible for manufacturing and primarily utilizes third-party contract manufacturing organizations to supply
Byetta. However, Lilly is manufacturing Byetta pen delivery devices for Amylin. Lilly is responsible for development
and commercialization costs outside the U.S.

Under the terms of our collaboration with Amylin, we report as revenue our 50 percent share of gross margin

on sales in the U.S., 100 percent of sales outside the U.S., and our sales of Byetta pen delivery devices to Amylin.
We recorded revenues of $396.1 million, $330.7 million, and $219.0 million in 2008, 2007, and 2006, respectively,
for Byetta. We pay Amylin a percentage of the gross margin of exenatide sales outside of the U.S., and these costs
are recorded in cost of sales. Under the 50/50 proﬁ t-sharing arrangement for the U.S., in addition to recording as
revenue our 50 percent share of exenatide’s gross margin, we also report 50 percent of U.S. research and develop-
ment costs, and marketing and selling costs in the research and development and marketing, selling, and adminis-
trative line items, respectively, on the consolidated statements of income.

Exenatide once weekly is presently in Phase III clinical trials and has not received regulatory approval. Amylin

is constructing and will operate a manufacturing facility for exenatide once weekly, and we have entered into a
supply agreement in which Amylin will supply exenatide once weekly product to us for sales outside the U.S. The
estimated total cost of the facility is approximately $550 million. In 2008, we paid $125.0 million to Amylin, which
we will amortize to cost of sales over the estimated life of the supply agreement beginning with product launch.
We would be required to reimburse Amylin for a portion of any future impairment of this facility, recognized in
accordance with GAAP. A portion of the $125.0 million payment we made to Amylin would be creditable against any
amount we would owe as a result of impairment. We have also agreed to loan up to $165.0 million to Amylin at an
indexed rate beginning December 1, 2009, and any borrowings have to be repaid by June 30, 2014.

Cymbalta
Boehringer Ingelheim
We are in a collaborative arrangement with Boehringer Ingelheim (BI) to market and promote Cymbalta, a product
for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder,
and ﬁ bromyalgia, outside the U.S. Pursuant to the terms of the agreement, we generally share equally in develop-
ment, marketing, and selling expenses, and pay BI a commission on sales in the co-promotional territories. We
manufacture the product for all territories.

Collaborative reimbursements or payments for the cost sharing of marketing, selling, and administrative
expenses are recorded in the respective expense line items in the consolidated statement of operations. The com-
mission paid to BI is recognized in marketing, selling, and administrative expenses.

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Quintiles
We are in a collaborative arrangement with Quintiles Transnational Corp. (Quintiles) to market and promote Cymbalta
in the U.S. Pursuant to the terms of the agreement, Quintiles shares in the costs to co-promote Cymbalta with us.
In exchange, Quintiles receives a payment based upon net sales. According to the current agreement, Quintiles’
obligation to promote Cymbalta expires in 2009, and we will pay a lower rate on net sales for three years post their
promotion efforts. The royalties paid to Quintiles are recorded in marketing, selling, and administrative expenses.

Prasugrel
We are in a collaborative arrangement with Daiichi Sankyo Company, Limited (D-S) to develop, market, and pro-
mote prasugrel, an investigational antiplatelet agent for the treatment of patients with acute coronary syndromes
(ACS) who are being managed with an artery-opening procedure known as percutaneous coronary intervention
(PCI). We have submitted new drug applications to the FDA and European Medicines Agency (EMEA) and are cur-
rently awaiting their decisions. Within this arrangement, we have agreed to co-promote under the same trademark
in certain territories (the U.S., ﬁ ve major European markets, and Brazil), while we have exclusive marketing rights
in other territories. Pursuant to the terms of the agreement, we paid D-S an upfront license fee and agreed to pay
future success milestones. Both parties share in the costs of the development and marketing in the co-promotion
territories and share in the proﬁ ts according to the terms speciﬁ ed in the agreement. D-S is responsible for sup-
plying bulk product, but we will produce the ﬁ nished product for our exclusive and co-promotion territories. Proﬁ ts
in the U.S. and other co-promotion territories will be shared according to the agreement. In the exclusive territo-
ries, we will pay D-S a royalty speciﬁ c to those territories. Proﬁ t share payments made to D-S will be recorded as
marketing, selling, and administrative expenses. All royalties paid to D-S will be recorded in cost of sales.

TPG-Axon Capital
In 2008, we entered into an agreement with an afﬁ liate of TPG-Axon Capital (TPG) for the Phase III development of
our gamma-secretase inhibitor and our A-beta antibody, our two lead molecules for the treatment of mild to mod-
erate Alzheimer’s disease. Pursuant to the terms of the agreement, both we and TPG will provide funding for the
Alzheimer’s clinical trials. Funding from TPG will not exceed $325 million and could extend into 2014. In exchange
for their funding, TPG may receive success-based milestones totaling $330 million and mid- to high-single digit
royalties that are contingent upon the successful development of the Alzheimer’s treatments. The royalties will be
paid for approximately eight years after launch of a product. Reimbursements received from TPG for their portion
of research and development costs incurred related to the Alzheimer’s treatments are recorded as a reduction to
the research and development expense line item on the consolidated statement of operations. The reimbursement
from TPG is not expected to be material in any period.

Note 5: 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
We incurred asset impairment, restructuring, and other special charges of $80.0 million in the fourth quarter
of 2008. These charges were the result of decisions approved by management in the fourth quarter as well as
previously announced strategic decisions. The primary components of this charge include non-cash asset impair-
ments of $35.1 million for the write down of impaired assets, all of which have no future use, and other charges
of $44.9 million, primarily related to severance and environmental cleanup charges in connection with previously
announced strategic decisions made in prior periods. We anticipate that substantially all of these costs will be paid
during the ﬁ rst quarter of 2009.

As discussed further in Note 14, in the third quarter of 2008, we recorded a charge of $1.48 billion related to
the Zyprexa investigations led by the U.S. Attorney for the Eastern District of Pennsylvania, as well as the resolu-
tion of a multi-state investigation regarding Zyprexa involving 32 states and the District of Columbia.

Further, in the third quarter of 2008, as a result of our previously announced agreements with Covance Inc.
(Covance), Quintiles Transnational Corp. (Quintiles), and Ingenix Pharmaceutical Services, Inc., doing business
as i3 Statprobe (i3), and as part of our efforts to transform into a more ﬂ exible organization, we recognized asset
impairments, restructuring, and other special charges of $182.4 million. We sold our Greenﬁ eld, Indiana site to
Covance, a global drug development services ﬁ rm, and entered into a 10-year service agreement under which

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Covance will provide preclinical toxicology work and perform additional clinical trials for us as well as operate the
site to meet our needs and those of other pharmaceutical industry clients. In addition, we signed agreements with
Quintiles for clinical trial monitoring services and with i3 for clinical data management services. Components of
the third-quarter restructuring charge include non-cash charges of $148.3 million primarily related to the loss on
sale of assets sold to Covance, severance costs of $27.8 million, and exit costs of $6.3 million. Substantially all of
these costs were paid in 2008.

In the second quarter of 2008, we recognized restructuring and other special charges of $88.9 million. In addi-

tion, we recognized non-cash charges of $57.1 million for the write down of impaired manufacturing assets that
had no future use, which were included in cost of sales. In April 2008, we announced a voluntary exit program that
was offered to employees primarily in manufacturing. Components of the second-quarter restructuring charge
include total severance costs of $53.5 million related to these programs and $35.4 million related to exit costs
incurred during the second quarter in connection with previously announced strategic decisions made in prior
periods. Substantially all of these costs were paid by the end of July 2008.

In March 2008, we terminated development of our AIR Insulin program, which was being conducted in col-

laboration with Alkermes, Inc. The program had been in Phase III clinical development as a potential treatment
for type 1 and type 2 diabetes. This decision was not a result of any observations during AIR Insulin trials relating
to the safety of the product, but rather was a result of increasing uncertainties in the regulatory environment, and
a thorough evaluation of the evolving commercial and clinical potential of the product compared to existing medi-
cal therapies. As a result of this decision, we halted our ongoing clinical studies and transitioned the AIR Insulin
patients in these studies to other appropriate therapies. We implemented a patient program in the U.S., and other
regions of the world where allowed, to provide clinical trial participants with appropriate ﬁ nancial support to fund
their medications and diagnostic supplies through the end of 2008.

We recognized asset impairment, restructuring, and other special charges of $145.7 million in the ﬁ rst quarter

of 2008. These charges were primarily related to the decision to terminate development of AIR Insulin. Compo-
nents of these charges included non-cash charges of $40.9 million for the write down of impaired manufacturing
assets that had no use beyond the AIR Insulin program, as well as charges of $91.7 million for estimated contrac-
tual obligations and wind-down costs associated with the termination of clinical trials and certain development
activities, and costs associated with the patient program to transition participants from AIR Insulin. This amount
includes an estimate of Alkermes’ wind-down costs for which we were contractually obligated. The wind-down
activities and patient programs were substantially complete by the end of 2008. The remaining component of these
charges, $13.1 million, is related to exit costs incurred in the ﬁ rst quarter of 2008 in connection with previously
announced strategic decisions made in prior periods.

We incurred asset impairment, restructuring, and other special charges of $67.6 million in the fourth quarter
of 2007. These charges were a result of decisions approved by management in the fourth quarter as well as previ-
ously announced strategic decisions. Components of this charge include non-cash charges of $42.5 million for the
write down of impaired assets, all of which have no future use, and other charges of $25.1 million, primarily related
to additional severance and environmental cleanup charges related to previously announced strategic decisions.
The impairment charges were necessary to adjust the carrying value of the assets to fair value. These restructur-
ing activities were substantially complete at December 31, 2007.

In connection with previously announced strategic decisions, we recorded asset impairment, restructuring,
and other special charges of $123.0 million in the ﬁ rst quarter of 2007. These charges primarily related to a vol-
untary severance program at one of our U.S. plants and other costs related to this action as well as management
actions taken in the fourth quarter of 2006 as described below. The component of these charges related to the
non-cash asset impairment was $67.6 million, and were necessary to adjust the carrying value of the assets to fair
value. These restructuring activities were substantially complete at December 31, 2007.

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 payments.
The impairment charges were necessary to adjust the carrying value of the assets to fair value. These restructur-
ing activities were substantially complete at December 31, 2007.

Product Liability and Other Special Charges
As a result of our product liability exposures, the substantial majority of which were related to Zyprexa, we record-
ed net pretax charges of $111.9 million and $494.9 million in 2007 and 2006, respectively. These charges, which
are net of anticipated insurance recoveries, include the costs of product liability settlements and related defense
costs, reserves for product liability exposures and defense costs regarding known product liability claims, and
expected future claims to the extent we could formulate a reasonable estimate of the probable number and cost of
the claims. See Note 14 for further discussion.

Note 6: 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 and insurance. We place substantially all of
our interest-bearing investments with major ﬁ nancial institutions, in U.S. government securities, or with top-rated
corporate issuers. At December 31, 2008, our investments in debt securities were comprised of 41 percent corpo-
rate securities, 34 percent asset-backed securities, and 25 percent U.S. government securities. In accordance with
documented corporate 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
The following table summarizes certain fair value information at December 31 for assets and liabilities measured
at fair value on a recurring basis, as well as the carrying amount of certain other investments:

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2008

Fair Value Measurements Using

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

Signiﬁ cant
Other
Observable
Inputs
(Level 2)

Signiﬁ cant
Unobservable
Inputs
(Level 3)

Carrying
Amount

2007

Fair
Value

Carrying
Amount

Fair
Value

Description

Short-term investments

Debt securities . . . . . . . . . .

$ 429.4 $212.3 $ 217.1

$ –

$ 429.4

$ 1,610.7 $ 1,610.7

Long-term investments

Debt securities . . . . . . . . . .
Marketable equity . . . . . . . .
Equity method and other
investments . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .

Long-term debt, including

$ 1,194.9
221.9

$179.2 $ 1,004.6

221.9

—

$ 11.1 $ 1,194.9
221.9

—

$ 408.3 $ 408.3
70.0

70.0

127.8
$ 1,544.6

98.8
$ 577.1

current portion . . . . . . . . . .

$(5,036.1)

—

$(5,180.1)

—

$(5,180.1)

$(4,988.6) $(5,056.9)

Risk-management

instruments—asset . . . . . .

455.0

—

455.0

—

455.0

23.6

NA—Not available

We determine fair values based on a market approach using quoted market values, signiﬁ cant other observable

inputs for identical or comparable assets or liabilities, or discounted cash ﬂ ow analyses, principally for long-term
debt. The fair value of equity method and other investments is not readily available. Approximately $1.1 billion of our
investments in debt securities mature within ﬁ ve years.

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A summary of the fair value of available-for-sale securities in an unrealized gain or loss position and the

amount of unrealized gains and losses (pretax) in other comprehensive income at December 31 follows:

Unrealized gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of securities in an unrealized gain position . . . . . . . . . . . .
Fair value of securities in an unrealized loss position. . . . . . . . . . . . .

2008

$ 69.9
239.0
767.5
1,046.1

2007

$ 43.5
22.0
921.7
964.6

The securities in an unrealized loss position are comprised of ﬁ xed-rate debt securities of varying maturities.

The value of ﬁ xed income securities is sensitive to changes to the yield curve and other market conditions which
led to the decline in value during 2008. Approximately 90 percent of the securities in a loss position are investment-
grade debt securities. The majority of these securities ﬁ rst moved into an unrealized loss position during 2008. At
this time, there is no indication of default on interest or principal payments for asset-backed securities. We have
the intent and ability to hold the securities in a loss position until the market values recover or all of the underlying
cash ﬂ ows have been received and we have concluded that no other-than-temporary loss exists at December 31,
2008. The fair values of all of our auction rate securities and collateralized debt obligations held at December 31,
2008 were determined using Level 3 inputs. We do not hold securities issued by structured investment vehicles at
December 31, 2008.

The net adjustment to unrealized gains and losses (net of tax) on available-for-sale securities increased
(decreased) other comprehensive income by $(125.8) million, $(5.4) million, and $0.3 million in 2008, 2007, and
2006, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,876.4
45.7
8.7

$1,212.1
21.4
6.1

$2,848.4
63.5
9.0

2008

2007

2006

During the years ended December 31, 2008, 2007, and 2006, 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 $10.2 million of pretax net losses on cash ﬂ ow hedges of the variability in

expected future interest payments on ﬂ oating rate debt from accumulated other comprehensive loss to earnings
during 2009.

Available-for-sale investment securities are classiﬁ ed as long-term investments when they are likely to be
held for more than one year because of our intent to hold securities in an unrealized loss position until the market
values recover or all of the underlying cash ﬂ ows have been received.

Note 7: Borrowings

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

2008

2007

4.50 to 7.13 percent notes (due 2012–2037). . . . . . . . . . . . . . . . . . . . . .
Floating rate bonds (due 2037). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.90 percent notes (due 2008). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, including capitalized leases . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SFAS 133 fair value adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,987.4
400.0
—
116.8
531.9
5,036.1
(420.4)
$4,615.7

$3,987.4
400.0
300.0
222.0
79.2
4,988.6
(395.1)
$4,593.5

In March 2007, we issued $2.50 billion of ﬁ xed-rate notes ($1.00 billion at 5.20 percent due in 2017; $700.0 mil-

lion at 5.50 percent due in 2027; and $800.0 million at 5.55 percent due in 2037).

The $400.0 million of ﬂ oating rate bonds outstanding at December 31, 2008 are due in 2037 and have variable

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interest rates at LIBOR plus our six-month credit spread, adjusted semiannually (total of 4.10 percent at December 31,
2008). We pay interest monthly on this borrowing program. We expect to reﬁ nance the bonds in 2009 and have clas-
siﬁ ed them as current at December 31, 2008.

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
amortizing feature of the ESOP debt, bondholders will receive both interest and principal payments each quarter.
The balance was $81.9 million and $90.6 million at December 31, 2008 and 2007, respectively, and is included in
Other in the table above.

The aggregate amounts of maturities on long-term debt for the next ﬁ ve years are as follows: 2009, $420.4 mil-

lion; 2010, $19.7 million; 2011, $13.1 million; 2012, $510.8 million; and 2013, $11.1 million.

At December 31, 2008 and 2007, short-term borrowings included $5.43 billion and $18.6 million, respectively,
of notes payable to banks and commercial paper. Commercial paper was issued in late 2008 for the acquisition of
ImClone. At December 31, 2008, we have $1.24 billion of unused committed bank credit facilities, $1.20 billion of
which backs our commercial paper program. Additionally, in November 2008, we obtained a one-year short-term
revolving credit facility in the amount of $4.00 billion as back-up, alternative ﬁ nancing. 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 approximately 50 percent of all ﬁ xed-rate debt to ﬂ oating rates through the use of inter-
est rate swaps. The weighted-average effective borrowing rates based on debt obligations and interest rates at
December 31, 2008 and 2007, including the effects of interest rate swaps for hedged debt obligations, were 4.77
percent and 5.47 percent, respectively.

In 2008, 2007, and 2006, cash payments of interest on borrowings totaled $203.1 million, $159.2 million, and

$305.7 million, respectively, net of capitalized interest.

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 8: Stock Plans

Stock-based compensation expense in the amount of $255.3 million, $282.0 million, and $359.3 million was rec-
ognized in 2008, 2007, and 2006, respectively, as well as related tax beneﬁ ts of $88.6 million, $96.4 million, and
$115.9 million, respectively. Our stock-based compensation expense consists primarily of performance awards
(PAs), shareholder value awards (SVAs), and stock options. We recognize the stock-based compensation expense
over the requisite service period of the individual grantees, which generally equals the vesting period. We pro-
vide newly issued shares and treasury stock to satisfy stock option exercises and for the issuance of PA and SVA
shares. We 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 statements of cash ﬂ ows.

At December 31, 2008, additional stock options, PAs, SVAs, or restricted stock grants may be granted under

the 2002 Lilly Stock Plan for not more than 88.0 million shares.

Performance Award Program
Performance awards (PAs) are granted to ofﬁ cers and management and are payable in shares of our common stock.
The number of PA shares actually issued, if any, varies depending on the achievement of certain pre-established
earnings-per-share targets over a one-year period. PA shares are accounted for at fair value based upon the closing
stock price on the date of grant and fully vest at the end of the ﬁ scal year of the grant. The fair values of perfor-
mance awards granted in 2008, 2007, and 2006 were $51.22, $54.23, and $56.18, respectively. The number of shares
ultimately issued for the performance award program is dependent upon the earnings achieved during the vest-
ing period. Pursuant to this plan, approximately 2.5 million shares, 2.3 million shares, and 1.7 million shares were
issued in 2008, 2007, and 2006, respectively. Approximately 2.8 million shares are expected to be issued in 2009.

Shareholder Value Award Program
In 2007, we implemented a shareholder value award (SVA) program, which replaced our stock option program.
SVAs are granted to ofﬁ cers and management and are payable in shares of common stock at the end of a three-

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year period. The number of shares actually issued varies depending on our stock price at the end of the three-year
vesting period compared to pre-established target stock prices. We measure the fair value of the SVA unit on the
grant date using a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input vari-
ables that determine the probability of satisfying the market condition stipulated in the award grant and calculates
the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded
options on our stock, historical volatility of our stock price, and other factors. Similarly, the dividend yield is based
on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the
U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair values of the SVA units granted
during 2008 and 2007 were $43.46 and $49.85, respectively, determined using the following assumptions:

Expected dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Range of volatilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.00%
2.05%–2.29%
20.48%–21.48%

2.75%
4.81%–5.16%
22.54%–23.90%

2008

2007

A summary of the SVA activity is presented below:

Units Attributable to SVAs
(in thousands)

Outstanding at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
969
—
(47)
922
1,282
—
(301)
1,903

The maximum number of shares that could ultimately be issued upon vesting of the SVA units outstanding at
December 31, 2008, is 2.7 million. As of December 31, 2008, the total remaining unrecognized compensation cost
related to nonvested SVAs amounted to $46.7 million, which will be amortized over the weighted-average remain-
ing requisite service period of 21.6 months.

Stock Option Program
Stock options were granted in 2006 to ofﬁ cers and management at exercise prices equal to the fair market value of
our stock price at the date of grant. No stock options were granted in 2008 or 2007. Options fully vest three years
from the grant date and have a term of 10 years. 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 grants is derived from the output of the lattice model. The weighted-average fair values of the individual
options granted during 2006 were $15.61, determined using the following assumptions:

Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Range of volatilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average expected life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006

2.0%
25.0%
24.8%–27.0%
4.6%–4.8%
7 years

Stock option activity during 2008 is summarized below:

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, 2008 . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2008 . . . . . .
Exercisable at December 31, 2008. . . . . . .

81,149
—
(145)
(8,979)
72,025
68,033

$69.57
—
19.69
72.31
69.35
70.04

3.6
3.4

$1.9
1.9

A summary of the status of nonvested options as of December 31, 2008, and changes during the year then

ended, is presented below:

S
L
A

I
C
N
A
N

I
F

Nonvested at January 1, 2008. . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2008. . . . . . . .

Shares
(in thousands)

9,049
—
(5,045)
(12)
3,992

Weighted-Average
Grant Date
Fair Value

$16.47
—
17.51
15.76
15.26

The intrinsic value of options exercised during 2008, 2007, and 2006 amounted to $4.8 million, $1.5 million, and

$40.8 million, respectively. The total grant date fair value of options vested during 2008, 2007, and 2006 amounted
to $84.1 million, $381.8 million, and $249.1 million, respectively. We received cash of $2.9 million, $15.2 million,
and $66.2 million from exercises of stock options during 2008, 2007, and 2006, respectively, and recognized related
tax beneﬁ ts of $0.5 million, $0.4 million, and $11.3 million during those same years.

As of December 31, 2008, there was no signiﬁ cant remaining unrecognized compensation cost related to non-

vested stock options.

Note 9: Other Assets and Other Liabilities

Our other receivables include receivables from our collaboration partners and a variety of other items. The
decrease in other receivables is primarily attributable to a decrease in income tax receivable, and lower insurance
recoverables.

Our sundry assets primarily include our deferred tax assets (Note 12), capitalized computer software, and
the fair value of our interest rate swaps. The increase in sundry assets is primarily attributable to an increase in
deferred tax assets and an increase in the fair value of our interest rate swaps.

Our other current liabilities include product litigation, tax liabilities, and a variety of other items. The increase in

other current liabilities is caused primarily by an increase in product litigation liabilities, speciﬁ cally, the $1.42 bil-
lion related to the EDPA settlements discussed in Note 14, and an increase in current deferred taxes.

Our other noncurrent liabilities include deferred income from our collaboration and out-licensing arrangements,

the long-term portion of our estimated product return liabilities, product litigation, and a variety of other items.
The increase in other noncurrent liabilities is primarily due to an increase in deferred income attributable to our
2008 acquisitions and other business development arrangements.

F
I

N
A
N
C
I

A
L
S

Note 10: Shareholders’ Equity

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

Balance at January 1, 2006. . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per

share: $1.63 . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury shares . . . . . . . .
Purchase for treasury . . . . . . . . . . . . . . .
Issuance of stock under employee

stock plans—net . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . .
ESOP transactions. . . . . . . . . . . . . . . . . .

Balance at December 31, 2006 . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per

share: $1.75 . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury shares . . . . . . . .
Issuance of stock under employee

stock plans—net . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . .
ESOP transactions. . . . . . . . . . . . . . . . . .
FIN 48 implementation (Note 12) . . . . . .

