Eli Lilly - 10-K annual report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 1998



Commission File Number 001-6351





ELI LILLY AND COMPANY



An Indiana Corporation I.R.S. Employer Number 35-0470950



Address: Lilly Corporate Center, Indianapolis, Indiana 46285



Telephone number, including area code: (317) 276-2000



SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



Name Of Each Exchange

Title Of Each Class                    On Which Registered

-------------------                   ---------------------

Common Stock                 New York and Pacific Stock Exchanges

Preferred Stock Purchase Rights      New York and Pacific Stock Exchanges

8-1/8% Notes Due December 1, 2001       New York Stock Exchange

8-3/8% Notes Due December 1, 2006       New York Stock Exchange

6.57% Notes Due January 1, 2016       New York Stock Exchange

6.77% Notes Due January 1, 2036       New York Stock Exchange



SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None



Indicate by check mark whether the Registrant (1) has filed all reports required

to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during

the preceding 12 months, and (2) has been subject to such filing requirements

for the past 90 days. Yes X No ___



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405

of Regulation S-K is not contained herein, and will not be contained, to the

best of Registrant's knowledge, in the definitive proxy statement incorporated

by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

[ ]



Aggregate market value of voting stock of the Registrant held by non-affiliates

as of February 12, 1999 (Common Stock): $82,996,965,000.



Number of shares of common stock outstanding as of February 12, 1999:

1,101,256,334.



Portions of the following documents have been incorporated by reference into

this report:



Document                      Parts Into Which Incorporated

--------                      -----------------------------

Registrant's Annual Report to Shareholders              Parts I, II, and IV

for fiscal year ended December 31, 1998



Registrant's Proxy Statement dated March 4, 1999               Part III

PART I



Item 1.  BUSINESS



Eli Lilly and Company was incorporated in 1901 under the laws of Indiana

to succeed to the drug manufacturing business founded in Indianapolis, Indiana,

in 1876 by Colonel Eli Lilly. The Company*, including its subsidiaries,

discovers, develops, manufactures, and sells products in one significant

business segment--pharmaceutical products. Products are manufactured or

distributed through owned or leased facilities in the United States, Puerto

Rico, and 27 other countries. Its products are sold in approximately 160

countries. Through its PCS Health Systems ("PCS") business, which was sold in

January 1999, the Company provided health care management services in the United

States. See "Health Care Management" at page 3.



Most of the Company's products were discovered or developed through the

Company's research and development activities, and the success of the Company's

business depends to a great extent on the continued introduction of new products

resulting from these research and development activities. Research efforts are

primarily directed toward discovering and developing products to diagnose and

treat diseases in human beings and animals and to increase the efficiency of

animal food production.





FINANCIAL INFORMATION RELATING TO BUSINESS

SEGMENTS AND CLASSES OF PRODUCTS



Financial information relating to business segments and classes of

products, set forth in the Company's 1998 Annual Report at page 43 under

"Segment Information" (page 6 of Exhibit 13 to this Form 10-K), is incorporated

herein by reference.



Due to several factors, including the introduction of new products by the

Company and other manufacturers, the relative contribution of any particular

Company product to consolidated net sales is not necessarily constant from year

to year, and its contribution to net income is not necessarily the same as its

contribution to consolidated net sales.





PRODUCTS AND SERVICES



Pharmaceutical Products



Pharmaceutical products include:



Neuroscience products, the Company's largest-selling product

group, including Prozac(R), indicated for the treatment of depression

and, in many countries, for bulimia and obsessive-compulsive disorder;

Zyprexa(R), a product for the treatment of schizophrenia; the Darvon(R)

line of analgesic products; and Permax(R), a treatment for Parkinson's

disease;



* The terms "Company" and "Registrant" are used interchangeably herein to refer

to Eli Lilly and Company or to Eli Lilly and Company and its consolidated

subsidiaries,  as the context requires.



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Endocrine products, including Humulin(R), human insulin produced

through recombinant DNA technology; Humalog(R), a rapid-acting

injectable human insulin analog of recombinant DNA origin; Iletin(R),

animal-source insulin in its various pharmaceutical forms; and

Humatrope(R), human growth hormone produced by recombinant DNA

technology;



Anti-infectives, including the oral cephalosporin antibiotics

Ceclor(R) (cefaclor), Keflex(R), and Keftab(R), used in the treatment

of a wide range of bacterial infections; the oral carbacephem

antibiotic Lorabid(R), used to treat a variety of bacterial infections;

Vancocin(R) HCl, an injectable antibiotic used primarily to treat

staphylococcal infections; the oral macrolide antibiotic Dynabac(R);

the injectable cephalosporin antibiotics Tazidime(R), Kefurox(R), and

Kefzol(R), used to treat a wide range of bacterial infections in the

hospital setting; and Nebcin(R), an injectable aminoglycoside

antibiotic used in hospitals to treat various infections caused by

staphylococci and Gram-negative bacteria;



Cardiovascular agents, including ReoPro(R), a monoclonal antibody

product developed and manufactured by Centocor, Inc. and co-marketed by

the Company and Centocor for use as an adjunct to percutaneous coronary

intervention ("PCI"), including patients undergoing angioplasty,

atherectomy or stent placement and patients with unstable angina who

are not responding to conventional medical therapy when PCI is planned

within 24 hours; Dobutrex(R), an inotropic agent; and Cynt(TM),

marketed outside the United States for treatment of hypertension;



An antiulcer agent, Axid(R), an H2 antagonist, indicated for the

treatment of active duodenal ulcer, for maintenance therapy for

duodenal ulcer patients after healing of an active duodenal ulcer, for

reflux esophagitis, and for benign gastric ulcer;



Oncology products, including Gemzar(R), indicated for treatment

of advanced or metastatic pancreatic cancer and, in combination with

other agents, for treatment of non-small-cell lung cancer; Oncovin(R),

indicated for treatment of acute leukemia and, in combination with

other oncolytic agents, for treatment of several different types of

advanced cancers; Velban(R), used in a variety of malignant neoplastic

conditions; and Eldisine(R), indicated for treatment of acute childhood

leukemia resistant to other drugs; and



Evista(R), a selective estrogen receptor modulator, indicated for

the prevention of osteoporosis in post-menopausal women, and in some

countries outside the United States, for the treatment of osteoporosis

in post-menopausal women.



Animal Health Products



Animal health products include Tylan(R), an antibiotic used to control

certain diseases in cattle, swine, and poultry and to improve feed efficiency

and growth; Rumensin(R), a cattle feed additive that improves feed efficiency

and growth; Coban(R), Monteban(R) and Maxiban(R), anticoccidial agents for use

in poultry; Apralan(R), an antibiotic used to control enteric infections in

calves and swine; Micotil(R) and Pulmotil(R), antibiotics used to treat

respiratory disease in cattle and swine, respectively; and Surmax(R) (sold as

Maxus(R) in some countries), a growth promotant for swine and poultry.



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Health Care Management Services



The Company's PCS business was sold to Rite Aid Corporation effective

January 22, 1999. The Company received approximately $1.6 billion, including

$1.5 billion in cash from Rite Aid and approximately $100 million in cash from

PCS. As a result of the sale, the operating results of PCS are included in the

Company's 1998 financial statements as discontinued operations. PCS provided

computer-based prescription drug claims processing, pharmacy benefit

administration and management services, mail order pharmacy services, data

management and disease-management services to health plan sponsors, including

insurance companies, third-party administrators, self-insured employers, health

maintenance organizations, and Blue Cross/Blue Shield organizations that

underwrite or administer prescription benefit plans.



MARKETING



Most of the Company's major products are marketed worldwide. Health care

management services were marketed primarily in the United States.



Pharmaceuticals -- United States



In the United States, the Company distributes pharmaceutical products

principally through approximately 200 independent wholesale distributing

outlets. The Company's marketing policy is designed to assure that products are

immediately available to physicians, pharmacies, hospitals, and appropriate

health care professionals throughout the country. Four wholesale distributors in

the United States accounted for approximately 17%, 15%, 13%, and 10%,

respectively, of the Company's consolidated net sales in 1998. No other

distributor accounted for more than 7% of consolidated net sales. The Company

also sells pharmaceutical products directly to the United States government and

other manufacturers, but those direct sales are not material to consolidated net

sales.



The Company's major pharmaceutical products are promoted in the United

States under the Lilly and Dista trade names by Company sales forces employing

salaried sales representatives. These sales representatives, many of whom are

registered pharmacists, call upon physicians, wholesalers, hospitals,

managed-care organizations, retail pharmacists, and other health care

professionals. Their efforts are supported by the Company through advertising in

medical and drug journals, distribution of literature and samples of certain

products to physicians, and exhibits for use at medical meetings. The Company

also advertises certain of its products directly to consumers in the United

States. The Company has created divisions of its sales force dedicated to

product lines or practice areas, such as primary care, neuroscience, diabetes

care, cardiovascular, endocrinology, and oncology. The Company has entered into

licensing arrangements under which certain products manufactured by the Company,

such as Ceclor CD, Dynabac, Keftab, and Permax, are marketed by other

pharmaceutical companies.



Large purchasers of pharmaceuticals, such as managed-care groups and

government and long-term care institutions, now account for a significant

portion of total pharmaceutical purchases in the United States. The Company has

created special sales groups to service managed-care organizations, government

and long-term care institutions, hospital contract administrators, and certain

retail pharmacies. In response to competitive pressures, the Company has entered

into arrangements with a number of these organizations providing for discounts

or rebates on one or more Company products or other cost-sharing arrangements.



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Pharmaceuticals -- Outside the United States



Outside the United States, pharmaceutical products are promoted primarily

by salaried sales representatives. While the products marketed vary from country

to country, neuroscience products constitute the largest single group in total

sales. Distribution patterns vary from country to country. In recent years, the

Company has significantly expanded its marketing efforts in a number of overseas

markets, including emerging markets in Central and Eastern Europe, Latin

America, Asia and Africa.



