Eli Lilly and Company Annual Report 2004

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FY2004 Annual Report · Eli Lilly and Company

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Eli Lilly and Company

Lilly Corporate Center

Indianapolis, Indiana 46285 USA

www.lilly.com

Answers for Shareholders 2004

Eli Lilly and Company

2004 Annual Report

Notice of 2005 Annual Meeting

and Proxy Statement

Year in Review

1 Financial Highlights
2 Letter to Shareholders
6 A Pipeline of Innovation at Lilly
8 Lilly: A Good Corporate Citizen

Financials

9 Review of Operations
15 Consolidated Statements of Income
17 Consolidated Balance Sheets
25 Consolidated Statements of Cash Flows
26 Consolidated Statements of Comprehensive Income
27 Segment Information
28 Selected Quarterly Data
29 Selected Financial Data
30 Notes to Consolidated Financial Statements
49 Management’s Report on Internal Control Over Financial Reporting
50 Report of Independent Registered Public Accounting Firm

Proxy Statement

52 Notice of 2005 Annual Meeting and Proxy Statement
54 General Information
58 Board of Directors
62 Highlights of the Company’s Corporate Governance Guidelines
67 Audit Committee Matters
69 Executive Compensation
77 Performance Graph
78 Ownership of Company Stock
79
88 Other Matters
89 Appendices

Items of Business To Be Acted Upon at the Meeting

Corporate Information

92 Senior Management
93 Corporate Information
94 Trademarks
95 Annual Meeting Admission Ticket

LillyAnswers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lillyanswers.com or call toll-free 1-877-RX-LILLY

Lilly Cares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lillycares.com or call toll-free 1-800-545-6962

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

Medicare reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.cms.hhs.gov/medicarereform

Pharmaceutical industry patient assistance programs . . . www.pparx.org

500002R

2004 Financial Highlights

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

Year Ended December 31

2004

2003

Change %

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

$13,857.9

$12,582.5

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

2,691.1

2,350.2

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

19.4%

18.7%

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

$ 1,810.1

$ 2,560.8

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

1.67

2.38

(29)

(30)

Earnings per share—diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reconciling items1
Tax expense on the expected repatriation of earnings

under the American Jobs Creation Act . . . . . . . . . . . . . . . . . . . .

Asset impairments, restructuring and other

special charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Acquired in-process research and development

for AME acquisition and insomnia compound . . . . . . . . . . . . . . .
Gain on sale of dapoxetine patents . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted earnings per share—diluted. . . . . . . . . . . . . . . . . . . . . . . . . .

.43

.38

.35
—
2.82

—

.25

—
(.04)
2.58

1.66

2.37

(30)

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

1.42

1.34

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

1,898.1

1,706.6

1For more information on these reconciling items, see the Financial Results section of the Executive Overview on page 9.

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Sidney Taurel
Chairman of the Board, President,
and Chief Executive Ofﬁ cer

“Fair Balance”

To Our Shareholders
Clearly, for the pharmaceutical industry as a whole, the
tough sledding of the past few years intensiﬁ ed in 2004.
Many companies are struggling with signiﬁ cant business
challenges including looming patent expirations, sputter-
ing R&D output, and, in one case, a major product recall.
In addition to these operational troubles, the industry ran
into further problems in the external policy environment,
as concerns about product safety and allegations that
some companies had concealed important clinical data
brought new calls for more stringent regulation.

Almost as troubling to me as the negative events
themselves is the way in which they have come to domi-
nate virtually every discussion of the industry, whether in
media coverage or policy debates. Neither investors nor
legislators can make good decisions in an environment
where everything is portrayed in stark black and white.
What is needed is a greater sense of reasonable propor-
tion in public dialogue—the ethic newspapers used to call
“fair balance.”

Applying this to Lilly’s record for the year, it seems to
me that, while we had some undeniable setbacks, we also
had some remarkable achievements in both our business
results and our public interactions. Taken together, these
accomplishments point to genuine progress not only for
our company, but, in some measure, for our industry too.
We had our share of bad news, and I won’t gloss over

it in any way. Most disappointing for our shareholders,
certainly, was the fall in our share value—19 percent for
the 12-month period. In part, this decline was a sector ef-
fect, driven by the events I just noted. The pharmaceutical
industry has traditionally traded at a 20 percent or more
premium to the S&P 500, but by the end of 2004 it trailed
that index by 15 to 20 percent. Lilly’s stock was also held

down as investors waited to see the outcome of a chal-
lenge to our U.S. Zyprexa® patent. The trial was concluded
in February 2004 and, at this writing, we are awaiting a
ruling from the trial court.

A second disappointment—and another key factor
affecting our share price—was weaker-than-expected sales
for Zyprexa in the U.S., showing an 8 percent decline.
This sales erosion was driven by concerns about potential
weight gain and hyperglycemia and ampliﬁ ed by intense
advertising by trial lawyers targeting Zyprexa patients.

Genuine progress in a difﬁ cult year

Disappointing though they were, these setbacks
should not obscure the many positive highlights for Lilly
in 2004.

In our ﬁ nancial performance, we saw total sales grow
10 percent over the prior year—at the high end for our in-
dustry. Our eight new products contributed to that result,
accounting for 11 percent of Lilly’s total sales. And we
expect that share to roughly double in 2005. Moreover,
we managed to beat investors’ expectations for earnings
for the year, delivering adjusted earnings per share of
$2.82. (For a reconciliation of our adjusted EPS per share
to the reported EPS of $1.66, please see page 1.)

Most signiﬁ cantly, we continued to run counter to
the industry trend by delivering breakthrough innovation
at a record pace—a total of eight new drugs since late
2001, thereby doubling our portfolio of promoted prod-
ucts. In 2004, Lilly launched ﬁ ve new products plus six
new indications or formulations in several key markets.
Three of these new products were ﬁ rst-in-class: Symbyax™
for bipolar depression, Alimta® for mesothelioma, and
Yentreve® for stress urinary incontinence in Europe. The
other two—Cialis® for erectile dysfunction in the U.S. and

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Growth in Established and Newer Products
($ millions)

Combined net sales of the company’s established
growth and newer products—Actos, Evista, Gemzar,
Humalog, Alimta, Cialis, Cymbalta, Forteo, Strattera,
Symbyax, Xigris, Yentreve, and Zyprexa—increased
by 17 percent over 2003, representing $9.7 billion,
or 70 percent of total net sales, compared with
$8.3 billion, or 66 percent in 2003. Zyprexa sales
as a percentage of total net sales decreased from
34 percent in 2003 to 32 percent in 2004.

Newly Launched Growth Products
Strattera, Cialis, Forteo, Xigris, Cymbalta, Yentreve, Symbyax, and Alimta

Other Established Growth Products
Humalog, Gemzar, Evista, and Actos

Zyprexa

Prozac/Sarafem/Prozac Weekly

Other

$15,000–

$12,000–

$9,000–

$6,000–

$3,000–

$0–

Cymbalta® for depression—represent outstanding new
options in two very competitive categories.

For the most part, sales for these newcomers have
met or exceeded our expectations. Symbyax has had a
slow start, and Yentreve is too new to evaluate. But we
are pleased with the strong uptake for Cialis, Cymbalta
and Alimta. Both Cymbalta and Alimta beneﬁ ted from
receiving accelerated FDA review and approvals for new
indications. Cymbalta is the ﬁ rst drug to be approved for
neuropathic pain associated with diabetes, and Alimta has
been approved for second-line non-small-cell lung cancer,
the most common cause of cancer mortality. To win
multiple indications in the launch year is rare—and adds
extra luster to Lilly’s bright reputation in R&D.

Indeed, Lilly’s outstanding R&D productivity con-
tinues to set us apart from the crowd. We have several
exciting compounds now in late-stage development,
including two potential breakthroughs in diabetes, one in
cancer, and a drug we believe could become best-in-class
in the treatment of acute coronary syndrome and stroke.
(For details, see question 5 below.) At the other end of the
pipeline, our scientists posted a record-breaking year in
2004. The output from discovery research has increased
by more than 50 percent and the number of candidates
entering human clinical studies has increased by more
than 40 percent, compared to the average for the four
prior years.

One ﬁ nal operational highlight deserves commen-
dation precisely because it did not make headlines in
2004. Lilly’s manufacturing component has made great
progress in fulﬁ lling our promise to not only address the
serious quality problems that confronted us a few years
ago, but to reengineer this vital component into a world-
class capability. The job is not ﬁ nished; but as evidence

it is proceeding as planned, last year saw the extensive
overhaul and very successful restart of our key injectable
medicines facility in Indianapolis—the plant that had
been at the center of the original regulatory review. This
may be our most important “non-story” of 2004.

Rebalancing the scales of trust

Even as we have been working to build our opera-
tional capabilities, we also have taken important steps
to respond to the very hostile external environment that
currently weighs so heavily on our industry.

In 2004, we took a leadership role to allay public
concerns about drug safety and to help restore trust in the
accuracy and accessibility of the industry’s clinical trial
data. We have deﬁ ned and disseminated a very strong set
of principles for the conduct of clinical research, including
a commitment to disclose all results, whether favorable or
unfavorable to our products. Most recently, we launched the
most comprehensive clinical trial registry of any pharma-
ceutical company that included online posting of clinical
trials at their initiation as well as complete results once the
study is concluded and the drug is brought to market.

We know that the wellspring of public criticism goes
deeper than anger at industry practices. It reﬂ ects growing
anxiety about access to and affordability of vital medicines.
Here, too, Lilly has taken action. We continue to maintain
and promote our “LillyAnswers” program, which makes
many Lilly products available to low-income seniors for
just $12 a month. The total value of the program more
than doubled in 2004, delivering $140 million worth of
medicines to 235,000 seniors. In addition, our “Lilly Cares”
program offers our medicines free to needy patients,
regardless of age, who could not otherwise afford them. In
2004, “Lilly Cares” provided assistance to nearly 160,000
patients, a total donation worth about $166 million.

I ﬁ rmly believe these kinds of responsible policies

and practices can, over time, achieve a better balance
in the public view, especially as they are echoed in the
actions of our peers. But it would be a mistake to suppose
that all of the external problems we are facing now can be
addressed by improving the industry’s reputation.

What we’re witnessing is a collision of several mas-
sive forces—a biomedical revolution, an aging population,
and ever-rising health care expenditures. Eventually, every
part and every participant in the health care system will
feel this pressure and every component will be remade by
it. I believe the pharmaceutical companies that succeed in
this changing world will be those that ﬁ nd a way to deliver
greater therapeutic innovation at a lower overall cost.

We intend to be one of those companies, and to that

end, we began implementing last year the ﬁ rst phase
of a long-term campaign to reduce our cost structure
and improve our productivity from top to bottom. Our
wide-ranging cost control efforts are not the typical sort of
belt-tightening where spending requests are temporarily
delayed or deferred until better times. Rather, many of our

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restructuring initiatives are intended to be permanent and
sustainable. Speciﬁ cally, in every part of our global busi-
ness, we streamlined operations, cut infrastructure, and
reallocated as well as reduced our total headcount. These
measures are expected to generate net savings of about
$150 million in 2005, with larger gains going forward.
This year, we will launch a corporate-wide effort to
identify and pursue further productivity gains, using the
well-established toolkit of the Six Sigma process. We will
apply these tools across our operations, looking for every
opportunity to cut waste, reduce variability, shorten cycle
times and boost efﬁ ciency. The dollars gained can be har-
vested to deliver more—to fund a clinical trial that supports
a new indication, or a new market research effort to bring
our solutions to more patients who may be helped by them.
In this effort, I believe we will be addressing both
current and future business challenges. Greater productiv-
ity is a key to delivering the ﬁ nancial results our share-
holders expect and deserve. But it will also be essential to
enable us to continue to discover, develop and deliver, as
economically as possible, the new medicines patients are
waiting for all over the world.

Questions and Answers

Q: What is Lilly doing to stem the decline in Zyprexa?
A: To begin with, we’re focusing our efforts where
Zyprexa shines—generally speaking, as an answer for
patients with some of the most signiﬁ cant symptoms of
schizophrenia and bipolar disorder. Zyprexa grew to be a
blockbuster drug on the strength of its rapid action and
outstanding efﬁ cacy for these patients, and that is still
perceived to be its strong suit.

On the negative side, it’s now seen as having weight-
gain and hyperglycemia risks that have been heightened
by trial attorneys’ advertising efforts. We are undertaking
a number of efforts to restore the balanced view of the
beneﬁ ts and management of risks that patients and their
doctors need to make appropriate use of this medicine.
First of all, we continue to provide patients with basic
lifestyle information and speciﬁ c wellness programs that
help them deal with weight gain. Second, we’re helping
doctors understand and manage diabetes risks in this
patient population. Our aim is to demystify these issues,
and reinforce that any patient treated with an atypical
antipsychotic should be carefully monitored—regardless
of the particular medicine they’re on. Finally, we will
continue to vigorously defend our brand against mislead-
ing statements from any source.

Q: Antidepressants have been getting a lot of nega-
tive attention. In light of that, what is the outlook for
Cymbalta?
A: Indeed, our Cymbalta launch has coincided with
challenging times for the U.S. antidepressant market.

But we don’t feel Cymbalta’s long-term potential will be
constrained in this environment.

We’ve used Cymbalta’s distinctive proﬁ le to develop

strong positioning in the marketplace. This product ad-
dresses depression’s emotional symptoms—and its painful
physical symptoms. Studies have shown that between 40
and 60 percent of people who are depressed also experi-
ence pain. Physicians have been quick to recognize pa-
tients in their practices who are troubled by these issues.
The opportunities for this drug extend well beyond
depression. In September, the FDA approved Cymbalta
as the ﬁ rst available treatment for diabetic peripheral
neuropathic pain—or DPNP. I’ve been moved—and
thrilled—to hear some early success stories from patients
who have long suffered from this very debilitating
condition, and who are now getting help from Cymbalta.
It’s currently under review for this indication in Europe
as well. In addition, we have seen encouraging results
in Phase II studies testing Cymbalta for the treatment
of ﬁ bromyalgia—a condition of very painful physical
symptoms, often accompanied by chronic fatigue and
emotional distress.

In short, we believe Cymbalta is one of the most

important and exciting new drugs in our portfolio.

Q: Given the poor performance of pharmaceutical
stocks in recent years and intensifying pressures on
the industry, how does Lilly expect to reward share-
holders in the future?
A: It’s true, as I noted above, that the industry is go-
ing through a very tough period. Investors have been
understandably cautious in the face of such trends as
continuing pressure on pricing, patent life, and new drug
applications. These factors have helped to drive the phar-
maceutical sector to a 10-year low against the S&P 500.
Sales and EPS growth for the industry have fallen several
percentage points in recent years, and annual revenue
growth is now projected to be in the range of 9 percent
for the next ﬁ ve years.

On the other hand, that level of growth would be

considered excellent in many industries. It can support
strong earnings growth if companies can ﬁ nd the busi-
ness discipline needed to bring more through to the bot-
tom line. Looking at the long term, there is still enormous
opportunity for our industry. Demand for effective
answers to unmet medical needs is high and will likely
grow as populations age and technologies continue to
improve. The great challenge for our industry is to meet
that demand in a more cost-effective way.

As for Lilly in particular, I believe we are one of the

few that are already doing what we need to do to meet
that demand. In a very short space of time, we have
restocked our portfolio with outstanding new products.
We have built the capabilities to support those products
in the marketplace. We expect no patent expirations until
the next decade. We have a proven R&D organization

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working on a pipeline that is considered among the best
in the industry. These assets make us very competitive in
the current business environment. Moreover, as I noted
earlier, we are taking numerous steps to shrink our cost
structure and dramatically improve productivity in order
to ensure that we will keep a competitive edge in the
environment that we see evolving.

I have to believe all of these factors position Lilly as a

growth company.

Finally, a bit further back in the pipeline, we are
working on another PKC inhibitor, enzastaurin, for use
against cancer. It is an oral agent that has shown very
little toxicity in studies to date. Last year, we saw early
evidence that this compound may have the ability to ﬁ ght
glioblastoma, an aggressive type of brain tumor that is
a major cause of cancer-related death among younger
people—those 18 to 54. If successful, this would be an
extraordinary breakthrough.

Q: Why has Lilly’s gross margin eroded and when will
it rebound?
A: The decrease in gross margin in 2004 was due to
several factors—but primarily to our ongoing invest-
ments to upgrade our manufacturing capabilities and
the impact of foreign exchange rates. Our gross margin
also reﬂ ects changes in our product mix over time. We
believe we’ll have a more favorable product mix as our
new products grow, but this will be offset by increases in
the cost of labor, growth in depreciation, and the cost of
new capacity investments. Therefore, we expect our gross
margin to continue to erode modestly through 2005. As
our new products gain additional traction, we expect our
gross margin to improve somewhat from 2006 forward.

Q: Give us an appraisal of Lilly’s near-term pipeline.
What new drug prospects should shareholders be
looking for?
A: Let me cover just four interesting examples of what
we’re developing. Currently, the FDA is reviewing our
application for exenatide, the ﬁ rst of a new class of drugs
that we are co-developing with Amylin for the treatment
of type 2 diabetes. In our registration trials, a signiﬁ cant
percentage of patients not only improved their blood
glucose levels, they also lost weight. We believe that
exenatide, when approved, will create an option for
patients who are not well controlled with one or more
oral agents—and before insulin therapy.

Another very exciting new drug in late-stage trials is
Arxxant™ (ruboxistaurin), our PKC-beta inhibitor, which
is a potential ﬁ rst-in-class treatment for several serious
complications of diabetes. We expect the ﬁ rst approved
indication to be for the symptoms of diabetic peripheral
neuropathy—a type of nerve damage that is a leading
cause of foot ulceration and amputations. We’re also
investigating it for treatment of diabetes-related damage
to the eyes and kidneys.

In cardiovascular care, we’re also working with
Sankyo to develop a possible new treatment for acute
coronary syndrome and stroke called prasugrel. This com-
pound works like a widely used anti-clotting agent called
clopidogrel, but early animal data suggest prasugrel may
have some advantages. We’ve initiated a Phase III trial
to evaluate prasugrel’s capacity to prevent heart attack,
stroke, and death in patients undergoing a procedure to
open a blocked artery.

Q: How likely is it that the U.S. Congress will legalize
importation of drugs? What impact would that have on
Lilly’s business?
A: At this writing, the outlook is still uncertain and we
are getting mixed signals from Washington. On one hand,
we hear that importation still has many advocates on
both sides of the aisle, and that several key legislators are
determined to bring a new bill to the ﬂ oor.

On the other hand, in a report issued in late 2004, the

U.S. Department of Health and Human Services reaf-
ﬁ rmed its long-standing opinion that allowing imports
from other countries would also open a channel for
potentially dangerous counterfeit drugs. The HHS task
force found that total savings to consumers from legalized
importation would be a small percentage relative to total
drug spending in the U.S. (about 1 to 2 percent). Further,
they found legalized importation would likely adversely
affect incentives for R&D, thereby slowing the ﬂ ow of
new drugs. Since annual R&D spending would drop,
importation could result in between four to 18 fewer new
drugs being introduced per decade—a substantial cost to
society.

This conclusion was further buttressed by a report
from the U.S. Department of Commerce, which estimated
that price controls in OECD countries cost U.S. drug
companies sales in the range of $18 to $27 billion per
year. That loss, in turn, translates into reduced R&D,
and ultimately means a loss to patients of potential new
medicines, which the Commerce report put in the range
of three or four new drugs per year.

At Lilly, we concur with both reports. We do believe

imports would put patients at risk and we are quite
certain that importing price controls—which is the real
point of such legislation—would seriously erode our
incentives to innovate, to the detriment of patients the
world over.

For the Board of Directors,

Sidney Taurel
Chairman of the Board, President, and Chief Executive Ofﬁ cer

A Pipeline of Innovation at Lilly

Major Marketed Products

(Dates indicate the year of ﬁ rst global launch.)

2004

Cymbalta®

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

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Alimta®

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

Symbyax™

for bipolar depression

Yentreve™

for stress urinary incontinence (not approved in the U.S.)
(copromoted with Boehringer Ingelheim in major markets, except Japan)

2003

Cialis®

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

Strattera®

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

2002

Forteo®

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

2001

Xigris®

for adult severe sepsis patients at high risk of death

1999

Actos®

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

1998

Evista®

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

1996

Zyprexa®

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

Humalog®

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

1995

Gemzar®

for non-small-cell lung cancer
for pancreatic cancer (1996)
for bladder cancer (2000; not approved in the U.S.)
for metastatic breast cancer (2003)
for recurrent ovarian cancer (2004; not approved in the U.S.)

ReoPro®

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

Major Marketed Products, continued

1987

Humatrope®

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

1983

Humulin®

for type 1 and type 2 diabetes

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New Drug Applications Under Review by the U.S. Food and Drug Administration

Exenatide

for type 2 diabetes
(codeveloping with Amylin Pharmaceuticals, Inc.)

Drug Candidates in Late-Stage Investigation

Arxxant™ (ruboxistaurin)

for diabetic microvascular complications

Prasugrel

Arzoxifene

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

for prevention and treatment of osteoporosis, and for reducing the risk
of breast cancer

Selected Drug Candidates in Mid-Stage Investigation

Enzastaurin

Inhaled insulin

for glioblastoma, a type of brain tumor; non-Hodgkin’s lymphoma; and
other cancers

for non-injectable delivery of insulin
(codeveloping with Alkermes, Inc.)

Factor Xa inhibitor

for prevention of deep vein thrombosis

Pruvanserin (5-HT2A antagonist) for insomnia

Naveglitazar

for type 2 diabetes

Gamma-secretase inhibitor

for slowing the progression of Alzheimer’s disease

PPAR alpha agonist

for reducing the progression of atherosclerosis

Note: All of this information is current as of February 14, 2005. The search for new drugs is risky and uncertain, and there are no guar-
antees. Remaining scientiﬁ c and regulatory hurdles may cause pipeline compounds to be delayed or even to fail to reach the market.

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Lilly: A Good Corporate Citizen

Every day, Lilly strives to be a good corporate citizen of the world.

Our tradition of philanthropy dates back to the company’s earliest days and our founder’s strong belief in
community service. That vision broadened in 1906 when a massive earthquake shook San Francisco and Lilly
stepped forward with medicines and supplies. Today, our commitment is stronger than ever to the communities
where we live, work, and raise our families. Never before in our history have we been so involved, in depth and
breadth of programs, in serving the needs of people around the globe.

In 2004, the total value of Lilly’s global philanthropy was approximately $400 million. Our contributions included
$337 million (wholesale value) worth of product donations; $31 million in cash donations for urgent or special
causes; and $26 million in contributions from the Lilly Foundation, established in 1968 to carry out Lilly’s phil-
anthropic interests. In the United States, Lilly employees also gave generously to United Way charities, pledging
$4.5 million, an amount matched by the Foundation.