Balance at December 31, 2007 . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per

share: $1.90 . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury shares . . . . . . . .
Issuance of stock under employee

stock plans—net . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . .
ESOP transactions. . . . . . . . . . . . . . . . . .

Additional
Paid-in
Capital

$3,323.8

(129.1)

6.2
359.3
11.7

3,571.9

(3.9)

(55.2)
282.0
10.4

3,805.2

(10.9)

(84.9)
255.3
11.9

Retained
Earnings

Deferred Costs—
ESOP

Common Stock in Treasury
Shares
(in thousands)

Amount

$ 9,866.7
2,662.7

(1,763.2)

10,766.2
2,953.0

(1,903.9)

(8.6)

11,806.7
(2,071.9)

(2,079.9)

$ (106.3)

934

$104.1

(2,297)
2,145

(130.6)
122.1

128

5.8

5.6

(100.7)

910

101.4

(76)

(3.9)

3.0

5.5

(95.2)

899

100.5

(170)

(11.1)

160

9.8

8.9

Balance at December 31, 2008 . . . . . . . .

$3,976.6

$ 7,654.9

$ (86.3)

889

$ 99.2

As of December 31, 2008, we have purchased $2.58 billion of our announced $3.0 billion share repurchase
program. We acquired approximately 2.1 million shares in 2006 under this program. No shares were repurchased
in 2008 or 2007.

We have 5 million authorized shares of preferred stock. As of December 31, 2008 and 2007, 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 $25.0 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 2008, 2007, or 2006. In the ﬁ rst quarter of 2009, we contributed an additional 10.0 million shares to the trust.

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 $200.0 million of third-
party debt, repayment of which was guaranteed by us (see Note 7). 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.

Note 11: Earnings (Loss) Per Share

Following is a reconciliation of the denominators used in computing earnings (loss) per share:

Income (loss) available to common shareholders . . . . . . . . . . . . . . . .

$ (2,071.9)

$2,953.0

$2,662.7

(Shares in thousands)

2008

2007

2006

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

including incremental shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings (loss) per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,094,499
$(1.89)

1,090,430
$2.71

1,086,239
$2.45

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

1,092,041
2,458

1,088,929
1,821

1,085,337
2,153

outstanding—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,094,499
$(1.89)

1,090,750
$2.71

1,087,490
$2.45

S
L
A

I
C
N
A
N

I
F

Note 12: Income Taxes

Following is the composition of income tax expense:

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

Deferred
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2008

2007

2006

$(207.6)
623.6
(44.6)
371.4

363.0
23.7
6.2
392.9
$ 764.3

$489.5
412.1
27.7
929.3

53.0
(27.9)
(30.6)
(5.5)
$923.8

$ 197.7
390.6
(25.2)
563.1

78.3
113.5
0.4
192.2
$755.3

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

Deferred tax assets
Compensation and beneﬁ ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforwards and carrybacks . . . . . . . . . . . . . . . . . . . .
Intercompany proﬁ t in inventories . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax loss carryforwards and carrybacks . . . . . . . . . . . . . . . . . . . . .
Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product return reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2008

2007

$1,154.6
755.0
585.0
562.3
345.2
251.5
211.6
117.9
100.8
313.6
4,397.5
(845.4)

$ 654.8
361.5
810.5
712.2
49.3
174.6
27.7
69.1
110.0
302.1
3,271.8
(354.2)

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

3,552.1

2,917.6

Deferred tax liabilities

Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid employee beneﬁ ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(860.2)
(620.7)
(542.7)
(467.3)
—
(287.8)
(2,778.7)

(532.5)
(662.2)
(432.4)
(65.3)
(675.9)
(133.0)
(2,501.3)

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

$ 773.4

$ 416.3

At December 31, 2008, we had net operating losses and other carryforwards for international and U.S. income

tax purposes of $1.24 billion: $84.3 million will expire within 10 years; $1.09 billion will expire between 10 and
20 years; and $63.1 million of the carryforwards will never expire. The primary component of the remaining por-
tion of the deferred tax asset for tax loss carryforwards and carrybacks is related to net operating losses for state
income tax purposes that are fully reserved. We also have tax credit carryforwards and carrybacks of $755.0 mil-
lion available to reduce future income taxes; $295.1 million will be carried back; $84.1 million of the tax credit
carryforwards will expire after 5 years; and $13.0 million of the tax credit carryforwards will never expire. The
remaining portion of the tax credit carryforwards is related to federal tax credits of $97.4 million and state tax
credits of $265.4 million, both of which are fully reserved.

Domestic and Puerto Rican companies generated the entire consolidated loss before income taxes in 2008 and

contributed approximately 7 percent and 18 percent in 2007 and 2006, respectively, to consolidated income before
income taxes. We have a subsidiary operating in Puerto Rico under a tax incentive grant. The current tax incentive
grant will not expire prior to 2017.

At December 31, 2008, we had an aggregate of $13.31 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 distrib-
uted, would result in additional income tax expense at approximately the U.S. statutory rate.

Cash payments (refunds) of income taxes totaled $(52.0) million, $1.01 billion, and $864.0 million in 2008, 2007,

and 2006, respectively.

F
I

N
A
N
C
I

A
L
S

S
L
A

I
C
N
A
N

I
F

Following is a reconciliation of the income tax expense (beneﬁ t) applying the U.S. federal statutory rate to

income (loss) before income taxes to reported income tax expense:

Income tax (beneﬁ t) at the U.S. federal statutory tax rate . . . . . . . . .
Add (deduct)
Acquisitions and non-deductible acquired in-process

research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International operations, including Puerto Rico . . . . . . . . . . . . . . .
Government investigation charges . . . . . . . . . . . . . . . . . . . . . . . . . .
IRS audit conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General business credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2008

2007

2006

$(457.7)

$1,356.9

$1,196.3

1,819.4
(641.3)
359.3
(210.3)
(58.0)
(47.1)
$ 764.3

208.1
(450.7)
—
—
(60.3)
(130.2)
$ 923.8

—
(229.9)
—
—
(47.6)
(163.5)
$ 755.3

We adopted FIN 48 on January 1, 2007. FIN 48 prescribes a recognition threshold 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. As a result of the implementation of FIN 48, we recognized an increase of $8.6 million in the liability for
unrecognized tax beneﬁ ts, and an offsetting reduction to the January 1, 2007 balance of retained earnings. A rec-
onciliation of the beginning and ending amount of gross unrecognized tax beneﬁ ts is as follows:

Beginning balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the current year . . . . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . .
Lapses of statutes of limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,657.4
115.6
288.8
(234.9)
(216.2)
(598.4)
$1,012.3

$1,470.8
206.4
35.6
(53.1)
—
(2.3)
$1,657.4

2008

2007

The total amount of unrecognized tax beneﬁ ts that, if recognized, would affect our effective tax rate was

$863.8 million at December 31, 2008.

We ﬁ le income tax returns in the U.S. federal jurisdiction and various state, local, and non-U.S. jurisdictions.

We are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations in major taxing
jurisdictions for years before 2002. During the ﬁ rst quarter of 2008, we completed and effectively settled our
Internal Revenue Service (IRS) audit of tax years 2001-2004 except for one matter for which we will seek resolution
through the IRS administrative appeals process. As a result of the IRS audit conclusion, gross unrecognized tax
beneﬁ ts were reduced by approximately $618 million, and the consolidated results of operations were beneﬁ ted by
$210.3 million through a reduction in income tax expense. The majority of the reduction in gross unrecognized tax
beneﬁ ts related to intercompany pricing positions that were agreed with the IRS in a prior audit cycle for which a
prepayment of tax was made in 2005. Application of the prepayment and utilization of tax carryovers resulted in a
refund of approximately $50 million. The IRS began its examination of tax years 2005-2007 during the third quarter
of 2008. We do not believe it is reasonably possible that the total amount of unrecognized tax beneﬁ ts will signiﬁ -
cantly increase or decrease within the next twelve months.

We recognize both accrued interest and penalties related to unrecognized tax beneﬁ ts in income tax expense.

During the years ended December 31, 2008, 2007, and 2006, we recognized income tax expense (beneﬁ t) of
$(118.0) million, $66.6 million, and $51.2 million, respectively, related to interest and penalties. At December
31, 2008 and 2007, our accruals for the payment of interest and penalties totaled $177.6 million and $364.2 mil-
lion, respectively. Substantially all of the expense (beneﬁ t) and accruals relate to interest. The change in the 2008
accrual reﬂ ects the impact of the effective settlement of the IRS audit discussed above.

Note 13: Retirement Beneﬁ ts

We use a measurement date of December 31 to develop the change in beneﬁ t obligation, change in plan assets,
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments. . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate changes

and other adjustments. . . . . . . . . . . . . . . . . . .
Beneﬁ t obligation at end of year . . . . . . . . . . . . .

Change in plan assets
Fair value of plan assets at beginning of year . .
Actual return on plan assets . . . . . . . . . . . . . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . .
Beneﬁ ts paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate changes

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

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

Amounts recognized in the consolidated
balance sheet consisted of
Prepaid pension. . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . .
Accrued retirement beneﬁ t . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss

before income taxes. . . . . . . . . . . . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . .

Deﬁ ned Beneﬁ t Pension Plans
2008

2007

Retiree Health Beneﬁ t Plans
2007
2008

$6,561.0
260.1
409.8
(257.4)
(338.4)
(2.4)

$6,480.3
287.1
362.4
(373.1)
(311.0)
32.7

$1,622.8
62.1
105.7
101.6
(92.2)
—

$1,740.7
70.4
101.4
16.4
(81.6)
(227.7)

(279.0)
6,353.7

82.6
6,561.0

(3.7)
1,796.3

3.2
1,622.8

7,304.2
(2,187.8)
223.7
(326.1)

(217.9)
4,796.1

(1,557.6)
3,474.8
72.7
$1,989.9

6,519.0
833.8
202.9
(301.4)

49.9
7,304.2

743.2
1,143.3
88.4
$ 1,974.9

1,348.5
(438.6)
87.9
(92.2)

—
905.6

(890.7)
1,409.6
(261.6)
$ 257.3

1,157.3
147.4
125.4
(81.6)

—
1,348.5

(274.3)
820.3
(297.7)
$ 248.3

$ —

(52.9)
(1,504.7)

$ 1,670.5
(47.9)
(879.4)

$ —

$ –

(7.8)
(882.9)

(8.6)
(265.7)

3,547.5
$ 1,989.9

1,231.7
$ 1,974.9

1,148.0
$ 257.3

522.6
$ 248.3

The unrecognized net actuarial loss and unrecognized prior service cost (beneﬁ t) have not yet been recognized

in net periodic pension costs and are included in accumulated other comprehensive loss at December 31, 2008.
In 2009, we expect to recognize from accumulated other comprehensive loss as components of net periodic
beneﬁ t cost, $97.5 million of unrecognized net actuarial loss and $8.7 million of unrecognized prior service cost
related to our deﬁ ned beneﬁ t pension plans, and $69.4 million of unrecognized net actuarial loss and $35.9 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 2009.

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

(Percents)

Deﬁ ned Beneﬁ t Pension Plans

2008

2007

Retiree Health Beneﬁ t Plans
2007
2008

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 . . . . . .

6.7
6.4
4.1
4.6
9.0

6.4
5.7
4.6
4.6
9.0

6.9
6.7
—
—
9.0

6.7
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 mar-
ket conditions in 2001, 2002, and 2008, our 20-year annualized rate of return on our U.S. deﬁ ned beneﬁ t pension
plans and retiree health beneﬁ t plan was approximately 8.2 percent as of December 31, 2008. Health-care-cost
trend rates are assumed to increase at an annual rate of 8.5 percent in 2009, decreasing by approximately 0.6 per-
cent per year to an ultimate rate of 5.5 percent by 2014.

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 . . . . . . . . . . $360.5

$378.6

$384.8

$392.4

$403.3

$2,234.0

2009

2010

2011

2012

2013

2014-2018

Retiree health beneﬁ t plans—gross . . . . . $ 103.3
Medicare rebates . . . . . . . . . . . . . . . . . . . . .
(11.6)
Retiree health beneﬁ t plans—net . . . . . . . $ 91.7

$ 106.0
(7.9)
$ 98.1

$ 109.8
(8.7)
$ 101.1

$ 110.3
(10.0)
$ 100.3

$ 114.7
(10.6)
$ 104.1

$ 599.0
(69.0)
$ 530.0

The total accumulated beneﬁ t obligation for our deﬁ ned beneﬁ t pension plans was $5.64 billion and $5.69 bil-
lion at December 31, 2008 and 2007, 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 $6.35 billion
and $4.80 billion, respectively, as of December 31, 2008, and $1.04 billion and $160.9 million, respectively, as of
December 31, 2007. The accumulated beneﬁ t obligation and fair value of the plan assets for the deﬁ ned beneﬁ t
pension plans with accumulated beneﬁ t obligations in excess of plan assets were $4.98 billion and $4.06 billion,
respectively, as of December 31, 2008, and $825.8 million and $46.9 million, respectively, as of December 31, 2007.

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

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

(beneﬁ t) . . . . . . . . . . . . . . . . . . . . . . . .
Recognized actuarial loss . . . . . . . . . . .
Net periodic beneﬁ t cost . . . . . . . . . . . .

Deﬁ ned Beneﬁ t Pension Plans
2007

2008

2006

Retiree Health Beneﬁ t Plans
2007

2008

2006

$260.1
409.8
(603.0)

$287.1
362.4
(548.2)

$280.0
343.5
(494.8)

8.2
76.6
$151.7

7.7
130.0
$239.0

8.3
149.6
$286.6

$62.1
105.7
(118.4)

(36.0)
62.7
$76.1

$ 70.4
101.4
(102.1)

(15.7)
95.0
$149.0

$ 72.2
97.9
(89.9)

(15.6)
107.9
$172.5

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

ber 31, 2008, accumulated postretirement beneﬁ t obligation would increase by $247.8 million (13.9 percent) and
the aggregate of the service cost and interest cost components of the 2008 annual expense would increase by
$26.9 million (16.0 percent). A one-percentage-point decrease in these rates would decrease the December 31,
2008, accumulated postretirement beneﬁ t obligation by $192.0 million (10.8 percent) and the aggregate of the 2008
service cost and interest cost by $20.7 million (12.3 percent).

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The following represents the amounts recognized in other comprehensive income (loss) in 2008:

Actuarial loss arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost (beneﬁ t) included in net income . .
Amortization of net actuarial loss included in net income . . . . . . . . .
Foreign currency exchange rate changes. . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive loss during period. . . . . . . . . . . . . . . . . . .

$2,533.4
(2.4)
(8.2)
(76.6)
(130.4)
$2,315.8

$658.6
—
36.0
(62.7)
(6.5)
$625.4

Deﬁ ned Beneﬁ t
Pension Plans

Retiree Health
Beneﬁ t Plans

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 provid-
ing employees 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 $114.1 million, $112.3 million, and $106.5 million, for the years
2008, 2007, and 2006, 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 2008, 2007, and
2006 were not signiﬁ cant.

Our U.S. deﬁ ned beneﬁ t pension and retiree health beneﬁ t plan investment allocation strategy currently
comprises approximately 88 percent to 92 percent growth investments and 8 percent to 12 percent ﬁ xed-income
investments. Within the growth investment allocation, the plan asset strategy encompasses equity and equity-like
instruments that are expected to represent approximately 75 percent of our plan asset portfolio of both public and
private market investments. The largest component of these equity and equity-like instruments is public equity
securities that are well diversiﬁ ed and invested in U.S. and international small-to-large companies. The remaining
portion of the growth investment allocation includes alternative 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

2008

2007

Percentage of
Retiree Health Plan Assets
2008

2007

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

70
12
1
17
100

75
10
1
14
100

74
14
—
12
100

78
11
—
11
100

In 2009, we expect to contribute approximately $55 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 $15 million of additional
discretionary funding in 2009 to our deﬁ ned beneﬁ t plans. We do not expect to make any contributions to our post-
retirement health beneﬁ t plans during 2009.

Note 14: 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 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 liquidity, 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 matters brought pursuant to procedures set out in the Hatch-
Waxman Act (the Drug Price Competition and Patent Term Restoration Act of 1984):
• Cymbalta: Sixteen generic drug manufacturers have submitted Abbreviated New Drug Applications (ANDAs)

seeking permission to market generic versions of Cymbalta prior to the expiration of our relevant U.S. patents (the

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earliest of which expires in 2013). Of these challengers, all allege non-infringement of the patent claims directed
to the commercial formulation, and eight allege invalidity of the patent claims directed to the active ingredient
duloxetine. Of the eight challengers to the compound patent claims, one further alleges invalidity of the claims
directed to the use of Cymbalta for treating ﬁ bromyalgia, and one alleges the patent having claims directed to
the active ingredient is unenforceable. Lawsuits have been ﬁ led in U.S. District Court for the Southern District of
Indiana against Activis Elizabeth LLC; Aurobindo Pharma Ltd.; Cobalt Laboratories, Inc.; Impax Laboratories, Inc.;
Lupin Limited; Sandoz Inc.; Sun Pharma Global, Inc.; and Wockhardt Limited, seeking rulings that the patents are
valid, infringed, and enforceable. Answers to the complaints are pending.

• Gemzar: Sicor Pharmaceuticals, Inc. (Sicor), Mayne Pharma (USA) Inc. (Mayne), and Sun Pharmaceutical

Industries Inc. (Sun) each submitted an ANDA seeking permission to market generic versions of Gemzar prior to
the expiration of our relevant U.S. patents (compound patent expiring in 2010 and method-of-use patent expiring
in 2013), and alleging that these patents are invalid. We ﬁ led lawsuits in the U.S. District Court for the Southern
District of Indiana against Sicor (February 2006) and Mayne (October 2006 and January 2008), seeking rulings that
these patents are valid and are being infringed. The suit against Sicor has been scheduled for trial in July 2009.
Sicor’s ANDAs have been approved by the FDA; however, Sicor must provide 90 days notice prior to marketing
generic Gemzar to allow time for us to seek a preliminary injunction. Both suits against Mayne have been
administratively closed, and the parties have agreed to be bound by the results of the Sicor suit. In November 2007,
Sun ﬁ led a declaratory judgment action in the United States District Court for the Eastern District of Michigan,
seeking rulings that our method-of-use and compound patents are invalid or unenforceable, or would not be
infringed by the sale of Sun’s generic product. This trial is scheduled for December 2009.

• Alimta: Teva Parenteral Medicines, Inc. (Teva) and APP Pharmaceuticals, LLC (APP) each submitted ANDAs seeking
approval to market generic versions of Alimta prior to the expiration of the relevant U.S. patent (licensed from the
Trustees of Princeton University and expiring in 2016), and alleging the patent is invalid. We, along with Princeton,
ﬁ led lawsuits in the U.S. District Court for the District of Delaware against Teva and APP, seeking rulings that the
compound patent is valid and infringed. Trial is scheduled for November 8, 2010.

• Evista: 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 Pharmaceuticals USA, Inc. (Teva) has also submitted an ANDA seeking permission to market a generic
version of Evista. In June 2006, we ﬁ led a similar lawsuit against Teva in the U.S. District Court for the Southern
District of Indiana. The lawsuit against Teva is currently scheduled for trial beginning March 9, 2009, while no trial
date has been set in the lawsuit against Barr. In April 2008, the FDA granted Teva tentative approval of its ANDA,
but Teva’s ability to market a generic product is subject to a statutory stay, which has been extended to expire on
March 9, 2009. Teva has appealed the extension of the statutory stay. If the stay expires and the company cannot
obtain preliminary relief from the court, Teva can launch its generic product, regardless of the status of the current
litigation, but subject to our right to recover damages, should we prevail at trial.

We believe each of these Hatch-Waxman challenges is without merit and expect to prevail in this litigation.
However, it is not possible to determine the outcome of this litigation, and accordingly, we can provide no assur-
ance that we will prevail. An unfavorable outcome in any of these cases could have a material adverse impact on
our future consolidated results of operations, liquidity, and ﬁ nancial position.

We have received challenges to Zyprexa patents in a number of countries outside the U.S.:

• In Canada, several generic pharmaceutical manufacturers have challenged the validity of our Zyprexa compound and
method-of-use patent (expiring in 2011). In April 2007, the Canadian Federal Court ruled against the ﬁ rst challenger,
Apotex Inc. (Apotex), and that ruling was afﬁ rmed on appeal in February 2008. In June 2007, the Canadian Federal
Court held that an invalidity allegation of a second challenger, Novopharm Ltd. (Novopharm), was justiﬁ ed and
denied our request that Novopharm be prohibited from receiving marketing approval for generic olanzapine in
Canada. Novopharm began selling generic olanzapine in Canada in the third quarter of 2007. We sued Novopharm
for patent infringement, and the trial began in November 2008. We expect the trial to run through the ﬁ rst quarter
of 2009, with a decision in the second half of 2009. In November 2007, Apotex ﬁ led an action seeking a declaration of
the invalidity of our Zyprexa compound and method-of-use patents, and no trial date has been set. We have brought
similar actions against Pharmascience (August 2007), Sandoz (July 2007), Nu-Pharm (June 2008), Genpharm (June
2008) and Cobalt (January 2009); none of these suits has been scheduled for trial. Pharmascience has agreed to
be bound by the outcome of the Novopharm suit, and, pending the outcome of the lawsuit, we have agreed not to
take any further steps to prevent the company from coming to market with generic olanzapine tablets, subject to a

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contingent damages obligation should we be successful against Novopharm.

• In Germany, generic pharmaceutical manufacturers Egis-Gyogyszergyar and Neolab Ltd. challenged the validity
of our Zyprexa compound and method-of-use patent (expiring in 2011). In June 2007, the German Federal Patent
Court held that our patent is invalid. Generic olanzapine was launched by competitors in Germany in the fourth
quarter of 2007. We appealed the decision to the German Federal Supreme Court and following a hearing in
December 2008, the Supreme Court reversed the Federal Patent Court and found the patent to be valid. Following
the decision of the Supreme Court, the generic companies either agreed to withdraw from the market or were
subject to preliminary injunction. We are pursuing these companies for damages arising from infringement.

• We have received challenges in a number of other countries, including Spain, the United Kingdom (U.K.), France,
and several smaller European countries. In Spain, we have been successful at both the trial and appellate court
levels in defeating the generic manufacturers’ challenges, but further legal challenge is now pending before the
Commercial Court in Madrid. In the U.K., the generic pharmaceutical manufacturer Dr. Reddy’s Laboratories
(UK) Limited has challenged the validity of our Zyprexa compound and method-of-use patent (expiring in 2011).
In October 2008, the Patents Court in the High Court, London ruled that our patent was valid. Dr. Reddy’s appealed
this decision, and a hearing date for the appeal has not been set.

We are vigorously contesting the various legal challenges to our Zyprexa patents on a country-by-country
basis. We cannot determine the outcome of this litigation. The availability of generic olanzapine in additional mar-
kets could have a material adverse impact on our consolidated results of operations.