Animal Health Products



Elanco Animal Health, a division of the Company, employs field salespeople

throughout the United States to market animal health products. Sales are made to

wholesale distributors, retailers, feed manufacturers, or producers in

conformance with varying distribution patterns applicable to the various types

of products. The Company also has an extensive sales force outside the United

States to market its animal health products.



RAW MATERIALS



Most of the principal materials used by the Company in manufacturing

operations are chemical, plant, and animal products that are available from more

than one source. Certain raw materials are available or are purchased

principally from only one source. Unavailability of certain materials from

present sources could cause an interruption in production pending establishment

of new sources or, in some cases, implementation of alternative processes.



Although the major portion of the Company's sales abroad are of products

manufactured wholly or in part abroad, a principal source of active ingredients

for these manufactured products continues to be the Company's facilities in the

United States.



PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS



Intellectual property protection is, in the aggregate, material to the

Company's ability to successfully commercialize its life sciences innovations.

The Company owns, has applications pending for, or is licensed under, a

substantial number of patents, both in the United States and in other countries,

relating to products, product uses, formulations, and manufacturing processes.

There can be no assurance that patents will result from the Company's pending

applications. Moreover, patents relating to particular products, uses,

formulations, or processes do not preclude other manufacturers from employing

alternative processes or from successfully marketing substitute products to

compete with the patented products or uses.



The standard of intellectual property protection outside the United States

for pharmaceutical inventions varies widely. While many countries have strong

laws, many other countries provide little or no intellectual property

protection. In recent years, the adoption of international agreements such as

the new World Trade Agreement have resulted in a strengthening of intellectual

property laws in some countries, and the Company believes further improvements

are likely. The commercial significance of these changes to the Company is still

uncertain.



The expiration of a product patent often results in a loss of market

exclusivity and, particularly in the United States, can result in very

substantial reductions in sales of the patented product. However, in some cases

additional commercial benefits may be obtained from



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manufacturing trade secrets, later-expiring patents on processes, uses, or

formulations, or marketing exclusivity that may be provided by the

pharmaceutical regulatory laws in the United States or other countries.



Patent protection for certain products, processes, and uses--particularly

that relating to Prozac, Zyprexa, Axid, Humalog, ReoPro, Gemzar, and Evista--is

considered to be important to the operations of the Company. The United States

compound patent covering Prozac expires in February 2001 and a patent for the

process by which Prozac works expires in December 2003. See "Legal Proceedings"

at pages 10-11 for a discussion of certain litigation involving these two

patents. In other countries, Prozac patents generally either have expired or

will expire over the next several years. Other U.S. compound patent expirations

include Axid, 2002; Zyprexa, 2011; Humalog, 2013; and ReoPro, 2015. The Gemzar

compound patent in the U.S. expires in 2006, but a use patent covering treatment

of neoplasms with Gemzar is in force until 2012. The Company holds a number of

U.S. patents covering Evista that the Company believes will provide exclusivity

in the United States until at least 2012.



Worldwide, all of the Company's major products are sold under trademarks

that are considered in the aggregate to be important to the Company. Trademark

protection varies widely throughout the world, with protection continuing in

some countries as long as the mark is used, and in other countries as long as it

is registered. Registrations are normally for fixed but renewable terms.



The Company also grants licenses under patents and know-how developed by

the Company and manufactures and sells products and uses technology and know-how

under licenses from others. Royalties paid by the Company in relation to

pharmaceuticals amounted to approximately $138 million in 1998 and royalties

received were not material.



COMPETITION



The Company's pharmaceutical products compete with products manufactured

by many other companies in highly competitive markets in the United States and

throughout the world. The Company's animal health products compete on a

worldwide basis with products of pharmaceutical, chemical, and other companies

that operate animal health divisions or subsidiaries.



Important competitive factors include product efficacy, safety and ease of

use, price and demonstrated cost-effectiveness, service, and research and

development of new products and processes. The introduction by competitors of

new products and processes with therapeutic or cost advantages can result in

progressive price reductions or decreased volume of sales of the Company's

products, or both. New products introduced with patent protection usually must

compete with other products already on the market at the time of introduction or

products developed by competitors after introduction. Manufacturers of generic

products typically invest far less in research and development than

research-based pharmaceutical companies and accordingly are able to price their

products significantly lower than branded products. Therefore, upon expiration

of market exclusivity, branded products often face intense price competition

from generic forms of the product. In many countries outside the United States,

patent protection is weak or nonexistent. The growth of managed care and

pharmacy benefits management organizations has intensified price competition

significantly and has magnified the importance of demonstrating not only medical

benefits but also cost advantages as compared with other treatments.



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The Company believes its long-term competitive position depends upon the

success of its research and development endeavors in discovering and developing

innovative products that are clinically- and cost-effective, together with

increased productivity resulting from improved manufacturing methods and

effective sales and marketing efforts. There can be no assurance that the

Company's research and development efforts will result in commercially

successful products or that products manufactured or processes used by the

Company will not become outmoded from time to time as a result of products or

processes developed by its competitors.



GOVERNMENTAL REGULATION



For many years the Company's operations have been regulated extensively by

the federal government, to some extent by state governments, and in varying

degrees by foreign governments. The Federal Food, Drug, and Cosmetic Act, other

federal statutes and regulations, various state statutes and regulations, and

laws and regulations of foreign governments govern to varying degrees the

testing, approval, production, labeling, distribution, post-market surveillance,

advertising, dissemination of information, and promotion of the Company's

products. The lengthy process of laboratory testing, clinical testing, data

analysis and regulatory review necessary for required governmental approvals is

extremely costly and can significantly delay product introductions in a given

market. Promotion, marketing and distribution of pharmaceutical products are

extensively regulated in all major world markets. In addition, the Company's

operations are subject to complex federal, state, local, and foreign

environmental and occupational safety laws and regulations. The Company

anticipates that compliance with regulations affecting the manufacture and sale

of current products and the introduction of new products will continue to

require substantial scientific and technical effort, time, and expense and

significant capital investment.



In the United States, the Omnibus Budget Reconciliation Act of 1990

requires the Company to provide rebates to state governments on their purchases

of certain Company products under state Medicaid programs. Other cost

containment measures have been adopted or proposed by federal, state, and local

government entities that provide or pay for health care. In most international

markets, the Company operates in an environment of government-mandated cost

containment programs, which may include price controls, discounts and rebates,

restrictions on physician prescription levels, restrictions on reimbursement,

compulsory licenses and generic substitution. The Company expects that

governments inside and outside the United States will continue to propose and/or

adopt a variety of measures to contain health care costs, including

pharmaceutical costs, some of which could adversely affect the Company. As an

example, there are a number of legislative proposals in the United States at

both the state and federal levels intended to provide greater access to drugs

for the elderly that effectively would impose controls on the prices at which

the Company's products are sold for use by the elderly. The Company cannot

predict whether such proposals will be adopted or the extent to which its

business may be affected by these or other potential future legislative or

regulatory developments.



RESEARCH AND DEVELOPMENT



The Company's research and development activities are responsible for the

discovery or development of most of the products the Company offers today. Its

commitment to research and development dates back more than 100 years. The

Company invests heavily in research and development, which management believes

is critical to the Company's long-term competitiveness. The growth in research

and development expenditures and personnel over the past several years



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demonstrates both the continued vitality of the Company's commitment and the

increasing costs and complexity of bringing new products to the market. At the

end of 1998, approximately 5,800 people, including a substantial number who are

physicians or scientists holding graduate or postgraduate degrees or highly

skilled technical personnel, were engaged in pharmaceutical and animal health

research and development activities. The Company expended $1.19 billion on these

research and development activities in 1996, $1.37 billion in 1997, and $1.74

billion in 1998.



The Company's research is concerned primarily with the effects of

synthetic chemicals and natural products on biological systems. The results of

that research are applied to develop products to treat diseases in humans and

animals. The primary effort is devoted to human pharmaceutical products. The

Company concentrates its pharmaceutical research and development efforts in five

therapeutic categories: central nervous system and related diseases; endocrine

diseases, including diabetes and osteoporosis; infectious diseases; cancer; and

cardiovascular diseases. The Company also selectively pursues promising leads in

other therapeutic areas. The Company is actively engaged in biotechnology

research programs involving recombinant DNA, proteins, and genomics (the

development of therapeutics through identification of disease-causing genes and

their cellular function).



In addition to the research carried on in the Company's own laboratories,

the Company sponsors and underwrites the cost of research and development by

independent organizations, including educational institutions and research-based

pharmaceutical and biotechnology companies, and contracts with others for the

performance of research in their facilities. It utilizes the services of

physicians, hospitals, medical schools, and other research organizations in the

United States and many other countries to establish through clinical evidence

the safety and effectiveness of new products. The Company actively seeks out

opportunities to invest in external research and technologies that hold the

promise to complement and strengthen the Company's own research efforts. These

investments can take many forms, including licensing arrangements,

co-development and co-marketing agreements, joint ventures and outright

acquisitions.



Extensive work is also conducted in the animal sciences, including animal

nutrition and physiology and veterinary medicine. Certain of the Company's

research and development activities relating to pharmaceutical products may be

applicable to animal health products. An example is the search for agents that

will cure infectious disease.



QUALITY ASSURANCE



The Company's success depends in great measure upon customer confidence in

the quality of the Company's products and in the integrity of the data that

support their safety and effectiveness. The quality of the Company's products

arises from the total commitment to quality in all parts of the Company,

including research and development, purchasing, facilities planning,

manufacturing, and distribution. Quality-assurance procedures have been

developed relating to the quality and integrity of the Company's scientific

information and production processes.