Access to medicines in the U.S.
Many urgent needs required our attention last year. In the U.S., millions of people cannot afford medicines or
struggle to pay for them. Believing it is critical for everyone to have affordable access to our products, Lilly in
2004 spent more than $307 million on two patient assistance programs that helped nearly 400,000 people:
• The LillyAnswers program offers our medicines to low-income seniors for just $12 a month. Last year, about

235,000 seniors were enrolled in this program and received prescriptions valued at nearly $141 million—more
than double the $67 million total in 2003. To learn more about LillyAnswers, visit www.lillyanswers.com or call
1-877-RX-LILLY.

• The Lilly Cares program offers our medicines free of charge, through physicians, to patients who are otherwise

unable to afford them. Last year, we provided more than $166 million worth of products to nearly 160,000
participants. For more information about Lilly Cares, visit www.lillycares.com or call 1-800-545-6962.

These are just two examples of assistance programs available to patients. For details on other pharmaceutical
industry programs, visit www.pparx.org.

Importantly on a broader scale, the new U.S. Medicare drug beneﬁ t program, which takes effect January 1, 2006,
will guarantee patients’ access to many medicines while also giving insurance companies the tools to help
contain health care costs. For more information, visit www.cms.hhs.gov/medicarereform.

Responding to global needs
Lilly and its employees responded to urgent needs of another kind when a devastating earthquake and tsunami
struck Southeast Asia on December 26, 2004. Lilly gave $2 million for relief efforts and the Lilly Foundation
pledged another $1 million to match employee donations. The company also quickly shipped medicines worth
millions of dollars to the region.

Around the globe, the company is deeply involved in helping world health leaders ﬁ ght a deadly threat—multi-
drug resistant tuberculosis. Lilly established a public-private partnership in 2003 to combat the disease and
committed $70 million toward the goal of treating 20,000 MDR-TB patients annually by 2010.

Yet another program gives us the chance to advance our longtime commitment to diabetes care. Working with
Project HOPE, which offers solutions to global health problems, Lilly is funding a partnership in China to create
effective programs for diabetes prevention and control.

Taking steps to restore public trust
For Lilly, being a good corporate citizen also means taking a leadership role as drug companies strive to restore
public trust in the industry.

That’s why we deﬁ ned and disseminated a strong set of principles for the conduct of clinical research, including
a commitment to publish all results—favorable or unfavorable—for our medicines. Then we launched the most
comprehensive clinical trial registry of any pharmaceutical company, which includes online posting of clinical
trials at their initiation as well as complete results once the studies are concluded. To visit the publicly available
registry, go to www.lillytrials.com.

Our many good works don’t stop there. To learn more about these and other programs, visit our new corporate
responsibility website at www.lilly.com/about/citizenship.

8
8

Review of Operations

EXECUTIVE OVERVIEW

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

Revenues
($ millions)

0
2
4
,
4
$

We had 10 products in 2004 with annual
net revenues in excess of $300 million. Four
of these products—Zyprexa, Gemzar,
Humalog, and Evista—had net revenues
in excess of $1 billion in 2004. In addition,
the combined efforts of Lilly and ICOS
generated worldwide Cialis sales of
$552 million.

4
1
2
,
1
$

2
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,
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$

3
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Financial Results

We achieved worldwide sales growth of 10 percent, due
in part to the launch during the year of ﬁ ve new products
as well as six new indications or formulations for ex-
panded use of new and existing products in key markets.
We continued our substantial investments in our manu-
facturing operations and research and development
activities, resulting in cost of products sold and research
and development costs increasing at rates greater than
sales. Despite signiﬁ cant product launch expenditures,
our cost-containment and productivity measures result-
ed in marketing and administrative expenses increasing
at a rate signiﬁ cantly less than sales. We also beneﬁ ted
from an increase in net other income in 2004. Net income
was $1.81 billion, or $1.66 per share, in 2004 as com-
pared with $2.56 billion, or $2.37 per share, in 2003,
decreases of 29 and 30 percent, respectively. Net income
comparisons between 2004 and 2003 are negatively
affected in the aggregate by the impact of the following
signiﬁ cant items that are reﬂ ected in our ﬁ nancial re-
sults (see Notes 3, 4, and 11 to the consolidated ﬁ nancial
statements for additional information):

2004
• We recognized asset impairment charges, streamlined
our infrastructure, and provided for the anticipated
resolution of the government investigation of Evista®
marketing and promotional practices, resulting in
charges of $108.9 million (pretax) in the second
quarter and $494.1 million (pretax) in the fourth

F
I

N
A
N
C
I

A
L
S

quarter, which decreased earnings per share by $.08
and $.30, respectively.

• We incurred charges for acquired in-process research
and development (IPR&D) of $362.3 million (no tax
beneﬁ t) in the ﬁ rst quarter related to the acquisition
of Applied Molecular Evolution, Inc. (AME), and $29.9
million (pretax) in the fourth quarter related to our
acquisition of a Phase I compound currently under
development as a potential treatment for insomnia,
which decreased earnings per share by $.33 in the ﬁ rst
quarter and $.02 in the fourth quarter.

• As discussed further in Financial Condition, we

recognized tax expenses of $465.0 million in the fourth
quarter associated with the anticipated repatriation in
2005 of $8.00 billion of our earnings reinvested outside
the U.S., as a result of the passage of the American
Jobs Creation Act of 2004 (AJCA). This tax expense
decreased earnings per share by $.43 in that quarter.

2003
• We recognized asset impairments, primarily relating
to manufacturing assets in the U.S., and streamlined
our infrastructure, resulting in severance-related
and other charges totaling $167.1 million (pretax)
in the ﬁ rst quarter and $28.3 million (pretax) in the
fourth quarter, which decreased earnings per share
by approximately $.10 and $.02 in the ﬁ rst and fourth
quarters of 2003, respectively.

• Separately, we recognized asset impairments and
other charges of $186.8 million (pretax) in the ﬁ rst
quarter of 2003 related primarily to our common
stock ownership and loan agreements with Isis
Pharmaceuticals, Inc. (Isis), which decreased earnings
per share by $.13 in that quarter.

• In the fourth quarter of 2003, we recorded a gain of
$65.0 million (pretax) related to the sale of patent
rights to dapoxetine for development in the ﬁ eld of
genitourinary disorders to PPD, Inc., which increased
earnings per share by $.04 in that quarter.

Recent Product Launches and Late-Stage Product
Pipeline Developments

Our long-term success depends, to a great extent, on
our ability to continue to discover and develop innovative
pharmaceutical products and acquire or collaborate on
compounds currently in development by other biotech-
nology or pharmaceutical companies. We have achieved
a number of successes with recent product launches
and late-stage pipeline developments, including:
• We are in the process of rolling out the global launches
of a number of new products, which include Alimta®,
Cialis®, Cymbalta®, Forteo®, Strattera®, Symbyax™,
and Yentreve™. In addition, we have launched new
indications or formulations of Alimta, Cymbalta,
Gemzar®, Humatrope®, and Zyprexa®.

S
L
A

I
C
N
A
N

I
F

• The U.S. Food and Drug Administration (FDA) approved
Cymbalta, a balanced and potent selective serotonin
and norepinephrine reuptake inhibitor, for the
treatment of major depressive disorder in August 2004.
This breakthrough antidepressant, which addresses
both the emotional and painful physical symptoms of
depression, was launched in the U.S. later that month.
In September, following an accelerated review by the
FDA, Cymbalta received its second U.S. approval and
became the ﬁ rst FDA-approved treatment for pain
caused by diabetic peripheral neuropathy. In addition,
Cymbalta was approved in the European Union in late
December 2004 for the treatment of major depressive
episodes, and we expect to launch the product in a
number of European markets during 2005.

• In August, the FDA granted accelerated approval

for Alimta for the treatment of locally advanced or
metastatic non-small-cell lung cancer. This represents
the second approval for Alimta in 2004; the product
was approved and launched for malignant pleural
mesothelioma in the ﬁ rst quarter. In September,
Alimta was granted marketing authorization by the
European Commission for the treatment of malignant
pleural mesothelioma and as a second-line treatment
for non-small-cell lung cancer. Alimta will continue
to be launched in a number of European countries in
2005.

• The European Commission granted marketing

authorization throughout the European Union for
Yentreve, duloxetine for the treatment of moderate-
to-severe stress urinary incontinence (SUI) in women.
Yentreve has been launched in nine European countries
and will be available in many additional countries
in the coming months. To date, we have received
marketing authorization for the product in 27 countries
worldwide. In late January 2005, we withdrew the
New Drug Application from the FDA for duloxetine
for the treatment of SUI. This decision was based on
discussions with the FDA suggesting the agency is not
prepared at this time to grant approval for the product
for the treatment of the SUI patient population based
on the data package submitted. With our marketing
partner Boehringer Ingelheim, we will evaluate
our options for next steps for the SUI indication in
consultation with the FDA. Ongoing clinical trials for
the product’s treatment of SUI will continue.
• The FDA granted approval in May for Gemzar, in

combination with paclitaxel, for the ﬁ rst-line treatment
of patients with metastatic breast cancer.

• In late June, Lilly and Amylin Pharmaceuticals, Inc.,
submitted a New Drug Application to the FDA for
regulatory approval of exenatide, the ﬁ rst in a new
class of medicines known as incretin mimetics, for
the treatment of type 2 diabetes. We expect regulatory
action by the FDA during the ﬁ rst half of 2005.

Legal and Governmental Matters

Certain generic manufacturers have challenged our
U.S. compound patent for Zyprexa and are seeking
permission to market generic versions of Zyprexa prior
to its patent expiration in 2011. The trial regarding the
defense of these patents concluded in February 2004.
We are awaiting the court’s decision, and appeals are
expected to follow.

In March 2004, we were notiﬁ ed by the U.S. Attor-
ney’s ofﬁ ce for the Eastern District of Pennsylvania that
it has commenced a civil investigation relating to our
U.S. marketing and promotional practices. The products
involved include Zyprexa, Prozac®, and Prozac Weekly™.
In July 2002, we received the ﬁ rst of several grand

jury subpoenas for documents from the Ofﬁ ce of Con-
sumer Litigation, U.S. Department of Justice, related to
our marketing and promotional practices and physician
communications with respect to Evista. We continue to
cooperate in this matter and are in discussions with the
government to resolve it. In the fourth quarter of 2004,
we expensed $36.0 million, which we believe will be
sufﬁ cient to resolve the matter.

We have been named in a number of product li-

ability cases in the United States alleging a variety of
injuries from the administration of Zyprexa. Most of the
cases allege that the product caused or contributed to
diabetes or high blood-glucose levels. The suits seek
substantial compensatory and punitive damages and
typically accuse the company of inadequately testing for
and warning about side effects of Zyprexa. Many of the
suits also allege that we improperly promoted the drug.
We are vigorously defending these suits.

In the United States, we expect branded pharma-
ceutical products to be subject to increasing pricing
pressures. Implementation of the Medicare Prescrip-
tion Drug, Improvement and Modernization Act of 2003
(MMA), which provides a prescription drug beneﬁ t under
the Medicare program, will take effect January 1, 2006.
While it is difﬁ cult to predict the business impact of
this legislation prior to 2006, we currently anticipate a
relatively neutral short-term impact due to offsets of
price and volume in various customer groups. However,
in the long term there is additional risk associated with
increased pricing pressures. While the MMA prohib-
its the Secretary of Health and Human Services (HHS)
from directly negotiating prescription drug prices with
manufacturers, we expect continued challenges to that
prohibition over the next several years. Also, the MMA
retains the authority of the Secretary of HHS to prohibit
the importation of prescription drugs, but we expect
Congress to consider several measures that could
remove that authority and allow for the importation of
products into the U.S. regardless of their safety or cost.
If adopted, such legislation would likely have a negative
effect on our U.S. sales. We were encouraged by the

release of the HHS Task Force Report on Importation,
which concludes that the safety and possible savings of
an importation scheme are questionable.

As a result of the passage of the MMA, aged and dis-
abled patients jointly eligible for Medicare and Medicaid
will receive their prescription drug beneﬁ ts through the
Medicare program, instead of Medicaid, on January 1,
2006. This may relieve some state budget pressures but
is unlikely to result in reduced pricing pressures at the
state level. A majority of states have begun to implement
supplemental rebates and restricted formularies in their
Medicaid programs, and these programs are expected
to continue in the post-MMA environment. Several states
are also attempting to extend discounted Medicaid prices
to non-Medicaid patients. Additionally, notwithstand-
ing the federal law prohibiting drug importation, nine
states have implemented importation schemes for their
citizens, usually involving a website that links patients
to selected Canadian pharmacies. One state has such
a program for its state employees. In the absence of
federal action to curtail state activities, more states are
expected to launch importation efforts. As a result, we
expect pressures on pharmaceutical pricing to continue.
International operations are also generally subject

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

OPERATING RESULTS—2004

Sales

Our worldwide sales for 2004 increased 10 percent,
to $13.86 billion, due primarily to the increased global
sales of Strattera, Gemzar, Forteo, Zyprexa, Evista, Hu-
matrope, and Cialis, and sales related to the launches of
Alimta and Cymbalta. Sales in the U.S. increased 6 per-
cent, to $7.67 billion. Sales outside the U.S. increased
15 percent, to $6.19 billion. Worldwide sales reﬂ ected a
volume increase of 5 percent, with global selling prices
contributing 2 percent and an increase due to favorable
changes in exchange rates contributing 3 percent.

Zyprexa, our top-selling product, is a treatment for
schizophrenia, bipolar mania, and bipolar maintenance.
Zyprexa sales in the U.S. decreased 8 percent in 2004
due to a decline in underlying demand from continued
competitive pressures. Zyprexa sales outside the U.S.
increased 22 percent, driven by volume growth in a
number of major markets outside the U.S. International
Zyprexa sales growth also beneﬁ ted from the impact
of foreign exchange rates. Excluding the impact of
exchange rates, sales of Zyprexa outside the U.S. in-
creased by 13 percent in 2004. While we expect Zyprexa
sales in the U.S. to decline in 2005, we believe the ero-
sion will start to slow sometime in 2005. In addition, we
continue to expect double-digit growth of Zyprexa sales
outside the U.S. As a result, we expect a slight decline
in our 2005 worldwide Zyprexa sales.

The following table summarizes our net sales activity in 2004:

Product

U.S.1

(Dollars in millions)

Year Ended
December 31, 2004
Outside U.S.

Total

Year Ended
December 31, 2003
Total

Percent
Change
from 2003

F
I

N
A
N
C
I

A
L
S

Zyprexa . . . . . . . . . . . . . . . . . . . . . .
Gemzar . . . . . . . . . . . . . . . . . . . . . .
Humalog® . . . . . . . . . . . . . . . . . . . .
Evista . . . . . . . . . . . . . . . . . . . . . . . .
Humulin® . . . . . . . . . . . . . . . . . . . .
Animal health products. . . . . . . . .
Strattera . . . . . . . . . . . . . . . . . . . . .
Fluoxetine products. . . . . . . . . . . .
Anti-infectives . . . . . . . . . . . . . . . .
Actos® . . . . . . . . . . . . . . . . . . . . . . .
Humatrope . . . . . . . . . . . . . . . . . . .
ReoPro®. . . . . . . . . . . . . . . . . . . . . .
Forteo . . . . . . . . . . . . . . . . . . . . . . .
Xigris® . . . . . . . . . . . . . . . . . . . . . . .
Alimta . . . . . . . . . . . . . . . . . . . . . . .
Cialis2. . . . . . . . . . . . . . . . . . . . . . . .
Cymbalta. . . . . . . . . . . . . . . . . . . . .
Symbyax . . . . . . . . . . . . . . . . . . . . .
Other pharmaceutical products . .
Total net sales . . . . . . . . . . . . . .
NM—Not meaningful
1 U.S. sales include sales in Puerto Rico.
2 Cialis sales shown in the table above represent results in the territories in which we market Cialis exclusively. The remaining sales relate to the joint-
venture territories of Lilly ICOS LLC (North America, excluding Puerto Rico, and Europe). Our share of the joint-venture-territory sales, net of expenses,
is reported in net other income in our consolidated income statement.

$ 4,276.9
1,021.7
1,021.3
922.1
1,060.4
726.6
370.3
645.1
489.9
431.2
370.9
364.4
65.3
160.4
—
73.5
—
—
582.5
$12,582.5

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

$2,422.2
565.1
685.4
667.9
422.7
338.9
656.4
327.3
110.2
340.4
204.8
175.4
198.0
123.3
121.8
1.4
92.7
70.1
144.5
$7,668.5

$1,997.6
649.3
416.2
344.8
575.0
459.8
10.3
231.7
367.8
112.5
225.5
187.4
40.6
78.5
20.8
129.2
1.2
0.1
341.1
$6,189.4

3
19
8
10
(6)
10
80
(13)
(2)
5
16
0
NM
26
NM
78
NM
NM
(17)
10

Thirteen Key Products Collectively
Delivered 17 Percent Increase in
Net Sales
($ millions; percentages represent
changes from 2003)

The company’s established key
products—Gemzar, Zyprexa, Evista,
Humalog, and Actos—grew $528 million
(7 percent) and generated $8.2 billion
of total net sales in 2004. In addition,
sales of our newly launched growth
products—Strattera, Forteo, Alimta,
Cymbalta, Symbyax, Cialis (non-joint-
venture territories), Xigris, and Yen-
treve—doubled, generating $1.5 billion
of net sales in 2004. We expect our newer
products to approximate 20 percent of
total sales in 2005. Combined, all our
key products grew 17 percent.

%
0
8
+

6
9
2
$
+

Established
Key Products

Newly Launched
Growth Products

%
9
1
+

3
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1
$
+

%
3
+

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$
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+

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Diabetes care products, composed primarily of Hu-
mulin, biosynthetic human insulin; Humalog, our insulin
analog; and Actos, an oral agent for the treatment of
type 2 diabetes, had aggregate worldwide revenues of
$2.61 billion in 2004, an increase of 2 percent. Diabetes
care revenues in the U.S. decreased 6 percent, to $1.49
billion. Diabetes care revenues outside the U.S. in-
creased 14 percent, to $1.12 billion. Humulin sales in the
U.S. decreased 19 percent, driven primarily by volume
declines due to competitive pressures. Humulin sales
outside the U.S. increased 7 percent. Humalog sales in
the U.S. increased 3 percent as increased prices offset
slight volume declines. Humalog sales outside the U.S.
increased 16 percent, to $416.2 million. Actos revenues,
the majority of which represent service revenues from a
copromotion agreement in the U.S. with Takeda Phar-
maceuticals North America (Takeda), increased 5 per-
cent in 2004. Actos is manufactured by Takeda Chemical
Industries, Ltd., and sold in the U.S. by Takeda.

Sales of Gemzar, a product approved to ﬁ ght vari-

ous cancers, increased 8 percent in the U.S. largely due
to the May 2004 approval for the treatment of late-stage
metastatic breast cancer. Gemzar sales increased
31 percent outside the U.S., driven by strong volume
growth in a number of cancer indications as well as
favorable foreign exchange rates.

Sales of Evista, a product for the prevention and
treatment of osteoporosis, increased 1 percent in the
U.S. due to continued competitive pressures. Outside
the U.S., Evista maintained a strong growth rate of 32
percent, driven by volume growth in several markets
and the early 2004 launch of the product in Japan.

Strattera, the only nonstimulant medicine approved
for the treatment of attention-deﬁ cit hyperactivity disor-
der in children, adolescents, and adults, was launched
in the U.S. in January 2003 and in the United Kingdom in
July 2004. In 2004, Strattera generated an 80 percent in-
crease over 2003 sales despite a very competitive land-
scape. In December 2004, we added a bolded warning
to the product label, which indicates that the medication

should be discontinued in patients with jaundice (yellowing
of the skin or whites of the eyes) or in the event of labora-
tory evidence of liver injury. We expect the 2005 growth
rate to moderate signiﬁ cantly as a result of the substan-
tial increase in the sales base and anticipated wholesaler
destocking due to our restructured arrangements with our
U.S. wholesalers, which is discussed further in Financial
Expectations for 2005.

Forteo, an osteoporosis treatment for patients at
high risk for a fracture, generated $238.6 million in sales
in 2004, which continues its strong growth trajectory fol-
lowing its U.S. launch in December 2002 and European
launches in late 2003 and during 2004.

Xigris, a treatment for severe sepsis, had 2004 sales

growth of 12 percent in the U.S. compared with 2003,
while sales outside the U.S. increased 56 percent during
the same period.

The erectile dysfunction treatment Cialis was
launched in the U.S. in December 2003 by Lilly and ICOS
Corporation. The $552.3 million of worldwide Cialis sales
in 2004, an increase of 172 percent compared to 2003,
comprises $130.6 million of sales in our territories, which
are reported in our net sales, and $421.7 million of sales
in the joint-venture territories. Within the joint-venture
territories, U.S. sales of Cialis were $206.6 million for
2004. In early 2004, Lilly ICOS began a direct-to-consum-
er advertising campaign in the U.S. Cialis continues
to increase its market share in most major markets in
this extremely competitive category.

Alimta was launched in the U.S. in February 2004 for
the treatment of malignant pleural mesothelioma and in
August for second-line treatment of non-small-cell lung
cancer (NSCLC). In addition, in September 2004, Alimta was
granted marketing authorization by the European Commis-
sion for both the treatment of malignant pleural mesothe-
lioma and as a second-line treatment of non-small-cell lung
cancer. Alimta was launched in several European countries
in the second half of 2004, with additional European market
launches scheduled in 2005. We are encouraged by early
sales results for Alimta, which exceeded our expectations
by generating $142.6 million in 2004.

Cymbalta was launched in the U.S. in late August
2004 for the treatment of major depressive disorder and
in September 2004 for the treatment of diabetic periph-
eral neuropathic pain. Cymbalta has been well accepted,
generating $93.9 million in sales in 2004.

Symbyax, launched in the U.S. in January 2004, com-

bines olanzapine (the active ingredient in Zyprexa) and
ﬂ uoxetine (the active ingredient in Prozac) to treat bipolar
depression. Symbyax is the ﬁ rst FDA-approved medication
for this difﬁ cult-to-treat condition. Symbyax sales in 2004
did not meet our expectations. Several initiatives are under-
way to reposition the product in the marketplace.

Animal health product sales in the U.S. increased 9
percent, while sales outside the U.S. increased 10 percent,
led by Tylan®, Rumensin®, and Paylean®.

F
I

N
A
N
C
I

A
L
S

Gross Margin, Costs, and Expenses

The 2004 gross margin decreased to 76.7 percent of
sales compared with 78.7 percent for 2003. The de-
crease was due primarily to continued investment in our
manufacturing technical capabilities and capacity and
the impact of foreign exchange rates, offset partially by
favorable changes in product mix due to growth in sales
of higher margin products.

Gross Margin
(as a percent of total net sales)

Gross margin as a percent of sales decreased by 2.0 per-
centage points to 76.7 percent. This decline was primarily
due to continued investment in our manufacturing
technical capabilities and capacity and the impact of
foreign exchange rates, offset partially by a favorable
product mix due to growth in higher margin products
such as Gemzar, Strattera, Forteo, and the newly launched
Alimta.