Xigris and Evista: In June 2002, 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. Dis-
trict Court for the District of Massachusetts sued us, alleging that sales of two of our products, Xigris and Evista,
were inducing the infringement of a patent related to the discovery of a natural cell signaling phenomenon in the
human body, and seeking royalties on past and future sales of these products. On May 4, 2006, a jury in Boston
issued an initial decision in the case that Xigris and Evista sales infringe the patent. The jury awarded the plaintiffs
approximately $65 million in damages, calculated by applying a 2.3 percent royalty to all U.S. sales of Xigris and
Evista from the date of issuance of the patent through the date of trial. In addition, a separate bench trial with the
U.S. District Court of Massachusetts was held in August 2006, on our contention that the patent is unenforceable
and impermissibly covers natural processes. In June 2005, the United States Patent and Trademark Ofﬁ ce (USPTO)
commenced a reexamination of the patent, and in August 2007 took the position that the Ariad claims at issue are
unpatentable, a position that Ariad continues to contest. In September 2007, the Court entered a ﬁ nal judgment
indicating that Ariad’s claims are patentable, valid, and enforceable, and ﬁ nding damages in the amount of $65 mil-
lion plus a 2.3 percent royalty on net U.S. sales of Xigris and Evista since the time of the jury decision. However,
the Court deferred the requirement to pay any damages until after all rights to appeal have been exhausted. We
have appealed this judgment. The Court of Appeals for the Federal Circuit heard oral arguments on the appeal on
February 6, 2009. 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 and Related Litigation
In March 2004, the Ofﬁ ce of the U.S. Attorney for the Eastern District of Pennsylvania (EDPA) advised us that it had
commenced an investigation related to our U.S. marketing and promotional practices, including our communica-
tions with physicians and remuneration of physician consultants and advisors, with respect to Zyprexa, Prozac, and
Prozac Weekly. In addition, the State Medicaid Fraud Control Units of more than 30 states coordinated with the EDPA
in its investigation of any Medicaid-related claims relating to our marketing and promotion of Zyprexa. In January
2009, we announced that we reached resolution of this matter. As part of the resolution, we pled guilty to one misde-
meanor violation of the Food, Drug, and Cosmetic Act and agreed to pay $615.0 million. The misdemeanor plea is for
the off-label promotion of Zyprexa in elderly populations as treatment for dementia, including Alzheimer’s dementia,
between September 1999 and March 2001. We have also entered into a settlement agreement resolving the federal
civil claims, under which we will pay approximately $438.0 million, although we do not admit to the allegations. We
have also agreed to settle the civil investigations brought by the State Medicaid Fraud Control Units of the states that
have coordinated with the EDPA in its investigation, and will make available a maximum of approximately $362.0 mil-
lion for payment to those states that agree to settle. The charge we recorded for this matter in the third quarter
of $1.42 billion will be sufﬁ cient to cover these payments. Also, as part of the settlement, we have entered into a
corporate integrity agreement with the Ofﬁ ce of Inspector General (OIG) of the U.S. Department of Health and Human
Services (HHS). This agreement will require us to maintain our compliance program and to undertake a set of deﬁ ned
corporate integrity obligations for ﬁ ve years. The agreement also provides for an independent third-party review

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organization to assess and report on the company’s systems, processes, policies, procedures and practices.

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 promo-
tional 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. We expect these matters to be resolved if Florida and California participate in the state component
of the EDPA resolution.

Beginning in August 2006, we received civil investigative demands or subpoenas from the attorneys general of
a number of states under various state consumer protection laws. Most of these requests became part of a multi-
state investigative effort coordinated by an executive committee of attorneys general. In October 2008, we reached a
settlement with 32 states and the District of Columbia. While there is no ﬁ nding that we have violated any provision
of the state laws under which the investigations were conducted, we paid $62.0 million and agreed to undertake cer-
tain commitments regarding Zyprexa for a period of six years, through consent decrees ﬁ led in the settling states.
The 32 states participating in the settlement are: Alabama, Arizona, California, Delaware, Florida, Hawaii, Illinois,
Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Missouri, Nebraska, Nevada, New Jersey, New
York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennes-
see, Texas, Vermont, Washington, and Wisconsin.

Product Liability and Related Litigation
We have been named as a defendant in a large number of Zyprexa product liability lawsuits in the U.S. 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 32,670 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.

• 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 paid

during 2007.

We are prepared to continue our vigorous defense of Zyprexa in all remaining claims. The U.S. Zyprexa product

liability claims not subject to these agreements include approximately 105 lawsuits in the U.S. covering approxi-
mately 120 plaintiffs, of which about 80 cases covering about 90 plaintiffs are part of the MDL. No trials have been
scheduled related to these claims.

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, and a second has been
certiﬁ ed in Ontario and includes all Canadian residents except for residents of Quebec and British Columbia. The
allegations in the Canadian actions are similar to those in the litigation pending in the U.S.

Since the beginning of 2005, we have recorded aggregate net pretax charges of $1.61 billion for Zyprexa product

liability matters. The net charges, which take into account our actual insurance recoveries, covered the following:
• The cost of the Zyprexa product liability settlements to date; and
• Reserves for product liability exposures and defense costs regarding the known Zyprexa product liability claims and
expected future 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 Loui-

siana 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 (EDNY). 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. We have been served with similar lawsuits ﬁ led by the states of Alaska, Arkansas, Connecticut, Idaho,
Minnesota, Mississippi, Montana, New Mexico, Pennsylvania, South Carolina, Utah, and West Virginia in the courts
of the respective states. The Connecticut, Louisiana, Minnesota, Mississippi, Montana, New Mexico, and West Vir-
ginia cases are part of the MDL proceedings in the EDNY. The Alaska case was settled in March 2008 for a payment
of $15.0 million, plus terms designed to ensure, subject to certain limitations and conditions, that Alaska is treated
as favorably as certain other states that may settle with us in the future over similar claims. The following cases
have been set for trial in 2009: Connecticut in the EDNY in June, Pennsylvania in November, and South Carolina in
August, in their respective states.

In 2005, two lawsuits were ﬁ led in the EDNY purporting to be nationwide class actions on behalf of all consum-

ers 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 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 EDNY in 2006 on similar grounds. In September 2008, Judge Wein-
stein certiﬁ ed a class consisting of third-party payors, excluding governmental entities and individual consumers.
We appealed the certiﬁ cation order, and Judge Weinstein’s order denying our motion for summary judgment, in
September 2008. In 2007, The Pennsylvania Employees Trust Fund brought claims in state court in Pennsylvania
as insurer of Pennsylvania state employees, who were prescribed Zyprexa on similar grounds as described in
the New York cases. As with the product liability suits, these lawsuits allege that we inadequately tested for and
warned about side effects of Zyprexa and improperly promoted the drug. The Pennsylvania case is set for trial in
October 2009.

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

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.

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 com-
pletely self-insured for future product liability losses. In addition, there is no assurance that we will be able to fully
collect from our insurance carriers in the future.

Environmental Matters
Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Super-
fund, we have been designated as one of several potentially responsible parties with respect to fewer 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, available information
regarding site conditions, potential cleanup methods, estimated costs, and the extent to which other parties can be
expected to contribute to payment of those costs. We have limited liability insurance coverage for certain environ-
mental liabilities.

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Note 15: Other Comprehensive Income (Loss)

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

Beginning balance at January 1, 2008 . . . . . .
Other comprehensive income (loss) . . . . . . .
Balance at December 31, 2008 . . . . . . . . . . . .

Foreign
Currency
Translation
Gains (Losses)

$1,317.0
(766.1)
$ 550.9

Unrealized
Gains
(Losses)
on Securities

$ 14.6
(125.8)
$(111.2)

Deﬁ ned Beneﬁ t
Pension and
Retiree Health
Beneﬁ t Plans

$ (1,151.6)
(1,924.8)
$(3,076.4)

Effective
Portion of
Cash Flow
Hedges

$(166.8)
16.7
$(150.1)

Accumulated
Other
Comprehensive
Income (Loss)

$ 13.2
(2,800.0)
$(2,786.8)

The amounts above are net of income taxes. The income taxes associated with the unrecognized net actuarial
losses and prior service costs on our deﬁ ned beneﬁ t pension and retiree health beneﬁ t plans (Note 13) were a ben-
eﬁ t of $1.02 billion for 2008. 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 $1.7 million, $5.8 million,

and $16.9 million, net of tax, in 2008, 2007, and 2006, 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 $9.6 mil-
lion, $8.8 million, and $2.3 million, net of tax, in 2008, 2007, and 2006, respectively, for realized losses on foreign
currency options and $7.9 million, $11.6 million, and $17.1 million, net of tax, in 2008, 2007, and 2006, respectively,
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 presen-
tation of the ﬁ nancial statements. The statements have been prepared in accordance with generally accepted ac-
counting principles 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, and all ﬁ nancial management must sign a ﬁ nancial code of ethics, which further reinforces
their ﬁ duciary responsibilities.

The consolidated 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 66) is
included in our annual report. Ernst & Young reports directly to the audit committee of the board of directors.

Our audit committee includes ﬁ ve 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
committee’s responsibility to appoint an independent registered public accounting ﬁ rm subject to shareholder
ratiﬁ cation, 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
management, 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 inter-
nal 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,
relevant, 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
controls, 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 accounting
and reporting, ﬁ duciary accountability, and safeguarding of corporate assets. Our internal accounting control sys-
tems are designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in
accordance with management’s authorization and are properly recorded, and that accounting records are adequate
for preparation of ﬁ nancial statements and other ﬁ nancial information. A staff of internal auditors regularly moni-
tors, 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 control over
ﬁ nancial reporting was effective as of December 31, 2008. 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 whether internal control over ﬁ nancial reporting was designed and operating effectively.

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

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

February 16, 2009

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, 2008 and 2007, and the related consolidated statements of operations, cash ﬂ ows, and comprehen-
sive income (loss) (page 16, pages 21 through 23, 33, and pages 36 through 64) for each of the three years in the
period ended December 31, 2008. These ﬁ nancial statements are the responsibility of the company’s management.
Our responsibility is to express an opinion on these ﬁ nancial statements 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 consolidat-
ed ﬁ nancial position of Eli Lilly and Company and subsidiaries at December 31, 2008 and 2007, and the consolidated
results of their operations and their cash ﬂ ows for each of the three years in the period ended December 31, 2008, 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), Eli Lilly and Company and subsidiaries’ internal control over ﬁ nancial reporting as of December 31,
2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsor-
ing Organizations of the Treadway Commission and our report dated February 16, 2009 expressed an unqualiﬁ ed
opinion thereon.

As discussed in Note 12 to the ﬁ nancial statements, in 2007 Eli Lilly and Company and subsidiaries adopted a

new accounting pronouncement for income taxes.

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Indianapolis, Indiana
February 16, 2009

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Eli Lilly and Company

We have audited Eli Lilly and Company and subsidiaries’ internal control over ﬁ nancial reporting as of Decem-
ber 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Eli Lilly and Company and subsidiaries’
management is responsible for maintaining effective internal control over ﬁ nancial reporting and for its assess-
ment of the effectiveness of internal control over ﬁ nancial reporting included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a mate-
rial weakness exists, testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

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 report-
ing 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 accordance
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 reasonable
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 misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or proce-
dures may deteriorate.

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, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the 2008 consolidated ﬁ nancial statements of Eli Lilly and Company and subsidiaries and our
report dated February 16, 2009, expressed an unqualiﬁ ed opinion thereon.

Indianapolis, Indiana
February 16, 2009

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Notice of 2009 Annual Meeting and Proxy Statement

March 9, 2009

Dear Shareholder:

You are cordially invited to attend our annual meeting of shareholders on Monday, April 20, 2009, 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 71.
I look forward to seeing you at the meeting.

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

Important notice regarding the availability of proxy materials for the shareholder meeting to be held April 20, 2009:
The annual report and proxy statement are available at http://www.lilly.com/pdf/lillyar2008.pdf

Notice of Annual Meeting of Shareholders

April 20, 2009

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The annual meeting of shareholders of Eli Lilly and Company will be held at the Lilly Center Auditorium, Lilly
Corporate Center, Indianapolis, Indiana, on Monday, April 20, 2009, 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 auditor for the

year 2009

• to approve amendments to the articles of incorporation to provide for annual election of all directors
• to reapprove the material terms of performance goals for the Eli Lilly and Company Bonus Plan
• to consider and vote on a shareholder proposal requesting that the board eliminate all supermajority voting

provisions from the company’s articles of incorporation and bylaws

• 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 policy of asking
shareholders to ratify the compensation of named executive ofﬁ cers at the annual meeting of shareholders.

Shareholders of record at the close of business on February 13, 2009, 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 9, 2009.

By order of the board of directors,

James B. Lootens
Secretary

March 9, 2009
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 share-

holders (the annual meeting) to be held on Monday, April 20, 2009, 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 informa-
tion speciﬁ ed by law.

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

• election of directors
• ratiﬁ cation of the appointment of principal independent auditor
• amending the company’s articles of incorporation to provide for annual election of all directors
• reapproving performance goals for the company’s cash bonus plan
• a shareholder proposal on eliminating supermajority voting provisions from the company’s articles of

incorporation and bylaws

• a shareholder proposal on allowing shareholders to amend the company’s bylaws
• a shareholder proposal on shareholder ratiﬁ cation of executive compensation.

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 13, 2009 (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, 1,149,015,882 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 will be elected if they receive a majority of the votes cast. Abstentions will not

count as votes cast either for or against a nominee.

• The following items of business will be approved if the votes cast for the proposal exceed those cast against the

proposal:

—the appointment of principal independent auditor
—the management proposal to reapprove performance goals for the company’s bonus plan
—the shareholder proposals.

Abstentions will not be counted either for or against these proposals.

• The management proposal to amend the articles of incorporation to provide for annual election of all directors
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, the ratiﬁ cation of the auditor, and
the management proposals on reapproving performance goals for the company’s bonus plan and amending the arti-
cles of incorporation to provide for annual election of all directors, the broker may vote your shares in its discretion.
For all other proposals, the broker may not vote your shares at all. When that happens, it is called a “broker nonvote.”

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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 auditor, for the management proposals on amending the articles of incorporation and reapprov-
ing performance goals for the company’s bonus 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 control
number from the e-mail message that you received notifying you of the electronic availability of these materials,
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 19, 2009.

On the Internet. You may vote online at www.proxyvote.com. Follow the instructions on the enclosed proxy card
or, if you received these materials electronically, follow the instructions in the e-mail message that notiﬁ ed you
of their availability. 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 19, 2009.

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 by mail. 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, by
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 mail, 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
decline.” Otherwise, the trustee will automatically apply your voting preferences to the undirected shares propor-
tionally with all other participants who elected to have their votes applied in this manner.

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 Center
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 127.

If you have questions about admittance or parking, you may call 317-433-5112.

How do I contact the board of directors?
You may 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 2010 annual meeting?
The company’s 2010 annual meeting is scheduled for April 19, 2010. 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 9, 2009. 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 9, 2009. That
notice must provide certain other information as described in the bylaws. Copies of the bylaws are available online
at http://investor.lilly.com/governance.cfm or in paper form upon request to the company’s corporate secretary.

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://investor.lilly.com/services.cfm.

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.

Can 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 2008 annual report and 2009 proxy
statement, or if you wish to receive separate copies of future annual reports and proxy statements, please call
1-800-542-1061 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 2009
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 a term that will expire in 2012. See page 113 of this proxy statement
for more information.

Age 69

Director since 2002

Martin S. Feldstein, Ph.D.
George F. Baker Professor of Economics, Harvard University
Dr. Feldstein is president emeritus of the National Bureau of Economic Research and the
George F. Baker Professor of Economics at Harvard University. He became an assistant pro-
fessor at Harvard in 1967, an associate professor in 1968, and a professor in 1969. From 1982
through 1984, he served as chairman of the Council of Economic Advisers and President
Ronald Reagan’s chief economic adviser. President Obama has appointed him as a member
of the Economic Recovery Advisory Board. He is a member of the American Philosophical
Society, a corresponding fellow of the British Academy, a fellow of the Econometric Society,
and a fellow of the National Association for Business Economics. Dr. Feldstein is a member
of the executive committee of the Trilateral Commission and a director of American Inter-
national Group, Inc. and Economic Studies, Inc. He is a member of the American Academy of
Arts and Sciences and past president of the American Economic Association.

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Age 49

Director since 2005

J. Erik Fyrwald
Chairman, President, and Chief Executive Ofﬁ cer, Nalco Holding Company
Mr. Fyrwald joined Nalco Holding Company (a leading integrated water treatment and pro-
cess improvement company) as chairman, president, and chief executive ofﬁ cer in February
2008. From 2003 to 2008, Mr. Fyrwald served as group vice president of the agriculture and
nutrition division at E.I. du Pont de Nemours and Company. From 2000 until 2003, he was
vice president and general manager of DuPont’s Nutrition and Health business. In 1999, Mr.
Fyrwald was vice president for corporate strategic planning and business development. At
DuPont, Mr. Fyrwald held a broad variety of assignments in a number of divisions covering
many industries. He has worked in several locations throughout North America and Asia.

Age 62

Director since 2002

Ellen R. Marram
President, The Barnegat Group LLC
Ms. Marram is the 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 to 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
ofﬁ cer of the Nabisco Biscuit Company, the largest 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 Brothers. 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 Institute for the Future, The New York-Presbyterian Hospital, Lincoln Center
Theater, Families and Work Institute, and Citymeals-on-Wheels.

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Age 56

Director since 2008

Douglas R. Oberhelman
Group President, Caterpillar Inc.
Mr. Oberhelman is a group president of Caterpillar Inc. He joined Caterpillar in 1975 and has
held a variety of positions, including senior ﬁ nance representative based in South America
for Caterpillar Americas Co; region ﬁ nance manager and district manager for the company’s
North American Commercial Division; and managing director for strategic planning at Shin
Caterpillar Mitsubishi, Caterpillar’s afﬁ liated company in Tokyo, Japan. Mr. Oberhelman was
elected a vice president in 1995, serving as Caterpillar’s chief ﬁ nancial ofﬁ cer from 1995 to
November 1998. In 1998, he became vice president with responsibility for the engine prod-
ucts division and he was elected a group president and member of Caterpillar’s executive
ofﬁ ce in 2002. Mr. Oberhelman serves on the boards of Ameren Corporation, The Nature
Conservancy—Illinois Chapter, the National Association of Manufacturers, the Manufactur-
ing Institute, Easter Seals, and the Wetlands America Trust. Mr. Oberhelman has been serv-
ing under interim election since December 2008.

Class of 2010
The following four directors will continue in ofﬁ ce until 2010.

Age 67

Sir Winfried Bischoff
Retired Chairman, Citigroup Inc.
Sir Winfried Bischoff served as chairman of Citigroup Inc. from December 2007 until
February 2009. He served as chairman of Citigroup Europe from 2000 to 2007. 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
executive of Schroders plc. He is a nonexecutive director of The McGraw-Hill Companies,
Inc. and Prudential plc.

Director since 2000

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Age 66

Director since 2005

J. Michael Cook
Retired Chairman and Chief Executive Ofﬁ cer, Deloitte & Touche LLP
Mr. Cook served as chairman and chief executive ofﬁ cer of Deloitte & Touche LLP from 1989
until his retirement in 1999. He joined Deloitte, Haskins & Sells in 1964 and served as chair-
man and chief executive from 1986 through 1989. Mr. Cook is an emeritus 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 International
Flavors & Fragrances Inc. He is chairman of the Accountability Advisory Council to the Comp-
troller General of the United States and is chairman of the Department of Defense Audit Advi-
sory Committee. 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

Franklyn G. Prendergast, M.D., Ph.D.
Age 63
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 Therapeu-
tics at Mayo Medical School and the director of the Mayo Clinic 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.

Age 59

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. Prior to joining Kimberly-
Clark, Ms. Seifert held management positions at Procter & Gamble, Beatrice Foods, and Fort
Howard Paper Company. She is chairman of Katapult, LLC. Ms. Seifert serves on the boards of
Supervalu Inc.; Revlon Consumer Products Corporation; Lexmark International, Inc.; Appleton
Papers Inc.; the U.S. Fund for UNICEF; and the Fox Cities Performing Arts Center.

In addition, beginning on April 1, 2009, Mr. Alvarez will serve as a director under interim election for a term that will
expire in 2010.

Age 53

Ralph Alvarez
President and Chief Operating Ofﬁ cer, McDonald’s Corporation
Mr. Alvarez has been president and chief operating ofﬁ cer of McDonald’s Corporation since
August 2006. Previously, he served as president of McDonald’s North America, with respon-
sibility for all the McDonald’s restaurants in the U.S. and Canada. Prior to that, he was
president of McDonald’s USA. Mr. Alvarez joined McDonald’s in 1994 and has held a variety
of leadership roles throughout his career, including chief operations ofﬁ cer and president of
the Central Division, both with McDonald’s USA, and president of McDonald’s Mexico. Prior
to joining McDonald’s, he held leadership positions at Burger King Corporation and Wendy’s
International, Inc. Mr. Alvarez serves on the boards of McDonald’s Corporation and Key-
Corp. He currently serves on the President’s Council and the International Advisory Board
of the University of Miami, and he is a member of the board of trustees for Chicago’s Field
Museum.

Class of 2011
The following four directors will continue in ofﬁ ce until 2011.

Age 59

Director since 2008

Michael L. Eskew
Former Chairman and Chief Executive Ofﬁ cer, United Parcel Service, Inc.
Mr. Eskew served as chairman and chief executive ofﬁ cer of United Parcel Service, Inc., from
January 2002 until December 2007. He continues to serve on the UPS board of directors. Mr.
Eskew began his UPS career in 1972 as an industrial engineering manager and held vari-
ous positions of increasing responsibility, including time with UPS’s operations in Germany
and with UPS Airlines. In 1993, Mr. Eskew was named corporate vice president for industrial
engineering. Two years later he became group vice president for engineering. In 1998, he
was elected to the UPS board of directors. In 1999, Mr. Eskew was named executive vice
president and a year later was given the additional title of vice chairman. Mr. Eskew serves
as chairman of the board of trustees of the Annie E. Casey Foundation. He also serves on the
boards of 3M Corporation and IBM Corporation.

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Age 67

Director since 1995

Alfred G. Gilman, M.D., Ph.D.
Executive Vice President for Academic Affairs and Provost, The University of Texas South-
western Medical Center at Dallas; Dean, Southwestern Medical School; and Regental
Professor of Pharmacology and Director of the Cecil and Ida Green Center for Molecular,
Computational, and Systems Biology, The University 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 at Dallas and dean of the University of
Texas Southwestern Medical School since 2005 and professor of pharmacology at the Uni-
versity of Texas Southwestern Medical Center since 1981. He holds the Raymond and Ellen
Willie Distinguished Chair of 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 65

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. 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; chairman and
chief executive ofﬁ cer of Bank One, Cleveland, N.A.; president of the Federal Reserve Bank
of Cleveland; treasurer of Bell Telephone Company 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 Investment Fund, a presidential appointment; Simon Property Group, Inc.;
and Norfolk Southern Corporation. Ms. Horn has been senior managing director of Brock
Capital Group since 2004.

Age 55

Director since 2005

John C. Lechleiter, Ph.D.
Chairman, President, and Chief Executive Ofﬁ cer
Dr. Lechleiter became chairman of Eli Lilly and Company on January 1, 2009. Dr. Lechleiter
was named president and chief executive ofﬁ cer of the company in April 2008. He served as
president and chief operating ofﬁ cer from 2005 to 2008. 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 regula-
tory affairs in 1994. In 1996, he was named vice president for development and regulatory
affairs. Dr. Lechleiter became senior vice president of pharmaceutical products in 1998, and
executive vice president of pharmaceutical products and corporate development in 2001. He
was named executive vice president of pharmaceutical operations in 2004. He is a member
of the American Chemical Society. Dr. Lechleiter serves as a member of the executive com-
mittee of the board of directors of Pharmaceutical Research and Manufacturers of America
(PhRMA) and as a member of the Business Roundtable and the Business Council. He also
serves as a member of the Visiting Committee of Harvard Business School and a member
of the board of trustees of Xavier University (Cincinnati, Ohio). In addition, he serves as a
distinguished advisor to The Children’s Museum of Indianapolis and a member of the United
Way of Central Indiana board of directors.