Control of production processes involves rigid specifications for

ingredients, equipment, facilities, manufacturing methods, packaging materials,

and labeling. Control tests are made at various stages of production processes

and on the final product to assure that the product meets all regulatory

requirements and the Company's standards. These tests may involve chemical and

physical chemical analyses, microbiological testing, testing in animals, or a

combination of these tests. Additional assurance of quality is provided by a

corporate quality-assurance group that



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monitors existing pharmaceutical and animal health manufacturing procedures and

systems in the parent company, subsidiaries, and affiliates.



EXECUTIVE OFFICERS OF THE REGISTRANT



The following table sets forth certain information regarding the executive

officers of the Company. All but two of the executive officers have been

employed by the Company in executive or managerial positions during the last

five years. Charles E. Golden joined the Company as Executive Vice President and

Chief Financial Officer and was elected to the Board of Directors in March 1996.

He previously had held a number of executive positions with General Motors

Corporation ("GM") including Vice President of GM and Chairman and Managing

Director of Vauxhall Motors Limited, a GM subsidiary in the United Kingdom, from

1993 to 1996, Vice President and Treasurer from 1992 to 1993, and Treasurer from

1989 to 1992. Thomas Trainer joined the Company in January 1995. Since 1991 he

had served as Vice President and Chief Information Officer of Reebok

International Ltd.



Except as indicated in the following table, the term of office for each

executive officer expires on the date of the annual meeting of the Board of

Directors, to be held on April 19, 1999, or on the date his or her successor is

chosen and qualified. No director or executive officer of the Company has a

"family relationship" with any other director or executive officer of the

Company, as that term is defined for purposes of this disclosure requirement.

There is no understanding between any executive officer of the Company and any

other person pursuant to which the executive officer was selected.



NAME                     AGE                      OFFICES

- -------------------------------------------------------------------------------

Randall L. Tobias               57        Former Chairman of the Board (retired

as a director and employee December

31, 1998)



Sidney Taurel                   50        Chairman of the Board (since January

1999), President and Chief Executive

Officer (since June 1998) and a

Director



Charles E. Golden               52        Executive Vice President and Chief

Financial Officer (since March 1996)

and a Director



August M. Watanabe, M.D.        57        Executive Vice President, Science and

Technology (since February 1996) and a

Director



Mitchell E. Daniels, Jr.        49        Senior Vice President, Corporate

Strategy and Policy (since June 1998)



Rebecca O. Goss                 51        Senior Vice President and General

Counsel (since June 1998)



Pedro P. Granadillo             51        Senior Vice President, Human Resources

and Manufacturing (since June 1998)



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NAME                     AGE                      OFFICES

- -------------------------------------------------------------------------------



John C. Lechleiter              45        Senior Vice President, Pharmaceutical

Products (since June 1998)



Bryce D. Carmine                47        President, SERM and Skeletal Products

(since March 1999)*



Alan S. Clark                   64        Former President, U.S. Operations and

Global Marketing (since January 1997)

(retiring April 1999)



Michael L. Eagle                51        Vice President, Manufacturing (since

January 1994)*



Brendan P. Fox, D.V.M.          55        President, Elanco Animal Health (since

January 1991)*



James A. Harper                 51        President, Diabetes and Growth

Disorders Products (since August

1994)*



Gerhard N. Mayr                 52        President, Intercontinental Operations

(since September 1997)*



Richard D. Pilnik               42        Vice President, Global Marketing

(since January 1998)*



Robert N. Postlethwait          50        Former President, Neuroscience

Products (since August 1994) (retiring

May 1999)



William R. Ringo, Jr.           53        President, Internal Medicine Products

(since January 1998)*



Gino Santini                    42        President, U.S. Operations and Global

Marketing (since March 1999)*



Gary Tollefson, M.D., Ph.D.     48        President, Neuroscience Products

(since January 1999)*



Thomas Trainer                  52        Former Vice President, Information

Technology, and Chief Information

Officer (since January 1995) (resigned

March 1999)



Albertus Van den Bergh          45        President, European Operations (since

September 1997)*





EMPLOYEES



At the end of 1998, the Company had approximately 29,800 employees

(excluding PCS), including approximately 15,400 employees outside the United

States. A substantial number of the Company's employees have long records of

continuous service.



- --------------

* Serves in office until successor is appointed.



-9-

FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS



Financial information relating to foreign and domestic operations, set

forth in the Company's 1998 Annual Report at page 43 under "Segment Information"

(page 6 of Exhibit 13), is incorporated herein by reference.



Local restrictions on the transfer of funds from branches and subsidiaries

located abroad (including the availability of dollar exchange) have not to date

been a significant deterrent in the Company's overall operations abroad. The

Company cannot predict what effect these restrictions or the other risks

inherent in foreign operations, including possible nationalization, might have

on its future operations or what other restrictions may be imposed in the

future. In addition, changing currency values can either favorably or

unfavorably affect the financial position and results of operations of the

Company. The Company actively manages its foreign exchange risk through various

hedging techniques including the use of foreign currency contracts.





Item 2.  PROPERTIES



The Company's principal domestic and international executive offices are

located in Indianapolis. At December 31, 1998, the Company owned 14 production

and distribution facilities in the United States and Puerto Rico. Together with

the corporate administrative offices, these facilities contain an aggregate of

approximately 9.5 million square feet of floor area dedicated to production,

distribution and administration. Major production sites include Indianapolis;

Clinton and Lafayette, Indiana; and Carolina and Mayaguez, Puerto Rico. The

Company also leases sales offices in a number of cities located in the United

States and abroad.



The Company owns production and distribution facilities in 19 countries

outside the United States and Puerto Rico, containing an aggregate of

approximately 4.1 million square feet of floor space. Major production sites

include facilities in the United Kingdom, France, Spain, Ireland, Brazil,

Mexico, and Italy. Leased production and warehouse facilities are utilized in

Puerto Rico and 18 countries outside the United States.



The Company's research and development facilities in the United States

consist of approximately 3.8 million square feet and are located primarily in

Indianapolis and Greenfield, Indiana. Its major research and development

facilities abroad are located in Belgium, Germany, and the United Kingdom and

contain approximately 387,000 square feet.



The Company believes that none of its properties is subject to any

encumbrance, easement, or other restriction that would detract materially from

its value or impair its use in the operation of the business of the Company. The

buildings owned by the Company are of varying ages and in good condition.





Item 3.  LEGAL PROCEEDINGS



Prozac Patent Litigation. In March 1996 the Company was informed by Barr

Laboratories, Inc. ("Barr"), a generic pharmaceutical manufacturer, that it had

submitted an abbreviated new drug application ("ANDA") to the U.S. FDA seeking

to market a generic form of Prozac in the United States several years before the

expiration of the Company's patents. Barr has alleged that



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the Company's U.S. patents covering Prozac are invalid and unenforceable. The

compound patent expires in February 2001 and a patent for the process by which

Prozac operates expires in December 2003. These patents are material to the

Company.



On April 11, 1996, the Company filed suit in the United States District

Court for the Southern District of Indiana seeking a ruling that Barr's

challenge to the Company's patents is without merit. In 1997, the Company was

informed that Geneva Pharmaceuticals, Inc. ("Geneva"), another generic

manufacturer, had submitted a similar ANDA and, like Barr, had asserted that the

Company's U.S. Prozac patents are invalid and unenforceable. On June 23, 1997,

the Company sued Geneva in the same court seeking a similar ruling as in the

Barr suit. The two suits have been consolidated. On January 12, 1999, the trial

court judge for the Southern District of Indiana granted partial summary

judgment in favor of the Company, dismissing the claims of Barr and Geneva based

on the patent doctrines of "best mode" and "double patenting." On January 25,

1999 (the day trial was to have begun), Barr and Geneva agreed to abandon their

remaining two claims (based on the patent doctrines of "anticipation" and

"inequitable conduct") in exchange for a payment of $4 million to be shared

among Barr, Geneva, and a third defendant, Apotex, Inc. Barr and Geneva have

appealed the trial court's January 12, 1999 rulings to the Court of Appeals for

the Federal Circuit.



In late 1998, three additional generic manufacturers, Zenith Goldline

Pharmaceuticals, Inc., Teva Pharmaceuticals USA, and Cheminor Drugs, Ltd.

together with one of its subsidiaries filed ANDAs for generic forms of Prozac,

asserting that the Company's December 2003 patent is invalid and unenforceable.

Finally, in January 1999, Novex Pharma, a division of Apotex, Inc. filed an ANDA

asserting that both the 2001 and 2003 patents are invalid and unenforceable. The

Company has filed lawsuits in the United States District Court of the Southern

District of Indiana seeking rulings that the four companies' challenges to the

patent(s) are without merit. These suits are in the preliminary stages.



The Company believes that the claims of the six generic manufacturers are

without merit and that the Company should be successful in this litigation.

However, it is not possible to predict or determine the outcome of this

litigation and accordingly there can be no assurance that the Company will

prevail. An unfavorable outcome could have a material adverse effect on the

Company's consolidated financial position, liquidity, or results of operations.



Product Liability Litigation. The Company is currently a defendant in a

variety of product liability litigation matters involving primarily

diethylstilbestrol ("DES") and Prozac. In approximately 100 actions, including

several with multiple claimants, plaintiffs seek to recover damages on behalf of

children or grandchildren of women who ingested DES during pregnancy. In another

approximately 10 actions, plaintiffs seek to recover damages as a result of the

ingestion of Prozac.



Pricing Litigation. The Company has been named, together with numerous

other U.S. prescription pharmaceutical manufacturers and in some cases

wholesalers or distributors, as a defendant in a large number of related actions

brought by retail pharmacies and consumers of prescription pharmaceuticals in

the United States alleging violations of federal or state antitrust laws, or

both, based on the practice of providing discounts or rebates to managed-care

organizations and certain other purchasers. The federal cases have been

consolidated or coordinated in the Northern District of Illinois as In re Brand

Name Prescription Drugs Antitrust Litigation (MDL No. 997).