%
1
.
1
8

%
3
.
1
8

%
4
.
0
8

%
7
.
8
7

%
7
.
6
7

Operating expenses (the aggregate of research and
development and marketing and administrative expens-
es) increased 9 percent in 2004. Investment in research
and development increased 15 percent, to $2.69 billion,
due to increased clinical trial and development expenses
and increased incentive compensation and beneﬁ ts ex-
penses, partially offset by reimbursements for research
activities from our collaboration partners. We continue
to be a leader in our industry peer group by reinvest-
ing more than 19 percent of our sales into research and
development. Marketing and administrative expenses
increased 6 percent in 2004, to $4.28 billion, attributable
primarily to increased selling expenses in support of
the new and anticipated product launches, the impact of
foreign exchange rates, increased incentive compensa-
tion and beneﬁ ts expenses, increased charitable contri-
butions to the Lilly Foundation, and increased product
liability expenses, offset partially by ongoing marketing
cost-containment measures and marketing expense
reimbursement from collaboration partners. A majority
of the reimbursements are ongoing.

Net other income for 2004 increased $126.9 million

to $330.0 million. The increase for 2004 was primar-
ily due to income related to the outlicensing of legacy
products outside the United States, milestone payments
from collaborations on the duloxetine molecule, income
related to a previously assigned patent arrangement of
$30.0 million that was recognized in the ﬁ rst quarter of
2004, and other miscellaneous income. This was offset
partially by an increase in the net loss of the Lilly ICOS
LLC joint venture, due primarily to increased market-

Research and Development
($ millions; percent of net sales)

Research and development expenditures
increased by 15 percent, to $2.7 billion,
in 2004 due to increased clinical trial and
development expenses and increased
incentive compensation and benefits
expenses, partially offset by reimburse-
ments for research activities from our
collaboration partners. At 19 percent of
net sales, we continue to be a leader in
our industry peer group in proportion of
revenue reinvested in research and
development. This significant financial
investment in our pipeline of products
supports our commitment to develop best-
in-class and first-in-class medicines to
provide answers for the unmet medical
needs of our customers.

%
4
.
9
1

1
9
6
,
2
$

%
7
.
8
1

0
5
3
,
2
$

%
4
.
9
1

5
3
2
,
2
$

%
4
.
9
1

9
4
1
,
2
$

%
6
.
8
1

9
1
0
,
2
$

%
8
.
7
1

4
8
7
,
1
$

%
8
.
8
1

9
3
7
,
1
$

%
2
.
7
1

0
7
3
,
1
$

%
0
.
7
1

0
9
1
,
1
$

%
0
.
6
1

2
4
0
.
1
$

ing costs of Cialis in joint-venture territories, and the
2003 sale of dapoxetine patent rights. We report our 50
percent share of the operating results of the Lilly ICOS
joint venture in our net other income. For 2004, our net
loss from the joint venture was $79.0 million, compared
with $52.4 million in 2003.

The effective tax rate for 2004 was 38.5 percent,
compared with 21.5 percent for 2003. The increase in
the effective tax rate was caused by the tax provision
related to the expected repatriation of $8.00 billion of
earnings reinvested outside the U.S. pursuant to the
AJCA and the charge for acquired IPR&D related to the
AME acquisition, which is not deductible for tax purpos-
es. See Note 11 to the consolidated ﬁ nancial statements
for additional information.

OPERATING RESULTS—2003

Financial Results

Net income was $2.56 billion, or $2.37 per share, in
2003 and $2.71 billion, or $2.50 per share, in 2002, a
decline of 5 percent. We achieved strong worldwide
sales growth of 14 percent, to $12.58 billion; however,
in order to position ourselves for sustained growth in
an increasingly competitive environment, we chose to
signiﬁ cantly increase our investments in a number of
areas. To ensure the successful launches of our new
products, we substantially increased our sales and
marketing efforts. In addition, we made substantial
investments in our manufacturing operations and re-
search and development activities. These investments
into the business, together with lower net other income,
negatively affected earnings in 2003.

Certain items, reﬂ ected in our operating results

for 2003 and 2002, should be considered in comparing
the two years. The signiﬁ cant items for 2003 are sum-
marized in the Executive Overview. The 2002 charge is
summarized as follows (see Note 3 to the consolidated
ﬁ nancial statements for additional information).

2002
• In the third quarter of 2002, we recognized a charge of
$84.0 million (pretax) for acquired in-process research
and development related to a collaboration arrangement
with Amylin Pharmaceuticals, Inc. (Amylin), to jointly
develop and commercialize exenatide, a potential new
treatment for type 2 diabetes, which decreased earnings
per share by approximately $.05 in that quarter.

Sales

Our worldwide sales for 2003 increased 14 percent, to
$12.58 billion, due primarily to the strong performance
of Zyprexa, diabetes care products, Gemzar, and Evista,
and sales related to the launches of Strattera, Cialis,
and Forteo. Sales in the U.S. increased 10 percent,
to $7.22 billion. Sales outside the U.S. increased 19
percent, to $5.36 billion. Worldwide sales reﬂ ected a
volume increase of 7 percent, with global selling prices
contributing 2 percent and an increase due to favorable
changes in exchange rates contributing 5 percent.
Zyprexa sales increased 4 percent in the U.S.,
where continuing competitive pressures contributed
to the slower growth. Sales outside the U.S. increased
42 percent. Excluding the impact of exchange rates,
our sales outside the U.S. grew 26 percent. The strong
international sales growth of Zyprexa was primarily
driven by increased unit volume attributable to the bipo-
lar mania indication and the ongoing conversion from

typical to atypical antipsychotics and, to a lesser extent,
the impact of exchange rates. Zyprexa recorded strong
growth in several key markets, including several major
European Union countries and in Japan.

Diabetes care products had aggregate worldwide

revenues of $2.57 billion in 2003, an increase of 12 per-
cent. Diabetes care revenues in the U.S. increased 10
percent, to $1.59 billion. Diabetes care revenues outside
the U.S. increased 17 percent, to $981.5 million. Humu-
lin sales in the U.S. decreased 2 percent, while sales
of the product outside the U.S. increased 13 percent.
Humalog sales in the U.S. increased 25 percent, and
sales outside the U.S. increased 19 percent.

Gemzar became a billion-dollar product in 2003,
with sales increases in the U.S. of 8 percent and outside
the U.S. of 27 percent.

Evista sales in the U.S. increased 5 percent. The
U.S. growth was negatively affected by the exit of pa-
tients from the osteoporosis prevention market. Sales
outside the U.S. increased 36 percent.

In November 2002, the FDA approved Strattera for
the treatment of attention-deﬁ cit hyperactivity disorder
in children, adolescents, and adults. Strattera sales
were $370.3 million in 2003.

Cialis was launched in 2003 in several markets
outside the U.S. by Lilly and ICOS, and the product was
launched in the U.S. in early December 2003. Cialis had
total sales of $203.3 million in 2003. Of this total,
$73.5 million represent sales in our exclusive territories

The following table summarizes our net sales activity in 2003 compared with 2002:

Product

U.S.1

(Dollars in millions)

Year Ended
December 31, 2003
Outside U.S.

Total

Year Ended
December 31, 2002
Total

Percent
Change
from 2002

S
L
A

I
C
N
A
N

I
F

Zyprexa . . . . . . . . . . . . . . . . . . . . . .
Humulin. . . . . . . . . . . . . . . . . . . . . .
Gemzar . . . . . . . . . . . . . . . . . . . . . .
Humalog . . . . . . . . . . . . . . . . . . . . .
Evista . . . . . . . . . . . . . . . . . . . . . . . .
Animal health products. . . . . . . . .
Fluoxetine products. . . . . . . . . . . .
Anti-infectives . . . . . . . . . . . . . . . .
Actos . . . . . . . . . . . . . . . . . . . . . . . .
Humatrope . . . . . . . . . . . . . . . . . . .
Strattera . . . . . . . . . . . . . . . . . . . . .
ReoPro. . . . . . . . . . . . . . . . . . . . . . .
Xigris . . . . . . . . . . . . . . . . . . . . . . . .
Cialis2. . . . . . . . . . . . . . . . . . . . . . . .
Forteo . . . . . . . . . . . . . . . . . . . . . . .
Other pharmaceutical products . .
Total net sales . . . . . . . . . . . . . .
NM—Not meaningful
1 U.S. sales include sales in Puerto Rico.
2 Cialis sales shown in the table above represent results in the territories in which we market Cialis exclusively. The remaining sales relate to the joint-
venture territories of Lilly ICOS LLC (North America, excluding Puerto Rico, and Europe). Our share of the joint-venture-territory sales, net of expenses,
is reported in net other income in our consolidated income statement.

$ 3,688.9
1,004.1
874.6
834.2
821.9
693.1
733.7
577.4
391.7
329.3
2.6
384.0
100.2
—
5.6
636.2
$11,077.5

$ 4,276.9
1,060.4
1,021.7
1,021.3
922.1
726.6
645.1
489.9
431.2
370.9
370.3
364.4
160.4
73.5
65.3
582.5
$12,582.5

$1,631.4
538.5
497.5
358.6
261.5
416.4
245.7
420.0
68.8
203.9
0.4
163.0
50.4
73.2
2.1
429.5
$5,360.9

$2,645.5
521.9
524.2
662.7
660.6
310.2
399.4
69.9
362.4
167.0
369.9
201.4
110.0
0.3
63.2
153.0
$7,221.6

16
6
17
22
12
5
(12)
(15)
10
13
NM
(5)
60
NM
NM
(8)
14

Consolidated Statements of Income

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

Year Ended December 31

2004

2003

2002

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

$13,857.9

$12,582.5

$11,077.5

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,223.9

2,675.1

2,176.5

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

2,691.1

2,350.2

2,149.3

Marketing and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,284.2

4,055.4

3,424.0

Acquired in-process research and development (Note 3) . . . . . . . . .

392.2

—

84.0

Asset impairments, restructuring, and other special

charges (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

603.0

382.2

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51.6

61.0

—

79.7

Other income—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(330.0)
10,916.0

(203.1)
9,320.8

(293.7)
7,619.8

Income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,941.9

3,261.7

3,457.7

Income taxes (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,131.8

700.9

749.8

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

$ 1,810.1

$ 2,560.8

$ 2,707.9

Earnings per share—basic (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1.67

$2.38

Earnings per share—diluted (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . .

$1.66

$2.37

$2.51

$2.50

See notes to consolidated ﬁ nancial statements.

F
I

N
A
N
C
I

A
L
S

S
L
A

I
C
N
A
N

I
F

and are reported in our net sales. The remaining Cialis
sales relate to the joint-venture territories of Lilly ICOS
LLC (North America and Europe) and are reported in
the Lilly ICOS joint-venture income statement along
with related expenses. We report our 50 percent share
of the operating results of the joint venture in our net
other income.

Forteo was ofﬁ cially launched in the U.S. in De-
cember 2002, and we received an approval in Europe in
June 2003. Forteo sales were $65.3 million in 2003.

Animal health product sales in the U.S. increased 2

percent, while sales outside the U.S. increased 7 percent.

Gross Margin, Costs, and Expenses

The 2003 gross margin decreased to 78.7 percent
of sales compared with 80.4 percent for 2002. This
decrease was attributed primarily to increased costs
associated with quality improvements and growth in ca-
pacity of our manufacturing operations and the impact
of foreign exchange rates, offset partially by favorable
changes in product mix due to growth in sales of higher
margin products.

Operating expenses (the aggregate of research
and development and marketing and administrative
expenses) increased 15 percent in 2003. Investment
in research and development increased 9 percent, to
$2.35 billion, due to increased clinical-trial expenses,
the impact of foreign exchange rates, and milestone
payments to Amylin for successful Phase III studies
of exenatide. Maintaining our strong commitment to
innovation, we invested approximately 19 percent of
our sales in research and development efforts in 2003.
Marketing and administrative expenses increased 18
percent compared with 2002, attributable primarily to
increased marketing expenses in support of new prod-
uct launches, preparation for anticipated launches, and
the impact of foreign exchange rates.

Net other income for 2003 was $203.1 million, a

decrease of $90.6 million. The decrease was primarily
due to lower interest and miscellaneous income. For
2003, our net loss from the Lilly ICOS LLC joint venture
was $52.4 million, compared with $37.8 million in 2002.
The effective tax rate for 2003 was 21.5 percent com-
pared with 21.7 percent for 2002. See Note 11 to the con-
solidated ﬁ nancial statements for additional information.

FINANCIAL CONDITION

Cash ﬂ ow from operations of $2.87 billion, net proceeds
from the sales of long-term investments of $2.88 billion
in preparation of implementation of the AJCA repatria-
tion (as discussed later in this section), and an increase
in short-term borrowings of $1.48 billion were partially
offset by dividends paid of $1.54 billion and net capital
expenditures of $1.88 billion. As a consequence, cash,

cash equivalents, and short-term investments increased
$3.75 billion to $7.46 billion at December 31, 2004.

Our inventories increased by $328.6 million during

2004, to $2.29 billion, due primarily to exchange rate
translation of overseas inventories to adjust for U.S.
dollar weakness and to the buildup of inventory for new
product launches and our growth products.

1
.
8
9
8
,
1
$

6
.
6
0
7
,
1
$

Capital Expenditures
($ millions)

Capital expenditures increased 11 percent from 2003.
The continued heavy investment supported various
manufacturing and research and development
initiatives and related infrastructure. We expect near-
term capital expenditures to remain approximately
the same as 2004 levels while we continue to prepare
for the long-term growth of our diabetes care and
other products, as well as increased research and
development activities.

9
.
0
3
1
,
1
$

0
.
4
8
8
$

9
.
7
7
6
$

Capital expenditures of $1.90 billion during 2004
were $191.5 million more than in 2003 as we continued
to invest in manufacturing and research and develop-
ment initiatives and related infrastructure. We expect
near-term capital expenditures to remain approximate-
ly the same as 2004 levels while we continue to prepare
for the long-term growth of our diabetes care and other
products, as well as increased research and develop-
ment activities.

Total debt at December 31, 2004, was $6.51 billion,

an increase of $1.63 billion from December 31, 2003,
primarily due to the issuance of commercial paper to
fund U.S. operating activities. In addition, in August
2004, we issued $1.00 billion of ﬂ oating rate notes. The
majority of the proceeds of this debt offering were used
to redeem other outstanding debt. Our current debt rat-
ings from Standard & Poor’s and Moody’s remain at AA
and Aa3, respectively.

Dividends of $1.42 per share were paid in 2004, an
increase of 6 percent from 2003. In the fourth quarter
of 2004, effective for the ﬁ rst-quarter dividend in 2005,
the quarterly dividend was increased to $.38 per share
(a 7 percent increase), resulting in an indicated annual
rate for 2005 of $1.52 per share. The year 2004 was the
120th consecutive year in which we made dividend pay-
ments and the 37th consecutive year in which dividends
have been increased.

On October 22, 2004, President Bush signed into
law the American Jobs Creation Act of 2004 (AJCA),
which creates a temporary incentive for U.S. corpora-
tions to repatriate undistributed income earned abroad
by providing an 85 percent dividends received deduction
for certain dividends from controlled foreign corpora-

F
I

N
A
N
C
I

A
L
S

Consolidated Balance Sheets

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

December 31

2004

2003

Assets
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowances of $66.1 (2004) and $69.3 (2003). . . . . . . .
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

$ 5,365.3
2,099.1
2,058.7
494.3
2,291.6
255.3
271.5
12,835.8

2,253.8
561.4
1,665.1
4,480.3

$ 2,756.3
957.0
1,864.9
477.6
1,963.0
500.6
249.5
8,768.9

1,613.3
3,374.6
1,392.5
6,380.4

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

7,550.9
$24,867.0

6,539.0
$21,688.3

Liabilities and Shareholders’ Equity
Current Liabilities
Short-term borrowings (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales rebates and discounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other Liabilities
Long-term debt (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,020.6
648.6
471.6
475.3
414.4
1,703.9
1,859.3
7,593.7

4,491.9
620.4
1,241.1
6,353.4

$ 196.5
875.9
387.4
488.9
398.3
1,749.8
1,464.0
5,560.8

4,687.8
386.1
1,288.8
6,362.7

Commitments and contingencies (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

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

Issued shares: 1,132,884,801 (2004) and 1,124,677,097 (2003) . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee beneﬁ t trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred costs—ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) (Note 14) . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

708.0
3,119.4
9,724.6
(2,635.0)
(111.9)
218.6
11,023.7

702.3
2,610.0
9,470.4
(2,635.0)
(118.6)
(160.1)
9,869.0

Less cost of common stock in treasury
2004—942,677 shares
2003—951,578 shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

See notes to consolidated ﬁ nancial statements.

103.8
10,919.9
$24,867.0

104.2
9,764.8
$21,688.3

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%
3
.
5
5

%
9
.
3
5

%
0
.
6
4

%
5
.
7
3

Return on Shareholders’ Equity
(based on income from continuing operations
divided by average shareholders’ equity)

Return on shareholders’ equity declined
in 2004, to 17.5 percent. This decline is
primarily attributable to additional tax
expense associated with the anticipated
repatriation of earnings as the result
of the American Jobs Creation Act and
charges related to both acquired in-
process research and development and
restructuring activities. In addition, we
made substantial investments in our
manufacturing operations and research
and development activities.

%
2
.
8
2

%
1
.
6
2

%
3
.
2
4

%
2
.
5
3

%
4
.
8
2

%
5
.
7
1

tions. Although the deduction is subject to a number
of limitations and uncertainty remains as to how to
interpret certain provisions of the AJCA, we believe we
have the information necessary to make an informed
decision on the impact of the AJCA on our repatriation
plans. Based on that decision, we plan to repatriate
$8.00 billion in incentive dividends, as deﬁ ned in the
AJCA, during 2005 and accordingly have recorded a
related tax liability of $465.0 million as of December
31, 2004. Potential uses of proceeds from the incentive
dividends include research and development activities,
capital asset expenditures, and other permitted activi-
ties. As noted above, in anticipation of the repatriation
of overseas earnings into the U.S. in 2005, we began to
liquidate our long-term investments held international-
ly during the latter part of 2004 into cash, cash equiva-
lents and short-term investments.

We believe that cash generated from operations,

along with available cash and cash equivalents, will be
sufﬁ cient to fund our operating needs, including debt
service, capital expenditures, dividends, and taxes in
2005. We believe that amounts available through our
existing commercial paper program should be adequate
to fund maturities of short-term borrowings, if neces-
sary. Our commercial paper program is also currently

Dividends Paid Per Share
(dollars)

Dividends paid during 2004 increased to $1.42 per
share. This constitutes the 37th consecutive increase
in annual dividends. The company also continues this
tradition into 2005 by declaring a first-quarter 2005
dividend of $.38 per share, a 7 percent increase over
first-quarter 2004. This record clearly reflects our
continued commitment to delivering outstanding
shareholder value.

2
4
.
1
$

4
3
.
1
$

4
2
.
1
$

2
1
.
1
$

4
0
.
1
$

backed by $1.25 billion of unused committed bank credit
facilities. We will likely repay our outstanding commer-
cial paper and a portion of our other debt during 2005
using available cash. Various risks and uncertainties,
including those discussed in the Financial Expectations
for 2005 section, may affect our operating results and
cash generated from operations.

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

Our primary interest rate risk exposure results
from changes in short-term U.S. dollar interest rates.
In an effort to manage interest rate exposures, we
strive to achieve an acceptable balance between ﬁ xed
and ﬂ oating rate debt positions and may enter into
interest rate derivatives to help maintain that balance.
Based on our overall interest rate exposure at Decem-
ber 31, 2004 and 2003, 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, 2004 and
2003, respectively, would have no material impact on
earnings, cash ﬂ ows, or fair values of interest rate risk-
sensitive instruments over a one-year period.

Our foreign currency risk exposure results from
ﬂ uctuating currency exchange rates, primarily the U.S.
dollar against the euro and the Japanese yen. We face
transactional currency exposures that arise when we
enter into transactions, generally on an intercompany
basis, denominated in currencies other than the local
currency. We also face currency exposure that arises
from translating the results of our global operations to
the U.S. dollar at exchange rates that have ﬂ uctuated
from the beginning of the period. We use forward con-
tracts and purchased options to manage our foreign cur-
rency exposures. Our policy outlines the minimum and
maximum hedge coverage of such exposures. Gains and
losses on these derivative positions offset, in part, the
impact of currency ﬂ uctuations on the existing assets,
liabilities, commitments, and anticipated revenues. Con-
sidering our derivative ﬁ nancial instruments outstanding
at December 31, 2004 and 2003, a hypothetical 10 per-
cent change in exchange rates (primarily against the U.S.
dollar) as of December 31, 2004 and 2003, respectively,
would have no material impact on earnings, cash ﬂ ows,
or fair values of foreign currency rate risk-sensitive
instruments over a one-year period. These calculations
do not reﬂ ect the impact of the exchange gains or losses
on the underlying positions that would be offset, in part,

by the results of the derivative instruments.

Off-Balance Sheet Arrangements and Contractual
Obligations

We have no off-balance sheet arrangements that have
a material current effect or that are reasonably likely to
have a material future effect on our ﬁ nancial condition,
changes in ﬁ nancial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or
capital resources. We acquire assets still in develop-
ment and enter into research and development arrange-
ments with third parties that often require milestone
and royalty payments to the third party contingent upon
the occurrence of certain future events linked to the
success of the asset in development. Milestone pay-
ments may be required contingent upon the successful
achievement of an important point in the development
life cycle of the pharmaceutical product (e.g., approval
of the product for marketing by the appropriate regula-
tory agency). If required by the arrangement, we may
have to make royalty payments based upon a percentage

of the sales of the pharmaceutical product in the event
that regulatory approval for marketing is obtained. Be-
cause of the contingent nature of these payments, they
are not included in the table of contractual obligations.
These arrangements are not material individually.

However, if milestones for multiple products covered
by these arrangements would happen to be reached in
the same year, the aggregate charge to expense could
be material to the results of operations in any one pe-
riod. The inherent risk in pharmaceutical development
makes it unlikely that this will occur, as the failure rate
for products in development is very high. In addition,
these arrangements often give us the discretion to uni-
laterally terminate development of the product, which
would allow us to avoid making the contingent pay-
ments; however, we are unlikely to cease development
if the compound successfully achieves clinical testing
objectives. We also note that, from a business perspec-
tive, we view these payments as positive because they
signify that the product is successfully moving through
development and is now generating or is more likely to
generate cash ﬂ ows from sales of products.

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

millions):

Total

Less Than
1 Year

Payments Due by Period
1–3
Years

3–5
Years

More Than
5 Years

Long-term debt, including

interest payments1 . . . . . . . . . . . . . $ 10,170.6
165.9
354.4
2,927.3

Capital lease obligations. . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . .
Purchase obligations2 . . . . . . . . . . . . .
Other long-term liabilities
reﬂ ected on our balance
589.2
sheet under GAAP3 . . . . . . . . . . . . .
Other4 . . . . . . . . . . . . . . . . . . . . . . . . . .
70.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,278.0

$ 473.4
28.9
89.3
2,596.0

$2,172.0
34.6
139.0
191.1

$557.6
27.0
78.2
88.9

$6,967.6
75.4
47.9
51.3

—
63.1
$3,250.7

90.6
7.5
$2,634.8

90.6
—
$842.3

408.0
—

$7,550.2

1 Our long-term debt obligations include both our expected principal and interest obligations, including our interest rate swaps. The interest rate forward
curve at December 31, 2004, was used to compute the amount of the contractual obligation for the variable rate debt instruments and swaps.
2 We have included the following:

• Purchase obligations, consisting primarily of all open purchase orders at our signiﬁ cant operating locations as of December 31, 2004. Some of

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

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

3 We have included our long-term liabilities consisting primarily of our nonqualiﬁ ed supplemental pension funding requirements and deferred compen-
sation liabilities.
4 This category comprises primarily cash to be used in loan funding requirements to our collaboration partners, and our minimum pension funding
requirements.