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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
h ttp://investor.lilly.com/governance.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 85–86.

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
an 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 $120,000 per year in direct
compensation from Lilly other than for service as a nonexecutive 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 the compensation committee of that company’s board.

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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 two 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 two 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
applicable independence tests of the New York Stock Exchange, Securities and Exchange Commission, and Internal
Revenue Service.

In February 2009, 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 11 nonemployee 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
11 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
addition to those listed above) in reaching its determination that the directors are independent. All of these rela-
tionships and transactions were entered into at arm’s length in the normal course of business and, to the extent
they are commercial relationships, have standard commercial terms. None of these relationships or transactions
exceeded the thresholds described above or otherwise compromise the independence of the named director.

Name

Independent Transactions/Relationships/Arrangements

Sir Winfried Bischoff

Mr. Cook

Mr. Eskew

Dr. Feldstein

Mr. Fyrwald

Dr. Gilman

Ms. Horn

Ms. Marram

Mr. Oberhelman

Dr. Prendergast

Ms. Seifert

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

None

Lilly grants and contributions to Harvard University—immaterial

Lilly’s purchase of DuPont and Nalco products and services—immaterial

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

None

Lilly grants and contributions to Mayo Clinic 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
In an uncontested election, any nominee for director who fails to receive a majority of the votes cast shall promptly
tender his or her resignation following certiﬁ cation of the shareholder vote. The directors and corporate governance

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committee will consider the resignation offer and recommend to the board whether to accept it. The board will act
on the committee’s recommendation within 90 days following certiﬁ cation of the shareholder vote. Board action on
the matter will require the approval of a majority of the independent directors.

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 director’s 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 corpo-
rate governance committee fails to receive a majority of the votes cast at the same election, then the independent
directors who did receive a majority of the votes cast will appoint a committee amongst themselves to consider the
resignation offers and recommend 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. Directors are required to hold Lilly stock valued at a
minimum of ﬁ ve times their annual cash retainer; new directors are allowed ﬁ ve years to reach this ownership level.

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 circum-
stances, and particularly during relatively short periods of leadership transition, these roles may be assigned to
two different persons. The presiding director recommends to the board an appropriate process by which a new
chairman and chief executive ofﬁ cer will be selected.

A key responsibility of the CEO and the board is ensuring that an effective process is in place to provide conti-

nuity of leadership over the long term at all levels in the company. Each year, succession planning reviews are held
at every signiﬁ cant organizational level of the company, culminating in a full review of senior leadership talent by
the independent directors. During this review, the CEO and the independent directors discuss future candidates for
senior leadership positions, succession timing for those positions, and development plans for the highest-potential
candidates. This process ensures continuity of leadership over the long term, and it forms the basis on which the
company makes ongoing leadership assignments. It is a key success factor in managing the long planning and
investment lead times of our business.

In addition, the CEO maintains in place at all times, and reviews with the independent directors, a conﬁ dential

plan for the timely and efﬁ cient transfer of his or her responsibilities in the event of an emergency or his or her
sudden incapacitation or departure.

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
issues 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 the 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

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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://www.lilly.com/about/compliance/conduct/ 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.

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;
• approves meeting agendas and schedules and generally approves information sent to the board;
• has the authority to call meetings of the independent directors; and
• has the authority to retain independent counsel or other advisors to the board.

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 cre-
ate 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 written policy and written procedures for review, approval, and monitoring of transac-
tions involving the company and “related persons” (directors and executive ofﬁ cers, their immediate family mem-
bers, or shareholders owning 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, transactions 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.

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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.

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

the company’s best interests.

The only related-person transaction is a time-share arrangement (now ended) between the company and
Mr. Taurel as described on page 110. The compensation committee approved and monitored 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
executive ofﬁ cers are invited. We also afford directors the opportunity to attend external director education pro-
grams.

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/governance.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 86–87.

Directors and Corporate Governance Committee
The duties of the directors and corporate governance committee are described on page 85.

Compensation Committee
The duties of the compensation committee are described on pages 88–89, and the “Compensation Committee
Report” is shown on page 99.

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
• reviews scientiﬁ c aspects of signiﬁ cant business development projects.

Me mbership and Meetings of the Board and Its Committees

In 2008, each director attended more than 85 percent of the total number of meetings of the board and the
committees on which he or she serves. In addition, all board members are expected to attend the annual meeting
of shareholders, and all but one attended in 2008. Current committee membership and the number of meetings of
the board and each committee in 2008 are shown in the table below.

Name

Mr. Alvarez 1

Sir Winfried Bischoff

Mr. Cook

Mr. Eskew

Dr. Feldstein

Mr. Fisher 2

Mr. Fyrwald

Dr. Gilman

Ms. Horn

Dr. Lechleiter

Ms. Marram

Mr. Oberhelman 3

Dr. Prendergast

Ms. Seifert

Mr. Taurel 4

Board

Member

Audit

Compensation

Chair

Member

Directors and
Corporate
Governance

Member

Finance

Member

Chair

Member

Public
Policy and
Compliance

Member

Science and
Technology

Member

Chair

Member

Chair

Presiding Director

Chair

Member

Chair

Member

Chair

Member

Number of 2008 Meetings

1 Mr. Alvarez’s term begins April 1, 2009.
2 Mr. Fisher retired from the board as of April 21, 2008.
3 Mr. Oberhelman joined the board as of December 1, 2008.
4 Mr. Taurel retired from the board as of December 31, 2008.

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Directors’ Compensation

Directors who are employees receive no additional compensation for serving on the board or its committees.

Cash Compensation
The company provides nonemployee 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 nonemployee directors consists of:

• shares of Lilly stock equaling $145,000, deposited annually in a deferred share 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 nonemployee 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 one or both 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 (4,513 shares
in 2008) 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 2009 is 5.2 percent.
The aggregate amount of interest that accrued in 2008 for the participating directors was $148,138, at a rate
of 5.5 percent.

Both accounts may be paid in a lump sum or in annual installments for up to 10 years, beginning the second

January following the director’s departure from the board. Amounts in the deferred share account are paid in
shares of Lilly stock.

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In 2008, we provided the following compensation to directors who are not employees:

Directors’ Compensation

Name

Current

Sir Winfried Bischoff

Mr. Cook

Mr. Eskew

Dr. Feldstein

Mr. Fyrwald

Dr. Gilman

Ms. Horn

Ms. Marram

Mr. Oberhelman

Dr. Prendergast

Ms. Seifert

Retired

Mr. Fisher

Fees Earned
or Paid in Cash ($) 1

Stock Awards ($) 2

All Other
Compensation ($) 3

$106,000

$121,000

$87,333

$108,000

$102,000

$100,000

$133,000

$106,000

$7,667

$93,000

$94,000

$28,667

$145,000

$16,844

$29,320

$8,399

$48,699

$13,295

$50,191

$33,915

$48,173

$16,590

$20,478

$34,676

$1,549

Total ($) 4

$267,844

$295,320

$240,732

$301,699

$260,295

$295,191

$311,915

$299,173

$24,257

$258,478

$273,676

$30,216

1 The following directors deferred 2008 cash compensation into their deferred share accounts under the Lilly

Directors’ Deferral Plan (further described above):

Name

Current

Mr. Fyrwald

Retired

Mr. Fisher

2008 Cash Deferred

$102,000

$14,333

2,354

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2 Each nonemployee director, other than Mr. Fisher and Mr. Oberhelman, received an award of stock with a grant

date fair value of $145,000 (4,513 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 above under “Lilly Directors’ Deferral Plan.” The table shows the expense recognized
by the company for each director’s stock award.

3 This column includes amounts donated by the Eli Lilly and Company Foundation, Inc. under its matching gift

program, which is generally available to U.S. employees as well as the outside directors. Under this program, the
foundation matches 100 percent of charitable donations over $25 made to eligible charities, up to a maximum of
$90,000 per year for each individual. The foundation matched the following donations for outside directors in 2008
via payments made directly to the recipient charity: Mr. Cook, $24,500; Mr. Eskew, $5,500; Dr. Feldstein, $27,000;
Mr. Fisher, $1,000; Mr. Fyrwald, $10,000; Dr. Gilman, $36,000; Ms. Horn, $8,275; Ms. Marram, $33,000; Mr.
Oberhelman, $16,590; and Ms. Seifert, $34,676. This column also includes the following amounts for expenses
for the directors’ spouses to travel to and participate in board functions that included spouse participation: Sir
Winfried Bischoff, $12,437; Dr. Feldstein, $16,119; Dr. Gilman, $10,376; Ms. Horn, $19,045; Ms. Marram, $10,969;
and Dr. Prendergast, $17,382. For all directors except Mr. Fisher, Mr. Oberhelman, and Ms. Seifert, the amounts
in this column also include tax reimbursements related to expenses for the directors’ spouses to travel to and
participate in board functions that included spouse participation.

4 Directors do not participate in a Lilly pension plan or non-equity incentive plan.

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Directors’ Outstanding Stock Options

Name

Sir Winfried Bischoff

Mr. Cook

Mr. Eskew

Dr. Feldstein

Mr. Fyrwald

Dr. Gilman

Ms. Horn

Ms. Marram

Mr. Oberhelman

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
—

4/20/2000
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
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
—

4/19/2010
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
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
—

$75.94
$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
$75.94
$73.98
$75.92
$57.85
$73.11

2,800
2,800
2,800
2,800
0

2,800
2,800
2,800
0

2,800
2,800
2,800
2,800
2,800
2,800
2,800
2,800
2,800
2,800
2,800
2,800
0

2,800
2,800
2,800
2,800
2,800
2,800
2,800
2,800
2,800
2,800

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 indepen-
dence, director compensation, and board performance. The committee’s charter is available online at
http://investor.lilly.com/governance.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 publicly 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,

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ﬁ nance or banking, and marketing or sales

• international business
• medicine and science
• government and public policy
• health care environment and policy.

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The board delegates the screening process to the directors and corporate governance committee, which

receives 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 and screening 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 a 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 or the search ﬁ rm,
gathers additional data on the candidate’s qualiﬁ cations, availability, probable level of interest, and any potential
conﬂ icts of interest. If the committee’s subsequent evaluation continues to be favorable, the candidate is contacted
by the chairman of the board and one or more of the independent directors for direct discussions to determine the
mutual levels of interest in pursuing the candidacy. If these discussions are favorable, the committee makes a ﬁ 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). Mr. Oberhelman, who is standing for election, and Mr. Alvarez, who will serve under
interim election beginning April 1, 2009, were referred to the committee by an independent executive search ﬁ rm.

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 candi-
date at the 2010 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 9,
2009. 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/governance.cfm. The bylaws will also be provided by mail without charge upon request to
the corporate secretary.

Audi t 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 and Mr.
Michael L. Eskew are audit committee ﬁ nancial experts, 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 auditor. 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 auditor,
including a review of the signiﬁ cant management judgments underlying the ﬁ nancial statements and disclosures.

The independent auditor reports to us. We have sole authority to appoint (subject to shareholder ratiﬁ cation)

and to terminate the engagement of the independent auditor.

We have discussed with the independent auditor matters required to be discussed by Statement on Auditing

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Standards No. 61 (Communication with Audit Committees), as amended and as adopted by the Public Company
Accounting Oversight Board (PCAOB) in Rule 3200T, including the quality, not just the acceptability, of the accounting
principles, the reasonableness of signiﬁ 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 auditor required by applica-
ble requirements of the PCAOB regarding communications with the audit committee concerning independence, and
have discussed with the independent auditor the auditor’s independence from the company and its management. In
concluding that the auditor is independent, we determined, among other things, that the nonaudit services provided
by Ernst & Young LLP (as described below) were compatible with its independence. Consistent with the requirements
of the Sarbanes-Oxley Act of 2002, we have adopted policies to avoid compromising the independence of the indepen-
dent auditor, 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 and the chief accounting ofﬁ cer) 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
annual report on Form 10-K for the year ended December 31, 2008, for ﬁ ling with the Securities and Exchange Com-
mission. We have also appointed the company’s independent auditor, subject to shareholder ratiﬁ cation, for 2009.

Audit Committee
J. Michael Cook, Chair
Michael L. Eskew
Martin S. Feldstein, Ph.D.
Douglas R. Oberhelman
Kathi P. Seifert

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Services Performed by the Independent Auditor
The audit committee preapproves all services performed by the independent auditor, in part to assess whether the pro-
vision 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 PCAOB 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 services.

• 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

incurred for the completed audit year.

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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 2008 and 2007. 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

2008
(millions)

2007
(millions)

$8.0

$7.0

Audit-Related Fees
• Assurance and related services reasonably related to the performance of the audit or reviews of the ﬁ nancial statements
—2008 and 2007: primarily related to employee beneﬁ t plan and other ancillary audits, and due diligence services on

$0.8

$0.4

acquisitions

Tax Fees
• 2008 and 2007: primarily related to consulting and compliance services

All Other Fees
• 2008 and 2007: primarily related to compliance services outside the U.S.

Total

Compensation Committee Matters

$1.7

$1.4

$0.2

$0.1

$10.7

$8.9

Scope of Authority
The compensation committee oversees the company’s global compensation philosophy and establishes the com-
pensation of executive ofﬁ cers. The committee also acts as the oversight committee with respect to the company’s
deferred compensation plans, management stock plans, and bonus plans covering executives. In overseeing those
plans, the committee may delegate authority to company ofﬁ cers for day-to-day plan administration and interpre-
tation, including selecting participants, determining award levels within plan parameters, and approving award
documents. However, the committee may not delegate any authority for matters affecting 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 and Analyses” on pages
90–91. Additional processes and procedures include:

• Meetings. The committee meets several times each year (nine times in 2008). Committee agendas are
established in consultation with the committee chair and the committee’s independent compensation
consultant. The committee meets in executive session after each 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. Mr. Cook reports directly to the committee, and
neither he nor his ﬁ rm is permitted to perform any services for management. The consultant’s duties include
the following:
—Review committee agendas and supporting materials in advance of each meeting and raise questions with

the company’s global compensation group and the committee chair as appropriate

—Review the company’s total compensation philosophy, peer group, and target competitive positioning for

reasonableness and appropriateness

—Review the company’s total executive compensation program and advise the committee of plans or practices

that might be changed to better reﬂ ect evolving best practices

—Provide independent analyses and recommendations to the committee on the CEO’s pay
—Review draft Compensation Discussion and Analysis report and related tables for proxy statement
—Proactively advise committee on best practices ideas for board governance of executive compensation
—Undertake special projects at the request of the committee chair.
The consultant interacts directly with members of Lilly management only on matters under the committee’s
oversight and with the knowledge and permission of the committee chairperson.

• Role of Executive Ofﬁ cers and Management. With the oversight of the CEO 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

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than the CEO as noted below). 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 attend committee meetings but are not present for the executive sessions or for any
discussion of their own compensation. (Only nonemployee directors and the committee’s consultant attend
executive sessions.)

The CEO does not participate in the formulation or discussion of his pay recommendations and has no

prior knowledge of the recommendations that the consultant makes to the 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 2008 (see page 80 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
2008 Summary
Executive compensation for 2008 aligned well with the objectives of our compensation philosophy and with our
performance, driven by these factors:

• Strong operating results yield strong incentive compensation payouts. In 2008, Lilly performed in the top tier of its
peer group in expected sales and adjusted earnings-per-share growth; this strong top- and bottom-line growth
led to cash and equity incentive compensation payouts substantially above target.

• Cost-effective equity design maintained for 2008. We lowered the overall cost of our equity
program in 2007—while maintaining its competitiveness and motivational impact—by
eliminating stock options in favor of shareholder value awards and by lowering total equity
grant values for most positions. We maintained this program in 2008 with some increases
in equity value.

Highlights:
(cid:153)(cid:21)(cid:72)(cid:105)(cid:103)(cid:100)(cid:99)(cid:92)(cid:21)(cid:101)(cid:90)(cid:103)(cid:91)(cid:100)(cid:103)(cid:98)(cid:86)(cid:99)(cid:88)(cid:90)
(cid:153)(cid:21)(cid:56)(cid:100)(cid:99)(cid:104)(cid:94)(cid:104)(cid:105)(cid:90)(cid:99)(cid:105)(cid:21)(cid:101)(cid:103)(cid:100)(cid:92)(cid:103)(cid:86)(cid:98)(cid:104)
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• A balanced program fosters employee achievement, retention, and engagement. We delivered
a balance of salary, performance-based cash and equity incentives, and a strong employee
beneﬁ t program. Together, these elements reinforced pay-for-performance incentives and encouraged
employee retention and engagement.

Mr. Taurel retired as CEO effective March 31, 2008, but remained as chairman of the board and a director through
December 31, 2008. His salary and cash bonus were reduced by half for the period of April through December
2008. Dr. Lechleiter was elected CEO effective April 1, 2008, and received increases to his salary and target cash
bonus at that time to reﬂ ect his increased responsibilities.

Executive Compensation Philosophy
Our success depends on our ability to discover, develop, and market a stream of innovative medicines that
address important medical needs. In addition, we must continually improve productivity in all that we do. To
achieve these goals, we need to attract, engage, and retain highly talented individuals who are committed to the
company’s core values of excellence, integrity, and respect for people. Our compensation and beneﬁ t programs
are based on these objectives:

• Compensation should reﬂ ect individual and company performance. We link all employees’ pay

to individual and company performance.
—As employees assume greater responsibilities, more of their pay is linked to company

performance and shareholder returns.

—We seek to deliver top-tier compensation given top-tier individual and company

performance, but lower-tier compensation where individual performance falls short of
expectations and/or company performance lags the industry.

—We design our programs to be simple and clear, so that employees can easily

understand how their efforts affect their pay.

Executive Compensation
Philosophy:
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(cid:153)(cid:21)(cid:65)(cid:100)(cid:99)(cid:92)(cid:34)(cid:105)(cid:90)(cid:103)(cid:98)(cid:21)(cid:91)(cid:100)(cid:88)(cid:106)(cid:104)
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(cid:153)(cid:21)(cid:58)(cid:92)(cid:86)(cid:97)(cid:94)(cid:105)(cid:86)(cid:103)(cid:94)(cid:86)(cid:99)
(cid:153)(cid:21)(cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:94)(cid:107)(cid:90)(cid:21)(cid:101)(cid:86)(cid:110)

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—We balance the objectives of pay-for-performance and employee retention. Even during downturns in company
performance, the programs should continue to motivate and engage successful, high-achieving employees.

• Compensation should foster a long-term focus. A long-term focus is critical to success in our industry. As

employees progress to higher levels of the organization, a greater portion of compensation is tied to our longer-
term performance.

• Compensation should be based on the level of job responsibility. We seek internal pay relativity, meaning that pay
differences among jobs should be commensurate with differences in the levels of responsibility and impact of
the jobs.

• Compensation should reﬂ ect the marketplace for talent. We aim to remain competitive with the pay of other

premier employers with which we compete for talent.

• Compensation and beneﬁ t programs should attract employees who are interested in a career at Lilly. Our employee
beneﬁ t programs provide a competitive advantage by helping us attract and retain highly talented employees
who are looking for the opportunity to build careers.

• Compensation should be efﬁ cient. To deliver superior long-term shareholder returns, we must deliver value to

employees in a cost-effective manner.

• Compensation and beneﬁ t programs should be egalitarian. While compensation 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.

The Committee’s Processes and Analyses
The compensation committee uses several tools to help it structure compensation programs that meet company
objectives. Among those are:

• Assessment of company performance. The committee uses company performance measures in two ways:

—In establishing total compensation ranges, the committee compares the performance of Lilly and its peer
group with respect to sales, earnings per share, return on assets, return on equity, and total shareholder
return. The committee uses this data as a reference point rather than applying a formula.

—The committee establishes speciﬁ c company performance measures that determine payouts under the

company’s cash and equity formula-based incentive programs.

• Assessment of individual performance. Individual performance has a strong impact on compensation. The

independent directors, under the direction of the presiding director, meet with the CEO in executive session at
the beginning of the year to agree upon the CEO’s performance objectives for the year. At the end of the year, the
independent directors again meet in executive session to review the performance of the CEO based on his or her
achievement of the 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 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 executive’s performance evaluation is based on the executive’s
achievement of objectives established between the executive and his or her supervisor, the executive’s
contribution to the company’s performance, and other leadership attributes and accomplishments.

• Peer group analysis. The committee compares the company’s programs with a peer group of global

pharmaceutical companies: Abbott Laboratories; Amgen Inc.; Bristol-Myers Squibb Company; GlaxoSmithKline
plc; Johnson & Johnson; Merck & Co.; Pﬁ zer, Inc.; Schering-Plough Corporation; and Wyeth. Pharmaceutical
companies’ needs for scientiﬁ c and sales and marketing talent are unique to the industry and as such, Lilly must
compete with these companies for talent. The committee uses the peer group data in two ways:

Compensation
Committee Tools:
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—Overall competitiveness. The committee uses aggregated data as a reference point to ensure
that the executive compensation program as a whole is competitive, meaning within the broad
middle range of comparative pay of the peer group companies when the company achieves
the targeted performance levels. The committee does not target a speciﬁ c position within the
range.
—Individual competitiveness. The committee compares the overall pay of individual executives,
if the jobs are sufﬁ ciently similar, to make the comparison meaningful. The individual’s pay is
driven primarily by individual and company performance and internal relativity rather than the
peer group data; the peer group data is used as a “market check” to ensure that individual pay

remains within the broad middle range of peer group pay. The committee does not target a speciﬁ c position
within the range.

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The peer group is reviewed for appropriateness at least every three years. The group was reviewed in June 2008,
and the new group will be used to assess company performance for purposes of 2009 compensation decisions.

• CEO compensation. To provide further assurance of independence, the compensation recommendation for

the CEO is developed by an independent consultant (Frederic W. Cook and his ﬁ rm, Frederic W. Cook & Co.)
without the input or knowledge of the CEO and with limited support from company staff. The Cook ﬁ rm prepares
analyses showing median CEO compensation among the peer group in terms of base salary, target annual
incentive award, most recent equity grant value, and resulting total direct compensation. Mr. Cook develops
a range of recommendations for any change in the CEO’s base salary, annual incentive target, equity grant
value, and mix. Mr. Cook’s recommendations for target CEO pay take into account the peer competitive pay
analysis and, importantly, the position of the CEO in relation to other senior company executives and proposed
pay actions for all key employees of the company. The range allows for the committee to exercise its discretion
based on the CEO’s individual performance. The CEO has no prior knowledge of the recommendations and takes
no part in the recommendations, committee discussions, or decisions.

Executive Compensation for 2008

Overview—Establishment of Overall Pay
In making its pay decisions for 2008, the committee reviewed 2007 company performance data and peer group data
as discussed above, and also considered expected competitive trends in executive pay. That review showed:

• Company performance. In 2007, Lilly performed in the upper tier of the peer group in adjusted earnings per share
growth, sales growth, return on assets, and return on equity and in the lower tier in ﬁ ve-year total shareholder
return.

• Pay relative to peer group. Lilly’s total pay to executive ofﬁ cers for 2007 was in the broad middle range.

The committee determined the following:

• Program elements. The 2008 program consisted of base salary, a cash incentive bonus award, and two forms
of performance-based equity grants: performance awards and shareholder value awards (SVAs). Executives
also received the company employee beneﬁ t package. This program balances the mix of cash and equity
compensation, the mix of current and longer-term compensation, the mix of ﬁ nancial and market goals, and the
security of foundational beneﬁ ts in a way that furthers the compensation objectives discussed above.