-11-

The federal suits include a certified class action on behalf of a majority

of retail pharmacies in the United States (the "Federal Class Action"). The

class plaintiffs allege an industrywide agreement in violation of the Sherman

Act to deny favorable pricing on sales of brand-name prescription

pharmaceuticals to certain retail pharmacies in the United States. The other

federal suits (the "Federal Individual Actions"), brought as individual claims

by several thousand pharmacies, allege price discrimination in violation of the

Robinson-Patman Act as well as Sherman Act claims. The suits seek treble damages

and injunctive relief against allegedly discriminatory pricing practices.



In 1995, the Company and several other manufacturers agreed with the

plaintiffs to settle the Federal Class Action. In addition, in 1997 and again in

1998 the Company reached settlements with two large groups of retail pharmacy

and supermarket chains that were plaintiffs in the Federal Individual Actions.

As a result of the various settlements, the claims of the great majority of the

U.S. retailers are now dismissed. With respect to the remaining Federal

Individual Actions, the District Court has designated certain plaintiffs and

defendants named in the individual suits (not including the Company) to

participate in an initial trial or trials of the claims. No trial dates have

been set. Robinson-Patman claims asserted in the Federal Individual Actions

against nondesignated defendants, including the Company, are stayed.



In addition, a number of related state court cases were filed. The state

court suits typically seek money damages and injunctive relief against allegedly

discriminatory pricing practices. Cases were brought in Alabama, California,

Minnesota, Mississippi, and Wisconsin by retail pharmacies alleging violations

of various state antitrust and pricing laws, purporting to be class actions on

behalf of all retail pharmacies in those states. Settlements have been approved

in Minnesota and Wisconsin and the cases in those states are now dismissed.

Cases were also brought in state courts in Alabama, Arizona, California,

District of Columbia, Florida, Kansas, Maine, Michigan, Minnesota, New York,

North Carolina, Tennessee, and Wisconsin that purport to be class actions on

behalf of consumers of prescription pharmaceuticals, alleging violations of

state antitrust, pricing or consumer protection laws. In all states except

Alabama and Tennessee, settlements in those cases have been approved and the

cases dismissed.



Other Matters. In March 1996, the Federal Trade Commission ("FTC")

commenced a non-public investigation focusing on the pricing practices described

under "Pricing Litigation" above. The Company has responded to two subpoenas

from the FTC requesting production of certain documents and other discovery

responses. The Company believes that all of its actions have been lawful and

proper and is cooperating with the investigation.



The Company is also a defendant in other litigation, including product

liability and patent suits, of a character regarded as normal to its business.



While it is not possible to predict or determine the outcome of the legal

actions and investigations pending against the Company, the Company believes

that except as noted above, the costs associated with all such matters will not

have a material adverse effect on its consolidated financial position or

liquidity but could possibly be material to the consolidated results of

operations in any one accounting period.





-12-

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



During the fourth quarter of 1998, no matters were submitted to a vote of

security holders.





PART II



Item 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS



Information relating to the principal market for the Company's common

stock and related stockholder matters, set forth in the Company's 1998 Annual

Report under "Selected Quarterly Data (unaudited)," at page 44 (pages 7-8 of

Exhibit 13), and "Selected Financial Data (unaudited)," at page 45 (page 9 of

Exhibit 13), is incorporated herein by reference.





Item 6.  SELECTED FINANCIAL DATA



Selected financial data for each of the Company's five most recent fiscal

years, set forth in the Company's 1998 Annual Report under "Selected Financial

Data (unaudited)," at page 45 (page 9 of Exhibit 13), are incorporated herein by

reference.





Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

AND FINANCIAL CONDITION



REVIEW OF OPERATIONS



Sale of PCS Health-Care-Management Business



In November 1998, the Company signed a definitive agreement to sell to

Rite Aid Corporation the Company's PCS health-care-management subsidiary for

$1.60 billion in cash. The sale, which was completed in January 1999, will allow

the Company to further focus on pharmaceutical innovation and the realization of

optimal demand for Company products in the marketplace. As a consequence of the

divestiture, the operating results of PCS have been reflected as "discontinued

operations" in the Company's financial statements for all periods and have been

excluded from consolidated sales and expenses reflected therein. The net gain on

disposal will be recognized in the first quarter of 1999. See Note 3 to the

consolidated financial statements for further discussion.



Operating Results From Continuing Operations--1998



Income from continuing operations (before the 1998 extraordinary charge of

$7.2 million, or $.01 per share) was $2.10 billion, or $1.87 per share, in 1998

and $2.02 billion, or $1.78 per share, in 1997. Comparisons between 1998 and

1997 are made difficult by the impact of several unusual transactions that are

reflected in the Company's operating results for both years. Excluding these

unusual items, which are discussed further below, income from continuing

operations before extraordinary item for 1998 and 1997 would have been $2.17

billion, or $1.94



-13-

per share, and $1.83 billion, or $1.62 per share, respectively. This represents

an increase in earnings and earnings per share of 19 percent and 20 percent,

respectively. The 1998 increases are attributed to increased sales, improved

gross margin, reduced interest expense and a lower effective tax rate, partially

offset by increases in operating expenses.



During 1998, the Company announced a collaboration with ICOS Corporation

to jointly develop and globally commercialize a phosphodiesterase type 5 (PDE5)

inhibitor as an oral therapeutic agent for the treatment of both male and female

sexual dysfunction. The compound is in the development phase (Phase II clinical

trials) and no alternative future uses have been identified. As with many Phase

II compounds, launch of the product, if successful, would not be expected in the

near term. Accordingly, under current accounting rules, the Company's payments

to acquire rights to this compound were required to be charged as a one-time

expense of $127.5 million, which reduced earnings per share by approximately

$.07 net of tax. The Company's reported tax rate was also affected by this item.



The Company's reported results from continuing operations for 1997 include

the following unusual transactions: a pretax gain of $631.8 million from the

sale of the Company's interest in the DowElanco joint venture, a $97.8 million

noncash charge for an asset impairment as discussed further in the 1997

operating results section, a charge for the settlement of a significant portion

of the Company's remaining retail pharmacy pricing litigation, and a $24.1

million charge for the discontinuance of the research collaboration with

Somatogen, Inc. The Company's reported tax rate for 1997 was also affected by

these transactions.



The Company's sales for 1998 increased 16 percent, to $9.24 billion. Sales

in the U.S. were $5.84 billion, a 20 percent increase, while sales outside the

U.S. were $3.40 billion, a 9 percent increase. Worldwide sales reflected volume

growth of 15.3 percent and a 2.1 percent increase in selling prices, which were

partially offset by an unfavorable exchange rate impact of 1.8 percent.



Worldwide pharmaceutical sales increased 17 percent, to $8.62 billion.

Sales growth was led by four of the Company's newer products: Zyprexa, a

treatment for schizophrenia and related psychoses; the cardiovascular agent

ReoPro; the oncolytic product Gemzar; and the osteoporosis prevention agent

Evista, which was launched in the first quarter of 1998; as well as the

antidepressant Prozac. Revenue growth was partially offset by lower sales of

anti-infective products and the antiulcer agent Axid due to continuing generic

competition and other competitive pressures. Total U.S. pharmaceutical sales

increased 20 percent, to $5.55 billion. Growth was driven primarily by increased

volumes. International pharmaceutical sales increased 10 percent, to $3.07

billion. Strong volume growth drove the increase, offset by the effect of

unfavorable exchange rates with selling prices remaining relatively stable. The

adverse exchange rate impact in the Asia-Pacific region did not have a material

impact on worldwide sales in 1998. The Company expects that the deterioration of

the Brazilian economy will have a slight adverse impact on 1999 sales and net

income due to a combination of the negative impact of the changing exchange

rates and weakening local demand.



Worldwide sales of Prozac in 1998 were $2.81 billion, representing an

increase of 10 percent. Prozac sales in the U.S. increased 13 percent, to $2.27

billion. Sales of Prozac outside the U.S. were substantially the same as 1997.

Continued competitive pressures affected sales globally. In addition, during the

first quarter of 1999 it became apparent that U.S. wholesaler stocking in late

1998 would have a greater negative impact on 1999 sales than had been

anticipated. Based on the 1999 results to date, the Company now anticipates only

slight growth in worldwide Prozac sales in 1999. The actual sales levels will

depend upon the effectiveness of



-14-

the Company's marketing efforts in offsetting increased competition, the rate of

growth of the antidepressant market, and U.S. wholesaler stocking patterns.



Zyprexa posted worldwide sales of $1.44 billion in 1998, representing an

increase of 98 percent. U.S. sales of Zyprexa increased 91 percent, to $1.12

billion. Sales outside the U.S. increased 127 percent, to $317.9 million. Sales

comparisons for Zyprexa benefited to some extent from U.S wholesaler stocking in

the fourth quarter of 1998. The Company expects continued strong sales growth

for Zyprexa in 1999 but at a lower percentage than in 1998.



Worldwide insulin sales, composed of Humulin, the Company's biosynthetic

human insulin; Humalog, the Company's insulin analog; and the animal-source

insulin Iletin, increased 8 percent, to $1.15 billion, in 1998. Insulin sales in

the U.S. increased 4 percent, to $701.5 million. Insulin sales outside the U.S.

increased 14 percent, to $453.4 million. Worldwide Humulin sales increased 3

percent. U.S. Humulin sales were flat compared with 1997 as they were affected

by both increased sales of Humalog and competition from oral antidiabetic

agents. Humulin sales outside the U.S. increased 8 percent. Worldwide Humalog

sales were $129.6 million, representing an increase of 91 percent, or $61.9

million, over 1997. Iletin sales were essentially flat compared with 1997. The

Company expects moderate growth in worldwide insulin sales in 1999.



Worldwide sales of anti-infectives decreased 9 percent, to $1.16 billion.