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The contractual obligations table is current as of
December 31, 2004. The amount of these obligations
can be expected to change materially over time as new
contracts are initiated and existing contracts are termi-
nated or modiﬁ ed.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

In preparing our ﬁ nancial statements in accordance
with generally accepted accounting principles (GAAP),
we must often make estimates and assumptions that
affect the reported amounts of assets, liabilities,
revenues, expenses, and related disclosures. Some of
those judgments can be subjective and complex, and
consequently actual results could differ from those
estimates. For any given individual estimate or as-
sumption we make, there may also be other estimates
or assumptions that are reasonable; however, we
believe that, given current facts and circumstances,
it is unlikely that applying any such other reasonable
judgment would cause a material adverse effect on our
consolidated results of operations, ﬁ nancial position, or
liquidity for the periods presented in this report.

Our most critical accounting policies are described

below. We have discussed the nature and the inherent
judgment used in the application of our critical account-
ing policies with our audit committee.

Revenue Recognition and Sales Rebate and Discount
Accruals

We recognize revenue from sales of products at the
time title of goods passes to the buyer and the buyer
assumes the risks and rewards of ownership. This is
generally at the time products are shipped to the cus-
tomer, typically a wholesale distributor. Provisions for
discounts and rebates to customers are established in
the same period the related sales are recorded.

We regularly review the supply levels of our signiﬁ -
cant products sold to major wholesalers in the U.S. and
in major markets outside the U.S., primarily by reviewing
periodic inventory reports supplied by our major whole-
salers and available prescription volume information for
our products, or alternative approaches. We attempt to
maintain wholesaler inventory levels at an average of
approximately one month or less on a consistent basis
across our product portfolio. We are generally able
to determine when signiﬁ cant wholesaler stocking or
destocking has occurred during a particular period, but
we cannot accurately quantify the amount of stocking or
destocking. An unusual buying pattern compared with
underlying demand of our products is often the result of
speculative buying by wholesalers in anticipation of price
increases. Other causes include product supply issues
and changes in wholesaler business operations. When
we believe wholesaler purchasing patterns have caused

an unusual increase or decrease in the sales of a major
product compared with underlying demand, we disclose
this in our product sales discussion if the amount is be-
lieved to be material to the product sales trend.

As a result of recently restructuring our arrange-
ments with our U.S. wholesalers, we anticipate reduc-
tions in wholesaler inventory levels for certain products
(primarily Strattera, Prozac, and Gemzar) in the ﬁ rst
part of 2005. While this could affect the sales growth
rates for certain individual products in the near term,
it is unlikely to have a material impact on our consoli-
dated sales or results of operations for 2005. We expect
that the new structure will reduce the speculative
wholesaler buying we have seen in the past and provide
us improved data on inventory levels at our U.S. whole-
salers. Wholesaler stocking and destocking activity
historically has not caused any material changes in the
rate of actual product returns, which have been ap-
proximately 1 percent or less of our net sales over the
past three years and have not ﬂ uctuated signiﬁ cantly as
a percent of sales.

We establish sales rebate and discount accruals in

the same period as the related sales. The rebate/dis-
count amounts are recorded as a deduction to arrive
at our net sales. Sales rebates/discounts that require
the use of judgment in the establishment of the ac-
crual include Medicaid, managed care, long-term-care,
hospital, discount card programs, and various other
government programs. We base these accruals primar-
ily upon our historical rebate/discount payments made
to our customer segment groups and the provisions of
current rebate/discount contracts. We calculate these
rebates/discounts based upon a percentage of our
sales for each of our products as deﬁ ned by the statu-
tory rates and the contracts with our various customer
groups.

The largest of our sales rebate/discount amounts

are rebates associated with sales covered by Medicaid.
Although we generally accrue a liability for Medicaid
rebates at the time we record the sale (when the prod-
uct is shipped), the Medicaid rebate related to that sale
is typically billed up to six months later. Due to the time
lag, in any particular period our rebate adjustments
may incorporate revisions of accruals for several pe-
riods. In determining the appropriate accrual amount,
we consider our historical Medicaid rebate payments by
product as a percentage of our historical sales as well
as any signiﬁ cant changes in sales trends, an evaluation
of the current Medicaid rebate laws and interpretations,
the percentage of our products that are sold to Medicaid
recipients, and our product pricing and current rebate/
discount contracts.

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

or legislatively mandated and are estimated and recog-
nized in the same period as the related sales. In some
large European countries, the government rebates are

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

We believe that our accruals for sales rebates and

discounts are reasonable and appropriate based on
current facts and circumstances. However, it is pos-
sible that other people applying reasonable judgment
to the same facts and circumstances could develop a
different accrual amount for sales rebates and dis-
counts. Federally mandated Medicaid rebate and state
pharmaceutical assistance programs reduced sales
by $641.0 million, $567.6 million, and $438.2 million in
2004, 2003, and 2002, respectively. A 5 percent change
in the Medicaid rebate expense we recognized in 2004
would lead to an approximate $32 million effect on our
income before income taxes. As of December 31, 2004,
our Medicaid rebate liability was $279.6 million.

Approximately 86 percent and 92 percent of our

global rebate and discount liability results from sales
of our products in the United States as of December 31,
2004 and 2003, respectively. The following represents a
roll-forward of our most signiﬁ cant U.S. rebate and dis-
count liability balances, including Medicaid (in millions):

2004

2003

Rebate and discount liability,
beginning of year . . . . . . . . . $ 398.0 $ 328.1
Reduction of net sales

due to discounts and

rebates1 . . . . . . . . . . . . . . .

1,157.0

1,225.2

Cash payments of

discounts and rebates . . .

(1,187.1)

(1,155.3)

Rebate and discount

liability, end of year. . . . . . . . $ 367.9 $ 398.0

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

Product Litigation Liabilities and Other Contingencies

Product litigation liabilities and other contingencies are,
by their nature, uncertain and are based upon complex
judgments and probabilities. The factors we consider
in developing our product litigation liability reserves
and other contingent liability amounts include the
merits and jurisdiction of the litigation, the nature and
the number of other similar current and past litigation
cases, the nature of the product and the current as-
sessment of the science subject to the litigation, and the
likelihood of settlement and current state of settlement
discussions, if any. In addition, we have accrued for
certain product liability claims incurred, but not ﬁ led,
to the extent we can formulate a reasonable estimate of

their costs. We estimate these expenses based primar-
ily on historical claims experience and data regarding
product usage.

We also consider the insurance coverage we have

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

We believe that the accruals and related insurance
recoveries we have established for product litigation li-
abilities and other contingencies are appropriate based
on current facts and circumstances. However, it is pos-
sible that other people applying reasonable judgment
to the same facts and circumstances could develop a
different liability amount for product litigation liabilities
and other contingencies or a different recovery amount
from the insurance companies. A 5 percent change in
the product litigation liabilities and other contingen-
cies accrual would lead to an approximate $13 million
effect on our income before income taxes; however, we
would expect much of this effect to be offset by recover-
ies from our insurance coverages. A 5 percent change
in the insurance recoveries estimate would lead to an
approximate $4 million effect on our income before
income taxes.

Pension and Retiree Medical Plan Assumptions

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

Periodically, we evaluate the discount rate and the

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

We believe our pension and retiree medical plan

assumptions are appropriate based upon the above

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factors. However, other people applying reasonable
judgment to the same facts and circumstances could
develop a different estimate of these factors. If the
health-care-cost trend rates were to be increased by
one percentage point each future year, the aggregate
of the service cost and interest cost components of the
2004 annual expense would increase by approximately
$16 million. A one-percentage-point decrease would
decrease the aggregate of the 2004 service cost and in-
terest cost by approximately $14 million. If the discount
rate for 2004 were to be changed by a quarter percent-
age point, income before income taxes would change
by approximately $21 million. If the expected return on
plan assets for 2004 were to be changed by a quarter
percentage point, income before income taxes would
change by approximately $11 million. If our assumption
regarding the expected age of future retirees for 2004
were adjusted by one year, that would affect our income
before income taxes by approximately $26 million.

Income Taxes

We have recorded valuation allowances against certain
of our deferred tax assets, primarily those that have
been generated from net operating losses in certain
taxing jurisdictions. In evaluating whether we would
more likely than not recover these deferred tax assets,
we have not assumed any future taxable income or tax
planning strategies in the jurisdictions associated with
these carryforwards. Implementation of tax plan-
ning strategies to recover these deferred tax assets or
future income generation in these jurisdictions could
lead to the reversal of these valuation allowances and a
reduction of income tax expense.

We believe that our estimates for the valuation al-
lowances reserved against the deferred tax assets are
appropriate based on current facts and circumstances.
However, other people applying reasonable judgment to
the same facts and circumstances could develop a dif-
ferent estimate of these factors.

We prepare and ﬁ le tax returns based on our
interpretation of tax laws and regulations and record
estimates based on these judgments and interpreta-
tions. In the normal course of business, our tax returns
are subject to examination by various taxing authorities.
Such examinations may result in future tax and inter-
est assessments by these taxing authorities. Inherent
uncertainties exist in estimates of tax contingencies
due to changes in tax law resulting from legislation,
regulation and/or as concluded through the various
jurisdictions’ tax court systems. We record a liability for
tax contingencies when we believe it is probable that we
will be assessed and the amount of the contingency can
be reasonably estimated. The tax contingency reserve
is adjusted for changes in facts and circumstances,
and additional uncertainties. For example, adjustments

could result from signiﬁ cant amendments to existing
tax law and the issuance of regulations or interpreta-
tions by the taxing authorities, new information obtained
during a tax examination, or resolution of an examina-
tion. We believe that our estimates for tax contingency
reserves are appropriate and sufﬁ cient to pay assess-
ments that may result from examinations of our tax
returns; however, other people applying reasonable
judgment to the same facts and circumstances could
develop a different estimate and the amount ultimately
paid upon resolution of issues raised may differ from
the amounts accrued.

FINANCIAL EXPECTATIONS FOR 2005

For the full year 2005, we currently expect earnings per
share to be in the range of $2.80 to $2.90, including the
incremental equity compensation expense estimated
at $.25 per share as a result of expensing stock options
(see Note 2 to the consolidated ﬁ nancial statements for
additional information) and compensation structural
changes. For the full year 2005, we expect sales to grow
8 percent to 10 percent (with acceleration in the sec-
ond half of the year), gross margins as a percentage of
sales to decline by roughly 50 basis points to 75 basis
points, marketing and administrative expenses to grow
in the low single digits, and research and development
expenses to grow in the mid-single digits. Further, we
expect other income to contribute approximately $175
million to $225 million, and the effective tax rate to be
about 22 percent. As a result of recently restructur-
ing our arrangements with our U.S. wholesalers, we
anticipate reductions in wholesaler inventory levels for
certain products (primarily Strattera, Prozac, and Gem-
zar) in the ﬁ rst part of 2005. While this could affect the
sales growth rates for certain individual products in the
near term, it is unlikely to have a material impact on our
consolidated sales or results of operations for 2005.
Actual results could differ materially and will
depend on, among other things, the continuing growth
of our currently marketed products; developments with
competitive products; the timing and scope of regula-
tory approvals and the success of our new product
launches; foreign exchange rates; wholesaler inventory
changes; other regulatory developments, litigation, and
government investigations; and the impact of govern-
mental actions regarding pricing, importation, and
reimbursement for pharmaceuticals. In particular, as
described later in Legal and Regulatory Matters, certain
generic pharmaceutical manufacturers have challenged
our U.S. compound patent for Zyprexa. We are awaiting
the trial court decision on the challenge. If the decision
is unfavorable and the generic companies launch gener-
ic olanzapine prior to resolution of appeals, our ﬁ nancial
results would be very negatively affected. We undertake
no duty to update these forward-looking statements.

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LEGAL AND REGULATORY MATTERS

Three generic pharmaceutical manufacturers, Zenith
Goldline Pharmaceuticals, Inc. (Zenith), Dr. Reddy’s
Laboratories, Ltd. (Reddy), and Teva Pharmaceuticals
(Teva), have submitted abbreviated new drug applica-
tions (ANDAs) seeking permission to market generic
versions of Zyprexa in various dosage forms several
years prior to the expiration of our U.S. patents for
the product, alleging that our patents are invalid,
unenforceable, or not infringed. We ﬁ led suit against
the three companies in the U.S. District Court for the
Southern District of Indiana seeking a ruling that the
challenges to our compound patent (expiring in 2011)
are without merit. The cases have been consolidated.
A trial before a district court judge in Indianapolis
was held in January and February of 2004, and we are
awaiting the court’s decision. Regardless of the trial
court ruling, we anticipate that appeals will follow. If
we are unsuccessful at the trial court level, we cannot
predict whether any of the generic companies would
launch generic versions of Zyprexa prior to a ﬁ nal
resolution of any appeals. We believe that the generic
manufacturers’ claims are without merit and we expect
to prevail in this litigation. However, it is not possible to
predict or determine the outcome of this litigation and,
accordingly, we can provide no assurance that we will
prevail. An unfavorable outcome would have a material
adverse impact on our consolidated results of opera-
tions, liquidity, and ﬁ nancial position.

In October 2002, we were notiﬁ ed that Barr Labo-
ratories, Inc. (Barr), had submitted an ANDA with the
FDA seeking permission to market a generic version of
Evista several years prior to the expiration of our U.S.
patents covering the product, alleging that the patents
are invalid or not infringed. In November 2002, we
ﬁ led suit against Barr in the U.S. District Court for the
Southern District of Indiana seeking a ruling that Barr’s
challenges to our patents claiming the methods of use
and pharmaceutical form (expiring from 2012 to 2017)
are without merit. Recently, Barr has also asserted
that the method of use patents are unenforceable. On
September 28, 2004, the U.S. Patent and Trademark Of-
ﬁ ce issued to us a new patent (expiring in 2017) directed
to pharmaceutical compositions containing raloxifene.
Barr has challenged this patent, alleging that the pat-
ent is invalid, unenforceable, or will not be infringed.
This patent has been added to the lawsuit. The suit is
in discovery and the trial is now scheduled to begin in
February 2006. While we believe that Barr’s claims are
without merit and we expect to prevail, it is not possible
to predict or determine the outcome of the litigation.
Therefore, we can provide no assurance that we will
prevail. An unfavorable outcome could have a material
adverse impact on our consolidated results of opera-
tions, liquidity, and ﬁ nancial position.

In July 2002, we received a grand jury subpoena
for documents from the Ofﬁ ce of Consumer Litigation,
U.S. Department of Justice, related to our marketing
and promotional practices and physician communica-
tions with respect to Evista. We received subpoenas
seeking additional documents in July 2003, July 2004,
and August 2004. We continue to cooperate with the
government and have provided a broad range of infor-
mation concerning our U.S. marketing and promotional
practices, including documents relating to communica-
tions with physicians and the remuneration of physi-
cian consultants and advisers. Based upon advanced
discussions with the government to resolve this matter,
which commenced in the fourth quarter of 2004, we
have expensed $36.0 million, which we believe will be
sufﬁ cient to resolve the matter.

In March 2004, the ofﬁ ce of the U.S. Attorney for

the Eastern District of Pennsylvania advised us that it
has commenced a civil investigation related to our U.S.
marketing and promotional practices with respect to
Zyprexa, Prozac, and Prozac Weekly. We are cooperat-
ing with the U.S. Attorney in this investigation and are
providing a broad range of documents and information
related to the investigation, including documents relat-
ing to communications with physicians and the remu-
neration of physician consultants and advisers. It is
possible that other Lilly products could become subject
to this investigation and that the outcome of this matter
could include criminal charges and ﬁ nes and/or civil
penalties. We cannot predict or determine the outcome
of this matter or reasonably estimate the amount or
range of amounts of any ﬁ nes or penalties that might
result from an adverse outcome. It is possible, however,
that an adverse outcome could have a material ad-
verse impact on our consolidated results of operations,
liquidity, and ﬁ nancial position. We have implemented
and continue to review and enhance a broadly based
compliance program that includes comprehensive com-
pliance-related activities designed to ensure that our
marketing and promotional practices, physician com-
munications, and remuneration of health care profes-
sionals comply with promotional laws and regulations.

We have been named in approximately 140 prod-

uct liability cases in the United States involving ap-
proximately 360 claimants alleging a variety of injuries
from the use of Zyprexa. Most of the cases allege that
the product caused or contributed to diabetes or high
blood-glucose levels. The lawsuits seek substantial
compensatory and punitive damages and typically ac-
cuse us of inadequately testing for and warning about
side effects of Zyprexa. Many of the lawsuits also allege
that we improperly promoted the drug. We are vigor-
ously defending these suits. All the federal cases, in-
volving approximately 330 claimants, have been or will
be transferred to The Honorable Jack Weinstein in the
Federal District Court for the Eastern District of New

addition to our patents, we have data package exclusivity
in Germany through September 2006. We are vigorously
contesting the legal challenge to this patent. We cannot
predict or determine the outcome of this litigation.

We have been named as a defendant in numer-
ous other product liability lawsuits, involving primarily
diethylstilbestrol (DES) and thimerosal. See Note 13 to
the consolidated ﬁ nancial statements for further infor-
mation on those matters.

While it is not possible to predict or determine the
outcome of the patent, product liability, or other legal
actions brought against us, we believe that, except as
noted previously with respect to the U.S. Zyprexa and
Evista patent litigation, the Zyprexa, Prozac, and Prozac
Weekly marketing and promotional practices investi-
gation, and the Zyprexa product liability litigation, the
resolution of all such matters will not have a material
adverse effect on our consolidated ﬁ nancial position or
liquidity but could possibly be material to the consoli-
dated results of operations in any one accounting period.

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

Under the safe harbor provisions of the Private Securi-
ties Litigation Reform Act of 1995, we caution investors
that any forward-looking statements or projections
made by us, including those made in this document, are
based on management’s expectations at the time they
are made, but they are subject to risks and uncertain-
ties that may cause actual results to differ materially
from those projected. Economic, competitive, govern-
mental, technological, legal, and other factors that may
affect our operations and prospects are discussed ear-
lier in this section and in Exhibit 99 to our most recent
report on Forms 10-Q and 10-K ﬁ led with the Securities
and Exchange Commission. We undertake no duty to
update forward-looking statements.

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York for consolidated and coordinated pretrial proceed-
ings. Two cases requesting certiﬁ cation of nationwide
class actions on behalf of those who allegedly suffered
injuries from the administration of Zyprexa were ﬁ led
in the Federal District Court for the Eastern District of
New York on April 16, 2004, and May 19, 2004, respec-
tively. The cases seek damages for alleged personal
injuries and also seek compensation for medical moni-
toring of individuals who have taken Zyprexa. A lawsuit
was also ﬁ led that requests a class action on behalf
of Iowa residents who took Zyprexa, and that case has
been transferred to the federal court in New York. In
addition, we have entered into agreements with various
plaintiffs’ counsel halting the running of the statutes
of limitation (tolling agreements) with respect to more
than 3,050 individuals who do not have lawsuits on ﬁ le
and may or may not eventually ﬁ le suits. This provides
counsel additional time to evaluate the potential claims.
In exchange, the individuals have agreed not to ﬁ le suits
in state courts, and the Plaintiffs Steering Commit-
tee agreed to dismiss the personal injury claims in the
two pending nationwide class actions. The class action
claims seeking medical monitoring for Zyprexa patients
are not affected by this agreement.

In December 2004, we were served with two law-
suits brought in state court in Louisiana on behalf of the
Louisiana Department of Health and Hospitals, alleging
that Zyprexa caused or contributed to diabetes or high
blood-glucose levels and that we improperly promoted
the drug. In these actions, which we have removed to
federal court, the Department of Health and Hospitals
seeks to recover the costs it paid for Zyprexa through
Medicaid and other drug beneﬁ t programs and the costs
the department alleges it has incurred and will incur to
treat Zyprexa-related illnesses.

In early 2005, we were served with four lawsuits

seeking class action status in Canada on behalf of
patients who took Zyprexa. The allegations in these
suits are similar to those in the litigation pending in the
United States.

The number of product liability lawsuits and tolled

claims relating to Zyprexa continues to increase, and
we cannot predict at this time the additional number
of lawsuits and claims that may be asserted. As noted,
we are vigorously defending this litigation. However,
product litigation of this type is inherently unpredict-
able, with the risk of excessive verdicts not justiﬁ ed by
the evidence. Accordingly, it is possible that the ultimate
resolution of the Zyprexa product liability litigation could
have a material adverse impact on our consolidated
results of operations, liquidity, and ﬁ nancial position.
In Germany, Egis-Gyogyszergyar, a generic phar-
maceutical manufacturer, has challenged the validity
of our Zyprexa compound and method of use patents
(expiring in 2011) in that country. We currently anticipate
a decision from the German Patent Court in 2006. In

Consolidated Statements of Cash Flows

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31

2004

2003

2002

$ 1,810.1

$ 2,560.8

$ 2,707.9

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

special charges, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

597.5
772.4
381.7

374.3
171.5
4,107.5

Changes in operating assets and liabilities:

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

(240.8)
(111.6)
(765.2)
(120.4)
(1,238.0)

548.5
130.9
—

261.7
61.0
3,562.9

(195.1)
(170.8)
(211.9)
661.6
83.8

493.0
346.5
54.6

—
10.8
3,612.8

(321.1)
(285.1)
(667.4)
(268.5)
(1,542.1)

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

2,869.5

3,646.7

2,070.7

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

Cash Flows From Financing Activities
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of common stock and other capital transactions . . . . . . . .
Issuances of common stock under stock plans . . . . . . . . . . . . . . . . . .
Net change in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by (Used for) Financing Activities . . . . . . . . . . .

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

(71.7)
(468.2)
(684.8)

(1,539.8)
—
104.5
1,478.2
1,000.0
(839.2)
203.7

(1,706.6)
61.2
774.0
6,762.4
(7,005.3)
—

—
(217.2)
(1,331.5)

(1,443.0)
(281.1)
103.1
(247.3)
830.0
(540.0)
(1,578.3)

(1,130.9)
36.8
(651.8)
4,777.9
(5,190.3)
(84.0)

—
(232.1)
(2,474.4)

(1,335.8)
(385.2)
64.6
(18.0)
1,259.6
(7.2)
(422.0)

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

220.6

73.5

69.3

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . .

2,609.0
2,756.3
$ 5,365.3

810.4
1,945.9
$ 2,756.3

(756.4)
2,702.3
$ 1,945.9

See notes to consolidated ﬁ nancial statements.