• Pay ranges and mix of pay elements. The company generally maintained the same pay ranges and mix of pay

elements as in 2007. The committee believes this overall program continues to provide a cost effective delivery
of total compensation that:
—encourages retention and employee engagement by delivering competitive cash and equity components
—maintains a strong link to company performance and shareholder returns through a balanced equity incentive

program without encouraging excessive risk-taking

—maintains appropriate internal pay relativity
—provides opportunity for total pay within the broad middle range of expected peer group pay given company

performance comparable to that of our peers.

Base Salary
In setting base salaries for 2008, the committee considered the following:

• The corporate “merit budget,” the company’s overall budget for merit-based salary increases. The corporate

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merit budget was established based on company performance for 2007, expected performance for 2008, and
a reference to general external merit trends. The objective of the merit budget is to allow
salary increases to retain, motivate, and reward successful performers while maintaining
affordability within the company’s business plan. Individual pay increases can be more or
less than the budget amount depending on individual performance, but aggregate increases
must stay within the budget. The aggregate merit increases for all executive ofﬁ cers were
within the corporate merit budget of four percent.

Base Salary
Considerations:
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(cid:153)(cid:21)(cid:69)(cid:90)(cid:90)(cid:103)(cid:21)(cid:92)(cid:103)(cid:100)(cid:106)(cid:101)(cid:21)(cid:89)(cid:86)(cid:105)(cid:86)

• Individual performance. As described above under “The Committee’s Processes and
Analyses,” base salary increases were driven largely by individual performance
assessments.
—The independent directors assessed Mr. Taurel’s 2007 performance. They considered the company’s and

Mr. Taurel’s accomplishment of objectives that had been established at the beginning of the year and their own
subjective assessment of his performance. They noted that under Mr. Taurel’s leadership in 2007, the company:

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• exceeded its sales and earnings targets;
• made signiﬁ cant progress on the transformation agenda, including progressing the tailored therapy

strategy;

• exceeded its Six Sigma and related productivity goals;
• strengthened its public image; and
• met or exceeded its targets for research pipeline progress and acquisition of new compounds.

—Mr. Taurel’s decision to retire as CEO as of April 1, 2008, and as chairman as of December 31, 2008, resulted
in the committee’s decision to maintain his annual salary at the 2007 level through March 31, 2008, and then
reduce it by one-half for the remainder of 2008.

The committee reviewed similar performance considerations for each of the other named executives.
—With regard to Dr. Lechleiter, the committee considered his new position as chief executive ofﬁ cer and

increased Dr. Lechleiter’s annual salary by 21 percent effective April 1, 2008, to $1,400,000. The committee
considered Dr. Lechleiter’s strong leadership in 2007 in driving the company’s operational results and
transformational agenda.

—With regard to Dr. Paul, the committee noted that Lilly Research Laboratories met or exceeded nearly all 2007
pipeline progress goals and implemented several strategic actions to increase ﬂ exibility and productivity. The
committee increased Dr. Paul’s annual salary by four percent.

—Mr. Carmine’s annual salary was increased by 79 percent upon his promotion, effective April 1, 2008, to

recognize his signiﬁ cantly expanded responsibilities.

—Mr. Rice’s annual salary was increased 13 percent in recognition of his assumption of increased operational

responsibilities, his strong leadership of the ﬁ nancial component, and outstanding contributions to the
management of the company.

—In establishing Mr. Armitage’s annual salary (a ﬁ ve percent increase), the committee noted his leadership in
driving a culture of compliance and transparency, shaping intellectual property policy to foster innovation,
and implementing effective litigation strategies.

• Internal relativity, meaning the relative pay differences between different job levels.
• Peer group data speciﬁ c to certain positions in which the jobs were viewed as comparable in content and

importance to the company. We used the peer group data not to target a speciﬁ c position in range, but instead
as a market check for reasonableness and competitiveness. The salaries as determined by the other factors
were within the broad middle range of expected competitive pay and, therefore, no further adjustments were
necessary for competitiveness.

Cash Incentive Bonuses
The company’s annual cash bonus programs 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 most
nonmanagement employees in the U.S., are determined under the Eli Lilly and Company Bonus Plan. Under the
plan, the company sets target bonus amounts (a percentage of base salary) for all participants at the beginning of
each year. Bonus payouts range from zero to 200 percent of target depending on the company’s ﬁ nancial results rel-
ative to predetermined performance measures. At the end of the performance period, the committee has discretion
to adjust an award payout downward for executive ofﬁ cers, but not upward, from the amount yielded by the formula.

The committee considered the following when establishing the 2008 awards:

• Bonus targets. Bonus targets (expressed as a percentage of base salary) were based on job responsibilities,
internal relativity, and peer group data. Consistent with our compensation objectives, as executives assume
greater responsibilities, more of their pay is linked to company performance. For most executive ofﬁ cers, the
committee maintained the same bonus targets as 2007; for some, targets were increased due to peer group
trends or internal relativity. The committee determined that these targets appropriately reﬂ ected internal
relativity and would maintain cash compensation within the broad middle range of expected competitive pay
given median peer group performance. The 2008 targets for the named executives were as follows:
—Mr. Taurel—140 percent (increased from 125 percent to approximate the peer group median)
—Dr. Lechleiter—140 percent (100 percent through March 31, 2008)
—Dr. Paul—85 percent
—Mr. Carmine—85 percent
—Mr. Rice—80 percent (increased from 75 percent due to internal relativity)
—Mr. Armitage—80 percent (increased from 75 percent due to internal relativity).

• Company performance measures. The committee established 2008 company performance measures with a 25

percent weighting on sales growth and a 75 percent weighting on growth in adjusted EPS (reported earnings per

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share adjusted as described below under “Adjustments for Certain Items”). This mix of performance measures
focuses employees appropriately on improving both top-line sales and bottom-line earnings, with special
emphasis on earnings in order to tie rewards directly to productivity improvements. The measures are also
effective motivators because they are easy for employees to track and understand.

In establishing the 2008 target growth rates, the committee considered the expected 2008 performance
of our peer group, based on published investment analyst estimates. The target growth rates of four percent
for sales and eight percent for adjusted EPS were slightly above the median expected
growth rates for our peer group. These targets are consistent with our compensation
objectives because they produce above-target payouts if Lilly outperforms the peer
group and below-target payouts if Lilly performance lags the peer group. Payouts were
determined by this formula:

Bonus Weighting:
25% sales growth
75% adjusted EPS growth

Targets:
4% sales growth
8% adjusted EPS growth

(0.25 x sales multiple) + (0.75 x adjusted EPS multiple) = bonus multiple

Bonus multiple X bonus target X base salary earnings = payout

2008 sales and adjusted EPS multiples are illustrated by these charts:

2008 Sales Multiple

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2.5

2.0

1.5

1.0

0.5

1.4

1.6

1.8

1.2

1.0

0.8

0.6

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10%

12%

14%

Sales Growth

2008 pro forma sales growth of 8.7 percent resulted in a sales multiple of 1.475.

2008 Adjusted EPS Multiple

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10%

12%

14%

16%

18%

Adjusted EPS Growth

2008 pro forma adjusted EPS growth of 13.6 percent resulted in an adjusted EPS multiple of 1.556.

Together, the sales multiple and the adjusted EPS multiple yielded a bonus multiple of 1.54.

(0.25 x 1.475) + (0.75 x 1.556) = 1.54 bonus multiple

See page 96 for a reconciliation of 2008 reported and pro forma sales and adjusted EPS.

Equity Incentives—Total Equity Program
In 2008, we employed two forms of equity incentives granted under the 2002 Lilly Stock Plan: performance awards
and shareholder value awards. These incentives ensure that our leaders are properly focused on long-term share-
holder value.

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• Target grant values. For 2008, the committee increased aggregate grant values for most named executives based
on internal relativity, performance, and peer group data suggesting that the 2007 grant values were below the

Equity Compensation:
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broad middle range. In addition, Dr. Lechleiter’s and Mr. Carmine’s targets were increased to
reﬂ ect their new roles. Consistent with the company’s compensation objectives, individuals at
higher levels received a greater proportion of total pay in the form of equity. The committee
determined that a 50/50 split for executives between performance awards and shareholder value
awards appropriately balances the company ﬁ nancial performance and shareholder equity return
incentives of the two programs. Target values for 2008 equity grants for the named executives
were as follows:

Name

Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Carmine

Mr. Rice

Mr. Armitage

Performance Awards

Shareholder Value Awards

$4,000,000

$3,250,000

$1,500,000

$1,200,000

$855,000

$4,000,000

$3,250,000

$1,500,000

$1,200,000

$855,000

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 are structured as a schedule of shares of Lilly stock based on the company’s achievement of speciﬁ c
adjusted earnings per share (adjusted EPS) levels over speciﬁ ed time periods of one or more years. In 2009, the
company will grant both a one-year and a two-year award, as a transition to a two-year performance period for
all performance awards granted beginning in 2010. Possible payouts range from zero to 200 percent of the target

Performance Awards:
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(cid:101)(cid:90)(cid:103)(cid:94)(cid:100)(cid:89)(cid:21)(cid:101)(cid:93)(cid:86)(cid:104)(cid:90)(cid:89)(cid:21)(cid:94)(cid:99)(cid:21)(cid:87)(cid:90)(cid:92)(cid:94)(cid:99)(cid:99)(cid:94)(cid:99)(cid:92)(cid:21)
(cid:94)(cid:99)(cid:21)(cid:39)(cid:37)(cid:37)(cid:46)

(cid:153)(cid:21)(cid:69)(cid:86)(cid:110)(cid:100)(cid:106)(cid:105)(cid:104)(cid:21)(cid:98)(cid:106)(cid:104)(cid:105)(cid:21)(cid:87)(cid:90)(cid:21)(cid:93)(cid:90)(cid:97)(cid:89)(cid:21)(cid:100)(cid:99)(cid:90)(cid:21)

(cid:110)(cid:90)(cid:86)(cid:103)

(cid:153)(cid:21)(cid:73)(cid:86)(cid:103)(cid:92)(cid:90)(cid:105)(cid:21)(cid:92)(cid:103)(cid:100)(cid:108)(cid:105)(cid:93)(cid:21)(cid:29)(cid:45)(cid:26)(cid:30)(cid:21)(cid:104)(cid:97)(cid:94)(cid:92)(cid:93)(cid:105)(cid:97)(cid:110)(cid:21)
(cid:86)(cid:87)(cid:100)(cid:107)(cid:90)(cid:21)(cid:90)(cid:109)(cid:101)(cid:90)(cid:88)(cid:105)(cid:90)(cid:89)(cid:21)(cid:101)(cid:90)(cid:90)(cid:103)(cid:21)(cid:92)(cid:103)(cid:100)(cid:106)(cid:101)(cid:21)
(cid:101)(cid:90)(cid:103)(cid:91)(cid:100)(cid:103)(cid:98)(cid:86)(cid:99)(cid:88)(cid:90)

(cid:153)(cid:21)(cid:54)(cid:88)(cid:105)(cid:106)(cid:86)(cid:97)(cid:21)(cid:92)(cid:103)(cid:100)(cid:108)(cid:105)(cid:93)(cid:21)(cid:38)(cid:40)(cid:35)(cid:43)(cid:26)

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amount, depending on adjusted EPS growth over the period. No dividends are paid on the
awards during the performance period. At the end of the performance period, the commit-
tee has discretion to adjust an award payout downward, but not upward, from the amount
yielded by the formula. For the 2008 grants, the committee considered the following:
• Target grant values. As described above, the committee increased equity awards for most
named executives and maintained a 50/50 split between performance awards and SVAs.
• Company performance measure. The committee established the performance measure
as adjusted EPS growth (reported EPS adjusted as described below under “Adjustments
for Certain Items”) over a one-year period, with a one-year holding period, thus creating
a two-year award. The committee believes adjusted EPS growth is an effective motivator
because it is closely linked to shareholder value, is broadly communicated to the public, and
is easily understood by employees. The target growth percentage of eight percent was slightly
above the median expected adjusted earnings performance of companies in our peer group

over a one-year period, based on published investment analyst estimates. Accordingly, consistent with our
compensation objectives, Lilly performance exceeding the expected peer-group median would result in above-
target payouts, while Lilly performance lagging the expected peer-group median would result in below-target
payouts. Payouts were determined according to this schedule:

Adjusted 2008 EPS Growth Less than 3.00% 3.00-4.99% 5.00-6.99% 7.00-8.99% 9.00-10.99% 11.00-12.99% 13.00-15.99% 16.00% +

Percent of Target

50%

75%

100%

125%

150%

175%

200%

Pro forma adjusted EPS growth of 13.6 percent ($4.02 per share) resulted in a 2008 performance award pay-

out at 175 percent of target. See page 96 for a reconciliation of 2008 reported and pro forma adjusted EPS.

Equity Incentives—Shareholder Value Awards
Beginning in 2007, the company implemented a new equity program, the shareholder value award (SVA), which
replaced our stock option program. The SVA pays out shares of Lilly stock based on the performance of the com-
pany’s stock over a three-year period. No dividends are paid on the awards during the performance period. Pay-
outs range from zero to 140 percent of the target amount, depending on stock price performance over the period.
The SVA program delivers equity compensation that is strongly linked to long-term shareholder returns. It is more
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Awards:
(cid:153)(cid:21)(cid:73)(cid:93)(cid:103)(cid:90)(cid:90)(cid:34)(cid:110)(cid:90)(cid:86)(cid:103)(cid:21)(cid:101)(cid:90)(cid:103)(cid:91)(cid:100)(cid:103)(cid:98)(cid:86)(cid:99)(cid:88)(cid:90)(cid:21)

(cid:101)(cid:90)(cid:103)(cid:94)(cid:100)(cid:89)

(cid:153)(cid:21)(cid:73)(cid:86)(cid:103)(cid:92)(cid:90)(cid:105)(cid:21)(cid:94)(cid:104)(cid:21)(cid:89)(cid:90)(cid:105)(cid:90)(cid:103)(cid:98)(cid:94)(cid:99)(cid:90)(cid:89)(cid:21)(cid:87)(cid:110)(cid:21)
(cid:86)(cid:101)(cid:101)(cid:97)(cid:110)(cid:94)(cid:99)(cid:92)(cid:21)(cid:86)(cid:99)(cid:21)(cid:90)(cid:109)(cid:101)(cid:90)(cid:88)(cid:105)(cid:90)(cid:89)(cid:21)
(cid:105)(cid:93)(cid:103)(cid:90)(cid:90)(cid:34)(cid:110)(cid:90)(cid:86)(cid:103)(cid:21)(cid:103)(cid:86)(cid:105)(cid:90)(cid:21)(cid:100)(cid:91)(cid:21)(cid:103)(cid:90)(cid:105)(cid:106)(cid:103)(cid:99)(cid:21)(cid:91)(cid:100)(cid:103)(cid:21)
(cid:97)(cid:86)(cid:103)(cid:92)(cid:90)(cid:34)(cid:88)(cid:86)(cid:101)(cid:21)(cid:88)(cid:100)(cid:98)(cid:101)(cid:86)(cid:99)(cid:94)(cid:90)(cid:104)

cost-effective than the stock option program it replaced because the SVA program delivers,
at a lower cost to the company, an equity incentive that is equally or more effective in aligning
employee interests with long-term shareholder returns. For the 2008 grants, the committee
considered the following:

• Target grant size. As described above, the committee increased target grant sizes for most
named executives and maintained a 50/50 split between performance awards and SVAs.

• Company performance measure. The SVA is designed to pay above target if Lilly stock

outperforms an expected compounded annual rate of return for large-cap companies and
below target if Lilly stock underperforms that rate of return. The expected rate of return used
in this calculation was determined considering total return that a reasonable investor would
consider appropriate for investing in the stock of a large-cap U.S. company, based on input
from external money managers, less Lilly’s current dividend yield. Executive ofﬁ cers receive
no payout if the stock price (less three years of dividends at the current rate) does not grow over the three-year
performance period—in other words, if total shareholder return for the three-year period is zero or negative.

(cid:110)(cid:90)(cid:86)(cid:103)

The starting price for the 2008 SVAs was $52.71 per share, representing the average of the closing prices
of Lilly stock for all trading days in November and December 2007. The ending price to determine payouts will
be the average of the closing prices of Lilly stock for all trading days in November and December 2010.

Payouts of the 2008 grant will be determined by this grid when they are paid out in early 2011:

Ending Stock Price

Less than $46.79

$46.79-$52.39

$52.40-$57.99

$58.00-$61.99

$62.00-$65.99

$66.00-$69.99

$69.99 +

Percent of Target

40%

60%

80%

100%

120%

140%

Adjustments for Certain Items
Consistent with past practice, the committee adjusted the results on which 2008 bonuses and performance awards
were determined to eliminate the distorting effect of certain unusual income or expense items on year-over-year
growth percentages. The adjustments are intended to:

• align award payments with the underlying growth of the core business
• avoid volatile, artiﬁ cial inﬂ ation or deﬂ ation of awards due to the unusual items in either the award year or the

previous (comparator) year

• eliminate certain counterproductive short-term incentives—for example, incentives to refrain from acquiring
new technologies or to defer disposing of underutilized assets or settling legacy legal proceedings in order to
protect current bonus payments.

To assure the integrity of the adjustments, the committee establishes adjustment guidelines at the beginning
of the year. These guidelines are consistent with the company guidelines for reporting adjusted earnings to the
investment community, which are reviewed by the audit committee of the board. The adjustments apply equally to
income and expense items and must exceed a materiality threshold. The committee reviews all adjustments and
retains “downward discretion”—i.e., discretion to reduce compensation below the amounts that are yielded by the
adjustment guidelines.

For the 2008 awards calculation, the committee made these adjustments to EPS:

• Both 2007 and 2008: Eliminated the impact of (i) one-time accounting charges for the acquisition of in-process

research and development and (ii) signiﬁ cant asset impairments and restructuring charges

• 2007: Eliminated the impact of special charges related to product liability litigation
• 2008: Eliminated the impact of (i) a one-time beneﬁ t to income resulting from settlement of a tax audit and (ii)

special charges related to the resolution of government investigations of prior sales and marketing practices of
the company.

In addition, to eliminate the distorting effect of the acquisition of ICOS Corporation (completed in late Janu-
ary 2007) on year-over-year growth rates, the committee adjusted sales and EPS for 2007 on a pro forma basis as
if the acquisition had been completed at the beginning of 2007. The committee also eliminated the impact on 2008
sales and EPS of the acquisition of ImClone Systems Incorporated (completed in late November 2008).

The adjustments were intended to align award payments more closely to underlying business growth trends

and eliminate volatile swings (up or down) caused by the unusual items. This is demonstrated by the 2006, 2007,
and 2008 adjustments:

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Percent Growth vs. Prior Years

–5

Sales Growth

EPS Growth

2006
Reported

2006
Adjusted

2007
Reported

2007
Pro Forma Adjusted

2008
Reported

2008
Pro Forma Adjusted

Reconciliations of the adjustments to our reported sales and earnings per share are below. The shaded num-

bers were used for calculating growth percentages for the compensation programs.

Sales as reported ($ millions)

Pro forma ICOS adjustment

Pro forma ImClone adjustment

Sales—pro forma adjusted

EPS as reported

Eliminate net impact associated with ImClone acquisition

Eliminate charges related to Zyprexa investigations

Eliminate IPR&D charges for acquisitions and in-licensing
transactions

Eliminate asset impairments, restructuring and other
special charges (including product liability charges)

Eliminate beneﬁ t from resolution of IRS audit

EPS—adjusted

Pro forma ICOS adjustment

EPS—pro forma adjusted

NM—Not meaningful

2008

2007

% Growth
2008 vs. 2007

2006

% Growth
2007 vs. 2006

$20,378.0

$18,633.5

9.4%

$15,691.0

18.8%

—

$35.6

$72.7

—

$20,342.4

$18,706.2

($1.89)

$2.71

8.7%

$4.46

$1.20

$0.10

$0.34

($0.19)

$4.02

—

$4.02

—

$0.63

$0.21

—

$3.55

($0.01)

$3.54

13.6%

$755.2

—

$16,446.2

$2.45

—

$0.73

—

$3.18

($0.15)

$3.03

13.7%

10.6%

16.8%

The bonus paid to all management was based on 13.6 percent growth between the adjusted EPS of $3.54 for 2007
and $4.02 for 2008.

Equity Incentive Grant Mechanics and Timing
The committee approves target grant values for equity incentives prior to the grant date. On the grant date, those
values are converted to shares based on:

• the closing price of Lilly stock on the grant date
• the same valuation methodology the company uses to determine the accounting expense of the grants under

Statement of Financial Accounting Standards (SFAS) 123R.

The committee’s procedure for timing of equity grants assures that grant timing is not being manipulated for
employee gain. The annual equity grant date for all eligible employees is in mid-February. This date is established
by the committee well in advance—typically at the committee’s October meeting. The mid-February grant date tim-
ing is driven by these 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 follows the annual earnings release by approximately two weeks, 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.

Grants to new hires and other off-cycle grants are effective on the ﬁ rst trading day of the following month.

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Employee and Post-Employment Benefits
The company offers core employee benefits coverage in order to:

• provide our global workforce with a reasonable level of financial support in the event of illness or injury
• enhance productivity and job satisfaction through programs that focus on work/life balance.

The benefits available are the same for all U.S. employees 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

reflecting employees’ careers with the company. U.S. employees are eligible to participate in these plans. To the
extent that any employee’s retirement benefit exceeds IRS limits for amounts that can be paid through a qualified
plan, Lilly also offers a nonqualified pension plan and a nonqualified savings plan. These plans provide only the dif-
ference between the calculated benefits and the IRS limits, and the formula is the same for all U.S. employees.

The cost of both employee and post-employment benefits is partially borne by the employee, including each

executive officer.

Perquisites
The company provides very limited perquisites to executive officers. The company aircraft is made available for the
personal use of Dr. Lechleiter, where the committee believes the security and efficiency benefits to the company
clearly outweigh the expense. The company aircraft was similarly made available to Mr. Taurel prior to his retire-
ment and is also made available to other executive officers for the more limited purpose of travel to outside board
meetings. In addition, depending on seat availability, family members of executive officers may travel on the com-
pany aircraft to accompany executives who are traveling on business. There is no incremental cost to the company
for these trips.

Mr. Taurel’s primary use of the corporate aircraft for personal flights in 2008 was to attend outside board
meetings for the two public companies at which he serves as an independent director. The committee believes that
Mr. Taurel’s service on these boards, and his ability to conduct Lilly business while traveling to board meetings,
provided clear benefits to the company. Mr. Taurel entered into a time-share arrangement (now ended) for use of
corporate aircraft under which he paid the company a lease fee for personal use, other than for attending outside
board meetings. This amount offset part of the company’s incremental cost of providing the aircraft. Dr. Lechleiter
had minimal use of the corporate aircraft for personal flights during 2008. Mr. Rice’s personal use of the aircraft
was limited to travel to outside board meetings.

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 Nonqualified Deferred
Compensation in 2008 table on page 107.

Severance Benefits
Except in the case of a change in control of the company, the company is not obligated to pay severance to named
executive officers 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 officers. 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 execu-
tives to consider corporate transactions that are in the best interests of the shareholders and other constituents
of the company without undue concern over whether the transactions may jeopardize the executives’ own employ-
ment. Because this program is guided by different objectives than the regular compensation program, decisions
made under this program do not affect the regular compensation program.