U.S. and international anti-infectives sales declined 20 percent and 4 percent,

respectively. These declines were due, in part, to continued generic competition

in certain markets and the impact of unfavorable exchange rates. Cefaclor,

Lorabid, and Vancocin accounted for the majority of the decline in

anti-infectives sales with declines of 10 percent, 14 percent and 5 percent,

respectively. The Company anticipates that 1999 worldwide sales of

anti-infectives will be below 1998 levels largely due to continued pricing

pressures as a result of generic competition.



Worldwide Axid sales decreased 20 percent, to $418.0 million, due to

continuing competition from other branded and generic antiulcer agents. The

Company expects a continued decline in Axid sales in 1999.



As mentioned above, the newer products ReoPro and Gemzar, along with

Evista, which was launched in the first quarter of 1998, contributed

significantly to worldwide sales growth. Worldwide ReoPro sales of $365.4

million reflected an increase of 44 percent. Worldwide Gemzar sales increased 76

percent, to $306.8 million. The Company expects the sales of both ReoPro and

Gemzar to increase in 1999 but at a lower rate than in 1998. Evista had

worldwide sales of $144.1 million and had been introduced in approximately 20

countries by the end of 1998. Sales of Evista benefited somewhat from U.S.

wholesaler stocking in the fourth quarter of 1998. The Company anticipates

strong growth in worldwide Evista sales for 1999.



Worldwide sales of animal health products increased 4 percent, to $614.4

million. Sales increased 7 percent in the U.S. and 2 percent outside the U.S.

The worldwide sales growth was driven primarily by Micotil, an antibiotic for

bovine respiratory disease; Tylan, an antibiotic for promoting feed efficiency

and growth in swine and cattle; and Surmax, a feed additive performance enhancer

for poultry. Weakness in the general economic condition of the Asia-Pacific

region negatively affected sales of animal health products outside the U.S.

These products have a greater sensitivity to adverse economic conditions in the

Asia-Pacific region than pharmaceutical products.



-15-

The Company's payments under federally mandated Medicaid rebate programs

reduced 1998 sales by approximately $278.6 million compared with approximately

$199.1 million in 1997. The Company anticipates that Medicaid rebates will

increase in 1999 due, in part, to the continuing growth in Zyprexa sales.



The gross margin improved to 78.2 percent of sales compared with 75.6

percent for 1997. This increase was primarily the result of favorable changes in

product mix and productivity improvements. The Company anticipates that the

gross margin percentage will continue to improve in 1999 due largely to

favorable product mix and the expiration of a royalty obligation on Humulin and

Humalog sales in August 1998.



Operating expenses (the aggregate of research and development and

marketing and administrative expenses) for 1998, excluding the effect of the

one-time expenses for acquired in-process technology related to the ICOS

collaboration, increased 22 percent. The increase reflects a 27 percent growth

rate in research and development, to $1.74 billion. This growth is the result of

greater investments in both internal research efforts and external research

collaborations. The Company expects research and development expenses in 1999 to

increase at a significantly lower rate but still approximating that of sales

growth. The actual 1999 increase will vary depending upon a number of factors,

particularly the level of research collaboration activity. Marketing and

administrative expenses increased 19 percent, to $2.66 billion. This increase

was driven by increased expenditures to support continued new product launches

around the world, including the U.S. launch of Evista and direct-to-consumer

advertising campaigns in the U.S. In addition to the above, operating expenses

were also affected by investments in the Company's global information technology

capabilities, which include expenditures relating to the Company's Year 2000

computer initiatives and increased compensation accruals due to the Company's

performance-based bonus programs. The Company expects marketing and

administrative expenses to increase at a significantly lower rate in 1999, due

in part to expense-management programs initiated in early 1999.



Interest expense in 1998 decreased $51.4 million, or 22 percent, due

largely to declines in the Company's borrowings.



Net other income for 1998 was $149.3 million, a decrease of $12.1 million

from 1997. Net other income in 1998 benefited from gains on the sale of certain

investments and increased interest income. Also, in comparison with 1997, 1998

benefited from the inclusion in the 1997 amount of the charges associated with

the discontinuance of a collaboration with Somatogen, Inc. These increases were

more than offset by the absence of both DowElanco joint venture income and

certain license fee income in 1998.



The Company's effective tax rate for 1998 was 21.3 percent compared with

30.5 percent for 1997. The Company's 1997 effective tax rate was distorted by

the gain from the sale of DowElanco and the asset impairment charge. The

Company's tax rate for 1997, excluding the impact of these items, was 24.1

percent. Excluding the ICOS transaction discussed previously, the Company's

effective tax rate for 1998 was 22.2 percent. The lower 1998 rate is primarily

the result of changes in the mix of earnings between jurisdictions with lower

tax rates and those with higher rates. The Company expects that a tax rate in

the range of 22 percent to 22.5 percent will be sustainable under present law

for the near term. See Note 11 to the consolidated financial statements for

additional information.



-16-

The Company refinanced an ESOP debenture during 1998. An extraordinary

charge of $7.2 million, net of a $4.8 million income tax benefit, was recorded

as a result of this refinancing.



Operating Results From Continuing Operations--1997



The Company's operating results from continuing operations for both 1997

and 1996 reflect the impact of several unusual transactions that make

comparisons difficult. As noted above, the Company's reported results from

continuing operations for 1997 include several unusual transactions. As a

consequence of these transactions, 1997 income from continuing operations was

$2.02 billion, or $1.78 per share. This compares with income from continuing

operations in 1996 of $1.63 billion, or $1.45 per share.



Excluding the unusual items noted previously, income from continuing

operations for 1997 would have been $1.83 billion, or $1.62 per share. After

excluding the income from the sale of the U.S. marketing rights for Ceclor CD

and Keftab to Dura Pharmaceuticals, Inc., from the 1996 amounts, 1997 income and

earnings per share from continuing operations, without the unusual items,

reflect increases from 1996 of 18 and 17 percent, respectively. The 1997

increases are attributed to increased sales, improved gross margin and reduced

interest expense, partially offset by decreased other income.



The Company's sales for 1997 increased 14 percent, to $7.99 billion. Sales

in the U.S. were $4.88 billion, a 25 percent increase, while sales outside the

U.S. were $3.11 billion, a 1 percent increase. Worldwide sales volume growth of

16 percent and a 2 percent increase in global selling prices were partially

offset by unfavorable exchange rates, which decreased sales by 4 percent.



Worldwide pharmaceutical sales increased 15 percent, to $7.39 billion. The

sales growth was led by three of the Company's newer products, Zyprexa, ReoPro

and Gemzar, as well as increased sales of Prozac and insulin products. The 1997

growth was achieved despite lower sales of anti-infective products. Total U.S.

pharmaceutical sales increased 25 percent, to $4.61 billion, primarily as a

result of increased volume. International pharmaceutical sales increased 1

percent, to $2.78 billion. Sales volume growth outside the U.S. of 12 percent

was offset largely by unfavorable exchange rates (9 percent) and decreased

selling prices (2 percent).



Worldwide sales of Prozac in 1997 were $2.56 billion, an increase of 8

percent. Prozac sales in the U.S. increased 17 percent, to $2.02 billion.

International sales of Prozac experienced a decline of 14 percent due largely to

the effects of unfavorable exchange rates, continuing generic competition in

Canada and competitive pressures in France.



Three of the Company's newer products contributed significantly to the

worldwide sales growth. Specifically, in 1997, Zyprexa, launched in the fourth

quarter of 1996, contributed $729.9 million to worldwide sales and $589.7

million to U.S. sales, which represent increases of $643.0 million and $511.4

million, respectively. ReoPro, launched in 1995, reported worldwide sales of

$254.4 million, reflecting an increase of $105.1 million. Worldwide sales of

Gemzar, launched in the U.S. in May 1996, grew to $174.8 million, representing

an increase over 1996 of $112.9 million.



Worldwide insulin sales in 1997 increased 9 percent, to $1.07 billion.

Insulin sales in the U.S. increased 6 percent, to $673.8 million, and insulin

sales outside the U.S. increased 14 percent, to $398.2 million. Worldwide sales

of Humulin increased 6 percent, to $934.9 million, for 1997. U.S. Humulin sales

increased 4 percent, to $585.7 million, with growth due to



-17-

wholesaler buying patterns being offset partially by the combined effect of

competition from oral antidiabetic agents and increased sales of Humalog.

International Humulin sales increased 9 percent.



Among other major products, worldwide sales of Axid decreased 1 percent,

to $525.4 million. Axid sales declined 2 percent in the U.S. and increased 3

percent outside the U.S. Worldwide sales of the human growth hormone Humatrope

declined 3 percent.



Compared with 1996, worldwide anti-infectives sales in 1997 decreased

$193.1 million (13 percent). This decline was due primarily to continued generic

competition in certain markets and the impact of unfavorable exchange rates.

Sales of cefaclor decreased 18 percent, to $442.2 million, accounting for the

majority of this decline. Both U.S. and international anti-infectives sales

reflected declines.



Worldwide sales of animal health products increased 8 percent over 1996,

driven by volume growth of 10 percent. Sales increased 15 percent in the U.S.

and 2 percent outside the U.S. The worldwide sales increase was primarily due to

increased sales of Micotil and Tylan.



The Company's payments under federally mandated Medicaid rebate programs

reduced 1997 sales by approximately $199.1 million.



Gross margin improved to 75.6 percent of sales compared with 73.2 percent

for 1996. This increase was primarily the result of favorable product mix,

production efficiencies and procurement savings.



Research and development expenses in 1997 increased 15 percent. Expenses

in support of global clinical trials, as well as an increase in external

research collaborations relating to the discovery and development of new

technologies, compounds and delivery systems, drove this increase.



Marketing and administrative expenses increased 18 percent over 1996.