Consolidated Statements of Comprehensive Income

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

Year Ended December 31

2004

2003

2002

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss)
Foreign currency translation gains . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gains (losses) on securities. . . . . . . . . . . . . . . . . . .
Minimum pension liability adjustment . . . . . . . . . . . . . . . . . . . . . . .
Effective portion of cash ﬂ ow hedges. . . . . . . . . . . . . . . . . . . . . . . .

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

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

$1,810.1

$2,560.8

$2,707.9

441.7
(25.9)
(4.4)
(53.7)

473.0
72.0
(9.8)
(2.1)

273.6
(67.4)
(4.6)
(217.9)

357.7

533.1

(16.3)

21.0
378.7

(22.4)
510.7

93.9
77.6

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

$2,188.8

$3,071.5

$2,785.5

See notes to consolidated ﬁ nancial statements.

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Segment Information

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

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

Year Ended December 31

2004

2003

2002

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

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

$ 5,554.8
3,926.7
1,039.8
726.6
669.3
489.9
175.4
$12,582.5

$ 4,668.3
3,444.6
893.1
693.1
624.9
577.4
176.1
$11,077.5

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

$ 7,668.5
3,534.7
2,654.7
$13,857.9

$ 7,221.6
3,102.9
2,258.0
$12,582.5

$ 6,582.3
2,471.9
2,023.3
$11,077.5

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

$ 5,874.1
1,606.7
1,577.3
$ 9,058.1

$ 5,296.0
1,279.1
1,209.2
$ 7,784.3

$ 4,725.1
997.1
673.3
$ 6,395.5

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

The largest category of products is the neurosciences group, which includes Zyprexa, Prozac, Strattera, Cym-
balta, Permax®, Symbyax, and Yentreve. Endocrinology products consist primarily of Humalog, Humulin, Actos,
Evista, Forteo, and Humatrope. Oncology products consist primarily of Gemzar and Alimta. Animal health products
include Tylan®, Rumensin®, Coban®, and other products for livestock and poultry. Cardiovascular products consist
primarily of ReoPro and Xigris. Anti-infectives include primarily Ceclor® and Vancocin®. The other pharmaceutical
product group includes Cialis, Axid®, and other miscellaneous pharmaceutical products and services.
Most of the pharmaceutical products are distributed through wholesalers that serve pharmacies, physicians and
other health care professionals, and hospitals. In 2004, our three largest wholesalers each accounted for between 13
percent and 17 percent of consolidated net sales. Further, they each accounted for between 1 percent and 13 percent
of accounts receivable as of December 31, 2004. Animal health products are sold primarily to wholesale distributors.
Our business segments are distinguished by the ultimate end user of the product: humans or animals. Perfor-
mance is evaluated based on proﬁ t or loss from operations before income taxes. The accounting policies of the in-
dividual segments are substantially the same as those described in the summary of signiﬁ cant accounting policies
in Note 1 to the consolidated ﬁ nancial statements. Income before income taxes for the animal health business was
approximately $223 million, $204 million, and $221 million in 2004, 2003, and 2002, respectively.
The assets of the animal health business are intermixed with those of the pharmaceutical products business.
Long-lived assets disclosed above consist of property and equipment and certain sundry assets.
We are exposed to the risk of changes in social, political, and economic conditions inherent in foreign opera-
tions, and our results of operations and the value of our foreign assets are affected by ﬂ uctuations in foreign cur-
rency exchange rates.

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Selected Quarterly Data (unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
2004

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

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

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

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

Fourth

Third

Second

First

$3,644.3
865.7
1,803.7
29.9

$3,280.4
810.1
1,606.7
—

$3,556.3
796.4
1,854.4
—

$3,376.9
751.7
1,710.5
362.3

494.1
(69.1)
520.0

(2.4)1

.00

—
(104.6)
968.2
755.2

.70

.69

108.9
(41.6)
838.2
656.9

.61

.60

—
(63.1)
615.5
400.4

.37

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

.355

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

62.01
50.44

69.37
60.05

76.26
67.60

74.70
65.00

2003

Fourth

Third

Second

First

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

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

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

$3,465.5
731.5
1,844.2

$3,139.4
679.3
1,531.5

$3,088.2
643.0
1,585.8

$2,889.4
621.3
1,444.1

28.3
(102.5)
964.0
747.2

.69

—
12.7
915.9
714.4

.66

—
(28.5)
887.9
692.2

.64

353.9
(23.8)
493.9
407.0

.38

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

.335

73.89
60.78

70.33
57.99

69.83
57.73

67.98
53.70

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

1The net loss in the fourth quarter of 2004 included tax expenses of $465.0 million associated with the anticipated
repatriation of $8.00 billion of our earnings reinvested outside the U.S. as a result of the American Jobs Creation
Act (see Note 11).

Selected Financial Data (unaudited)

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

2004

2003

2002

2001

2000

Operations
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,857.9
3,223.9
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,691.1
Research and development . . . . . . . . . . . . . . . . . . .
4,284.2
Marketing and administration . . . . . . . . . . . . . . . . .
716.8
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,941.9
Income before income taxes. . . . . . . . . . . . . . . . . . .
1,131.8
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,810.1
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income as a percent of sales . . . . . . . . . . . . . . .
Net income per share—diluted . . . . . . . . . . . . . . . .
Dividends declared per share . . . . . . . . . . . . . . . . .
Weighted-average number of shares
outstanding—diluted (thousands). . . . . . . . . . . . 1,088,936

13.1%
1.66
1.45

$12,582.5
2,675.1
2,350.2
4,055.4
240.1
3,261.7
700.9
2,560.8

$11,077.5
2,176.5
2,149.3
3,424.0
(130.0)
3,457.7
749.8
2,707.9

$11,542.5 $10,862.2
2,055.7
2,018.5
3,228.3
(299.0)
3,858.7
800.9
3,057.8

2,160.2
2,235.1
3,417.4
222.9
3,506.9
726.9
2,780.0

20.4%
2.37
1.36

24.4%
2.50
1.27

24.1%
2.55
1.15

28.2%
2.79
1.06

1,082,230

1,085,088

1,090,793

1,097,725

Financial Position
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,835.8
7,593.7
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,550.9
Property and equipment—net . . . . . . . . . . . . . . . . .
24,867.0
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,491.9
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,919.9
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,768.9
5,560.8
6,539.0
21,688.3
4,687.8
9,764.8

$ 7,804.1
5,063.5
5,293.0
19,042.0
4,358.2
8,273.6

$ 6,938.9 $ 7,943.0
4,960.7
4,176.6
14,690.8
2,633.7
6,046.9

5,203.0
4,532.4
16,434.1
3,132.1
7,104.0

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Supplementary Data
Return on shareholders’ equity . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,898.1
597.5
Depreciation and amortization . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38.5%
Number of employees . . . . . . . . . . . . . . . . . . . . . . . .
Number of shareholders of record . . . . . . . . . . . . .

44,500
52,400

17.5%
7.8%

28.4%
12.6%

35.2%
15.2%

42.3%
17.8%

55.3%
22.9%

$ 1,706.6
548.5

$ 1,130.9 $ 884.0
454.9

493.0

$ 677.9
435.8

21.5%

21.7%

20.7%

20.8%

45,000
54,600

42,900
56,200

40,500
57,700

35,200
59,200

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Notes to Consolidated Financial Statements

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

Note 1: Summary of Signiﬁ cant Accounting Policies

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

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

All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis, that is,
based on the weighted-average number of outstanding common shares and the effect of all potentially dilutive
common shares (primarily unexercised stock options).

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

Inventories: We state all inventories at the lower of cost or market. We use the last-in, ﬁ rst-out (LIFO) method for
substantially all our inventories located in the continental United States, or approximately 39 percent of our total
inventories. Other inventories are valued by the ﬁ rst-in, ﬁ rst-out (FIFO) method. FIFO cost approximates current
replacement cost. Inventories at December 31 consisted of the following:

Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction to LIFO cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 717.5
1,356.3
305.7
2,379.5
(87.9)
$2,291.6

$ 542.1
1,169.0
315.9
2,027.0
(64.0)
$1,963.0

2004

2003

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

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

For derivative contracts that are designated and qualify as fair value hedges, the derivative instrument is
marked to market with gains and losses recognized currently in income to offset the respective losses and gains
recognized on the underlying exposure. For derivative contracts that are designated and qualify as cash ﬂ ow hedg-
es, the effective portion of gains and losses on these contracts is reported as a component of other comprehensive
30

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income and reclassiﬁ ed into earnings in the same period the hedged transaction affects earnings. Hedge inef-
fectiveness is immediately recognized in earnings. Derivative contracts that are not designated as hedging instru-
ments are recorded at fair value with the gain or loss recognized in current earnings during the period of change.
We enter into foreign currency forward and option contracts to reduce the effect of ﬂ uctuating currency ex-
change rates (principally the euro and the Japanese yen). Generally, foreign currency derivatives used for hedging
are put in place using the same or like currencies and duration as the underlying exposures. Forward contracts
are principally used to manage exposures arising from subsidiary trade and loan payables and receivables denom-
inated in foreign currency. These contracts are recorded at fair value with the gain or loss recognized in current
earnings. The purchased option contracts are used to hedge anticipated foreign currency transactions, primarily
intercompany inventory activities expected to occur within the next year. These contracts are designated as cash
ﬂ ow hedges of those future transactions and the impact on earnings is included in cost of sales. We may enter into
foreign currency forward contracts and currency swaps as fair value hedges of ﬁ rm commitments. Forward and
option contracts generally have maturities not exceeding 12 months.

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

can vary the costs of ﬁ nancing, investing, and operating. We address a portion of these risks through a controlled
program of risk management that includes the use of derivative ﬁ nancial instruments. The objective of controlling
these risks is to limit the impact of ﬂ uctuations in interest rates on earnings. Our primary interest rate risk exposure
results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we
strive to achieve an acceptable balance between ﬁ xed and ﬂ oating rate debt and investment positions and may enter
into interest rate swaps or collars to help maintain that balance. Interest rate swaps or collars that convert our ﬁ xed
rate debt or investments to a ﬂ oating rate are designated as fair value hedges of the underlying instruments. Interest
rate swaps or collars that convert ﬂ oating rate debt or investments to a ﬁ xed rate are designated as cash ﬂ ow hedg-
es. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements.

Goodwill and other intangibles: Other intangibles with ﬁ nite lives arising from acquisitions and research alliances
are amortized over their estimated useful lives, ranging from 5-10 years, using the straight-line method. Goodwill
is not amortized. Goodwill and other intangibles are reviewed to assess recoverability at least annually and when
certain impairment indicators are present. Unamortized goodwill and other intangibles with ﬁ nite lives were $110.3
million and $92.2 million, respectively, at December 31, 2004 and 2003, and were included in sundry assets in the
consolidated balance sheets. We currently have no other intangible assets with indeﬁ nite lives. No material impair-
ments occurred with respect to the carrying value of our goodwill or other intangible assets in 2004, 2003, or 2002.

Property and equipment: Property and equipment is stated on the basis of cost. Provisions for depreciation of
buildings and equipment are computed generally by the straight-line method at rates based on their estimated
useful lives (generally 12 to 50 years for buildings and 3 to 18 years for equipment). We review the carrying value of
long-lived assets for potential impairment on a periodic basis, and whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. Impairment is determined by comparing projected
undiscounted cash ﬂ ows to be generated by the asset to its carrying value. If an impairment is identiﬁ ed, a loss is
recorded equal to the excess of the asset’s net book value over the asset’s fair value, and the cost basis is adjusted.

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

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

$ 147.0
3,569.5
5,627.2
2,995.2
12,338.9
4,788.0
$ 7,550.9

$ 124.8
3,134.7
5,305.8
2,502.7
11,068.0
4,529.0
$ 6,539.0

2004

2003

Depreciation expense for 2004, 2003, and 2002 was $495.9 million, $469.3 million, and $437.8 million, re-
spectively. Approximately $111.3 million, $61.0 million, and $60.3 million of interest costs were capitalized as part
of property and equipment in 2004, 2003, and 2002, respectively. Total rental expense for all leases, including
contingent rentals (not material), amounted to approximately $286.8 million, $268.5 million, and $240.8 million for
2004, 2003, and 2002, respectively. Capital leases included in property and equipment in the consolidated balance
sheets, capital lease obligations entered into, and future minimum rental commitments are not material.

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Revenue recognition: We recognize revenue from sales of products at the time title of goods passes to the buyer
and the buyer assumes the risks and rewards of ownership. This is generally at the time products are shipped to the
customer. Provisions for discounts and rebates to customers are established in the same period the related sales are
recorded. Revenue from copromotion services (primarily Actos) is based upon net sales reported by our copromotion
partner and, if applicable, the number of sales calls we perform. We immediately recognize the full amount of mile-
stone payments due us upon the achievement of the milestone event if the event is substantive, objectively deter-
minable, and represents an important point in the development life cycle of the pharmaceutical product. Milestone
payments earned by us are generally recorded in other income-net. Initial fees we receive from the partnering of our
compounds under development are amortized through the expected product approval date. Initial fees received from
out-licensing agreements that include both the sale of marketing rights to our commercialized products and a related
commitment to supply the products are generally recognized as net sales over the term of the supply agreement.

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

Income taxes: Deferred taxes are recognized for the future tax effects of temporary differences between ﬁ nancial
and income tax reporting based on enacted tax laws and rates. Federal income taxes are provided on the portion of
the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable. See Note 11
regarding the 2004 tax expense associated with the expected repatriation of earnings reinvested outside the U.S.
pursuant to the American Job Creations Act.

Earnings per share: We calculate basic earnings per share based on the weighted-average number of outstanding
common shares and incremental shares. We calculate diluted earnings per share based on the weighted-average
number of outstanding common shares plus the effect of dilutive stock options and other incremental shares.

Stock-based compensation: As discussed further in Note 7, we elected to follow Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for our stock op-
tions and performance awards. Under APB 25, because the exercise price of our employee stock options equals the
market price of the underlying stock on the date of grant, no compensation expense is recognized. However, SFAS
123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for Stock-Based Compensa-
tion-Transition and Disclosure, requires us to present pro forma information as if we had accounted for our employ-
ee stock options and performance awards under the fair value method of that statement. For purposes of pro forma
disclosure, the estimated fair value of the options and performance awards at the date of the grant is amortized to
expense over the vesting period. The following table illustrates the effect on net income and earnings per share if
we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

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

$1,810.1

$2,560.8

$2,707.9

2004

2003

2002

Add: Compensation expense for stock-based
performance awards included in reported net income,
net of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct: Total stock-based employee compensation
expense determined under fair-value-based method

34.5

—

for all awards, net of related tax effects . . . . . . . . . . . . . . . . . . . . .

(294.2)

(210.8)

(307.2)

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

$1,550.4

$2,350.0

$2,400.7

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

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

$1.67
$1.43

$1.66
$1.42

$2.38
$2.18

$2.37
$2.17

$2.51
$2.23

$2.50
$2.21

As discussed more fully in Note 2, we plan to adopt SFAS 123(R) effective January 1, 2005.

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Note 2: Implementation of New Financial Accounting Pronouncements

In 2001, the Financial Accounting Standards Board (FASB) issued SFAS 143, Accounting for Asset Retirement Obli-
gations. SFAS 143 requires companies to record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred, which is adjusted to its present value each subsequent period. In addition, companies
must capitalize a corresponding amount by increasing the carrying amount of the related long-lived asset, which
is depreciated over the useful life of the related long-lived asset. The adoption of SFAS 143 on January 1, 2003, had
no impact on our consolidated ﬁ nancial position or results of operations.

In 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS
146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is
incurred. Severance pay under SFAS 146, in many cases, would be recognized over the remaining service period
rather than at the time the plan is communicated. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. We adopted SFAS 146 for any actions initiated after January 1,
2003, and any future exit costs or disposal activities will be subject to this statement.

In 2002, the FASB issued FASB Interpretation (FIN) 45, Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires an issuer of a guarantee
to recognize an initial liability for the fair value of the obligations covered by the guarantee. FIN 45 also addresses
the disclosures required by a guarantor in interim and annual ﬁ nancial statements regarding obligations under
guarantees. We have adopted the requirement for recognition of liabilities for the fair value of guaranteed obliga-
tions prospectively for guarantees entered into after January 1, 2003.

In 2003, the FASB issued FASB Interpretation (FIN) 46, Consolidation of Variable Interest Entities. FIN 46
deﬁ nes a variable interest entity (VIE) as a corporation, partnership, trust, or any other legal structure that does
not have equity investors with a controlling ﬁ nancial interest or has equity investors that do not provide sufﬁ cient
ﬁ nancial resources for the entity to support its activities. FIN 46 requires consolidation of a VIE by the primary ben-
eﬁ ciary of the assets, liabilities, and results of activities. FIN 46 also requires certain disclosures by all holders of
a signiﬁ cant variable interest in a VIE that are not the primary beneﬁ ciary. We do not have any material investments
in variable interest entities; therefore, the adoption of this interpretation in the ﬁ rst quarter of 2004 had no mate-
rial impact on our consolidated ﬁ nancial position or results of operations.

In 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS 150 establishes standards for how an issuer classiﬁ es and measures certain ﬁ nancial
instruments with characteristics of both liabilities and equity. Financial instruments within the scope of SFAS 150
will now be required to be classiﬁ ed as a liability. This statement also requires enhanced disclosures regarding
alternative methods of settling the instruments and the capital structure of entities. SFAS 150 is effective for all
ﬁ nancial instruments entered into or modiﬁ ed after May 31, 2003, and otherwise is effective at the beginning of the
ﬁ rst interim period beginning after June 15, 2003. The adoption of this statement had no impact on our consoli-
dated ﬁ nancial position or results of operations.

In 2004, the FASB issued FASB Staff Position (FSP) 106-2, which provides guidance regarding accounting for
the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA). The FSP speci-
ﬁ es that, for plans with beneﬁ ts that are determined to be actuarially equivalent to the Medicare Part D beneﬁ ts,
the plan sponsor will be entitled to a tax-free subsidy under the MMA. We have determined that our plan is actuari-
ally equivalent and, therefore, we are entitled to the subsidy. Following our adoption of the provisions of FSP 106-2
in the second quarter of 2004, we remeasured the accumulated postretirement beneﬁ t obligation (APBO) to reﬂ ect
the effects of the MMA as of the effective date of the MMA (December 8, 2003), and recognized the ﬁ nancial state-
ment effect retroactively. This had no material impact on the APBO, our consolidated ﬁ nancial position, or results
of operations.

In December 2004, the FASB revised and issued SFAS 123, Share-Based Payment (SFAS 123(R)). SFAS 123(R)

eliminates the alternative of using the APB 25 intrinsic value method of accounting for stock options. This revised
statement will require recognition of the cost of employee services received in exchange for awards of equity
instruments based on the fair value of the award at the grant date. This cost is required to be recognized over the
vesting period of the award. The stock-based compensation table in Note 1 illustrates the effect on net income and
earnings per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee
compensation. SFAS 123(R) applies to all awards granted, modiﬁ ed, repurchased, or cancelled after June 30, 2005.
We will early-adopt SFAS 123(R) effective January 1, 2005, using the modiﬁ ed prospective method. As a result of
the adoption of this statement, our compensation expense for share-based payments is expected to be approxi-
mately $450 million in 2005 ($300 million net of related tax effects), assuming target levels are achieved for incen-
tive-based equity awards.

Note 3: Acquisitions and Collaboration

Applied Molecular Evolution, Inc. Acquisition
On February 12, 2004, we acquired all the outstanding common stock of Applied Molecular Evolution, Inc. (AME) in
a tax-free merger. Under the terms of the merger agreement, each outstanding share of AME common stock was
exchanged for our common stock or a combination of cash and our stock valued at $18. The aggregate purchase
price of approximately $442.8 million consisted of issuance of 4.2 million shares of our common stock valued at
$314.8 million, issuance of 0.7 million replacement options to purchase shares of our common stock in exchange
for the remaining outstanding AME options valued at $37.6 million, cash of $85.4 million for AME common stock
and options for certain AME employees, and transaction costs of $5.0 million. The fair value of our common stock
was derived using a per-share value of $74.14, which was our average closing stock price for February 11 and 12,
2004. The fair value for the options granted was derived using a Black-Scholes valuation method using assump-
tions consistent with those we used in valuing employee options. Replacement options to purchase our common
stock granted as part of this acquisition have terms equivalent to the AME options being replaced.

In addition to acquiring the rights to two compounds currently under development, we expect the acquisition of

AME’s protein optimization technology to create synergies that will accelerate our ability to discover and optimize
biotherapeutic drugs for cancer, critical care, diabetes, and obesity, areas in which proteins are of great therapeu-
tic beneﬁ t.

In accordance with SFAS 141, Business Combinations, the acquisition has been accounted for as a purchase
business combination. Under the purchase method of accounting, the assets acquired and liabilities assumed from
AME at the date of acquisition are recorded at their respective fair values as of the acquisition date in our consoli-
dated ﬁ nancial statements. The excess of the purchase price over the fair value of the acquired net assets has been
recorded as goodwill in the amount of $9.6 million. Goodwill resulting from this acquisition has been fully allocated
to the pharmaceutical products segment. No portion of this goodwill is expected to be deductible for tax purposes.
AME’s results of operations are included in our consolidated ﬁ nancial statements from the date of acquisition.

As of the date of acquisition, we determined the following estimated fair values for the assets purchased and
liabilities assumed. The determination of estimated fair value requires management to make signiﬁ cant estimates
and assumptions. We hired independent third parties to assist in the valuation of assets that were difﬁ cult to value.

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Estimated Fair Value at February 12, 2004

Cash and short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired in-process research and development . . . . . . . . . . . . . . . . .
Platform technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total estimated purchase price. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 38.7
362.3
17.9
9.6
14.3
$ 442.8

The acquired in-process research and development (IPR&D) represents compounds currently under develop-

ment that have not yet achieved regulatory approval for marketing. The estimated fair value of these intangible
assets was derived using a valuation from an independent third party. AME’s two lead compounds for the treat-
ment of non-Hodgkin’s lymphoma and rheumatoid arthritis represent approximately 80 percent of the estimated
fair value of the IPR&D. In accordance with FIN 4, Applicability of FASB Statement No. 2 to Business Combinations
Accounted for by the Purchase Method, these IPR&D intangible assets have been written off by a charge to income
immediately subsequent to the acquisition because the compounds do not have any alternative future use. This
charge is not deductible for tax purposes. The ongoing activity with respect to each of these compounds under
development is not material to our research and development expenses.

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

utilized the “income method,” which applies a probability weighting to the estimated future net cash ﬂ ows that
are derived from projected sales revenues and estimated costs. These projections are based on factors such as
relevant market size, patent protection, historical pricing of similar products, and expected industry trends. The
estimated future net cash ﬂ ows are then discounted to the present value using an appropriate discount rate. This
analysis is performed for each project independently. The discount rate we used in valuing the acquired IPR&D
projects was 18.75 percent.

Product Acquisition
In October 2004, we entered into an agreement with Merck KGaA (Merck) to acquire Merck’s compound for a

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potential treatment for insomnia. At the inception of this agreement, this compound was in the development stage
(Phase I clinical trials) and no alternative future uses were identiﬁ ed. As with many development phase com-
pounds, launch of the product, if approved, is not expected in the near term. Our charge for acquired in-process
research and development expense related to this arrangement was $29.9 million in the fourth quarter of 2004.