Although there are some differences in benefit 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
generally 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 financial protection upon loss of employment. A partial exception is made for performance

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awards, a portion of which would be paid out upon a change in control, based on time worked up 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. Likewise, if Lilly is not the surviving entity, a portion of the shareholder value
awards is paid out, based on time worked up to the change in control and the merger price for Lilly stock.
• 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 108–110 for a more detailed discussion, including a discussion of what
constitutes a change in control.

• Two-year protections. Employees who suffer a covered termination receive up to two years of pay and beneﬁ t
protection. The purpose of these provisions is to assure employees a reasonable period of protection of their
income and core employee beneﬁ ts upon which they depend for ﬁ nancial security.

Change In Control
Severance:
(cid:153)(cid:21)(cid:54)(cid:97)(cid:97)(cid:34)(cid:90)(cid:98)(cid:101)(cid:97)(cid:100)(cid:110)(cid:90)(cid:90)(cid:21)(cid:101)(cid:97)(cid:86)(cid:99)
(cid:153)(cid:21)(cid:57)(cid:100)(cid:106)(cid:87)(cid:97)(cid:90)(cid:21)(cid:105)(cid:103)(cid:94)(cid:92)(cid:92)(cid:90)(cid:103)
(cid:153)(cid:21)(cid:73)(cid:108)(cid:100)(cid:34)(cid:110)(cid:90)(cid:86)(cid:103)(cid:21)(cid:101)(cid:103)(cid:100)(cid:105)(cid:90)(cid:88)(cid:105)(cid:94)(cid:100)(cid:99)(cid:21)(cid:101)(cid:90)(cid:103)(cid:94)(cid:100)(cid:89)

—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).
—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. This period will be
reduced to 18 months beginning in 2010.

—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. This beneﬁ t will be eliminated
beginning in 2010.

• Accelerated vesting of equity awards. Any unvested equity awards at the time of termination of employment would

become vested.

• Excise tax. In some circumstances, the payments or other beneﬁ ts received by the employee in connection with
a change in control may exceed certain limits established under Section 280G of the Internal Revenue Code.
The employee would then be subject to an excise tax on top of normal federal income tax. Because of the way
the excise tax is calculated, it can impose a large burden on some employees while similarly compensated
employees will not be subject to the tax. The costs of this excise tax—but not the regular income tax—would
be borne by the company. To avoid triggering the excise tax, payments that would otherwise be due under the
program that are up to three percent over the IRS limit will be cut back to the IRS limit. Effective in 2010, this
cutback threshold will be raised to ﬁ ve percent above the IRS limit.

Share Ownership and Retention Guidelines; Hedging Prohibition
Share ownership and retention guidelines help to foster a focus on long-term growth. The committee has adopted
a guideline requiring the CEO to own Lilly stock valued at least ﬁ ve times his or her annual base salary, and other
executive ofﬁ cers to own at least three times their annual base salary. A phase-in of up to ﬁ ve years is provided
for newly hired or promoted executive ofﬁ cers. Individual shareholding requirements were set at the beginning of
2008, and will be reset for each individual periodically or when their job changes signiﬁ cantly. Lilly executives have
a long history of maintaining extensive holdings in Lilly stock, and all executive ofﬁ cers already meet or exceed the
guideline, or in the case of new executive ofﬁ cers, are on track to meet or exceed the guideline within the phase-in
period. As of his retirement, Mr. Taurel held shares valued at 50 times his salary and Dr. Lechleiter currently holds
shares valued, as of year-end 2008, at seven times his salary.

Executive ofﬁ cers are required to retain all shares received from the company equity programs, net of acqui-
sition costs and taxes, for at least one year. In addition, any executive ofﬁ cer who does not meet the stock owner-
ship guideline must retain all net shares until the requisite ownership level is achieved.

Employees are not permitted to hedge their economic exposures to the Lilly stock that they own through short

sales or derivative transactions.

Tax 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 certain executive ofﬁ cers. However, performance-based compensation 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 com-
pensation objectives.

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We have taken steps to qualify cash bonus compensation, performance awards, and SVAs for full deduct-
ibility 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 2008, the non-deductible compensation under this law for Dr. Lechleiter was essentially
equal to the portion of his base salary that exceeded $1,000,000 as shown in the Summary Compensation Table.
Mr. Taurel’s non-deductible compensation was approximately the amount listed under “All Other Compensation” in
the Summary Compensation Table.

Executive Compensation Recovery Policy
Any incentive awards, including SVAs, are subject to forfeiture prior to payment for termination of employment or
disciplinary reasons. In addition, the committee has adopted an executive compensation recovery policy applicable
to executive ofﬁ cers. Under this policy, the company may recover incentive compensation (cash or equity) that was
based on achievement of ﬁ nancial results 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. The committee and manage-
ment have implemented a three-pronged approach to minimizing the risk of compensation programs encouraging
misconduct or undue risk-taking. First, incentive programs are designed using a diversity of meaningful ﬁ nancial
metrics (growth in total shareholder return, measured over three years, net sales, and EPS, measured over one
and two years), thus providing a balanced approach between short- and long-term performance. The committee
reviews incentive programs each year against the objectives of the programs and makes changes as necessary.
Second, management has implemented effective controls that minimize unintended and willful reporting errors.
Third, if despite these actions an executive ofﬁ cer’s fraudulent conduct leads to “ill-gotten gains” due to misstated
ﬁ nancial results, the committee will “claw back” the portion of a bonus or performance award attributed to the
misstatement. The committee does not believe it is practical to apply a speciﬁ c claw-back policy to the shareholder
value award since it is very difﬁ cult to isolate the amount, if any, by which the stock price beneﬁ ted from misstated
earnings over the three-year performance period. In this case, the committee has the authority to exercise nega-
tive discretion to reduce or withhold payouts.

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 manage-
ment 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
89–99 of this proxy statement. The committee is satisﬁ ed that the “Compensation Discussion and Analysis” fairly
and completely represents the philosophy, intent, and actions of the committee with regard to executive compen-
sation. 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.

Compensation Committee
Karen N. Horn, Ph.D., Chair
Michael L. Eskew
J. Erik Fyrwald
Ellen R. Marram

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Summary Compensation Table 1

Name and Principal
Position

Sidney Taurel
Chairman Emeritus

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

Steven M. Paul, M.D.
Executive Vice President,
Science and Technology

Bryce D. Carmine
Executive Vice President,
Global Marketing and Sales

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

Robert A. Armitage
Senior Vice President and
General Counsel

Year

2008
2007
2006

Salary
($)

$1,080,313
$1,717,417
$1,650,333

$1,339,125
$1,149,083
$1,112,000

$1,000,250
$960,333
$916,167

Stock
Awards
($)2

$8,353,333
$6,443,000
$5,400,000

$6,621,333
$4,641,000
$3,510,000

$3,194,250
$2,852,671
$1,864,460

Option
Awards
($)2

$0
$600,000
$3,805,333

$0
$390,000
$3,967,976

$0
$200,000
$1,240,000

Non-Equity
Incentive Plan
Compensation
($) 3

Change
in Pension
Value
($) 4

All Other
Compensation
($) 5

Total
Compensation
($)

$2,329,154
$4,035,929
$2,764,308

$2,709,053
$2,160,277
$1,490,080

$1,309,327
$1,534,613
$1,043,514

$456,787
$0
$1,417,434

$2,221,597
$921,394
$1,156,247

$997,863
$396,687
$607,463

$839,428
$215,044
$192,409

$87,107
$70,761
$68,790

$18,372
$13,500
$55,789

$13,059,014
$13,011,390
$15,229,817

$12,978,215
$9,332,515
$11,305,093

$6,520,062
$5,957,804
$5,727,393

2008

$783,113

$2,958,333

$1,006,135

$1,158,720

$55,789

$5,962,090

2008
2007
2006

$834,117
$747,583
$615,000

$778,767
$741,667
$701,657

$2,485,000
$1,995,000
$675,000

$1,852,500
$1,995,000
$1,394,053

$318,133
$473,675
$590,928

$375,000
$716,400
$1,339,911

$1,027,632
$1,054,093
$580,466

$959,441
$1,045,750
$705,165

$455,226
$194,469
$168,627

$439,374
$232,697
$231,862

$86,034
$78,787
$37,722

$53,138
$45,551
$42,691

$5,206,142
$4,543,607
$2,667,743

$4,458,219
$4,777,065
$4,415,339

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 8 to our 2008 audited ﬁ nan-
cial statements on pages 50–52 of our annual report. No stock options were granted in 2008. Outstanding options
are expensed at a faster rate for individuals who are eligible to retire. As a result, Mr. Armitage’s options were
expensed entirely during 2008, and only Mr. Rice’s outstanding options are still being expensed.
3 Payments for 2008 performance were made in March 2009 under the Eli Lilly and Company Bonus Plan.
4 The amounts in this column are the change in pension value for each individual. No named executive ofﬁ cer
received preferential or above-market earnings on deferred compensation.
5 The table below shows the components of this column for 2006 through 2008, which include the company match
for each individual’s savings plan contributions, tax reimbursements, and perquisites.

Name

Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Carmine

Mr. Rice

Mr. Armitage

Year

2008
2007
2006

2008

2008
2007
2006

Savings Plan
Match

Tax
Reimbursements 1

Perquisites 2

Other

Total “All Other
Compensation”

$64,819
$103,045
$99,020

$80,348
$68,945
$66,720

$13,800
$13,500
$54,970

$46,987

$50,047
$44,855
$36,900

$46,726
$44,500
$42,099

$752,768 3
$2,731
$1,382

$6,759
$1,816
$2,070

$4,572
$0
$819

$6,510

$6,246
$15,030 4
$822

$6,412
$1,051
$592

$21,840
$109,268
$92,007

$0
$0
$0

$29,741
$0
$0

$0
$0
$0

$0
$18,902 5
$0

$0
$0
$0

$839,428
$215,044
$192,409

$87,107
$70,761
$68,790

$18,372
$13,500
$55,789

$53,497

$86,034
$78,787
$37,722

$53,138
$45,551
$42,691

1 Tax reimbursements for expenses for each executive’s spouse to attend certain company functions involv-
ing spouse participation. For Mr. Taurel and Mr. Rice, these amounts include income imputed for use of the
corporate aircraft to attend outside board meetings.
2 These amounts include the incremental cost to the company of use of the corporate aircraft to attend outside
board meetings and, for Mr. Taurel, one personal trip in 2007, offset by Mr. Taurel’s reimbursement under the
time-share agreement. The incremental cost of Mr. Taurel’s use of the corporate aircraft was $10,218 in 2008,
$107,105 in 2007 and $91,069 in 2006. Mr. Rice’s use of the corporate aircraft was $25,839 in 2008. The amounts
in this column also include Mrs. Taurel’s and Mrs. Nelson-Rice’s expenses to attend board functions that
included spouse participation. In addition, Mr. Taurel’s family members have occasionally accompanied him on

100100

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business trips, at no incremental cost to the company. 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 expens-
es, 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.
3 This amount includes tax payments and related reimbursements totaling $720,360 related to the FICA tax
payment made by the company for Mr. Taurel on beneﬁ ts he accrued under the company’s nonqualiﬁ ed pen-
sion plan. All participants in the nonqualiﬁ ed pension plan are eligible for this one-time reimbursement upon
retirement. Payments are made directly to the IRS, not to the employee.
4 For Mr. Rice, this amount includes $13,051 in tax reimbursements in 2007 for the payment described in foot-
note 5 below.
5 Reimbursement for an over-withholding of taxes by the company in a prior year when Mr. Rice was on an
overseas assignment.

We have no employment agreements with our named executive ofﬁ cers. See, however, the description of

additional years of service that may be credited to certain named executive ofﬁ cers (page 106).

Grants of Plan-Based Awards During 2008
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 89, 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, shareholder
value awards, stock options, restricted stock grants, and stock units.

Name

Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Carmine

Mr. Rice

Mr. Armitage

Compensation
Committee
Action Date

—
12/17/2007
12/17/2007

Grant Date

—
2/7/2008 4
2/7/2008 5

—
12/17/2007
12/17/2007

—
2/7/2008 4
2/7/2008 5

—
12/17/2007
12/17/2007

—
2/7/2008 4
2/7/2008 5

—
12/17/2007
12/17/2007

—
2/7/2008 4
2/7/2008 5

—
12/17/2007
12/17/2007

—
2/7/2008 4
2/7/2008 5

—
12/17/2007
12/17/2007

Estimated Possible Payouts
Under Non-Equity
Incentive Plan Awards 1

Estimated Possible and Future
Payouts Under Equity
Incentive Plan Awards 2

Threshold
($)

Target
($)

Maximum
($)

Threshold
(# shares)

Target
(# shares)

Maximum
(# shares)

$226,866

$1,512,438

$3,024,875

All Other
Option
Awards:
Number of
Securities
Underlying
Options 3

$263,869

$1,759,125

$3,518,250

$127,532

$850,213

$1,700,425

$98,000

$653,334

$1,306,669

$100,094

$667,293

$1,334,587

$93,452

$623,013

$1,246,027

39,047
42,542

78,094
106,355

156,189
148,897

31,726
34,565

63,452
86,414

126,904
120,980

14,643
15,953

29,285
39,884

58,571
55,838

14,643
15,953

29,285
39,884

58,571
55,838

11,714
12,762

23,428
31,907

46,857
44,670

8,346
9,093

16,693
22,734

33,385
31,828

Grant Date
Fair Value
of Equity
Shares

$4,000,000
$4,000,000

$3,250,000
$3,250,000

$1,500,000
$1,500,000

$1,200,000
$1,200,000

$855,000
$855,000

1 These columns show the threshold, target, and maximum payouts for 2008 performance under the Eli Lilly and
Company Bonus Plan. As described in the section titled “Cash Incentive Bonuses” in the “Compensation Discus-
sion and Analysis,” bonus payouts range from zero to 200 percent of target. The 2009 bonus payment for 2008
performance has been made based on the metrics described, at 154 percent of target, and is shown in the Sum-
mary Compensation Table in the column titled “Non-Equity Incentive Plan Compensation.”
2 These columns show the range of payouts targeted for 2008 performance under the 2002 Lilly Stock Plan as
described in the sections titled “Equity Incentives—Performance Awards” and “Equity Incentives—Shareholder
Value Awards” in the “Compensation Discussion and Analysis.”
3 No stock options were granted to named executive ofﬁ cers in 2008.

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4 These rows show performance award grants. The dollar amount recognized as expense 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 footnote 2 to that table. Performance award payouts range
from zero to 200 percent of target. The 2008 performance award payout was made in January 2009 and is shown
in more detail below.
5 These rows show SVA grants. SVA payouts range from zero to 140 percent of target. The payout for the 2008
shareholder value award will be determined in January 2011.

Our performance awards granted in 2008 paid out in January 2009, and the named executive ofﬁ cers received

the following shares or restricted share units:

Name

Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Carmine

Mr. Rice

Mr. Armitage

Performance Awards

Value on December 31, 2008

136,665

111,041

51,249

40,999

29,213

$5,503,514

$4,471,605

$2,063,797

$1,651,030

$1,176,408

For 2008 performance, payouts were 175 percent of target. In order to receive a performance award payout,
a participant must have remained employed with the company through December 31, 2008 (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 restricted share units. Non-preferential dividends are accrued during the
one-year restriction period and paid upon vesting. Each executive was awarded the share units identiﬁ ed above,
and the units will remain restricted (and subject to forfeiture if the executive resigns) until February 2010, at which
time the units will be paid out in the form of shares. Mr. Taurel’s shares vested upon his retirement from the com-
pany on December 31, 2008.

Our shareholder value awards granted in 2008 will pay out at the end of the three-year performance period

according to the grid shown on page 95 of the “Compensation Discussion and Analysis.”

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102102

Outstanding Equity Awards at December 31, 2008

Option Awards

Stock Awards

Name

Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Carmine

Mr. Rice

Mr. Armitage

Number of
Securities
Underlying
Unexercised
Options (#) 1
Exercisable

Number of
Securities
Underlying
Unexercised
Options (#) 1
Unexercisable

Option
Exercise Price
($)

Option
Expiration
Date

Number of
Shares or
Units of Stock
That Have Not
Vested (#) 2

Market Value of
Shares or Units
of Stock
That Have Not
Vested ($) 2

136,665 5

$5,503,514

Equity Incentive
Plan Awards:
Number of
Unearned
Shares, Units,
or Other Rights
That Have Not
Vested (#)

Equity Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units,
or Other Rights
That Have Not
Vested ($)

106,355 3
68,426 4

$4,282,916
$2,755,515

216,867
255,621
400,000
350,000
350,000 7
175,000
350,000
350,000

127,811
200,000
120,000
120,000 8
60,000
10,000
100,000
80,000

85,207
120,000
50,000
46,000
23,000
75,900
25,000 10
25,000 10

46,000

42,604
55,000
57,000
50,000
23,000
50,600
46,000

23,077
25,000
11,200
10,000
5,000
12,000
10,000

53,254
80,000
80,000
23,800
7,000
23,100
14,000

140,964

72,289

50,000 10

37,651

30,000
27,108

54,217

$56.18
$55.65
$73.11
$57.85
$75.92
$79.28
$88.41
$66.38

$56.18
$55.65
$73.11
$57.85
$75.92
$79.28
$88.41
$88.41
$66.38

$56.18
$55.65
$73.11
$57.85
$75.92
$79.28
$73.98
$88.41
$88.41
$88.41
$66.38

$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

$56.18
$55.65
$73.11
$57.85
$75.92
$79.28
$73.98
$66.38

12/31/2013
12/31/2013
12/31/2013
2/15/2013
2/17/2012
10/4/2011
12/17/2010
10/16/2009

2/9/2016
2/10/2015
2/14/2014
2/15/2013
2/17/2012
10/4/2011
12/17/2010
12/17/2010
10/16/2009

2/9/2016
2/10/2015
2/14/2014
2/15/2013
2/17/2012
10/4/2011
2/18/2011
12/17/2010
12/17/2010
12/17/2010
10/16/2009

2/9/2016
2/10/2015
2/14/2014
2/15/2013
2/17/2012
10/4/2011
2/18/2011
10/16/2009

4/29/2016
2/9/2016
2/10/2015
2/14/2014
2/15/2013
2/17/2012
10/4/2011
2/18/2011
10/16/2009

2/9/2016
2/10/2015
2/14/2014
2/15/2013
2/17/2012
10/4/2011
2/18/2011
10/16/2009

111,041 5
73,354 6

$4,471,605
$2,953,966

86,414 3
44,477 4

$3,479,892
$1,791,089

51,249 5
5,000 9
44,256 6

$2,063,797
$201,350
$1,782,189

39,884 3
26,834 4

$1,606,129
$1,080,605

51,249 5

$2,063,797

39,884 3
10,320 4

$1,606,129
$415,586

40,999 5
31,532 6

$1,651,030
$1,269,794

31,907 3
19,119 4

$1,284,895
$769,922

29,213 5
31,532 6

$1,176,408
$1,269,794

22,734 3
19,119 4

$915,498
$769,922

103103

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1 The vesting date of each option is listed in the table below by expiration date. Mr. Taurel’s options all vested upon

his retirement and they will expire on the earlier of the expiration date listed below or December 31, 2013:

Expiration Date

Vesting Date

Expiration Date

Vesting Date

04/29/2016

05/01/2009

02/17/2012

02/18/2005

02/09/2016

02/10/2009

10/04/2011

10/03/2003

02/10/2015

02/11/2008

02/18/2011

02/20/2004

02/14/2014

02/19/2007

12/17/2010

12/18/2003

02/15/2013

02/17/2006

10/16/2009

10/18/2002

2 These two columns show performance award shares paid in restricted shares or share units with a holding period
of one year. This award paid out in 2008 for 2007 performance. The restricted stock shares pay dividends during
the restriction period, but the dividends are not preferential.

3 Shares granted under the company’s Shareholder Value Award plan that will vest December 31, 2010. The number
of shares reported in the table reﬂ ects the target payout amount, which will be made if the average stock price in
November and December 2010 is between $62.00 and $65.99. Actual payouts may vary from zero to 140 percent
of target. Had the performance period ended at year end 2008, the payout would have been zero percent of target.
Mr. Taurel will receive one third of his payout amount, reﬂ ecting his retirement after the ﬁ rst year of the three-
year performance period.

4 Shares granted under the company’s Shareholder Value Award plan that will vest December 31, 2009. The number
of shares reported in the table reﬂ ects the target payout amount, which will be made if the average stock price in
November and December 2009 is between $63.00 and $66.99. Actual payouts may vary from zero to 140 percent
of target. Had the performance period ended at year end 2008, the payout would have been zero percent of target.
Mr. Taurel will receive two thirds of his payout amount, reﬂ ecting his retirement after the second year of the
three-year performance period.

5 Share units granted under the company’s Performance Award plan paid out in January 2009 for 2008 perfor-

mance. These shares will vest in February 2010. Mr. Taurel’s shares vested upon his retirement.

6 Shares granted under the company’s Performance Award plan paid out in January 2008 for 2007 performance.

These shares vested in February 2009.

7 Mr. Taurel transferred 348,683 shares of this option to a trust for the beneﬁ t of his children, and these shares

vested on April 30, 2002. 149,172 shares of this option are held in trust for the beneﬁ t of Mr. Taurel’s children, and
the remainder have been transferred back to Mr. Taurel.

8 Dr. Lechleiter transferred 118,683 shares of this option to a trust for the beneﬁ t of his children, and these shares
vested on April 30, 2002. 50,734 shares of this option are held in trust for the beneﬁ t of Dr. Lechleiter’s children,
and the remainder have been transferred back to Dr. Lechleiter.

9 These shares will vest on December 20, 2010.
10 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.

Options Exercised and Stock Vested in 2008

Name

Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Carmine

Mr. Rice

Mr. Armitage

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
($)

100,000
96,120

62,478

32,040

9,796

24,030

$3,967,000
$4,952,102

$3,218,867

$1,650,701

$994,098

$1,238,026

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 2007 for company performance in 2006, which were subject to forfeiture for one year

104104

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following issuance. For Mr. Taurel, these amounts also include a performance award issued in January 2008 for
company performance in 2007, which vested upon 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 six percent of base salary.
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 100 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 100 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 ($185,000 in 2008) as well as on the amount of annual earnings that can be used to
calculate a pension beneﬁ t ($230,000 in 2008). However, since 1975 the company has maintained a non-tax-quali-
ﬁ ed pension 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 nonqualiﬁ ed pension 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 2008

Name

Mr. Taurel

Dr. Lechleiter 2

Dr. Paul 3

Mr. Carmine 4

Mr. Rice

Mr. Armitage 5

Plan

tax-qualiﬁ ed plan

nonqualiﬁ ed plan

total

tax-qualiﬁ ed plan

nonqualiﬁ ed plan

total

tax-qualiﬁ ed plan

nonqualiﬁ ed plan

total

tax-qualiﬁ ed plan

nonqualiﬁ ed plan

total

tax-qualiﬁ ed plan

nonqualiﬁ ed plan

total

tax-qualiﬁ ed plan

nonqualiﬁ ed plan

total

Number of Years of
Credited Service

Present Value of
Accumulated Beneﬁ t ($) 1

Payments During Last
Fiscal Year ($)

$1,164,665

$29,699,031

$30,863,696

$820,109

$8,699,133

$9,519,242

$289,080

$3,998,445

$4,287,525

$1,159,841

$4,413,493

$5,573,334

$259,527

$999,084

$1,258,611

$2,201,713

$1,198,148

$3,399,861

1 The calculation of present value of accumulated beneﬁ t assumes a discount rate of 6.9 percent, mortality RP
2000CH (post-retirement decrement only), and joint and survivor beneﬁ t of 25 percent.
2 Dr. Lechleiter is currently eligible for early retirement. He qualiﬁ es for approximately eight percent less than his
full retirement beneﬁ t. Early retirement beneﬁ ts are further described below.
3 Dr. Paul is currently eligible for early retirement. He qualiﬁ es for approximately 20 percent less than his full
retirement beneﬁ t. Dr. Paul’s potential additional service credit, described below, increased the present value of
his nonqualiﬁ ed pension beneﬁ t shown above by $1,531,259.
4 Mr. Carmine is currently eligible for full retirement beneﬁ ts.
5 Mr. Armitage is currently eligible for early retirement. His additional service credit, described below, does not
change the present value of his nonqualiﬁ ed pension beneﬁ t, which is approximately ﬁ ve percent less than his full
retirement beneﬁ t.