Overall, the increase was largely due to increased expenditures to support

continued new product launches around the world, including the January 1998

launch of Evista, the Prozac direct-to-consumer advertising campaign,

investments in the Company's global information technology capabilities and

increased compensation accruals due to the Company's performance-based bonus

programs. The charge for the settlement of a significant portion of the

Company's remaining retail pharmacy pricing litigation also contributed to the

1997 increase.



The asset impairment represents a pretax noncash charge of $97.8 million,

recorded in the second quarter of 1997, primarily to adjust to their fair value

the carrying value of certain long-lived assets of a small portion of the

Company's health-care-management business that was not sold. Fair value was

determined based upon anticipated future cash flows, discounted at a rate

commensurate with the risk involved. This business is now part of a joint

venture, the results of which are immaterial to the consolidated financial

statements.



On June 30, 1997, The Dow Chemical Company acquired the Company's 40

percent interest in the DowElanco joint venture. The cash purchase price was

$1.2 billion, resulting in an after-tax gain of $303.5 million, or $.27 per

share.



-18-

Interest expense in 1997 decreased $55.3 million (19 percent) due

primarily to a decline in the Company's borrowings.



Net other income for 1997 amounted to $161.4 million, which was $213.6

million lower than in 1996. The decrease was primarily the result of several

nonrecurring items reflected in the 1996 amount, including the sale of the U.S.

marketing rights for Ceclor CD and Keftab ($91.8 million), income from

codevelopment and comarketing contracts, the sale of marketing rights for ReoPro

in Japan and Tapazole(R) in the U.S., and a higher level of sales of certain

equity securities held by the Company. Net other income for 1997 benefited from

income from outlicensing activity. These increases were partially offset by the

charge for the discontinuance of the collaboration with Somatogen, Inc.



The Company's reported tax rates for 1997 reflect the effects of the

unusual transactions that occurred during the year. The Company's 1997 tax rate,

excluding the impact of these items, was 24.1 percent compared with the 1996 tax

rate of 23.7 percent.



Discontinued Operations



Discontinued operations consists of the Company's PCS

health-care-management business. As noted previously, in November 1998, the

Company entered into an agreement to sell PCS for $1.6 billion in cash. The sale

was closed in January 1999 and the resulting net gain on disposal will be

recognized in the first quarter of 1999. See Note 3 to the consolidated

financial statements for further information.



In the second quarter of 1997, the Company recognized an asset impairment

(a noncash charge) of approximately $2.3 billion to adjust the carrying value of

PCS's long-lived assets, primarily goodwill, to their fair value of

approximately $1.5 billion. The Company determined that PCS's estimated future

undiscounted cash flows were below the carrying value of PCS's long-lived

assets. As a consequence, the carrying value was adjusted to estimated fair

value based on anticipated future cash flows, discounted at a rate commensurate

with the risk involved.



Financial Condition



As of December 31, 1998, cash, cash equivalents and short-term investments

totaled approximately $1.60 billion compared with $2.02 billion at December 31,

1997. Total debt at December 31, 1998, was $2.37 billion, a decrease of $186.8

million. The decrease in cash was due primarily to stock repurchases and

repayment of debt. The Company has completed its previously announced $2 billion

share repurchase, acquiring approximately 28.3 million shares in 1998. The

Company expects to repurchase shares costing approximately $1 billion in 1999.

The Company believes that cash generated from operations, along with available

cash and cash equivalents, will be sufficient to fund essentially all the

Company's operating needs, including debt service, capital expenditures, share

repurchases and dividends in 1999. The Company anticipates using the proceeds

from the sale of PCS in 1999 for general corporate purposes.



The Company believes that amounts available through existing commercial

paper programs should be adequate to fund maturities of short-term borrowings.

The outstanding commercial paper is also backed by $2 billion of committed bank

credit facilities.



In the normal course of business, operations of the Company are exposed to

fluctuations in currency values and interest rates. These fluctuations can vary

the costs of financing, investing



-19-

and operating. The Company addresses a portion of these risks through a

controlled program of risk management that includes the use of derivative

financial instruments. The objective of controlling these risks is to limit the

impact on earnings of fluctuations in interest and currency exchange rates. All

derivative activities are for purposes other than trading.



The Company's primary interest rate risk exposure results from changes in

short-term U.S. dollar interest rates. In an effort to manage interest rate

exposures, the Company strives to achieve an acceptable balance between fixed

and floating rate debt positions and may enter into interest rate swaps to help

maintain that balance. Based on the Company's overall interest rate exposure at

December 31, 1998, 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, 1998, would have no material

impact on earnings, cash flows or fair values of interest rate risk sensitive

instruments over a one-year period. Similarly, a hypothetical 10 percent change

in interest rates from 1997 applied to the fair value of the instruments as of

December 31, 1997, would have had no material impact on earnings, cash flows or

fair values of interest rate risk sensitive instruments during 1998.



The Company's foreign currency risk exposure results from fluctuating

currency exchange rates, primarily the strengthening of the U.S. dollar against

the Japanese yen and European currencies. The Company faces transactional

currency exposures that arise when its foreign subsidiaries (or the Company

itself) enter into transactions, generally on an intercompany basis, denominated

in currencies other than their local currency. The Company also faces currency

exposure that arises from translating the results of its global operations to

the U.S. dollar at exchange rates that have fluctuated from the beginning of the

period. The Company uses forward contracts and purchased options to manage its

foreign currency exposures. Company 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 fluctuations on the existing assets,

liabilities, commitments and anticipated revenues. Considering the Company's

derivative financial instruments outstanding at December 31, 1998, a

hypothetical 10 percent weakening in the exchange rates (primarily against the

U.S. dollar) over a one-year period would decrease earnings by $26.1 million,

while a 10 percent strengthening in the exchange rates would increase earnings

by $45.9 million. Comparatively, considering the Company's derivative financial

instruments outstanding at December 31, 1997, a hypothetical 10 percent

weakening in the exchange rates (primarily against the U.S. dollar) over a

one-year period would have decreased earnings by $51.0 million, while a 10

percent strengthening in the exchange rates would have increased earnings by

$67.8 million. This calculation does not reflect the impact of exchange

gains/losses on the underlying positions that would be offset, in part, by the

results of the derivative instruments.



In connection with the sale of the Company's PCS subsidiary, PCS

repurchased the Class B stock that had been sold to an institutional investor in

1997. See Note 9 to the consolidated financial statements for additional

information.



Capital expenditures of $419.9 million during 1998 were $53.6 million more

than in 1997 as the Company continued to invest in research and development

initiatives and related infrastructure. The Company expects near-term capital

expenditures to increase from 1998 levels but to remain well below the

historical peaks of the early 1990s. Sufficient cash flows exist to meet these

near-term requirements.



-20-

Dividends of $.80 per share were paid in 1998, an increase of

approximately 8 percent from the $.74 per share paid in 1997. In the fourth

quarter of 1998, effective for the first quarter dividend in 1999, the quarterly

dividend was increased $.03 per share (15 percent), resulting in an indicated

annual rate for 1999 of $.92 per share. The year 1998 was the 114th consecutive

year in which the Company made dividend payments and the 31st consecutive year

in which dividends have been increased.



Year 2000 Readiness Disclosure



Many of the Company's global information technology (IT) systems and

non-IT systems, including laboratory and process automation devices, will

require modification or replacement in order to render the systems ready for the

year 2000 (Y2K). In late 1996, the Company initiated a comprehensive program to

reduce the likelihood of a material impact on the business. The numerous

activities that are intended to enable the Company to obtain Y2K readiness

utilize both internal and external resources and are being centrally managed

through a program office. Monthly reports are made to senior management and a

business council comprising various management representatives. In addition,

regular reports are made to the audit committee of the board of directors.



The Company's inventory of IT systems, including software applications,

has been divided into various categories. Those most critical to the Company's

global operations are generally being assessed and renovated, when necessary,

first. The Company has instituted a process to monitor all critical and

essential replacement and upgrade projects of existing systems to assist in

managing them toward completion in a timely manner. The Company has completed

renovation of approximately 95 percent of its critical applications. The Company

anticipates that substantially all the remaining critical applications will be

completed by March 31, 1999. Of applications deemed essential, the Company

anticipates Y2K readiness of approximately 95 percent by June 30, 1999.



The most important non-IT systems are various laboratory and process

automation devices. The Company has completed a global assessment of all

devices. Based on this assessment, only a small percentage (10 percent to 13

percent) of all automation devices appear to require upgrade or replacement. The

Company has begun the process of either remediating or replacing these devices

and anticipates that this process will be substantially complete by mid-1999.



The representatives of the program office have visited numerous global

sites to assess the progress being made toward site readiness. In addition,

several global training programs have occurred to foster the consistent

application of the chosen methodologies.



The Company has also mailed letters to thousands of vendors, service

providers and customers to determine the extent to which they are prepared for

the Year 2000 issue. These activities are being coordinated through a global

network of regional site and functional coordinators. Many responses have been

received and the Company is identifying the vendors, service providers and

customers that are critical to Lilly through a business impact analysis.

Follow-up interviews are more thoroughly assessing their readiness.



The Company has begun, but not yet completed, a comprehensive analysis of

the operational problems and costs (including loss of revenues) that would be

reasonably likely to result from the failure by the Company and certain third

parties to complete efforts necessary to achieve Year 2000 compliance on a

timely basis or from abnormal wholesaler or consumer buying patterns in



-21-

anticipation of the Year 2000. Contingency plans are beginning to be developed

for the Company and its critical vendors, customers and suppliers to address the

flow of products to the consumer. The contingency planning involves a

multifaceted approach, which may include additional purchases of raw materials,

manufacturing additional finished stock of critical products and/or locating

inventories of products closer to the consumer. Business continuity plans will

be developed to address the Company's approach for dealing with extended

disruptions. In addition, "rapid response" teams will be established to respond

to any issues that occur around the millennium. The Company currently plans to

complete analysis and have contingency plans in place by September 30, 1999.