Amylin Collaboration
In September 2002, we entered into a collaboration arrangement with Amylin Pharmaceuticals, Inc. (Amylin), to
jointly develop and commercialize Amylin’s synthetic exendin-4 compound, a potential new treatment for type 2 dia-
betes. The ongoing activity with respect to this agreement is not material to our research and development expenses.

At the inception of this collaboration, this compound was in the development phase and no alternative future

uses were identiﬁ ed. As with many development phase compounds, launch of the product, if approved, was not
expected in the near term. Our charge for acquired in-process research and development expense related to this
arrangement totaled $84.0 million in 2002.

In conjunction with this collaboration arrangement, we also entered into a loan agreement. Following the suc-
cessful completion of the ongoing clinical trials and contingent upon certain other events, we have agreed to loan
Amylin up to $110 million during the development period of the product, repayable in cash or Amylin stock at our
option. As of December 31, 2004, no loans to Amylin were outstanding.

Note 4: Asset Impairments, Restructuring, and Other Special Charges

The components of the charges included in asset impairments, restructuring, and other special charges in our
consolidated statements of income are described below.

In the fourth quarter of 2004, management approved actions designed to increase productivity, to address

current challenges in the marketplace, and to leverage prior investments in our product portfolio. These actions,
which are described further below, affect primarily operations in the manufacturing, research and development,
and sales and marketing components and resulted in asset impairments, severance and other related charges.
We expect to substantially complete the restructuring activities by March 31, 2005, although certain activities may
require additional time for completion throughout 2005.

We discontinued our plans to produce the bulk active ingredient for Xigris at our Indianapolis operations.
Although we remain committed to this important lifesaving product, we have determined that our manufacturing
partner, Lonza Biologics plc, has enough capacity to supply anticipated Xigris demand for the foreseeable future.
In addition, we determined that a redesign of our Prince William County, Virginia, facility that is currently under
construction was warranted. This decision rendered obsolete certain engineering and construction costs that
have already been incurred. Also, the mission of our Clinton, Indiana, manufacturing site will be narrowed to make
products solely for the Elanco Animal Health business. The portion of that site that currently produces human
pharmaceutical products has ceased operation.

We will focus our research efforts on the therapeutic areas of neuroscience, endocrine, oncology, and car-
diovascular and will discontinue our efforts in inﬂ ammation. In addition to this narrowing of therapeutic focus, we
have closed our RTP Laboratory site in Research Triangle Park, North Carolina. This site has historically been our
center for high-throughput screening and combinatorial chemistry, but much of that technology has evolved such
that these operations can be more efﬁ ciently performed in existing facilities in Indianapolis. The site has been writ-
ten down to fair value less cost to sell and is currently held for sale.

We closed all district and regional sales ofﬁ ces throughout the United States, and these operations are now

managed from home-based ofﬁ ces. In addition, we have reorganized our U.S. sales force to create an organization
that better meets customer needs and maximizes sales potential. We are also streamlining some sales and mar-
keting support activities as well as our ﬁ eld-based operations that support our medical function.

As a result of the above actions, we recognized asset impairment charges of $377.4 million in the fourth quar-

ter of 2004. The charges principally relate to Xigris manufacturing equipment in Indianapolis, the Prince William
County assets, human pharmaceutical manufacturing buildings and equipment in Clinton, Indiana, and the RTP
Laboratory building and equipment, which are described above. We have ceased using these assets, and they will
be disposed of or destroyed. The impairment charges are necessary to adjust the carrying value of the assets to
fair value. Other site charges, including lease termination payments, were $12.2 million.

In addition, nearly 1,400 positions globally were eliminated as a result of these actions. While a substantial
number of the affected employees were successfully placed in other positions in the company, severance expenses
were incurred in the fourth quarter of 2004 for those employees who elected a severance package. The restructur-
ing and other special charges incurred in the fourth quarter of 2004 related to the elimination of positions totaled

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$68.5 million, including $35.1 million of severance charges related to restructuring activities in our overseas afﬁ li-
ates. The severance charges consisted primarily of voluntary severance expenses. Substantially all of this charge
has been expended.

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

In addition, in the second quarter of 2004, as part of our ongoing review of our manufacturing and research

and development strategies to maximize performance and efﬁ ciencies, including the streamlining of manufactur-
ing operations and research and development activities, we also made decisions that resulted in the impairment of
certain assets. This review did not result in any closure of facilities or layoffs, but certain assets located at various
sites were affected. We have ceased using these assets, written down their carrying value to zero, and are in the
process of disposing of or destroying all of the assets. The asset impairment charges incurred in the second quar-
ter of 2004 aggregated $108.9 million.

Similar to 2004, during 2003, management approved global manufacturing strategies across our product
portfolio to improve plant performance and efﬁ ciency, including the outsourcing of production of certain anti-infec-
tive products. These decisions resulted in the impairment of certain assets, primarily manufacturing assets in the
U.S. This review did not result in any closure of facilities, but certain assets located at various manufacturing sites
were affected. We have ceased using these assets, and all these assets have been disposed of or their destruction
commenced. The impairment charges were necessary to adjust the carrying value of these assets to zero. These
asset impairment charges incurred totaled $142.9 million, of which $114.6 million was incurred in the ﬁ rst quarter
of 2003 with the remaining $28.3 million incurred in the fourth quarter of 2003.

In December 2002, we initiated a plan of eliminating approximately 700 positions worldwide in order to
streamline our infrastructure. While a substantial majority of affected employees were successfully placed in
other positions in the company, severance expenses were incurred in the ﬁ rst quarter of 2003 for those employees
who elected a severance package. The restructuring and other special charges incurred in the ﬁ rst quarter of 2003
were $52.5 million, consisting primarily of voluntary severance expenses. All of this charge has been expended.

In August 2001, we licensed from Isis Pharmaceuticals, Inc. (Isis), Afﬁ nitak, a non-small-cell lung cancer drug

candidate, and entered into an agreement regarding an ongoing research collaboration. In conjunction with this
agreement, we purchased approximately 4.2 million shares of Isis common stock with a cost basis of approximate-
ly $68.0 million, and we committed to loan Isis $100 million over the four-year term of the research agreement.
The Isis loan is repayable at the end of the research agreement term in cash or Isis stock, at Isis’s option, using a
conversion price of $40 per share. In addition, we committed to loan Isis $21.2 million for the building of a manu-
facturing suite for Afﬁ nitak. On March 17, 2003, we announced, along with Isis, the results of the Phase III trial
that evaluated Afﬁ nitak when combined with chemotherapy in patients with advanced non-small-cell lung cancer.
No difference was observed in the overall survival of the two groups. Due to this announcement and the decline
in Isis’s stock price that occurred in the previous 12 months, we concluded in the ﬁ rst quarter of 2003 that our
investment in Isis common stock was other-than-temporarily impaired as deﬁ ned by generally accepted account-
ing principles. For the same reasons, it was probable that the value of the consideration that we will be eligible to
receive from Isis pursuant to the terms of the loan agreements will be less than the carrying amount of the loans.
Therefore, in the ﬁ rst quarter of 2003, we recognized an impairment in our investment in Isis common stock of
$55.0 million and a reserve related to the loans of $92.9 million. In addition, we recognized a charge of $38.9 mil-
lion for contractual obligations related to Afﬁ nitak. The primary portion of this charge resulted from our supply
agreement with Isis. The supply agreement obligated us to pay certain costs associated with work-in-process and
raw materials and other costs that were triggered when we canceled our order of Afﬁ nitak. The remaining portion
of the charge resulted from our contractual obligations related to the conduct of Afﬁ nitak clinical trials. Substan-
tially all our contractual obligations have been fulﬁ lled. The stock and loan impairments and other special charges
incurred in the ﬁ rst quarter of 2003 related to this relationship totaled $186.8 million.

Note 5: Financial Instruments and Investments

Financial instruments that potentially subject us to credit risk consist principally of trade receivables and interest-
bearing investments. Wholesale distributors of life-sciences products and managed care organizations account
for a substantial portion of trade receivables; collateral is generally not required. The risk associated with this
concentration is mitigated by our ongoing credit review procedures. We place substantially all our interest-bearing
investments with major ﬁ nancial institutions, in U.S. government securities, or with top-rated corporate issuers.

In accordance with documented corporate policies, we limit the amount of credit exposure to any one ﬁ nancial
institution or corporate issuer. We are exposed to credit-related losses in the event of nonperformance by coun-
terparties to ﬁ nancial instruments but do not expect any counterparties to fail to meet their obligations given their
high credit ratings.

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

Short-term investments
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

2004

2003

Carrying Amount

Fair Value

Carrying Amount

Fair Value

$2,099.1

$ 957.0

$ 80.4
366.1
114.9
$ 561.4

$ 80.4
366.1
N/A

$ 105.5
3,173.1
96.0
$3,374.6

$ 105.5
3,173.1
N/A

Long-term debt, including current portion. . . . . . .

$4,858.5

$4,868.6

$4,867.5

$4,874.4

We determine fair values based on quoted market values where available or discounted cash ﬂ ow analyses

(principally long-term debt). The fair value of equity method investments is not readily available and disclosure is
not required. The fair value and carrying amount of risk-management instruments in the aggregate were not mate-
rial at December 31, 2004 and 2003. Approximately $2.1 billion of our investments in debt securities mature within
ﬁ ve years.

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

hensive income at December 31 follows:

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

2004

$43.7
7.9

2003

$72.3
10.6

The net adjustment to unrealized gains and losses (net of tax) on available-for-sale securities increased (de-

creased) other comprehensive income by ($18.2) million, $45.4 million, and ($45.0) million in 2004, 2003, and 2002,
respectively. Activity related to our available-for-sale investment portfolio was as follows:

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

2004

2003

2002

$7,774.7
37.3
17.6

$5,303.7
72.1
26.4

$3,724.2
57.0
35.2

During the years ended December 31, 2004, 2003, and 2002, net losses related to ineffectiveness and net
losses related to the portion of fair value and cash ﬂ ow hedging instruments excluded from the assessment of ef-
fectiveness were not material.

We expect to reclassify an estimated $47.0 million of pretax net losses on cash ﬂ ow hedges of anticipated for-
eign currency transactions and the variability in expected future interest payments on ﬂ oating rate debt from accu-
mulated other comprehensive loss to earnings during 2005. This assumes that short-term interest rates remain
unchanged from the prevailing rates at December 31, 2004.

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Note 6: Borrowings

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

2004

2003

4.50 to 7.13 percent notes (due 2012–2036). . . . . . . . . . . . . . . . . . . . . .
2.90 to 8.38 percent notes (due 2006–2008) . . . . . . . . . . . . . . . . . . . . .
Floating rate bonds (due 2007–2037) . . . . . . . . . . . . . . . . . . . . . . . . . .
Private placement bonds (due 2007–2008). . . . . . . . . . . . . . . . . . . . . .
Floating rate capital securities (due 2029) . . . . . . . . . . . . . . . . . . . . . .
8.38 percent eurodollar bonds (due 2005) . . . . . . . . . . . . . . . . . . . . . .
Resettable coupon capital securities (due 2029) . . . . . . . . . . . . . . . . .
6.55 percent ESOP debentures (due 2017) . . . . . . . . . . . . . . . . . . . . . .
Other, including capitalized leases . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SFAS 133 fair value adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,487.4
811.4
1,424.7
652.6
—
150.0
—
93.6
122.8
116.0
4,858.5
366.6
$4,491.9

$1,487.4
811.4
417.8
810.5
525.0
150.0
300.0
94.6
130.3
140.5
4,867.5
179.7
$4,687.8

In August 2004, we issued $1.00 billion of ﬂ oating rate notes due in 2007. The ﬂ oating rate notes pay interest

at the three-month LIBOR rate plus 0.05 percent (2.41 percent at December 31, 2004). We may redeem these notes
in August 2005 for a deﬁ ned redemption price. In March 2003, we issued $300.0 million of 2.9 percent 5-year notes
and $200.0 million of 4.5 percent 15-year notes. In July 2002 and May 2001, we issued $150.0 million and $250.0
million, respectively, of ﬂ oating rate bonds that mature in 2037. The variable interest rate on these bonds is at
LIBOR (2.58 percent at December 31, 2004) and beginning May 15, 2004, adjusts every six months to reﬂ ect our six-
month credit spread. The interest accumulates over the life of the bonds and is payable upon maturity. We have an
option to begin periodic interest payments at any time. At the time of option exercise, we would owe all previously
accrued interest on the bonds. Additionally, in July 2003 and July 2002, respectively, we executed a $330.0 million
and $542.8 million private placement note with a ﬁ nancial institution. Principal and interest are due semiannually
over the ﬁ ve-year terms of each of these notes. In conjunction with these notes, we entered into interest rate swap
agreements with the same ﬁ nancial institution, which converts the ﬁ xed rate into a variable rate of interest at es-
sentially LIBOR over the term of the notes. In March 2002, we issued $500.0 million of 10-year 6.0 percent notes.

The ﬂ oating rate capital securities paid cumulative interest at an annual rate equal to LIBOR plus a predeter-

mined spread, reset quarterly. The rate at December 31, 2003, was 2.37 percent. The resettable coupon capital
securities paid cumulative interest at an annual rate of 7.72 percent. Both the ﬂ oating rate capital securities and
the resettable coupon capital securities were redeemed in 2004. In 2003, we repurchased $257.1 million of ﬂ oating
rate debt securities due in 2008.

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

The aggregate amounts of maturities on long-term debt for the next ﬁ ve years are as follows: 2005, $366.6

million; 2006, $720.2 million; 2007, $1.21 billion; 2008, $392.5 million; and 2009, $15.5 million.

At December 31, 2004 and 2003, short-term borrowings included $1.65 billion and $16.8 million, respectively,
of notes payable to banks and commercial paper. At December 31, 2004, unused committed lines of credit totaled
approximately $1.25 billion. Compensating balances and commitment fees are not material, and there are no con-
ditions that are probable of occurring under which the lines may be withdrawn.

We have converted substantially all ﬁ xed rate debt to ﬂ oating rates through the use of interest rate swaps. The

weighted-average effective borrowing rate based on debt obligations and interest rates at December 31, 2004 and
2003, including the effects of interest rate swaps for hedged debt obligations, was 2.7 percent.

In 2004, capitalized interest exceeded cash payments of interest on borrowings, due in large part to certain
debt instruments requiring interest payments only at maturity, as previously noted. In 2003 and 2002, cash pay-
ments of interest on borrowings totaled $44.7 million and $54.6 million, respectively, net of capitalized interest.

In accordance with the requirements of SFAS 133, the portion of our ﬁ xed-rate debt obligations that is hedged

is reﬂ ected in the consolidated balance sheet as an amount equal to the sum of the debt’s carrying value plus the
fair value adjustment representing changes in fair value of the hedged debt attributable to movements in market
interest rates subsequent to the inception of the hedge.

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Note 7: Stock Plans

Stock options are granted to employees at exercise prices equal to the fair market value of the company’s stock
at the dates of grant. Generally, options vest 100 percent three years from the grant date and have a term of 10
years. Performance awards are granted to ofﬁ cers and key employees and are payable in shares of our common
stock. The number of performance award shares actually issued, if any, varies depending upon the achievement of
certain earnings-per-share targets. In general, performance awards vest 100 percent at the end of the ﬁ scal year
following the grant date. No performance awards were granted in 2002.

We have elected to follow APB Opinion 25 and related interpretations in accounting for our stock options and per-
formance awards. See Note 1 for a calculation of our net income and earnings per share under the fair value method
pursuant to SFAS 123. As discussed more fully in Note 2, we plan to adopt SFAS 123 (R) effective January 1, 2005.

The weighted-average per-share fair values of the individual options and performance awards granted during

2004, 2003, and 2002 were as follows on the date of grant:

Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance awards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2004

$26.19
70.33

2003

$20.59
63.51

2002

$25.98
N/A

The fair values of the options calculated in accordance with SFAS 123 were determined using a Black-Scholes

option-pricing model with the following assumptions:

Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeiture rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stock option activity during 2002-2004 is summarized below:

2004

2003

2002

1.57%
35.20%
3.43%
0
7 years

1.50%
35.10%
3.32%
0
7 years

1.54%
35.00%
3.14%
0
7 years

Unexercised at January 1, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unexercised at December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unexercised at December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unexercised at December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares of Common Stock Weighted-Average

Attributable to Options
(in thousands)

Exercise
Price of Options

67,098
14,133
(3,357)
(1,819)
76,055
14,361
(4,379)
(4,047)
81,990
19,578
(4,145)
(3,765)
93,658

$60.60
74.33
21.18
70.95
64.65
57.36
22.65
70.03
65.36
71.26
28.45
70.46
68.02

The following table summarizes information concerning outstanding and exercisable options at December 31,

2004 (shares in millions, contractual life in years):

Range of
Exercise
Prices

$1–$25
$25–$55
$55–$65
$65–$75
$75–$95

Options Outstanding
Weighted-
Average
Remaining
Contractual
Life

1.1
2.9
6.6
6.4
6.5

Weighted-
Average
Exercise
Price

$22.53
38.29
59.33
72.36
77.96

Number
Outstanding

4.2
2.9
17.0
47.3
22.3

Options Exercisable

Number
Exercisable

4.2
2.6
5.2
29.4
12.7

Weighted-
Average
Exercise
Price

$22.53
36.31
62.39
71.97
79.38

Shares exercisable at December 31, 2004, 2003, and 2002, were 54.1 million, 48.7 million, and 44.6 million,

respectively.

As noted above, the number of shares ultimately issued for the performance award program is dependent
upon the earnings achieved during the vesting period. Pursuant to this plan, approximately 0.4 million shares were
issued in 2002. No shares were issued in 2003 or 2004, and approximately 0.8 million shares will be issued in 2005.
At December 31, 2004, additional options, performance awards, or restricted stock grants may be granted

under the 2002 Lilly Stock Plan for not more than 58.1 million shares.

Note 8: Other Assets and Other Liabilities

Our sundry assets include our capitalized computer software, prepaid retiree health beneﬁ t (Note 12), goodwill and
other intangible assets (Note 1), long-term deferred income tax assets (Note 11), estimated insurance recoveries from
our product litigation and environmental contingencies (Note 13), and a variety of other items. The increase in sundry
assets is primarily attributable to an increase in capitalized computer software and prepaid retiree health beneﬁ ts.

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

other taxes, interest payable, deferred income tax liabilities, and a variety of other items. Major contributors to the
increase in other current liabilities are interest payable, deferred income tax liabilities, and other taxes payable.

Our other noncurrent liabilities include the accrued liabilities from our pension and retiree health plans (Note

12), deferred income from our collaboration and out-licensing arrangements, product liability litigation and envi-
ronmental accruals (Note 13), and a variety of other items. The decrease in other noncurrent liabilities is primar-
ily attributable to a decrease in deferred income from collaboration and out-licensing arrangements offset by an
increase to accrued liabilities from our pension and retiree health plans.

None of the components of sundry assets exceeds 5 percent of total assets, and none of the components of

other current liabilities or other noncurrent liabilities exceeds 5 percent of current or total liabilities, respectively.

S
L
A

I
C
N
A
N

I
F

Note 9: Shareholders’ Equity

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

Common Stock in Treasury

Additional
Paid-in Capital

Retained
Earnings

Deferred
Costs—ESOP

Shares
(in thousands)

$ (129.1)

985

Amount

$ 107.4

(393.9)

131.8
13.8
248.3
2,610.0

Balance at January 1, 2002. . . . . . . . . . . . . . . . . . . . $2,610.0
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share: $1.27 . . . . . . .
Retirement of treasury shares . . . . . . . . . . . . . . . . .
Purchase for treasury . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of stock under employee stock plans . . .
ESOP transactions. . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassiﬁ cation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2002 . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share: $1.36 . . . . . . .
Retirement of treasury shares . . . . . . . . . . . . . . . . .
Purchase for treasury . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of stock under employee stock plans . . .
ESOP transactions. . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassiﬁ cation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2003 . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share: $1.45 . . . . . . .
(17.4)
Retirement of treasury shares . . . . . . . . . . . . . . . . .
163.7
Issuance of stock under employee stock plans . . .
13.2
ESOP transactions. . . . . . . . . . . . . . . . . . . . . . . . . . .
349.9
Acquisition of AME . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2004 . . . . . . . . . . . . . . . . . $3,119.4

150.4
13.6
125.1
2,610.0

(289.1)

$ 7,411.2
2,707.9
(1,370.7)

(248.3)
8,500.1
2,560.8
(1,465.4)

(125.1)
9,470.4
1,810.1
(1,555.9)

(4,677)
4,532
168

(396.8)
389.2
9.7

5.8

(123.3)

1,008

109.5

(3,180)
2,976
148

(291.2)
276.8
9.1

4.7

(118.6)

952

104.2

(271)
262

(17.6)
17.2

6.7

$9,724.6

$(111.9)

943

$103.8

As of December 31, 2004, we have purchased $2.08 billion of our announced $3.0 billion share repurchase
program. During 2004, we did not repurchase any stock pursuant to this program. We acquired approximately 3.0
million and 4.5 million shares in 2003 and 2002, respectively, under our share repurchase program. As previously
disclosed, in connection with the share repurchase program, we entered into agreements to purchase shares of
our stock. During the second quarter of 2003, we satisﬁ ed all our remaining obligations under the agreements.

We have 5 million authorized shares of preferred stock. As of December 31, 2004 and 2003, no preferred stock

has been issued.

We have funded an employee beneﬁ t trust with 40 million shares of Lilly common stock to provide a source of
funds to assist us in meeting our obligations under various employee beneﬁ t plans. The funding had no net impact
on shareholders’ equity as we consolidated the employee beneﬁ t trust. The cost basis of the shares held in the
trust was $2.64 billion and is shown as a reduction in shareholders’ equity, which offsets the resulting increases of
$2.61 billion in additional paid-in capital and $25 million in common stock. Any dividend transactions between us
and the trust are eliminated. Stock held by the trust is not considered outstanding in the computation of earnings
per share. The assets of the trust were not used to fund any of our obligations under these employee beneﬁ t plans
in 2004, 2003, or 2002.

We have an ESOP as a funding vehicle for the existing employee savings plan. The ESOP used the proceeds
of a loan from us to purchase shares of common stock from the treasury. The ESOP issued $200 million of third-
party debt, repayment of which was guaranteed by us (see Note 6). The proceeds were used to purchase shares of
our common stock on the open market. Shares of common stock held by the ESOP will be allocated to participating
employees annually through 2017 as part of our savings plan contribution. The fair value of shares allocated each
period is recognized as compensation expense.

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

owned, a preferred stock purchase right entitling them to purchase from the company one one-thousandth of
a share of Series B Junior Participating Preferred Stock (the Preferred Stock) at a price of $325. The rights are
exercisable only after the Distribution Date, which is generally the 10th business day after the date of a public
announcement that a person (the Acquiring Person) has acquired ownership of 15 percent or more of our com-
mon stock. We may redeem the rights for $.005 per right, up to and including the Distribution Date. The rights will
expire on July 28, 2008, unless we redeem them earlier.