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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 and any qualifying survivor. 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 (ﬁ nal average 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 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 fol-
lowing 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

unmarried dependents may elect that, upon the retiree’s death, the plan will pay survivor annuity beneﬁ ts at either
25, 50, or 75 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. Dr. Paul will receive 10 years of additional service credit if he remains
employed by the company past age 60, or is involuntarily terminated before he turns 60. 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. Since Mr. Armitage reached age 60 with 9.75 years of service, he has been treated
as though he has, for eligibility purposes only, 20 years of service. The additional service credit made him eligible
to begin reduced beneﬁ ts nine months early, but did not change the timing or amount of his unreduced beneﬁ ts
(shown in the Pension Beneﬁ ts in 2008 table on page 105). A grant of additional years of service credit to any
employee must be approved by the compensation committee of the board of directors.

Upon retirement, Mr. Taurel was appointed chairman emeritus, effective January 1, 2009. In connection with
that appointment, we are providing the following administrative support arrangement to Mr. Taurel, in addition to
normal retirement programs. This arrangement has been granted for a period of ﬁ ve years following his retire-
ment, at which point the compensation committee of the board of directors may elect to extend this arrangement
for an additional period, if requested by Mr. Taurel.

Beneﬁ t

Ofﬁ ce space 1

Incremental Cost
to the Company (annualized)

—

Administrative and computer/technology support 2

$40,000

Parking at company facilities

—

1 Currently this space is provided in the corporate headquarters at no incremental cost to the company.
2 The incremental cost to the company is calculated by estimating the cost of computer hardware, software, and IT
support, as well as part-time administrative support.

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106106

Nonqualiﬁ ed Deferred Compensation in 2008

Name

Plan

Executive
Contributions in
Last Fiscal Year
($) 1

Registrant
Contributions in
Last Fiscal Year
($) 2

Aggregate
Earnings in Last
Fiscal Year
($)

Aggregate
Withdrawals/
Distributions in
Last Fiscal Year
($)

Aggregate
Balance at Last
Fiscal Year End
($) 3

Mr. Taurel

nonqualiﬁ ed savings

$51,019

($902,296)

deferred compensation

total

Dr. Lechleiter

nonqualiﬁ ed savings

—

$51,019

$66,548

deferred compensation

$1,080,138

total

$1,146,686

Dr. Paul

nonqualiﬁ ed savings

deferred compensation

total

Mr. Carmine

nonqualiﬁ ed savings

deferred compensation

total

Mr. Rice

nonqualiﬁ ed savings

deferred compensation

total

Mr. Armitage

nonqualiﬁ ed savings

—

$33,187

$344,422

$377,609

$36,247

—

$36,247

$32,926

deferred compensation

$1,020,457

total

$1,053,383

—

$51,019

$66,548

—

$66,548

—

$33,187

—

$33,187

$36,247

—

$36,247

$32,926

—

$32,926

$473,727

($428,569)

($282,414)

$210,586

($71,828)

($213,476)

—

($213,476)

($84,211)

$47,278

($36,933)

($62,423)

—

($62,423)

($136,712)

$179,099

$42,387

$2,170,064

$9,024,790

$11,194,854

$729,866

$4,207,892

$4,937,758

$485,199

—

$485,199

$215,816

$963,203

$1,179,019

$198,920

—

$198,920

$304,756

$3,597,219

$3,901,975

1 The amounts in this column are also included in the Summary Compensation Table on page 100, in the “Salary”
column (nonqualiﬁ 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 100, in the “All Other
Compensation” column as a portion of the savings plan match.
3 Of the totals in this column, the following amounts have previously been reported in the Summary Compensation
Table for this year and for previous years:

Name

Mr. Taurel

Dr. Lechleiter

Dr. Paul

Mr. Carmine

Mr. Rice

Mr. Armitage

2008 ($)

Previous Years ($)

$102,038

$1,213,233

$410,795

$72,494

$1,086,309

$3,520,965

$2,666,297

$218,711

$110,110

$2,620,075

Total ($)

$3,623,003

$3,879,530

$218,711

$410,795

$182,604

$3,706,384

The Nonqualiﬁ ed Deferred Compensation in 2008 table above shows information about two company pro-
grams: a nonqualiﬁ ed savings plan and a deferred compensation plan. The nonqualiﬁ ed savings plan is designed
to allow each executive to contribute up to six percent 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 employ-
ees 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 5.5 percent for 2008 and is 5.2 percent for 2009. 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.

107107

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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 shown below and described under “Retirement Beneﬁ ts” above, there are no agreements,
arrangements, or plans that entitle named 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 execu-
tive ofﬁ cer (other than following a change in control) would be at the discretion of the compensation committee.

Potential Payments Upon Termination of Employment

Incremental
Pension
Beneﬁ t
(present
value)

Continuation
of Medical/
Welfare
Beneﬁ ts
(present
value) 1

Cash
Severance
Payment

Acceleration
and
Continuation
of Equity
Awards
(unamortized
expense as of
12/31/08)

Mr. Taurel

• Voluntary retirement (12/31/08)

Dr. Lechleiter

• Voluntary retirement

• Involuntary termination

• Involuntary or good reason termination after

change in control (CIC)

$8,218,106

$1,616,631

$24,000

Dr. Paul

• Voluntary retirement

• Involuntary termination

$3,327,394 2

• Involuntary or good reason termination after CIC

$4,632,054

$4,695,338 2

$90,076 2

$114,076 2

Excise Tax
Gross-Up

Total
Termination
Beneﬁ ts

$3,678,530

$13,537,267

$3,417,470

$201,350

$3,537,468

$13,180,286

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Mr. Carmine

• Voluntary retirement

• Involuntary termination

• Involuntary or good reason termination after CIC

$3,772,270

$289,618

$24,000

$249,352

Mr. Rice

• Voluntary termination

• Involuntary termination

$4,335,240

• Involuntary or good reason termination after CIC

$3,755,264

$161,415

$24,000

$2,684,962

$1,498,108

$8,123,749

Mr. Armitage

• Voluntary retirement

• Involuntary termination

• Involuntary or good reason termination after CIC

$3,488,882

$498,064

$24,000

$2,278,154

$1,572,805

$7,861,906

1 See “Accrued Pay and Regular Retirement Beneﬁ ts” and “Change-in-Control Severance Pay Program—Continua-
tion of medical and welfare beneﬁ ts” on pages 108–110.
2 These amounts reﬂ ect an additional 10 years of service credit that would be credited to Dr. Paul upon an involun-
tary termination, other than for cause, should it occur before he reaches age 60 (see page 106 for more informa-
tion about Dr. Paul’s retirement beneﬁ ts).

Accrued Pay and Regular Retirement Beneﬁ ts. The amounts shown in the previous table 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 nonqualiﬁ ed pension plan. See “Retirement
Beneﬁ ts” on pages 105–106. The amounts shown in the table above as “Incremental Pension Beneﬁ t” 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 nonqualiﬁ ed savings plan. See the narrative
following the Nonqualiﬁ ed Deferred Compensation in 2008 table on page 107 for information about the 401(k)

108108

plan, the deferred compensation plan, and the nonqualiﬁ 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 and shareholder value 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 Nonqualiﬁ ed Deferred Compensation in 2008
table on page 107.

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 Beneﬁ ts” on pages 97–98, the company maintains a change-in-control severance pay program for near-
ly all employees, including the named executive ofﬁ cers (the “CIC Program”). The CIC Program deﬁ nes a change in
control very speciﬁ cally, but generally the term includes the occurrence of, or entry into, an agreement to do one of
the following: (a) acquisition of 15 percent (20 percent beginning October 20, 2010) or more of the company’s stock;
(b) replacement by the shareholders of one third (one half beginning October 20, 2010) or more of the board of direc-
tors; (c) consummation of a merger, share exchange, or consolidation of the company; or (d) liquidation of the com-
pany or sale or disposition of all or substantially all of its assets. The amounts shown in the table for “involuntary or
good reason termination” following a change in control are based on the following assumptions and plan provisions:
• 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, 2008. 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 or 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 or her of additional responsibilities that materially increase his or 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 or 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 2008 annual base salary plus two

times the cash bonus for 2008 under the Eli Lilly and Company Bonus Plan.

• Incremental pension beneﬁ t. Represents the present value of an incremental nonqualiﬁ ed pension beneﬁ t of

two years of age credit and two years of service credit that is provided under the CIC Program. The incremental
pension beneﬁ t will be discontinued effective October 20, 2010. The following standard actuarial assumptions
were used to calculate each individual’s incremental pension beneﬁ t:

Discount rate:

Mortality (post-retirement only):

6.9 percent

RP 2000CH

Joint & survivor beneﬁ t:

25% of pension

109109

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For Dr. Paul, the amounts in the table above reﬂ ect the 10 years of additional service credit described on page 106.

• 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. Effective October 20, 2010, the coverage
period will be reduced to 18 months. For Dr. Paul, the amount in the table reﬂ ects the 10 years of additional
service credit described on page 106, which makes him eligible for an enhanced retiree medical beneﬁ t. 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. Payment of the shareholder value award (SVA) is accelerated in the case
of a change in control in which Lilly is not the surviving entity. For the four retirement-eligible employees, Dr.
Lechleiter, Dr. Paul, Mr. Carmine, and Mr. Armitage, the only other equity award receiving accelerated vesting
and term extension because of the CIC Plan would be 5,000 shares of restricted stock held by Dr. Paul; all
other unvested equity awards (with the exception of the SVA) 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 named executive ofﬁ cer who is not
retirement-eligible, Mr. Rice, would receive the beneﬁ t under the CIC Plan of continuation of his 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 reimbursement. 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 the
reimbursement. The amounts in the table are based on a 280G excise tax rate of 20 percent and a 40 percent
federal, state, and local income tax rate. To reduce the company’s exposure to these reimbursements, the
employee’s severance will be cut back by up to three percent (ﬁ ve percent effective October 20, 2010) if the effect
is to avoid triggering the excise tax under Section 280G.

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Payments Upon Change in Control Alone. In general, 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 con-
summation of a change in control a partial payment of outstanding performance awards would be made, reduced
to reﬂ ect only the portion of the year worked prior to the change in control. For example, if a change in control
occurred on June 30, the employee would receive one-half of the value of the performance award, calculated
based on the company’s then-current ﬁ nancial forecast for the year. Likewise, in the case of a change in control in
which Lilly is not the surviving entity, the SVA will pay out based on the change-in-control stock price and prorated
for the portion of the three-year performance period elapsed.

Related-Person Transaction
As noted above, for security reasons the company aircraft was made available to Mr. Taurel prior to his retirement
for all travel. The company entered into a time-share arrangement (now ended) with Mr. Taurel in connection with
his personal use of company aircraft. Under the time-share agreement, Mr. Taurel leased the company aircraft,
including crew and ﬂ ight services, for personal ﬂ ights. He paid 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 com-
mercially available) or (ii) the Standard Industry Fare Levels as established by the Internal Revenue Service for
purposes of determining taxable fringe beneﬁ ts.

110110

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 3, 2009.

The table shows shares held by named executives in the Lilly Employee 401(k) Plan, shares credited to the

accounts of outside directors in the Lilly 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 3, 2009.

Name

Robert A. Armitage

Sir Winfried Bischoff

Bryce D. Carmine

J. Michael Cook

Michael L. Eskew

Martin S. Feldstein, Ph.D.

J. Erik Fyrwald

Alfred G. Gilman, M.D., Ph.D.

Karen N. Horn, Ph.D.

John C. Lechleiter, Ph.D.

Ellen R. Marram

Douglas R. Oberhelman

Steven M. Paul, M.D.

Franklyn G. Prendergast, M.D., Ph.D.

Derica W. Rice

Kathi P. Seifert

Sidney Taurel

401(k) Plan Shares

Directors’ Deferral
Plan Shares 1

Total Shares Owned
Beneﬁ cially 2

Stock Options Exercis-
able Within 60 Days of
February 3, 2009

1,932

—

4,717

—

14,163

—

552

—

5,559

—

18,061

—

16,237

—

15,683

4,513

14,529

16,673

22,424

35,769

—

14,529

—

28,317

—

24,176

—

63,424

18,237

44,348

17,483

4,513

15,529

16,786

22,424

35,769

229,400 3

15,529

43,538

28,317

59,689

27,709

335,371

11,200

361,855

—

8,400

—

14,000

958,775

5,600

—

568,396

14,000

123,385

14,000

1,064,059 4

2,447,488

All directors and executive ofﬁ cers as a group (22 people):

1,925,653

1 See description of the Lilly Directors’ Deferral Plan, page 83.
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 0.09 percent of the outstanding common stock of the company. All directors and executive
ofﬁ cers as a group own 0.17 percent of the outstanding common stock of the company. 1,800 of Mr. Cook’s shares
were on deposit in a margin account as of February 3, 2009.
3 The shares shown for Dr. Lechleiter include 13,470 shares that are owned by a family foundation for which he is a
director. Dr. Lechleiter has shared voting power and shared investment power over the shares held by the founda-
tion.
4 The shares shown for Mr. Taurel are presented as of his retirement, December 31, 2008, and include 17,304 shares
that are owned by a family foundation for which he is a director. Mr. Taurel has shared voting power and shared
investment power over the shares held by the foundation.

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111111

Principal Holders of Stock
To the best of the company’s knowledge, the only beneﬁ cial owners of more than ﬁ ve 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

Capital World Investors
333 South Hope Street
Los Angeles, California 90071

Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109

PRIMECAP Management Company
225 South Lake Ave., #400
Pasadena, California 91101

Number of Shares
Beneﬁ cially Owned

135,670,804
(as of 2/3/09)

66,088,590
(as of 12/31/08)

65,015,094
(as of 12/31/08)

59,240,937
(as of 12/31/08)

Percent of Class

11.9%

5.8%

5.7%

5.2%

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, Charles E. Golden, Eli Lilly II,
and Eugene F. Ratliff (emeritus director). Each of the directors is, either directly or indirectly, a shareholder of the
company.

Capital World Investors is a division of Capital Research and Management Company. It has sole voting power

with respect to 1,240,000 shares (approximately 0.11 percent of shares outstanding) and sole 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 19,428,434 shares (approximately 1.71 percent of shares outstanding) and shared investment
power with respect to all of its shares.

PRIMECAP Management Company acts as investment advisor to various clients. It has sole voting power with

respect to 17,464,474 shares (approximately 1.54 percent of shares outstanding) and sole investment power with
respect to all of its shares.

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112112

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 2012. 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:

• Martin S. Feldstein, Ph. D.
• J. Erik Fyrwald
• Ellen R. Marram
• Douglas R. Oberhelman

Biographical information about these nominees may be found on pages 73–74 of this proxy statement. Information
about certain legal matters may be found on page 122.

Item 2. Proposal to Ratify the Appointment of Principal Independent Auditor

The audit committee has appointed the ﬁ rm of Ernst & Young LLP as principal independent auditor for the com-
pany for the year 2009. In accordance with the bylaws, this appointment is being submitted to the shareholders for
ratiﬁ cation. Ernst & Young served as the principal independent auditor for the company in 2008. Representatives
of Ernst & Young are expected to be present at the annual meeting and will be available to respond to questions.
Those representatives will have the opportunity to make a statement if they wish to do so.

The board recommends that you vote FOR ratifying the appointment of Ernst & Young LLP as principal indepen-
dent auditor for 2009.

Item 3. Proposal to Amend the Company’s Articles of Incorporation to Provide for Annual Election of All 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. On the recommendation of the directors and corporate gov-
ernance committee, the board has approved, and recommends to the shareholders for approval, amendments to
provide for the annual election of directors. This proposal was brought before shareholders in April 2007 and again
in April 2008, and received the vote of more than 75 percent of the outstanding shares at each meeting; however,
the proposal requires the vote of 80 percent of the outstanding shares to pass.

If approved, this proposal will become effective upon the ﬁ ling of amended and restated articles of incor-

poration containing these amendments with the Secretary of State of Indiana, which the company intends to do
promptly after shareholder approval is obtained. Directors elected prior to the effectiveness of the amendments
will stand for election for one-year terms once their then-current terms expire. This means that directors whose
terms expire at the 2010 and 2011 annual meetings of shareholders would be elected for one-year terms, and
beginning with the 2012 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 2009 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.

113113

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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, and to the 77 percent favorable vote for management’s proposal in 2008 (75 percent in 2007).
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 recognizes those potential beneﬁ ts,
it also notes that even without a classiﬁ ed board, the company has other means to compel a takeover bidder to
negotiate with the board, including certain “supermajority” vote requirements in its amended articles of incorpora-
tion (as described in the company’s response to Item 5 on page 117), other provisions of its articles and bylaws, and
certain provisions of Indiana law.

On the recommendation of the directors and corporate governance committee, the board approved the
amendments, and now recommends that the shareholders approve them. Although this proposal did not pass in
2008, the board continues to support this change and believes that by taking this action, it can provide sharehold-
ers 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 to provide for
annual election of all directors.

Item 4. Reapproval of Material Terms of Performance Goals for the Eli Lilly and Company Bonus 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 Eli Lilly and Company Bonus Plan (the plan) allows the grant of cash bonuses that qualify as performance-

based compensation under Section 162(m) of the Code. 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 plan was when the plan itself was approved in 2004. To preserve the tax status of compa-
ny bonuses 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 plan. If this proposal is not adopted, the committee will continue to grant cash bonuses
under the plan, but certain executive ofﬁ cer bonuses would no longer be fully tax deductible by the company.

Purpose of the Plan
The purpose of the plan is to motivate superior performance and teamwork by employees at all levels of the com-
pany by linking annual cash bonuses to important corporate performance measures. Bonus payments are linked
directly to both individual and corporate performance. Exceptional performance by individuals and the company
will lead to increases in bonuses, and shortfalls in performance will lead to bonus reductions.

Principal Features of the Plan
The following is a summary of the material features of the plan:

• Administration. The plan is administered by the compensation committee of the board, which is composed

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entirely of independent directors. The committee has authority to delegate plan administration with respect to
employees other than the executive ofﬁ cers.

• Eligibility. Plan participants include all executive ofﬁ cers, all management employees worldwide, most U.S. and
Puerto Rico nonmanagement employees, and selected employees outside the United States. The committee may
include other employees at its discretion. For 2008, approximately 17,500 employees were eligible to participate.
• Performance Measures and Bonus Calculation. Prior to the beginning of each year, the committee establishes

the following elements necessary for the bonus calculation:
—Bonus targets are established for participants based on a schedule that associates job responsibilities with a

bonus target amount expressed as a percentage of regular earnings for the year.

—Company performance measures are established for the year. The committee may select one or more

from among the following measures: growth in net income or earnings per share; growth in sales; return
on assets; return on equity; total shareholder return; economic value added; market value added; or any
of the foregoing before the effect of acquisitions, divestitures, accounting changes, changes in corporate
capitalization, restructurings, and special charges or gains (determined according to objective criteria
established by the committee not later than 90 days after the beginning of the year). Unless the committee
chooses otherwise, the company performance measures are based 75 percent on earnings-per-share growth
and 25 percent on sales growth. Bonuses for 2009 will be based on this measure.

—A bonus multiple is used to adjust the bonus target to account for company performance. The committee

establishes performance benchmarks for sales and earnings growth after considering expected peer group
performance. If the benchmarks are met exactly, the bonus multiple would be 100 percent of the bonus
target. Actual bonus multiples will vary depending on company performance relative to the benchmarks.
The maximum bonus multiple is 200 percent of the bonus target and the threshold multiple is 25 percent of
the bonus target (zero for executive ofﬁ cers), except that the committee has discretion to reduce the bonus
multiple to a lower percentage or to zero. The committee does not have discretion to increase the multiple.

• Individual Performance Adjustments. For employees other than executive ofﬁ cers, the committee will establish

performance multipliers which correspond to individual performance ratings on an annual basis. Executive
ofﬁ cers’ awards may not be adjusted upward.

• Payment. Payment will be made following certiﬁ cation by the committee of the company’s actual performance
results for the year. No executive ofﬁ cer’s bonus payment may exceed $7 million in any one year. Participants
must remain employed until the end of the year to receive a bonus, except in the case of retirement, death,
disability, and certain leaves of absence.

• Amendment. The plan may be amended at any time by the board or the committee. Shareholder approval
of amendments may be sought to the extent the company deems it necessary or advisable to preserve tax-
deductibility under Section 162(m) of the Code.

It is not possible to predict with certainty the bonuses that would be payable to the executive ofﬁ cers with respect
to 2009 performance. However, if the company were to meet the target performance benchmarks for earnings-
per-share growth and sales growth, and assuming no change in the regular earnings of the executive ofﬁ cers for
the year, the following bonuses would be paid for 2009 (before taxes):

Mr. Taurel—no longer eligible
Dr. Lechleiter—$2,100,000
Dr. Paul—$933,210
Mr. Carmine—$831,600
Mr. Rice—$720,800
Mr. Armitage—$653,120
All executive ofﬁ cers as a group (10 ofﬁ cers): $7,382,020

It is not possible to estimate the aggregate 2009 bonuses that would be payable to all eligible employees as a group.

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Equity Compensation Plan Information
The following table presents information as of December 31, 2008, about our other compensation plans under
which shares of Lilly stock have been authorized for issuance.

Plan category

Equity compensation plans approved by security holders

Equity compensation plans 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

63,429,738

8,594,960

72,024,698

$68.48

$75.76

$69.35

(c) Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding securities
reﬂ ected in (a))

87,996,763

0 ²

87,996,763

1 Represents shares in the Lilly GlobalShares Stock Plan, which permits the company to grant stock options to non-
management 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 administrator may adjust the number of shares available for grant, the number of shares subject to outstand-
ing grants, and the exercise price of outstanding grants.
2 The Lilly GlobalShares Stock Plan was terminated in February 2009. No more grants can be made under this plan.

The board recommends that you vote FOR reapproving the material terms of performance goals for the Eli Lilly
and Company Bonus Plan.

Item 5. Shareholder Proposal on Eliminating Supermajority Voting Provisions from the Company’s Articles of
Incorporation and Bylaws

Dana Chatﬁ eld Jones, 1354 Campus Drive, Berkeley, California 94708, beneﬁ cial owner of approximately
100 shares, has submitted the following proposal:

Simple Majority Vote Standard
RESOLVED, Shareholders request that our board take the steps necessary so that each shareholder voting
requirement in our charter and bylaws, that calls for a greater than simple majority vote, be changed to a major-
ity of the votes cast for and against related proposals in compliance with applicable laws. This proposal applies to
each 80% provision in our charter and bylaws.