The costs of the Company's Year 2000 efforts are based upon management's

best estimates, which are derived using numerous assumptions regarding future

events, including the continued availability of certain resources, third-party

remediation plans and other factors. There can be no assurance that these

estimates will prove to be accurate, and actual results could differ materially

from those currently anticipated. The Company currently estimates it will spend

between $160 and $190 million over the life of the program and that

approximately 55 percent to 60 percent of the anticipated costs were incurred by

the end of 1998. Expenses associated with addressing the Year 2000 issues are

being recognized as incurred.



The failure to correct a material Year 2000 problem could result in an

interruption in, or a failure of, certain normal business activities or

operations. Such failures could materially and adversely affect the Company's

results of operations. Due to the uncertainty inherent in the Year 2000 problem,

the Company is unable to determine, at this time, whether the consequences of

Year 2000 failures will have a material impact on the Company's results of

operations. The Year 2000 project is expected to significantly reduce the

Company's level of uncertainty about the Year 2000 problem and, in particular,

about the Year 2000 compliance and readiness of its vendors, service suppliers

and customers. The Company believes that, with the completion of the project as

scheduled, the possibility of a material interruption of normal operations

should be reduced.



Euro Conversion



On January 1, 1999, 11 European nations adopted a common currency, the

euro, and formed the European Economic and Monetary Union (EMU). For a

three-year transition period, both the euro and individual participants'

currencies will remain in circulation. After July 1, 2002, at the latest, the

euro will be the sole legal tender for EMU countries. The adoption of the euro

will affect a multitude of financial systems and business applications as the

commerce of these nations will be transacted in the euro and the existing

national currency.



The Company is currently addressing euro-related issues and their impact

on information systems, currency exchange rate risk, taxation, contracts,

competition and pricing. Action plans currently being implemented are expected

to result in compliance with all laws and regulations; however, there can be no

certainty that such plans will be successfully implemented or that external

factors will not have an adverse effect on the Company's operations. Any costs

of compliance associated with the adoption of the euro will be expensed as

incurred and the Company does not expect these costs to be material to its

results of operations, financial condition or liquidity.





-22-

Legal And Environmental Matters



Barr Laboratories, Inc. (Barr), and Geneva Pharmaceuticals, Inc. (Geneva),

have each submitted an Abbreviated New Drug Application (ANDA) seeking FDA

approval to market generic forms of Prozac before the expiration of the

Company's patents. The ANDAs assert that two U.S. patents held by Lilly covering

Prozac are invalid and unenforceable. The Company filed suit against Barr and

Geneva in federal court in Indianapolis seeking a ruling that Barr's challenge

to Lilly's patents is without merit. On January 12, 1999, the trial court

granted summary judgment in favor of Lilly on two of the four claims raised by

Barr and Geneva against Lilly's patents. Barr and Geneva have appealed that

decision. On January 25, 1999, Barr and Geneva dismissed their other two claims

in exchange for a $4 million payment, which Barr and Geneva will share with a

third defendant. In late 1998, three other generic pharmaceutical companies,

Zenith Goldline Pharmaceuticals, Inc., Teva Pharmaceuticals USA, and Cheminor

Drugs, Ltd. together with one of its subsidiaries each filed ANDAs for generic

forms of Prozac, asserting that the later of the two patents (expiring in

December 2003) is invalid and unenforceable. Finally, in January 1999, Novex

Pharma, a division of Apotex, Inc., filed an ANDA challenging both patents.

Lilly has filed suits against the four companies in federal court in

Indianapolis. The suits are in a very early stage. While the Company believes

that the claims of the six generic companies are without merit, there can be no

assurance that the Company will prevail. An unfavorable outcome of this

litigation could have a material adverse effect on the Company's consolidated

financial position, liquidity or results of operations.



As with other industrial enterprises, the Company's operations are subject

to complex and changing federal, state and local environmental laws and

regulations, which will continue to require capital investment and operational

expenses. The Company also has been designated a potentially responsible party

under the Comprehensive Environmental Response, Compensation and Liability Act,

commonly known as Superfund, with respect to fewer than 10 sites with which the

Company had varying degrees of involvement. Further, the Company continues

remediation of certain of its own properties consistent with current

environmental practices. The Company has accrued for estimated Superfund costs

and remediation of its own properties, taking 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 those costs. The Company reached a settlement with its primary

liability insurance carrier providing for coverage for certain environmental

liabilities and has instituted litigation seeking coverage from certain excess

carriers. In addition, the Company has accrued for certain other environmental

matters.



During 1998, the Company continued to be named as a defendant in a small

number of product liability lawsuits involving Prozac. However, continuing a

trend seen in recent years, the number of pending cases declined from levels of

the previous year.



The Company continues to be a defendant, together with numerous other U.S.

prescription drug manufacturers, in related suits brought under federal and

state antitrust laws by many retail pharmacies and, in some cases, consumers.

The Company has now resolved the great majority of the retailer claims and,

subject in certain cases to court approval, has also settled the great majority

of the consumer claims.



While it is not possible to predict or determine the outcome of the

patent, product liability, antitrust or other legal actions brought against the

Company or the ultimate cost of environmental matters, the Company believes

that, except as noted above, the costs associated with all such



-23-

matters will not have a material adverse effect on its consolidated financial

position or liquidity but could possibly be material to the consolidated results

of operations in any one accounting period. For additional information on

litigation and environmental matters, see Item 3 above and Note 13 to the

consolidated financial statements.



Private Securities Litigation Reform Act Of 1995 --

A Caution Concerning Forward-Looking Statements



Under the safe harbor provisions of the Private Securities Litigation

Reform Act of 1995, the Company cautions investors that any forward-looking

statements or projections made by the Company, including those made in this

document, are based on management's expectations at the time they are made, but

they are subject to risks and uncertainties that may cause actual results to

differ materially from those projected. Economic, competitive, governmental,

technological and other factors that may affect the Company's operations and

prospects are discussed in Exhibit 99 to the Company's most recent report on

Forms 10-Q and 10-K filed with the Securities and Exchange Commission.



Additional Information



Additional financial information, presented as graphs in the Company's

1998 Annual Report to Shareholders, is found at pages 29-32 of Exhibit 13 and is

incorporated herein by reference.





Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Quantitative and qualitative disclosures about market risk (e.g., interest

rate risk and foreign currency exchange risk) are set forth under Item 7 above

at "Review of Operations -- Financial Condition" and are incorporated by

reference herein.





Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The consolidated financial statements of the Company and its subsidiaries,

listed in Item 14(a)1 and included in the Company's 1998 Annual Report at pages

32, 36-37, 41 and 42 (Consolidated Statements of Income, Consolidated Balance

Sheets, Consolidated Statements of Cash Flows, and Consolidated Statements of

Comprehensive Income), page 43 (Segment Information), and pages 46-59 (Notes to

Consolidated Financial Statements) (together, pages 1-6 and 10-26 of Exhibit

13), and the Report of Independent Auditors set forth in the Company's 1998

Annual Report at page 61 (page 28 of Exhibit 13), are incorporated herein by

reference.



Information on quarterly results of operations, set forth in the Company's

1998 Annual Report under "Selected Quarterly Data (unaudited)," at page 44

(pages 7-8 of Exhibit 13), is incorporated herein by reference.



-24-

Item 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.





PART III



Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Information relating to the Company's directors, set forth in the

Company's Proxy Statement dated March 4, 1999 (the "Proxy Statement"), under

"Item 1. Election of Directors" at pages 3-6, is incorporated herein by

reference. Information relating to the Company's executive officers is set forth

at pages 8-9 of this Form 10-K under "Executive Officers of the Registrant."

Information relating to certain filing obligations of directors and executive

officers under the federal securities laws, set forth in the Proxy Statement

under "Other Matters -- Section 16(a) Beneficial Ownership Reporting Compliance"

at page 23, is also incorporated herein by reference.





Item 11. EXECUTIVE COMPENSATION



Information relating to executive compensation, set forth in the Proxy

Statement under "Directors' Compensation", "Executive Compensation",

"Compensation Committee Interlocks", "Retirement Plan", and "Change-in-Control

Severance Pay Arrangements" at pages 9-18, is incorporated herein by reference,

except that the Compensation Committee Report and Performance Graph are not so

incorporated.





Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



Information relating to ownership of the Company's common stock by persons

known by the Company to be the beneficial owners of more than 5 percent of the

outstanding shares of common stock and by management, set forth in the Proxy

Statement under "Common Stock Ownership by Directors and Executive Officers," at

page 8, and "Principal Holders of Common Stock," at page 9, is incorporated

herein by reference.





Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



None.





-25-

PART IV



Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



(a)1.    Financial Statements



The following consolidated financial statements of the Company and its

subsidiaries, included in the Company's 1998 Annual Report at the pages

indicated in parentheses, are incorporated by reference in Item 8:



Consolidated Statements of Income--Years Ended December 31, 1998, 1997,

and 1996 (page 32) (page 1 of Exhibit 13)



Consolidated Balance Sheets--December 31, 1998 and 1997 (pages 36-37)

(pages 2-3 of Exhibit 13)



Consolidated Statements of Cash Flows--Years Ended December 31, 1998,

1997, and 1996 (page 41) (page 4 of Exhibit 13)



Consolidated Statements of Comprehensive Income--Years Ended December

31, 1998, 1997, and 1996 (page 42) (page 5 of Exhibit 13)



Segment Information (page 43) (page 6 of Exhibit 13)



Notes to Consolidated Financial Statements (pages 46-59) (pages 10-26

of Exhibit 13)



(a)2.    Financial Statement Schedules



The consolidated financial statement schedules of the Company and its

subsidiaries have been omitted because they are not required, are inapplicable,

or are adequately explained in the financial statements.



Financial statements of interests of 50 percent or less, which are

accounted for by the equity method, have been omitted because they do not,

considered in the aggregate as a single subsidiary, constitute a significant

subsidiary.