The rights plan provides that, if an Acquiring Person acquires 15 percent or more of our outstanding common
stock and our redemption right has expired, generally each holder of a right (other than the Acquiring Person) will
have the right to purchase at the exercise price the number of shares of our common stock that have a value of two
times the exercise price.

Alternatively, if, in a transaction not approved by the board of directors, we are acquired in a business com-

bination transaction or sell 50 percent or more of our assets or earning power after a Distribution Date, generally
each holder of a right (other than the Acquiring Person) will have the right to purchase at the exercise price the
number of shares of common stock of the acquiring company that have a value of two times the exercise price.
At any time after an Acquiring Person has acquired 15 percent or more but less than 50 percent of our out-
standing common stock, the board of directors may exchange the rights (other than those owned by the Acquiring
Person) for our common stock or Preferred Stock at an exchange ratio of one common share (or one one-thou-
sandth of a share of Preferred Stock) per right.

F
I

N
A
N
C
I

A
L
S

S
L
A

I
C
N
A
N

I
F

Note 10: Earnings per Share

The following is a reconciliation of the denominators used in computing earnings per share:

2004

2003

2002

(Shares in thousands)

Income available to common shareholders . . . . . . . . . . . . . . . . . . . . .

$1,810.1

$2,560.8

$2,707.9

Basic earnings per share
Weighted-average number of common shares

outstanding, including incremental shares . . . . . . . . . . . . . . . .

1,083,887

1,076,547

1,076,922

Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1.67

$2.38

$2.51

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

1,083,677
5,259

1,076,547
5,683

1,076,873
8,215

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

1,088,936

1,082,230

1,085,088

Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1.66

$2.37

$2.50

Note 11: Income Taxes

Following is the composition of income taxes:

2004

2003

2002

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

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

$ 47.6
519.9
(10.6)
556.9

175.2
(74.0)
8.7
109.9
465.0
$1,131.8

$391.2
284.7
(6.2)
669.7

(112.9)
138.2
5.9
31.2
—
$700.9

$140.1
306.3
(13.4)
433.0

366.1
(47.3)
(2.0)
316.8
—
$749.8

F
I

N
A
N
C
I

A
L
S

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

2004

2003

Deferred tax assets

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation and beneﬁ ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforwards and carrybacks . . . . . . . . . . . . . . . . . . . .
Asset disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 538.4
492.5
411.5
320.7
220.6
165.3
88.6
476.8
2,714.4
(508.4)

$ 411.8
411.7
415.0
275.9
105.9
21.0
62.2
506.5
2,210.0
(473.6)

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

2,206.0

1,736.4

Deferred tax liabilities
Prepaid employee beneﬁ ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted earnings to be repatriated due to change in tax law . .
Unremitted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(952.8)
(681.3)
(465.0)
(327.4)
(215.5)
(2,642.0)

(701.5)
(564.5)
—
(204.6)
(153.3)
(1,623.9)

Deferred tax (liabilities) assets—net. . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (436.0)

$ 112.5

At December 31, 2004, we had other carryforwards, primarily net operating loss carryforwards, for interna-

tional and U.S. income tax purposes of $364.1 million: $228.4 million will expire within ﬁ ve years and $86.4 million
thereafter; $49.3 million of the carryforwards will never expire. The primary component of the remaining portion
of the deferred tax asset for other carryforwards is related to net operating losses for state income tax purposes
that are fully reserved. We also have tax credit carryforwards and carrybacks of $220.6 million available to reduce
future income taxes; $53.0 million will be carried back, $66.0 million will expire after ﬁ ve years, and $16.3 million
of the tax credit carryforwards will never expire. The remaining portion of the tax credit carryforwards is related
to state tax credits that are fully reserved.

Domestic and Puerto Rican companies contributed approximately 6 percent, 22 percent, and 28 percent in
2004, 2003, and 2002, respectively, to consolidated income before income taxes. We have a subsidiary operating in
Puerto Rico under a tax incentive grant that begins to expire at the end of 2007.

On October 22, 2004, the President of the United States signed into law the American Jobs Creation Act of
2004 (AJCA), which creates a temporary incentive for U.S. corporations to repatriate undistributed income earned
abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign
corporations. Although the deduction is subject to a number of limitations and uncertainty remains as to how to
interpret certain provisions of the AJCA, we believe we have the information necessary to make an informed deci-
sion on the impact of the AJCA on our repatriation plans. Based on that decision, we plan to repatriate $8.00 billion
in incentive dividends, as deﬁ ned in the AJCA, during 2005 and accordingly have recorded a related tax liability of
$465.0 million as of December 31, 2004.

At December 31, 2004, we had an aggregate of $2.8 billion of unremitted earnings of foreign subsidiaries that
have been or are intended to be permanently reinvested for continued use in foreign operations and that, if distrib-
uted, would result in taxes at approximately the U.S. statutory rate. The amount of unremitted earnings for which
no tax has been provided decreased substantially in 2004 due to the change in tax law described above, which
caused us to change our previous plans to permanently reinvest a portion of those unremitted earnings.

Cash payments of income taxes totaled $487.0 million, $614.0 million, and $864.0 million in 2004, 2003, and
2002, respectively. The higher cash payments of income taxes in 2002 are primarily attributable to the resolution of
an IRS examination.

S
L
A

I
C
N
A
N

I
F

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

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

International operations, including Puerto Rico . . . . . . . . . . . . . . .
Additional repatriation due to change in tax law . . . . . . . . . . . . . . .
Non-deductible acquired in-process research and

development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General business credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2004

35.0%

(19.1)
15.8

4.3
(1.3)
3.8
38.5%

2003

35.0%

(15.7)
—

—
(0.7)
2.9
21.5%

2002

35.0%

(12.6)
—

—
(0.7)
—
21.7%

Note 12: Retirement Beneﬁ ts

We used a measurement date of December 31 to develop the change in beneﬁ t obligation, change in plan assets,
funded status, and amounts recognized in the consolidated balance sheets at December 31 for our deﬁ ned beneﬁ t
pension and retiree health beneﬁ t plans, which were as follows:

Deﬁ ned Beneﬁ t Pension Plans

Retiree Health Beneﬁ t Plans

2004

2003

2004

2003

Change in beneﬁ t obligation
Beneﬁ t obligation at beginning of year . . . . . . . . . . . . . . . . $4,703.1
238.8
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
286.4
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.7
Actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beneﬁ ts paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(259.4)
Reduction in discount rate, foreign currency

exchange rate changes, and other adjustments. . . . . .
Beneﬁ t obligation at end of year . . . . . . . . . . . . . . . . . . . . .

182.1
5,190.7

$3,988.2
195.4
267.2
105.8
(250.5)

$1,039.6
47.6
62.5
161.2
(71.5)

397.0
4,703.1

149.0
1,388.4

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

3,721.9
494.6
784.0
(257.3)

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

54.6
4,797.8

3,177.4
580.2
153.4
(247.6)

58.5
3,721.9

553.9
58.7
204.3
(71.5)

—
745.4

$ 911.6
38.2
60.4
17.6
(75.5)

87.3
1,039.6

415.0
75.3
139.1
(75.5)

—
553.9

(392.9)
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,339.7
Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . . . . .
Unrecognized prior service cost (beneﬁ t) . . . . . . . . . . . . .
66.0
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,012.8

(981.2)
2,296.5
72.0
$ 1,387.3

(643.0)
979.5
(116.9)
$ 219.6

(485.7)
728.2
(132.6)
$ 109.9

Amounts recognized in the consolidated balance sheet

consisted of

Prepaid pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,253.8
Accrued beneﬁ t liability . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(464.4)
Accumulated other comprehensive loss before

$ 1,613.3
(445.0)

$ 310.4
(90.8)

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

223.4
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,012.8

219.0
$ 1,387.3

—

$ 219.6

$ 192.3
(82.4)

—
$ 109.9

(Percents)

Deﬁ ned Beneﬁ t Pension Plans

Retiree Health Beneﬁ t Plans

2004

2003

2004

2003

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

5.9
6.2
5.6
5.3
9.20

6.2
6.8
5.3
5.3
9.27

6.0
6.2
—
—
9.25

6.2
6.9
—
—
9.25

In evaluating the expected return on plan assets, we have considered our historical assumptions compared
with actual results, an analysis of current market conditions, asset allocations, and the views of leading ﬁ nancial
advisers and economists. Our plan assets in our U.S. deﬁ ned beneﬁ t pension and retiree health plans comprise ap-
proximately 85 percent of our worldwide beneﬁ t plan assets. Including the investment losses due to overall market
conditions in 2001 and 2002, our 10- and 20-year annualized rate of return on our U.S. deﬁ ned beneﬁ t pension
plans and retiree health beneﬁ t plan was approximately 10.3 percent and 11.9 percent, respectively, as of De-
cember 31, 2004. Health-care-cost trend rates were assumed to increase at an annual rate of 10 percent in 2005,
decreasing 1 percent per year to 6 percent in 2009 and thereafter.

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

as follows:

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deﬁ ned Beneﬁ t
Pension Plans

Retiree Health
Beneﬁ t Plans

$ 246.4
249.3
255.2
263.6
272.2
1,551.8

$ 83.4
89.5
95.2
100.5
105.2
594.9

The total accumulated beneﬁ t obligation for our deﬁ ned beneﬁ t pension plans was $4.55 billion and $3.96 bil-
lion at December 31, 2004 and 2003, respectively. The projected beneﬁ t obligation and fair value of the plan assets
for the deﬁ ned beneﬁ t pension plans with projected beneﬁ t obligations in excess of plan assets were $1.33 billion
and $0.78 billion, respectively, as of December 31, 2004, and $4.70 billion and $3.72 billion, respectively, as of
December 31, 2003.

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

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Deﬁ ned Beneﬁ t Pension Plans
2003

2004

2002

Retiree Health Beneﬁ t Plans

2004

2003

2002

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

$238.8
286.4
(402.2)
7.3
99.7
$230.0

$195.4
267.2
(382.7)
11.9
52.4
$144.2

$170.2
254.3
(398.0)
16.1
21.9
$ 64.5

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

$38.2
60.4
(53.6)
(15.6)
50.6
$80.0

$34.0
64.5
(50.8)
(0.7)
36.0
$83.0

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

ber 31, 2004, accumulated postretirement beneﬁ t obligation would increase by 13.9 percent and the aggregate of
the service cost and interest cost components of the 2004 annual expense would increase by 14.5 percent. A one-
percentage-point decrease in these rates would decrease the December 31, 2004, accumulated postretirement
beneﬁ t obligation by 12.2 percent and the aggregate of the 2004 service cost and interest cost by 12.6 percent.

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

deﬁ ned contribution plans is generally to provide additional ﬁ nancial security during retirement by providing em-
ployees with an incentive to save. Our contributions to the plan are based on employee contributions and the level
of our match. Expenses under the plans totaled $75.5 million, $72.9 million, and $41.7 million for the years 2004,
2003, and 2002, respectively.

We provide certain other postemployment beneﬁ ts primarily related to disability beneﬁ ts and accrue for the
related cost over the service lives of employees. Expenses associated with these beneﬁ t plans in 2004, 2003, and

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2002 were not signiﬁ cant.

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

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

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

Percentage of
Pension Plan Assets

2004

2003

Percentage of
Retiree Health Plan Assets
2004

2003

74
9
1
16
100

79
8
2
11
100

78
10
1
11
100

81
12
1
6
100

In 2005, we expect to contribute approximately $30 million to our deﬁ ned beneﬁ t pension plans to satisfy mini-
mum funding requirements for the year. In addition, we expect to contribute approximately $75 million of additional
discretionary funding in 2005 to our deﬁ ned beneﬁ t plans. We also expect to contribute approximately $100 million
of discretionary funding to our postretirement health beneﬁ t plans during 2005.

Note 13: Contingencies

Three generic pharmaceutical manufacturers, Zenith Goldline Pharmaceuticals, Inc. (Zenith), Dr. Reddy’s Labora-
tories, Ltd. (Reddy), and Teva Pharmaceuticals (Teva), have submitted abbreviated new drug applications (ANDAs)
seeking permission to market generic versions of Zyprexa in various dosage forms several years prior to the expi-
ration of our U.S. patents for the product, alleging that our patents are invalid, unenforceable, or not infringed. We
ﬁ led suit against the three companies in the U.S. District Court for the Southern District of Indiana seeking a ruling
that the challenges to our compound patent (expiring in 2011) are without merit. The cases have been consolidated.
A trial before a district court judge in Indianapolis was held in January and February of 2004, and we are awaiting
the court’s decision. Regardless of the trial court ruling, we anticipate that appeals will follow. If we are unsuc-
cessful at the trial court level, we cannot predict whether any of the generic companies would launch generic ver-
sions of Zyprexa prior to a ﬁ nal resolution of any appeals. We believe that the generic manufacturers’ claims are
without merit and we expect to prevail in this litigation. However, it is not possible to predict or determine the out-
come of this litigation and, accordingly, we can provide no assurance that we will prevail. An unfavorable outcome
would have a material adverse impact on our consolidated results of operations, liquidity, and ﬁ nancial position.
In October 2002, we were notiﬁ ed that Barr Laboratories, Inc. (Barr), had submitted an ANDA with the FDA

seeking permission to market a generic version of Evista several years prior to the expiration of our U.S. patents
covering the product, alleging that the patents are invalid or not infringed. In November 2002, we ﬁ led suit against
Barr in the U.S. District Court for the Southern District of Indiana seeking a ruling that Barr’s challenges to our
patents claiming the methods of use and pharmaceutical form (expiring from 2012 to 2017) are without merit. Re-
cently, Barr has also asserted that the method of use patents are unenforceable. On September 28, 2004, the U.S.
Patent and Trademark Ofﬁ ce issued to us a new patent (expiring in 2017) directed to pharmaceutical compositions
containing raloxifene. Barr has challenged this patent, alleging that the patent is invalid, unenforceable, or will
not be infringed. This patent has been added to the lawsuit. The suit is in discovery and the trial is now scheduled
to begin in February 2006. While we believe that Barr’s claims are without merit and we expect to prevail, it is not
possible to predict or determine the outcome of the litigation. Therefore, we can provide no assurance that we will
prevail. An unfavorable outcome could have a material adverse impact on our consolidated results of operations,
liquidity, and ﬁ nancial position.

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We continue to cooperate with the government and have provided a broad range of information concerning our
U.S. marketing and promotional practices, including documents relating to communications with physicians and
the remuneration of physician consultants and advisers. Based upon advanced discussions with the government
to resolve this matter, which commenced in the fourth quarter of 2004, we have expensed $36.0 million, which we
believe will be sufﬁ cient to resolve the matter.

In March 2004, the ofﬁ ce of the U.S. Attorney for the Eastern District of Pennsylvania advised us that it has

commenced a civil investigation related to our U.S. marketing and promotional practices with respect to Zyprexa,
Prozac, and Prozac Weekly. We are cooperating with the U.S. Attorney in this investigation and are providing a
broad range of documents and information related to the investigation, including documents relating to communi-
cations with physicians and the remuneration of physician consultants and advisers. It is possible that other Lilly
products could become subject to this investigation and that the outcome of this matter could include criminal
charges and ﬁ nes and/or civil penalties. We cannot predict or determine the outcome of this matter or reasonably
estimate the amount or range of amounts of any ﬁ nes or penalties that might result from an adverse outcome. It
is possible, however, that an adverse outcome could have a material adverse impact on our consolidated results
of operations, liquidity, and ﬁ nancial position. We have implemented and continue to review and enhance a broadly
based compliance program that includes comprehensive compliance-related activities designed to ensure that our
marketing and promotional practices, physician communications, and remuneration of health care professionals
comply with promotional laws and regulations.

We have been named in approximately 140 product liability cases in the United States involving approximately

360 claimants alleging a variety of injuries from the use of Zyprexa. Most of the cases allege that the product caused
or contributed to diabetes or high blood-glucose levels. The lawsuits seek substantial compensatory and punitive
damages and typically accuse us of inadequately testing for and warning about side effects of Zyprexa. Many of the
lawsuits also allege that we improperly promoted the drug. We are vigorously defending these suits. All the federal
cases, involving approximately 330 claimants, have been or will be transferred to The Honorable Jack Weinstein
in the Federal District Court for the Eastern District of New York for consolidated and coordinated pretrial pro-
ceedings. Two cases requesting certiﬁ cation of nationwide class actions on behalf of those who allegedly suffered
injuries from the administration of Zyprexa were ﬁ led in the Federal District Court for the Eastern District of New
York on April 16, 2004, and May 19, 2004, respectively. The cases seek damages for alleged personal injuries and
also seek compensation for medical monitoring of individuals who have taken Zyprexa. A lawsuit was also ﬁ led that
requests a class action on behalf of Iowa residents who took Zyprexa, and that case has been transferred to the
federal court in New York. In addition, we have entered into agreements with various plaintiffs’ counsel halting the
running of the statutes of limitation (tolling agreements) with respect to more than 3,050 individuals who do not
have lawsuits on ﬁ le and may or may not eventually ﬁ le suits. This provides counsel additional time to evaluate the
potential claims. In exchange, the individuals have agreed not to ﬁ le suits in state courts, and the Plaintiffs Steering
Committee agreed to dismiss the personal injury claims in the two pending nationwide class actions. The class ac-
tion claims seeking medical monitoring for Zyprexa patients are not affected by this agreement.

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

siana Department of Health and Hospitals, alleging that Zyprexa caused or contributed to diabetes or high blood-
glucose levels and that we improperly promoted the drug. In these actions, which we have removed to federal
court, the Department of Health and Hospitals seeks to recover the costs it paid for Zyprexa through Medicaid and
other drug beneﬁ t programs and the costs the department alleges it has incurred and will incur to treat Zyprexa-
related illnesses.

In early 2005, we were served with four lawsuits seeking class action status in Canada on behalf of patients
who took Zyprexa. The allegations in these suits are similar to those in the litigation pending in the United States.

The number of product liability lawsuits and tolled claims relating to Zyprexa continues to increase, and we
cannot predict at this time the additional number of lawsuits and claims that may be asserted. As noted, we are vig-
orously defending this litigation. However, product litigation of this type is inherently unpredictable, with the risk of
excessive verdicts not justiﬁ ed by the evidence. Accordingly, it is possible that the ultimate resolution of the Zyprexa
product liability litigation could have a material adverse impact on our consolidated results of operations, liquidity,
and ﬁ nancial position.

We have been named as a defendant in numerous product liability lawsuits involving primarily diethylstilbes-
trol (DES), thimerosal, and Zyprexa. With respect to current claims, we have accrued for our estimated exposures
to the extent they are both probable and estimable based on the information available to us. In addition, we have
accrued for certain claims incurred but not ﬁ led to the extent we can formulate a reasonable estimate of their
costs. We estimate these expenses based primarily on historical claims experience and data regarding product
usage. We expect the cash amounts related to the accruals to be paid out over the next several years. A portion of

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the costs associated with defending and disposing of these suits is covered by insurance. We estimate insurance
recoverables based on existing deductibles, coverage limits, and the existing and projected future level of insol-
vencies among the insurance carriers.

Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as
Superfund, we have been designated as one of several potentially responsible parties with respect to fewer than
10 sites. Under Superfund, each responsible party may be jointly and severally liable for the entire amount of
the cleanup. We also continue remediation of certain of our own sites. We have accrued for estimated Superfund
cleanup costs, remediation, and certain other environmental matters, 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 payment of those costs. We have reached a settlement with our liability
insurance carriers providing for coverage for certain environmental liabilities.

The litigation accruals and environmental liabilities have been reﬂ ected in our consolidated balance sheet at
the gross amount of approximately $258.4 million at December 31, 2004. Estimated insurance recoverables of ap-
proximately $70.9 million at December 31, 2004, have been reﬂ ected as assets in the consolidated balance sheet.
While it is not possible to predict or determine the outcome of the patent, product liability, or other legal ac-

tions brought against us or the ultimate cost of environmental matters, we believe that, except as noted previously
with respect to the U.S. Zyprexa and Evista patent litigation, the Zyprexa, Prozac, and Prozac Weekly marketing and
promotional practices investigation, and the Zyprexa product liability litigation, the resolution of all such matters
will not have a material adverse effect on our consolidated ﬁ nancial position or liquidity but could possibly be ma-
terial to the consolidated results of operations in any one accounting period.

Note 14: Other Comprehensive Income (Loss)

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

Foreign
Currency
Translation
Gains (Losses)

Beginning balance at January 1, 2004. . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . .
Balance at December 31, 2004 . . . . . . . . . . . . . . . .

$116.7
434.7
$551.4

Unrealized
Gains
(Losses) on
Securities

$42.5
(18.2)
$24.3

Minimum
Pension
Liability
Adjustment

Effective
Portion of
Cash Flow
Hedges

Accumulated
Other
Comprehensive
Income (Loss)

$(144.2)
(2.8)
$ (147.0)

$(175.1)
(35.0)
$(210.1)

$(160.1)
378.7
$ 218.6

The amounts above are net of income taxes. The income taxes related to other comprehensive income were

not signiﬁ cant, as income taxes were generally not provided for foreign currency translation.

The unrealized gains (losses) on securities is net of reclassiﬁ cation adjustments of $9.8 million, $37.4 mil-
lion, and $11.3 million, net of tax, in 2004, 2003, and 2002, respectively, for net realized gains on sales of securities
included in net income. The effective portion of cash ﬂ ow hedges is net of reclassiﬁ cation adjustments of $23.1 mil-
lion and $27.2 million, net of tax, in 2004 and 2003, respectively, for realized losses on foreign currency options and
$15.6 million, $14.2 million, and $6.5 million, net of tax, in 2004, 2003, and 2002, respectively, for interest expense
on interest rate swaps designated as cash ﬂ ow hedges.

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

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Management’s Report on Internal Control Over Financial Reporting

Eli Lilly and Company and Subsidiaries

Management of Eli Lilly and Company and subsidiaries is responsible for the accuracy, integrity, and fair presenta-
tion of the ﬁ nancial statements as well as for establishing and maintaining adequate internal control over ﬁ nancial
reporting. The statements have been prepared in accordance with generally accepted accounting principles in the
United States and include amounts based on judgments and estimates by management.
We have global ﬁ nancial policies that govern critical areas, including internal controls, ﬁ nancial accounting and
reporting, ﬁ duciary accountability, and safeguarding of corporate assets. Our internal accounting control systems
are designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in ac-
cordance with management’s authorization and are properly recorded, and that accounting records are adequate
for preparation of ﬁ nancial statements and other ﬁ nancial information. The design, monitoring, and revision of
internal accounting control systems involve, among other things, management’s judgments with respect to the
relative cost and expected beneﬁ ts of speciﬁ c control measures. A staff of internal auditors regularly monitors,
on a worldwide basis, the adequacy and effectiveness of internal accounting controls. The general auditor reports
directly to the audit committee of the board of directors.
We also conducted an evaluation of the effectiveness of our internal control over ﬁ nancial reporting based on
the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on our evaluation under this framework, we concluded that our internal controls
over ﬁ nancial reporting were effective as of December 31, 2004.