Supporting Statement: This proposal is submitted in part to support our Board and management in securing the
necessary vote to adopt the management proposals for annual election of each director, also known as declassify-
ing the board.

In 2007 and 2008 our management recommended that we vote in favor of management proposals for annual

election of each director. But although we responded and management won strong support of 75% and 77% of
shares outstanding it still fell disappointingly short of our 80% threshold.

This Simple Majority Vote proposal will reduce the threshold from 80% to 50% and one vote to adopt annual
election of each director. I believe this proposal will enable our management to secure the vote necessary to adopt
annual election of each director after these two disappointments.

Additionally this proposal topic to adopt simple majority voting received 63% of our yes and no votes at our

2008 annual meeting as a shareholder proposal. This proposal topic also won up to 89% support at the following
companies in 2008:

Whirlpool (WHR)
Lear Corp. (LEA)
Liz Claiborne (LIZ)

79%
88%
89%

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The Council of Institutional Investors recommends adoption of simple majority voting. The Council also rec-

ommends timely adoption of shareholder proposals upon receiving their ﬁ rst 51% or higher vote.

Please encourage our board to respond positively to this proposal and take the steps necessary to adopt a

simple majority voting standard.

Statement in Opposition to the Proposal on Eliminating Supermajority Voting Provisions from the Company’s
Articles of Incorporation and 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 supermajority vote requirements were approved by shareholders and are very limited.
Nearly all proposals submitted to a vote of shareholders can already be adopted by a simple majority vote. How-
ever, in 1985 the company’s shareholders voted to increase the approval requirement established in the articles
of incorporation for a few fundamental corporate actions. These actions, which require the approval of at least 80
percent of the outstanding shares, relate to:

• terms of ofﬁ ce of directors (i.e., the classiﬁ ed board structure)
• removal of directors prior to the end of their elected term
• the amendment of the articles of incorporation’s provisions relating to the terms of ofﬁ ce and removal of directors
• merger, consolidation, recapitalization, or certain other business combinations that are not approved by the

board of directors

• the amendment of the articles of incorporation’s provisions relating to such mergers and business combinations.

Under Item 3 of this proxy statement the board is recommending a vote to provide for annual election of directors.
If Item 3 is successful, the only signiﬁ cant matters that would require an 80 percent vote would be (i) removal of
directors other than through the annual election process and (ii) approval of mergers and business combinations
that are opposed by the board. These are rare and dramatic corporate actions that should not be undertaken with-
out the approval of a very large majority of shareholders.

The vote requirements help the board preserve long-term value for shareholders in the face of short-term
opportunistic threats.
The board believes that in adopting these supermajority voting provisions, the shareholders intended to preserve
and maximize the value of Lilly stock for all shareholders by protecting against short-term, self-interested actions
by one or a few large shareholders who would seek to make fundamental changes to the company without the
involvement of the board of directors.

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. In the event of an unsolicited bid to take over or restructure the company, these
supermajority voting provisions encourage bidders to negotiate with the board and give the board substantial
bargaining leverage. The provisions also give the board valuable time to consider alternative proposals that might
provide greater value for all shareholders.

The board believes that these supermajority voting provisions protect all shareholders by making it more dif-

ﬁ cult for one or a few large shareholders to restructure 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 shareholders.

In today’s troubled markets, takeover defenses are especially important.
In our analysis, the evidence does not support the view that large-scale pharmaceutical mergers have produced
sustained operating performance, competitive advantage, or superior returns for shareholders. Thus, under any
circumstances—and especially during a period of depressed stock prices—it is important that a board be able to
respond to opportunistic takeover bids from a position of strength, ensuring that the outcome is in the best inter-
ests of the company and all shareholders.

The board recommends that you vote AGAINST this proposal.

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Item 6. Shareholder Proposal on Allowing Shareholders to Amend the Company’s Bylaws

California Public Employees’ Retirement System (CalPERS), P.O. Box 942707, Sacramento, California 94229-2707,
beneﬁ cial owner of approximately 3,488,440 shares, has submitted the following proposal:

RESOLVED, that the shareowners of Eli Lilly & Company (“Company”) urge the Company to take all steps neces-
sary, in compliance with applicable law, to allow its shareowners to amend the Company’s bylaws by a simple
majority vote.

Supporting Statement: The most important shareowner power is the power to vote. In most cases, in addition to
having the power to vote to elect directors, shareowners are able to vote to amend a company’s bylaws. Approxi-
mately 95% of companies in the S&P 500 and the Russell 1000 allow shareowners to amend the bylaws. The Com-
pany is one of the very few companies in the S&P 500 that does not give shareowners this power.

Bylaws typically contain corporate governance provisions of the utmost importance to shareowners, e.g., the

ability to call a special meeting, the ability to remove directors, anti-takeover provisions, director election rules,
among other provisions. Without a formal mechanism to impact a company’s governance through bylaw amend-
ments, the shareowners of a company are disenfranchised. In fact, limiting shareowner ability to amend the
bylaws has been found to be one of six entrenching mechanisms that are negatively correlated with company per-
formance. See “What Matters in Corporate Governance?” Lucian Bebchuk, Alma Cohen & Allen Ferrell, Harvard
Law School, Discussion Paper No. 491 (09/2004, revised 03/2005).

This proposal asks for a simple majority vote standard to amend the bylaws of the Company since a super-

majority vote can be almost impossible to obtain in light 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 pass by a majority
of shares outstanding 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 shareowners, 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. At the Sara Lee
Corporation, approximately 81% of shareowners agreed when it passed a proposal identical to this proposal.

This is why CalPERS is sponsoring this proposal that, 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 1.5 million participants, and as the owner of approximately 3.4 million shares of the Company’s
common stock, CalPERS believes that corporate governance procedures and practices, and the level of account-
ability they impose, are closely related to ﬁ nancial performance. CalPERS also believes that shareowners are
willing to pay a premium for shares of corporations that have excellent corporate governance. 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.

Please vote FOR this proposal.

Statement in Opposition to the Proposal on Allowing Shareholders to Amend 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 current rules prevent the bylaws from being abused by special interest shareholder groups.
The company’s bylaws establish a number of fundamental corporate governance operating principles, including
rules for meetings of directors and shareholders, election and duties of directors and ofﬁ cers, authority to approve
transactions, and procedures for stock issuance. Under Indiana law, the bylaws can contain any provision regulat-
ing the operation of the business not prohibited by law or the articles of incorporation. 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 shareholders to the risk that a relatively small number of large share-
holders 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 would be detrimental to minority shareholders. Under the major-
ity vote standard endorsed by the proponent (requiring only a majority of shares voted at the meeting), sharehold-
ers holding signiﬁ cantly less than half of the outstanding shares could adopt bylaw amendments to further their

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own special interests. 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.

This proposal is not necessary to foster good governance or create growth in shareholder value.
The proponent suggests this proposal is necessary to foster good governance principles 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 accountable to sharehold-
ers. Further, the board has taken signiﬁ cant steps to demonstrate its continuing commitment to good corporate
governance and accountability to shareholders:

• In this proxy statement, the board is seeking shareholder approval to provide for annual election of all directors

(see Item 3).

• The board adopted a majority voting standard for uncontested director elections beginning this year.
• The board allowed the company’s shareholder rights plan to expire in 2008.

The proponent also suggests that adopting this proposal will enhance company performance. We certainly agree
that strong corporate governance practices beneﬁ t shareholders, but we do not believe that this 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 University1 found that companies that permit shareholders to amend
the bylaws performed no better or worse than those which reserve that power to the directors. This is consistent
with our view that adopting this proposal would not enhance our already strong corporate governance practices
and instead would expose minority shareholders to actions detrimental to their best interests.

The board recommends that you vote AGAINST this proposal.

Item 7. Shareholder Proposal on Shareholder Ratiﬁ cation of Executive Compensation

Gretchen Parrish, 2820 Senour Road, Indianapolis, Indiana 46239, beneﬁ cial owner of approximately 120 shares,
has submitted the following proposal:

RESOLVED, that shareholders of Eli Lilly and Company request the board of directors to adopt a policy that pro-
vides shareholders the opportunity at each annual shareholder meeting to vote on an advisory resolution, pro-
posed by management, to ratify the compensation of the named executive ofﬁ cers (“NEOs”) set forth in the proxy
statement’s Summary Compensation Table (the “SCT”) and the accompanying narrative disclosure of material
factors provided to understand the SCT (but not the Compensation Discussion and Analysis). The proposal submit-
ted to shareholders should make clear that the vote is non-binding and would not affect any compensation paid or
awarded to any NEO.

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Supporting Statement: Investors are increasingly concerned about mushrooming executive compensation espe-
cially when insufﬁ ciently linked to performance. In 2008, shareholders ﬁ led close to 100 “Say on Pay” resolutions.
Votes on these resolutions have averaged 43% in favor, with ten votes over 50%, demonstrating strong shareholder
support for this reform.

An Advisory Vote establishes an annual referendum process for shareholders about senior executive com-

pensation. We believe the results of this vote would provide the board and management useful information about
shareholder views on the company’s senior executive compensation.

In its 2008 proxy Aﬂ ac submitted an Advisory Vote resulting in a 93% vote in favor, indicating strong investor
support for good disclosure and a reasonable compensation package. Daniel Amos, Chairman and CEO said, “An
advisory vote on our compensation report is a helpful avenue for our shareholders to provide feedback on our pay-
for-performance compensation philosophy and pay package.”

To date eight other companies have also agreed to an Advisory Vote, including Verizon, MBIA, H&R Block,
Ingersoll Rand, Blockbuster, and Tech Data. TIAA-CREF, the country’s largest pension fund, has successfully uti-
lized the Advisory Vote twice.

1 Brown, L.D. and M.L. Caylor. 2004. The Correlation between Corporate Governance and Company Performance. Institutional Shareholder Services White Paper.

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Inﬂ uential proxy voting service RiskMetrics Group, recommends votes in favor, noting: “RiskMetrics encourag-
es companies to allow shareholders to express their opinions of executive compensation practices by establishing
an annual referendum process. An advisory vote on executive compensation is another step forward in enhancing
board accountability.”

The Council of Institutional Investors endorsed advisory votes and a bill to allow annual advisory votes passed
the House of Representatives by a 2-to-1 margin. We believe the statement like [sic] approach for company leaders
is to adopt an Advisory Vote voluntarily before required by law.

We believe that existing U.S. Securities and Exchange Commission rules and stock exchange listing standards
do not provide shareholders with sufﬁ cient mechanisms for providing input to boards on senior executive compen-
sation. In contrast, in the United Kingdom, public companies allow shareholders to cast a vote on the “directors’
remuneration report,” which discloses executive compensation. Such a vote isn’t binding, but gives shareholders a
clear voice that could help shape senior executive compensation.

We believe that a company that has a clearly explained compensation philosophy and metrics, reasonably
links pay to performance, and communicates effectively to investors would ﬁ nd a management sponsored Advisory
Vote a helpful tool.

We urge our board to allow shareholders to express their opinion about senior executive compensation

through an Advisory Vote.

Statement in Opposition to the Proposal on Shareholder Ratiﬁ cation of Executive Compensation
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.

An advisory vote is not a substitute for the informed judgment of independent directors.
The compensation committee, composed of independent directors and assisted by an independent consultant,
takes very seriously its ﬁ duciary duties to oversee executive compensation programs that are designed to promote
long-term value for the company and its shareholders. The committee’s work is complex and time-consuming; it
involves analysis of both public and conﬁ dential information, including competitively sensitive strategic and opera-
tional information. Any votes by shareholders would necessarily be based on less information and analysis and
therefore could not be a substitute for the fully informed judgment of the independent directors.

An advisory vote is an ineffective way to communicate shareholder opinions regarding our executive compensation.
The compensation committee welcomes shareholder input on executive compensation; however, a simple “up or
down” advisory vote would give the committee no insight into what aspects of the company’s programs should be
addressed or how to address them. Further, voting results could be misconstrued. For example, a heavily posi-
tive vote could lead the committee to discount legitimate concerns raised by a small minority of shareholders.
Likewise, a heavily negative vote could be a reaction to events unrelated to the company’s executive compensation
programs and could pressure the committee to make compensation changes that are not in the best long-term
interests of the shareholders.

Shareholders already have an efﬁ cient and effective way to express their opinions.
The company has established an avenue for shareholders to communicate directly with the board or its commit-
tees. See “How do I contact the board of directors?” on page 71 for instructions on how shareholders can com-
municate with the compensation committee or board. In addition, company representatives periodically meet with
large shareholders and shareholder representatives to discuss governance issues and executive compensation.
Finally, the committee’s independent consultant routinely consults with shareholder groups and advises the com-
mittee of evolving shareholder views on executive compensation best practices.

These communications yield results. In recent years, the committee has made a number of changes to our exec-

utive compensation programs that were inﬂ uenced at least in part by shareholder views expressed to us directly:

• eliminated stock options in favor of performance-based shareholder value awards
• extended the performance period for performance awards from one to two years and added additional stock

retention periods for executive ofﬁ cers

• substantially reduced beneﬁ ts under the change-in-control severance pay program for executives
• implemented a claw-back provision to recoup performance-based compensation from executives in the case of

restatement of results attributable to misconduct

• enhanced the transparency and clarity of our disclosures on executive compensation.

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The committee takes seriously its responsibilities to provide competitively justiﬁ able and defensible pay levels and
programs that reﬂ ect evolving best practices. Enacting this resolution would be a distraction and not helpful to a
process that is already working well.

We should not adopt advisory voting ahead of proposed U.S. legislation that would apply to all companies.
In the U.K., advisory votes are mandated by law. In the U.S., legislation is expected to be introduced in Congress
that would mandate advisory votes, but the nature and scope of the advisory vote is not at all clear at this time. We
should not adopt advisory voting until the rules are clear and apply to all companies equally.

The board recommends that you vote AGAINST this proposal.

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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.

Certain Legal Matters
In 2007, the company received two demands from shareholders that the board of directors cause the company to
take legal action against current and former directors and others for allegedly causing damage to the company
through improper marketing of Evista, Prozac, and Zyprexa. In accordance with procedures established under the
Indiana Business Corporation Law (Ind. Code § 23-1-32), the board has appointed a committee of independent per-
sons to consider the demands and determine what action, if any, the company should take in response. Since Janu-
ary 2008, we have been served with seven shareholder derivative lawsuits: Lambrecht, et al. v. Taurel, et al., ﬁ led
January 17, 2008, in the United States District Court for the Southern District of Indiana; Staehr, et al. v. Eli Lilly and
Company, et al., ﬁ led March 27, 2008, in Marion County Superior Court in Indianapolis, Indiana; Waldman, et al. v. Eli
Lilly and Company, et al., ﬁ led February 11, 2008, in the United States District Court for the Eastern District of New
York; Solomon v. Eli Lilly and Company, et al., ﬁ led March 27, 2008, in Marion County Superior Court in Indianapolis,
Indiana; Robbins v. Taurel, et al., ﬁ led April 9, 2008, in the United States District Court for the Eastern District of New
York; City of Taylor General Employees Retirement System v. Taurel, et al., ﬁ led April 15, 2008, in the United States
District Court for the Eastern District of New York; and Zemprelli v. Taurel, et al., ﬁ led June 24, 2008, in the United
States District Court for the Southern District of Indiana. Two of these lawsuits were ﬁ led by the shareholders who
served the demands described above. All seven lawsuits are nominally ﬁ led on behalf of the company, against vari-
ous current and former directors and ofﬁ cers and allege that the named ofﬁ cers and directors harmed the com-
pany through the improper marketing of Zyprexa, and in certain suits, Evista and Prozac. The Zemprelli suit also
claims that certain defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Each of the
current directors, other than Mr. Eskew and Mr. Oberhelman, are named in the suits. We believe these suits are
without merit and are prepared to defend against them vigorously.

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, fax, or electronic mail. We
have retained Georgeson Shareholder Communications Inc. to assist in the distribution and solicitation of proxies.
Georgeson may solicit proxies by personal interview, telephone, fax, mail, and electronic mail. We expect that the
fee for those services will not exceed $17,500 plus reimbursement of customary out-of-pocket expenses.

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By order of the board of directors,

James B. Lootens
Secretary

March 9, 2009

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Appendix A

Proposed Amendments to the Company’s Articles of Incorporation
The changes to the company’s articles of incorporation proposed in Item 3, Items of Business To Be Acted Upon at the
Meeting, are shown below. Additions are indicated by underlining and deletions are indicated by strike-outs.

. . . . .

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 2010 annual meeting of shareholders, the Board of Directors (exclusive of Preferred Stock
Directors) shall be divided into three classes, with the term of ofﬁ ce of one class expiring each year. At the
annual meeting of shareholders in 1985, ﬁ ve directors of the ﬁ rst class shall be elected to hold ofﬁ ce for a
term expiring at the 1986 annual meeting, 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 expiring at the 1988 annual meeting. Commencing with the annual meeting of shareholders
in 19862010, each class of directors whose term shall then expire shall be elected to hold ofﬁ ce for a three
one-year term expiring at the next annual meeting of shareholders. In the case of any vacancy on the Board of
Directors occurring after the 2009 annual meeting of shareholders, including a vacancy created by an increase
in the number of directors, the vacancy shall be ﬁ lled by election of the Board of Directors with the director
so elected to serve for the remainder of the term of the director 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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Senior Management

John C. Lechleiter, Ph.D. 1
Chairman, President, and Chief
Executive Ofﬁ cer

Andrew M. Dahlem, Ph.D.
Vice President, LRL Operations and
Lilly Research Laboratories, Europe

Elizabeth G. O’Farrell
Vice President, Finance

Steven M. Paul, M.D.
Executive Vice President, Science
and Technology and President, Lilly
Research Laboratories

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

Gino Santini
Senior Vice President, Corporate
Strategy and Business Development

Jeffrey N. Simmons
President, Elanco Animal Health

Sharon L. Sullivan
Vice President, Global Compensation
and HR Services

Jacques Tapiero
President, Intercontinental Operations

Thomas R. Verhoeven, Ph.D.
President, Global Product
Development, Lilly Research
Laboratories

Fionnuala Walsh, Ph.D.
Vice President, Quality

James A. Ward
Vice President and Chief Procurement
Ofﬁ cer

Andreas F. Witzel
Vice President, Drug Product
Manufacturing for Europe and Asia

Alfonso Zulueta
President and General Manager, Lilly
Japan

Frank M. Deane, Ph.D.
President, Manufacturing Operations

Alecia A. DeCoudreaux
Vice President and General Counsel,
Lilly USA, LLC

J. Carmel Egan, Ph.D.
Vice President, Project Management,
Lilly Research Laboratories

Timothy J. Garnett, M.D.
Chief Medical Ofﬁ cer and Vice
President, Global Medical, Regulatory,
and Safety; Lilly Research Laboratories

Thomas W. Grein
Vice President and Treasurer

William F. Heath Jr., Ph.D.
Vice President, Product Research
and Development, Lilly Research
Laboratories

Michael C. Heim
Vice President, Information Technology,
and Chief Information Ofﬁ cer

Peter J. Johnson
Executive Director, Corporate Strategy

Elizabeth H. Klimes.
Vice President, Six Sigma

Patricia A. Martin
Vice President, Global Diversity

W. Darin Moody
Vice President, Corporate Engineering
and Continuous Improvement

Anthony J. Murphy, Ph.D.
Senior Vice President, Human
Resources

Anne Nobles.
Chief Ethics and Compliance Ofﬁ cer
and Vice President, Enterprise Risk
Management

E. Paul Ahern, Ph.D.
Vice President, Global API
Manufacturing

Robert A. Armitage
Senior Vice President and General
Counsel

Robert W. Armstrong, Ph.D.
Vice President, Global External
Research and Development, Lilly
Research Laboratories

Alex M. Azar II
Senior Vice President, Corporate
Affairs and Communications

John E. Bailey
Vice President, Account-Based
Markets, Lilly USA, LLC

Karim Bitar
President, European Operations

Thomas F. Bumol, Ph.D.
Vice President, Biotechnology
Discovery Research, Lilly Research
Laboratories; and President, Applied
Molecular Evolution

Bryce D. Carmine.
Executive Vice President, Global
Marketing and Sales

William W. Chin, M.D.
Vice President, Discovery Research
and Clinical Investigation, Lilly
Research Laboratories

Enrique Conterno
President, Lilly USA, LLC

Newton F. Crenshaw
Vice President, Global Public Policy;
Pricing, Reimbursement, and Access;
and International Corporate Affairs

Maria Crowe
Vice President, Drug Product
Manufacturing for the Americas

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Board of Directors

John C. Lechleiter, Ph.D. 1
Chairman, President, and Chief Executive Ofﬁ cer

Ralph Alvarez 2
President and Chief Operating Ofﬁ cer, McDonald’s Corporation

Sir Winfried Bischoff
Retired Chairman, Citigroup Inc.

J. Michael Cook
Retired Chairman and Chief Executive Ofﬁ cer, Deloitte & Touche LLP

Michael L. Eskew
Former Chairman and Chief Executive Ofﬁ cer, United Parcel Service, Inc.

Martin S. Feldstein, Ph.D.
George F. Baker Professor of Economics, Harvard University

J. Erik Fyrwald
Chairman, President, and Chief Executive Ofﬁ cer, Nalco Holding Company

Alfred G. Gilman, M.D., Ph.D.
Executive Vice President for Academic Affairs and Provost, The University of Texas Southwestern Medical Center at
Dallas; Dean, Southwestern Medical School; and Regental Professor of Pharmacology and Director of the Cecil and Ida
Green Center for Molecular, Computational, and Systems Biology, The University of Texas Southwestern Medical Center

Karen N. Horn, Ph.D.
Retired President, Private Client Services, and Managing Director, Marsh, Inc.

Ellen R. Marram
President, The Barnegat Group LLC

Douglas R. Oberhelman 3
Group President, Caterpillar Inc.

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

Kathi P. Seifert
Retired Executive Vice President, Kimberly-Clark Corporation

Notes
1 Effective January 1, 2009, Dr. Lechleiter assumed the role of chairman.
2 Mr. Alvarez was elected to the board effective April 1, 2009.
3 Mr. Oberhelman was elected to the board effective December 1, 2008.

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Corporate Information

Annual meeting
The annual meeting of shareholders will be held at
the Lilly Center Auditorium, Lilly Corporate Center,
Indianapolis, Indiana, on Monday, April 20, 2009, at
11:00 a.m. EDT. For more information, see the proxy
statement section of this report, beginning on page 68.

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/sec.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://investor.lilly.com/services.cfm and follow
the directions provided.

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Annual Meeting Admission Ticket

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

Lilly Center Auditorium
Lilly Corporate Center
Indianapolis, Indiana 46285

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

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

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

Name

Address

City, State, and Zip Code

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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.

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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 20, 2009

Complimentary Parking
Lilly Corporate Center

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

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Trademarks

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

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

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

For More Information

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

Lilly clinical trials registry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lillytrials.com

Lilly Grant Ofﬁ ce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lillygrantofﬁ ce.com

LillyPAC contributions report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lilly.com/about/public_affairs/

Multidrug-Resistant Tuberculosis Partnership . . . . . . . . . . . . . . . . . www.lillymdr-tb.com

Medicare prescription drug coverage . . . . . . . . . . . . . . . . . . . . . . . . . www.lillymedicareanswers.com

Pharmaceutical industry patient assistance programs . . . . . . . . . . www.pparx.org

Lilly Cares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lillycares.com or call toll-free 1-800-545-6962

2009AR