(a)3.    Exhibits



3.1      Amended Articles of Incorporation



3.2      By-laws



4.1      Rights Agreement dated as of July 20, 1998, between Eli Lilly

and Company and First Chicago Trust Company of New York, as

Rights Agent



4.2      Form of Indenture with respect to Debt Securities dated as of

February 1, 1991, between Eli Lilly and Company and Citibank,

N.A., as Trustee



-26-

4.3      Form of Standard Multiple-Series Indenture Provisions dated,

and filed with the Securities and Exchange Commission on,

February 1, 1991



4.4      Form of Fiscal and Paying Agency Agreement dated February 7,

1995, between Eli Lilly and Company and Citibank, N.A., Fiscal

and Paying Agent, including forms of Notes, relating to 8-1/8%

Notes Due February 7, 2000(1)



4.8      Form of Fiscal and Paying Agency Agreement dated February 7,

1995, between Eli Lilly and Company and Citibank, N.A., Fiscal

and Paying Agent, including forms of Notes, relating to 8-3/8%

Notes Due February 7, 2005(1)



10.1     1989 Lilly Stock Plan, as amended(2)



10.2     1994 Lilly Stock Plan, as amended(2)



10.3     1998 Lilly Stock Plan(2)



10.4     The Lilly Deferred Compensation Plan, as amended(2)



10.5     The Lilly Directors' Deferral Plan, as amended(2)



10.6     The Eli Lilly and Company EVA(R)Bonus Plan, as amended(2),(3)



10.7     Eli Lilly and Company Change in Control Severance Pay Plan for

Select Employees(2)



12.      Computation of Ratio of Earnings to Fixed Charges



13.      Annual Report to Shareholders for the Year Ended December 31,

1998 (portions incorporated by reference into this Form 10-K)



21.      List of Subsidiaries



23.      Consent of Independent Auditors



27.      Financial Data Schedules for the periods indicated:



27.1     Year ended December 31, 1998



27.2     Restated for year ended December 31, 1996



27.3     Restated for quarter ended March 31, 1997



27.4     Restated for six months ended June 30, 1997



- ---------

(1) This exhibit is not filed with this Report. Copies will be furnished to the

Securities and Exchange Commission upon request.



(2) Indicates management contract or compensatory plan.



(3) EVA(R) is a registered trademark of Stern Stewart & Co.



-27-

27.5     Restated for nine months ended September 30, 1997



27.6     Restated for year ended December 31, 1997



27.7     Restated for quarter ended March 31, 1998



27.8     Restated for six months ended June 30, 1998



27.9     Restated for nine months ended September 30, 1998



99.      Cautionary Statement under Private Securities Litigation

Reform Act of 1995 -- "Safe Harbor" for Forward-Looking

Disclosures







(b)  Reports on Form 8-K



The Company filed no reports on Form 8-K during the fourth quarter of

1998. During the third quarter, the Company filed a report on Form 8-K on July

23, 1998, in connection with the adoption of a new Shareholder Rights Plan to

replace the Plan that expired on July 28, 1998.







-28-

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities

Exchange Act of 1934, the Registrant has duly caused this report to be signed on

its behalf by the undersigned thereunto duly authorized.





ELI LILLY AND COMPANY





By /s/Sidney Taurel

---------------------

Sidney Taurel, Chairman of the Board,

President and  Chief Executive Officer



March 25, 1999





Pursuant to the requirements of the Securities Exchange Act of 1934,

this report has been signed below on March 25, 1999 by the following persons on

behalf of the Registrant and in the capacities indicated.





SIGNATURE                                   TITLE

- ------------------------------------------------------------------------------



/s/ Sidney Taurel                    Chairman of the Board, President, Chief

- -----------------------------        Executive Officer, and a Director

(SIDNEY TAUREL)                      (principal executive officer)





/s/ Charles E. Golden                Executive Vice President, Chief Financial

- -----------------------------        Officer, and a Director (principal

(CHARLES E. GOLDEN)                  financial officer)





/s/ Arnold C. Hanish                 Chief Accounting Officer

- -----------------------------        (principal accounting officer)

(ARNOLD C. HANISH)





/s/ Steven C. Beering, M.D.          Director

- -----------------------------

(STEVEN C. BEERING, M.D.)





/s/ Karen N. Horn                    Director

- -----------------------------

(KAREN N. HORN, Ph.D.)





-29-

SIGNATURE                                   TITLE

- ------------------------------------------------------------------------------



/s/ Alfred G. Gilman, M.D., Ph.D.    Director

- -----------------------------

(ALFRED G. GILMAN, M.D., Ph.D.)





/s/ Kenneth L. Lay, Ph.D.            Director

- -----------------------------

(KENNETH L. LAY, Ph.D.)





/s/ Franklyn G. Prendergast,

M.D., Ph.D.                          Director

- -----------------------------

(FRANKLYN G. PRENDERGAST,

M.D., Ph.D.)





/s/ Kathi P. Seifert                 Director

- -----------------------------

(KATHI P. SEIFERT)





/s/ August M. Watanabe, M.D.         Director

- -----------------------------

(AUGUST M. WATANABE, M.D.)





/s/ Alva O. Way                      Director

- -----------------------------

(ALVA O. WAY)









-30-

TRADEMARKS USED IN THIS REPORT







Trademarks or service marks owned by Eli Lilly and Company or its

subsidiaries or affiliates, when first used in this Report, appear with an

initial capital and are followed by the symbol (R) or (TM), as applicable. In

subsequent uses of the marks in the Report, the symbols are omitted.

INDEX TO EXHIBITS







The following documents are filed as part of this report:

<TABLE>

<CAPTION>

Exhibit                                                         Location

- --------                                                        --------

<S>          <C>                                                <C>

3.1          Amended Articles of Incorporation                  Incorporated by reference from

Exhibit 3 to the Company's Report on

Form 10-Q for the quarter ended

September 30, 1998



3.2          By-laws                                            Incorporated by reference from

Exhibit 3 to the Company's Report on

Form 10-Q for the quarter ended

June 30, 1998



4.1          Rights Agreement dated as of July 20, 1998,        Incorporated by reference from

between Eli Lilly and Company and First Chicago    Exhibit 1 to the Company's Report on

Trust Company of New York, as Rights Agent         Form 8-K filed July 23, 1998



4.2          Form of Indenture with respect to Debt Securities  Incorporated by reference from

dated as of February 1, 1991, between Eli Lilly    Exhibit 4.1 to the Company's Registration

and Company and Citibank, N.A., as Trustee         Statement on Form S-3, Registration No. 33-38347



4.3          Form of Standard Multiple-Series Indenture         Incorporated by reference from

Provisions dated, and filed with the Securities    Exhibit 4.2 to the Company's Registration

and Exchange Commission on February 1, 1991        Statement on Form S-3, Registration No. 33-38347

</TABLE>

<TABLE>

<CAPTION>

Exhibit                                                         Location

- --------                                                        --------

<S>          <C>                                                <C>

4.6          Form of Fiscal and Paying Agency Agreement dated   *

July 8, 1993, between Eli Lilly and Company and

Citibank, N.A., Fiscal and Paying Agent,

including forms of Notes, relating to 5-1/2%

Notes Due 1998



4.7          Form of Fiscal and Paying Agency Agreement dated   *

February 7, 1995, between Eli Lilly and Company

and Citibank, N.A., Fiscal and Paying Agent,

including forms of Notes, relating to

8-1/8% Notes Due February 7, 2000



4.8          Form of Fiscal and Paying Agency Agreement dated   *

February 7, 1995, between Eli Lilly and Company

and Citibank, N.A., Fiscal and Paying Agent,

including forms of Notes, relating to

8-3/8% Notes Due February 7, 2005



10.1         1989 Lilly Stock Plan, as amended                  Incorporated by reference from

Exhibit 10.2 to the Company's

Report on Form 10-K for the fiscal year ended

December 31, 1993



10.2         1994 Lilly Stock Plan, as amended                  Incorporated by reference from

Exhibit 10 to the Company's Report on

Form 10-Q for the quarter ended

September 30, 1996



10.3         1998 Lilly Stock Plan                              Incorporated by reference from

Exhibit A to the Company's proxy statement

dated March 4, 1998



10.4         The Lilly Deferred Compensation Plan, as amended   Incorporated by reference from

Exhibit 10.4 to the Company's Report on Form

10-K for the fiscal year ended

December 31, 1994

</TABLE>



-2-

<TABLE>

<CAPTION>

Exhibit                                                         Location

- --------                                                        --------

<S>          <C>                                                <C>

10.5         The Lilly Directors' Deferral Plan, as amended     Attached



10.6         The Eli Lilly and Company EVA(R)Bonus Plan, as      Attached

amended



10.7         Eli Lilly and Company Change in Control Severance  Attached

Pay Plan for Select Employees



12.          Computation of Ratio of Earnings to Fixed Charges  Attached



13.          Annual Report to Shareholders for the Year Ended   Attached

December 31, 1998 (portions incorporated by

reference in this

Form 10-K)



21.          List of Subsidiaries                               Attached



23.          Consent of Independent Auditors                    Attached



27.          Financial Data Schedules for the periods

indicated:



27.1   Year ended December 31, 1998



27.2   Restated for year ended

December 31, 1996



27.3   Restated for quarter ended

March 31, 1997



27.4   Restated for six months ended

June 30, 1997



27.5   Restated for nine months ended

September 30, 1997



27.6   Restated for year ended

December 31, 1997

</TABLE>



-3-

<TABLE>

<CAPTION>

<S>          <C>                                                <C>



27.7   Restated for quarter ended

March 31, 1998



27.8   Restated for six months ended

June 30, 1998



27.9   Restated for nine months ended

September 30, 1998



99.          Cautionary Statement Under Private Securities      Attached

Litigation Reform Act of 1995 -- "Safe Harbor"

for Forward-Looking Disclosures

</TABLE>