In addition to the system of internal accounting controls, we maintain a code of conduct (known as The Red
Book) that applies to all employees worldwide, requiring proper overall business conduct, avoidance of conﬂ icts
of interest, compliance with laws, and conﬁ dentiality of proprietary information. The Red Book is reviewed on a
periodic basis with employees worldwide, and all employees are required to report suspected violations. A hotline
number is published in The Red Book to enable employees to report suspected violations anonymously. Employees
who report suspected violations are protected from discrimination or retaliation by the company. In addition to The
Red Book, the CEO and all ﬁ nancial management must agree, in writing, to a ﬁ nancial code of ethics, which further
reinforces their ﬁ duciary responsibilities.
The ﬁ nancial statements and internal control over ﬁ nancial reporting have been audited by Ernst & Young LLP,
an independent registered public accounting ﬁ rm. Their responsibility is to examine our consolidated ﬁ nancial
statements in accordance with generally accepted auditing standards of the Public Company Accounting Oversight
Board (United States) and evaluate management’s assessment and evidence about whether internal control over
ﬁ nancial reporting was designed and operating effectively. Ernst & Young’s attestation with respect to the fairness
of presentation of the statements, management’s assessment, and the effectiveness of internal control over ﬁ nan-
cial reporting (see attestation reports on pages 50 and 51) are included in our annual report. Ernst & Young reports
directly to the audit committee of the board of directors.
Our audit committee comprises ﬁ ve nonemployee members of the board of directors, all of whom are independent
from our company. The committee charter, which is published in the proxy statement, outlines the members’ roles
and responsibilities and is consistent with the recently enacted corporate reform laws and regulations. It is the audit
committee’s responsibility to appoint an independent registered public accounting ﬁ rm subject to shareholder rati-
ﬁ cation, approve both audit and nonaudit services performed by the independent registered public accounting ﬁ rm,
and review the reports submitted by the ﬁ rm. The audit committee meets several times during the year with manage-
ment, the internal auditors, and the independent public accounting ﬁ rm to discuss audit activities, internal controls,
and ﬁ nancial reporting matters, including reviews of our externally published ﬁ nancial results. The internal auditors
and the independent registered public accounting ﬁ rm have full and free access to the committee.
We are dedicated to ensuring that we maintain the high standards of ﬁ nancial accounting and reporting that
we have established. We are committed to providing ﬁ nancial information that is transparent, timely, complete,
relevant, and accurate. Our culture demands integrity and an unyielding commitment to strong internal practices
and policies. Finally, we have the highest conﬁ dence in our ﬁ nancial reporting, our underlying system of internal
controls, and our people, who are objective in their responsibilities and operate under a code of conduct and the
highest level of ethical standards.

Sidney Taurel
Chairman of the Board, President, and Chief Executive Ofﬁ cer

Charles E. Golden
Executive Vice President and Chief Financial Ofﬁ cer
February 14, 2005

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Eli Lilly and Company

We have audited the accompanying consolidated balance sheets of Eli Lilly and Company and subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of income, cash ﬂ ows, and comprehensive
income for each of the three years in the period ended December 31, 2004. These ﬁ nancial statements are the
responsibility of the company’s management. Our responsibility is to express an opinion on these ﬁ nancial state-
ments based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the ﬁ nancial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the ﬁ nancial statements. An audit also includes assessing
the accounting principles used and signiﬁ cant estimates made by management, as well as evaluating the overall
ﬁ nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the ﬁ nancial statements referred to above present fairly, in all material respects, the consolidat-
ed ﬁ nancial position of Eli Lilly and Company and subsidiaries at December 31, 2004 and 2003, and the consolidated
results of their operations and their cash ﬂ ows for each of the three years in the period ended December 31, 2004,
in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Eli Lilly and Company and subsidiaries’ internal control over ﬁ nancial report-
ing as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2005
expressed an unqualiﬁ ed opinion thereon.

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Indianapolis, Indiana
February 14, 2005

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Eli Lilly and Company

We have audited management’s assessment, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting, that Eli Lilly and Company and subsidiaries maintained effective internal control
over ﬁ nancial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO crite-
ria). Eli Lilly and Company and subsidiaries’ management is responsible for maintaining effective internal control
over ﬁ nancial reporting and for its assessment of the effectiveness of internal control over ﬁ nancial reporting. Our
responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the
company’s internal control over ﬁ nancial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over ﬁ nancial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over ﬁ nancial reporting, evaluating management’s assess-
ment, testing and evaluating the design and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over ﬁ nancial reporting is a process designed to provide reasonable assurance
regarding the reliability of ﬁ nancial reporting and the preparation of ﬁ nancial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over ﬁ nancial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reﬂ ect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of ﬁ nancial statements in accor-
dance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide rea-
sonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the ﬁ nancial statements.
Because of its inherent limitations, internal control over ﬁ nancial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, management’s assessment that Eli Lilly and Company and subsidiaries maintained effective
internal control over ﬁ nancial reporting as of December 31, 2004, is fairly stated, in all material respects, based on
the COSO criteria. Also, in our opinion, Eli Lilly and Company and subsidiaries maintained, in all material respects,
effective internal control over ﬁ nancial reporting as of December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the 2004 consolidated ﬁ nancial statements of Eli Lilly and Company and subsidiaries and our re-
port dated February 14, 2005 expressed an unqualiﬁ ed opinion thereon.

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Indianapolis, Indiana
February 14, 2005

Notice of 2005 Annual Meeting and Proxy Statement

March 8, 2005

Dear Shareholder:

You are cordially invited to attend our annual meeting of shareholders on Monday, April 18, 2005, at the Lilly Center
Auditorium, Lilly Corporate Center, Indianapolis, Indiana, at 11:00 a.m. EST (Indianapolis time). If you are unable
to attend in person, please join us via live webcast on the company’s website at www.lilly.com. The webcast will be
available for replay for 30 days.

The notice of meeting and proxy statement that follow describe the business we will consider at the meeting. Your
vote is very important. I urge you to vote by mail, by telephone, or on the Internet in order to be certain your shares
are represented at the meeting, even if you plan to attend.

Please note our procedures for admission to the meeting described on page 56.

I look forward to seeing you at the meeting.

Sidney Taurel
Chairman of the Board, President, and Chief Executive Ofﬁ cer

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5252

Notice of Annual Meeting of Shareholders
April 18, 2005

The annual meeting of shareholders of Eli Lilly and Company will be held at the Lilly Center Auditorium, Lilly
Corporate Center, Indianapolis, Indiana, on Monday, April 18, 2005, at 11:00 a.m. EST (Indianapolis time) for the fol-
lowing purposes:

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

year 2005

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

separating the roles of chairman and chief executive ofﬁ cer

• to consider and vote on a shareholder proposal requesting that the board of directors adopt a policy not to limit

importation of prescription drugs

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

impact of limiting the availability of products to Canadian wholesalers or pharmacies

• to consider and vote on a shareholder proposal requesting that the board of directors prepare a semi-annual report

on the company’s political contributions

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

compensation policy based on performance-based stock options

• to consider and vote on a shareholder proposal requesting that the board of directors take speciﬁ c actions to limit

animal testing.

Shareholders of record at the close of business on February 15, 2005, will be entitled to vote at the meeting and any
adjournment of the meeting.

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

This combined proxy statement and annual report to shareholders and the proxy are being mailed on or about
March 8, 2005.

By order of the board of directors,

Alecia A. DeCoudreaux
Secretary

March 8, 2005
Indianapolis, Indiana

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5353

General Information

Why did I receive this proxy statement?
The board of directors of Eli Lilly and Company is soliciting proxies to be voted at the annual meeting of sharehold-
ers (the annual meeting) to be held on Monday, April 18, 2005, and at any adjournment of the annual meeting. When
the company asks for your proxy, we must provide you with a proxy statement that contains certain information
speciﬁ ed by law.

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

• election of directors
• ratiﬁ cation of the appointment of principal independent auditors
• a shareholder proposal on separating the roles of chairman and chief executive ofﬁ cer
• a shareholder proposal on importation of prescription drugs
• a shareholder proposal requesting a report on the effect on the company of limiting product supply to Canada
• a shareholder proposal requesting periodic reports on the company’s political contributions
• a shareholder proposal on performance-based stock options
• a shareholder proposal on animal testing.

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

Who is entitled to vote?
Shareholders as of the close of business on February 15, 2005 (the record date), may vote at the annual meeting.
You have one vote for each share of common stock you held on the record date, including shares:
• held directly in your name as the shareholder of record
• held for you in an account with a broker, bank, or other nominee
• attributed to your account in the Lilly Employee Savings Plan (the savings plan).

What constitutes a quorum?
A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the annual meet-
ing. As of the record date, 1,132,720,819 shares of company common stock were issued and outstanding.

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

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

• The appointment of principal independent auditors will be approved if the votes cast for the proposal exceed

those cast against the proposal. Abstentions will not be counted either for or against the proposal.

• The shareholder proposals will be approved if the votes cast for the proposal exceed those cast against the

proposal. Abstentions and broker nonvotes will not be counted either for or against the proposal.

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

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

By mail. Sign and date each proxy card you receive and return it in the prepaid envelope. Sign your name exactly as

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it appears on the proxy. If you are signing in a representative capacity (for example, as an attorney-in-fact, execu-
tor, administrator, guardian, trustee, or the ofﬁ cer or agent of a corporation or partnership), please indicate your
name and your title or capacity. If the stock is held in custody for a minor (for example, under the Uniform Trans-
fers to Minors Act), the custodian should sign, not the minor. If the stock is held in joint ownership, one owner may
sign on behalf of all owners. If you return your signed proxy but do not indicate your voting preferences, we will
vote on your behalf for the election of the four nominees for director listed below, for the ratiﬁ cation of the appoint-
ment of the independent auditors, and against the shareholder proposals.

Note that if you previously elected to receive these materials electronically, you did not receive a proxy card.
If you wish to vote by mail, rather than by telephone or on the Internet as discussed below, you may request paper
copies of these materials, including a proxy card, by calling 317-433-5112 or by sending an e-mail message to
annual_meeting@lilly.com. Please make sure you give us the control number from the e-mail message that you
received notifying you of the electronic availability of these materials, along with your name and mailing address.

By telephone. Shareholders in the United States, Puerto Rico, and Canada may vote by telephone by following the
instructions on the enclosed proxy card or, if you received these materials electronically, by following the instruc-
tions in the e-mail message that notiﬁ ed you of their availability. Voting by telephone has the same effect as voting
by mail. If you vote by telephone, do not return your proxy card. Telephone voting will be available until 11:59 p.m.
EDT (10:59 p.m. Indianapolis time), April 17, 2005.

By Internet. You may vote online at www.proxyvote.com. Follow the instructions on the enclosed proxy card or, if
you received these materials electronically, the instructions in the e-mail message that notiﬁ ed you of their avail-
ability. Voting on the Internet has the same effect as voting by mail. If you vote on the Internet, do not return your
proxy card. Internet voting will be available until 11:59 p.m. EDT (10:59 p.m. Indianapolis time), April 17, 2005.

You have the right to revoke your proxy at any time before the meeting by (1) notifying the company’s secretary in
writing or (2) delivering a later-dated proxy by telephone, on the Internet, or in writing. If you are a shareholder of
record, you may also revoke your proxy by voting in person at the meeting.

How do I vote shares that are held by my broker?
If you have shares held by a broker or other nominee, you may instruct your broker or other nominee to vote your
shares by following instructions that the broker or nominee provides for you. Most brokers offer voting by mail,
telephone, and on the Internet.

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

How do I vote my shares in the Savings Plan?
You may instruct the plan trustee on how to vote your shares in the savings plan by mail, by telephone, or on the
Internet as described above, except that, if you vote by mail, the card that you use will be a voting instruction card
rather than a proxy card.

How many shares in the Savings Plan can I vote?
You may vote all the shares allocated to your account on the record date. In addition, unless you decline, your vote
will also apply to a proportionate number of other shares held in the plan for which voting directions are not re-
ceived. These undirected shares include:

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

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

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

All participants are named ﬁ duciaries under the terms of the savings plan and under the Employee Retirement

Income Security Act (ERISA) for the limited purpose of voting shares credited to their accounts and the portion of
undirected shares to which their vote applies. Under ERISA, ﬁ duciaries are required to act prudently in making vot-
ing decisions.

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

cline.” Otherwise, the trustee will automatically apply your voting preferences to the undirected shares proportion-

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ally with all other participants who elected to have their votes applied in this manner.

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

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

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

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

Parking will be available on a ﬁ rst-come, ﬁ rst-served basis in the garage indicated on the map on page 95.
If you have questions about admittance or parking, you may call 317-433-5112 or send an e-mail message to

annual_meeting@lilly.com.

Will the annual meeting be available on the Internet?
The annual meeting will be broadcast live via webcast on the company’s website. To join the live webcast, go to
www.lilly.com and click on the annual meeting link that appears on the home page. The webcast will be available
in both the Windows Media™ Player and RealPlayer® formats. It will be available for replay on the Lilly website until
May 18, 2005.

How do I contact the board of directors?
You can send written communications to one or more members of the board, addressed to:

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

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

How do I submit a shareholder proposal for the 2006 annual meeting?
The company’s 2006 annual meeting is scheduled for April 17, 2006. If a shareholder wishes to have a proposal
considered for inclusion in next year’s proxy statement, he or she must submit the proposal in writing so that we
receive it by November 8, 2005. Proposals should be addressed to the company’s secretary, Lilly Corporate Center,
Indianapolis, Indiana 46285. In addition, the company’s bylaws provide that any shareholder wishing to propose any
other business at the annual meeting must give the company written notice by November 8, 2005. That notice must
provide certain other information as described in the bylaws. Copies of the bylaws are available online at
http://investor.lilly.com/bylaws.cfm.

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

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You may sign up for electronic delivery in two ways.

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

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

electronically in the future.

If you hold your shares in a brokerage account, you may also have the opportunity to receive proxy materials elec-
tronically. Please follow the instructions of your broker.

What are the beneﬁ ts of electronic delivery?
Electronic delivery reduces the company’s printing and mailing costs. It is also a convenient way for you to receive
your proxy materials and makes it easy to vote your shares online. If you have shares in more than one account, it
is an easy way to avoid receiving duplicate copies of proxy materials.

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

May I change my mind later?
Yes. You may discontinue electronic delivery at any time. For more information, call 317-433-5112 or send an e-mail
message to annual_meeting@lilly.com.

What is “householding”?
We have adopted “householding,” a procedure under which shareholders of record who have the same address
and last name and do not receive proxy materials electronically will receive only one copy of our annual report and
proxy statement unless one or more of these shareholders notiﬁ es us that they wish to continue receiving individu-
al copies. This procedure saves printing and postage costs by reducing duplicative mailings.

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

will not affect dividend check mailings.

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

ers of record.

What if I want to receive a separate copy of the annual report and proxy statement?
If you participate in householding and wish to receive a separate copy of the 2004 annual report and proxy state-
ment, or if you wish to receive separate copies of future annual reports and proxy statements, please call us at
317-433-5112 or write to: Householding Department, 51 Mercedes Way, Edgewood, NY 11717. We will deliver the
requested documents to you promptly upon your request.

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Board of Directors

Directors’ Biographies

Class of 2005
The following four directors’ terms will expire at this year’s annual meeting. Each of these directors has been
nominated and is standing for election to serve another term that will expire in 2008. See page 79 of this proxy
statement for more information.

George M.C. Fisher
Retired Chairman of the Board and Chief Executive Ofﬁ cer, Eastman Kodak
Company
Director since 2000

Age 64

Mr. Fisher served as chairman of the board of Eastman Kodak Company from 1993
to December 2000. He also served as chief executive ofﬁ cer from 1993 to Janu-
ary 2000 and as president from 1993 until 1996. Prior to joining Kodak, he was an
executive ofﬁ cer of Motorola, Inc., serving as chairman and chief executive ofﬁ cer
from 1990 to October 1993, and president and chief executive ofﬁ cer from 1988 to
1990. Mr. Fisher is chairman of PanAmSat Corporation, a senior advisor for Kohl-
berg Kravis Roberts & Company, and a director of General Motors Corporation. He
is a member of The Business Council and was chairman of the National Academy of
Engineering from 2000 to 2004.

Alfred G. Gilman, M.D., Ph.D.
Regental Professor and Chairman, Department of Pharmacology, The University
of Texas Southwestern Medical Center
Interim Dean, Southwestern Medical School
Director since 1995

Age 63

Dr. Gilman has served as professor and chairman of the Department of Pharmacol-
ogy at The University of Texas Southwestern Medical Center since 1981 and interim
dean of Southwestern Medical School since 2004. He holds the Raymond and Ellen
Willie Distinguished Chair in Molecular Neuropharmacology, the Nadine and Tom
Craddick Distinguished Chair in Medical Science, and the Atticus James Gill, M.D.
Chair in Medical Science at the university and was named a regental professor in
1995. Dr. Gilman was on the faculty of the University of Virginia School of Medicine
from 1971 until 1981 and was named a professor of pharmacology there in 1977. He
is a director of Regeneron Pharmaceuticals, Inc. Dr. Gilman was a recipient of the
Nobel Prize in Physiology or Medicine in 1994.

Karen N. Horn, Ph.D.
Retired President, Private Client Services, and Managing Director, Marsh, Inc.
Director since 1987

Age 61

Ms. Horn served as president, Private Client Services, and managing director of
Marsh, Inc., a subsidiary of MMC, from 1999 until her retirement in 2003. Prior to
joining Marsh, she was senior managing director and head of international private
banking at Bankers Trust Company; chairman and chief executive ofﬁ cer, Bank One,
Cleveland, N.A.; president of the Federal Reserve Bank of Cleveland; treasurer of
Bell of Pennsylvania; and vice president of First National Bank of Boston. Ms. Horn
serves as director of T. Rowe Price Mutual Funds; The U.S. Russia Investment Fund,
a presidential appointment; Simon Property Group; and Georgia-Paciﬁ c Corpora-
tion. Ms. Horn has been senior managing director, Brock Capital Group since 2004.

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Sir John Rose
Chief Executive, Rolls-Royce Group plc
Director since 2003

Age 52

Sir John Rose is chief executive of Rolls-Royce plc. He joined Rolls-Royce in 1984,
became a member of its board in 1992, and was named chief executive in 1996. Sir
John is a fellow of the Royal Aeronautical Society, a past president of AECMA (The
European Association of Aerospace Industries), and a past president of the Society
of British Aerospace Companies. He is a member of the J.P. Morgan International
Council, the CBI International Advisory Board, the Advisory Board of the Economic
Development Board of Singapore, and The Engleﬁ eld Advisory Board. Sir John is
also a member of the European Round Table of Industrialists.

Class of 2006
The following four directors will continue in ofﬁ ce until 2006.

Martin S. Feldstein, D.Phil.
President and Chief Executive Ofﬁ cer, National Bureau of Economic Research,
and George F. Baker Professor of Economics, Harvard University
Director since 2002

Age 65

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

Charles E. Golden
Executive Vice President and Chief Financial Ofﬁ cer
Director since 1996

Age 58

Mr. Golden joined the company as executive vice president and chief ﬁ nancial ofﬁ cer
in 1996. Prior to joining the company, he served as a corporate vice president of
General Motors Corporation (GM) and chairman and managing director of Vauxhall
Motors Limited, a subsidiary of GM in the United Kingdom, from 1993 to 1996. Mr.
Golden joined GM in 1970 and held a number of executive positions in that company’s
domestic and international operations. He is chairman of The Council of Financial
Executives of the Conference Board and serves as a member of the board of direc-
tors of Clarian Health Partners, Hillenbrand Industries, and the National Advisory
Board of JPMorgan Chase & Co. Mr. Golden is a member of the board of trustees of
Park Tudor School and the Finance Committee of the Indianapolis Museum of Art,
and is past president of the Crossroads of America Council, Boy Scouts of America.

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Ellen R. Marram
Managing Director, North Castle Partners, LLC
Director since 2002

Age 58

Ms. Marram is a managing director at North Castle Partners, LLC. Prior to joining
North Castle, she served as the chief executive ofﬁ cer of a start-up B2B exchange
for the food and beverage industry. From 1993 through 1998, Ms. Marram was pres-
ident and chief executive ofﬁ cer of Tropicana and the Tropicana Beverage Group.
From 1988 to 1993, she was president and chief executive ofﬁ cer of the Nabisco
Biscuit Company, an operating unit of Nabisco, Inc.; from 1987 to 1988, was presi-
dent of Nabisco’s Grocery Division; and from 1970 to 1986, held a series of market-
ing positions at Nabisco/Standard Brands, Johnson & Johnson, and Lever Brothers.
Ms. Marram is a member of the board of directors of Ford Motor Company and The
New York Times Company as well as several private companies. She serves on the
boards of The New York & Presbyterian Hospital, Lincoln Center Theater, Families
and Work Institute, and Citymeals-on-Wheels.

Sidney Taurel
Chairman of the Board, President, and Chief Executive Ofﬁ cer
Director since 1991

Age 56

Mr. Taurel has been the company’s president since February 1996, chief executive
ofﬁ cer since July 1998, and chairman of the board since January 1999. He joined
the company in 1971 and has held management positions in the company’s interna-
tional operations based in São Paulo, Vienna, Paris, and London. Mr. Taurel served
as president of Eli Lilly International Corporation from 1986 until 1991, executive
vice president of the Pharmaceutical Division from 1991 until 1993, and executive
vice president of the company from 1993 until 1996. He is a member of the boards
of IBM Corporation and The McGraw-Hill Companies, Inc. He is also a member of
the executive committee of the board of directors of Pharmaceutical Research and
Manufacturers of America (PhRMA), a member of the board of overseers of the
Columbia Business School, a trustee at Indianapolis Museum of Art, a director of
the RCA Tennis Championships, and a member of The Business Council and The
Business Roundtable. In 2001, Mr. Taurel became a chevalier of the French Legion of
Honor. He was appointed in February 2003 to the President’s Export Council.

Class of 2007

Steven C. Beering, M.D.
President Emeritus, Purdue University
Director since 1983

Age 72

Dr. Beering served as president of Purdue University from 1983 until his retirement
in 2000, when he became president emeritus of the university. He served as dean of
the Indiana University School of Medicine and director of the Indiana University Medi-
cal Center from 1974 until 1983. Dr. Beering is a fellow of the American College of
Physicians and the Royal Society of Medicine and a member of the National Academy
of Sciences Institute of Medicine and the National Science Board. He is a director of
American United Mutual Insurance Holding Company and NiSource, Inc.; director
and past chairman of the Purdue Research Foundation; and a trustee of Universities
Research Association, Inc. Dr. Beering is the past national chairman of the Associa-
tion of American Universities and a trustee of the University of Pittsburgh.

Consistent with our retirement policy for nonemployee directors, Dr. Beering will retire from the board follow-

ing the annual meeting on April 18, 2005.

The following four directors will continue in ofﬁ ce until 2007.

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Sir Winfried Bischoff
Chairman, Citigroup Europe
Director since 2000

Age 63

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

J. Michael Cook
Retired Chairman and Chief Executive Ofﬁ cer, Deloitte and Touche LLP
Director since 2005

Age 62

Mr. Cook served as chairman and chief executive ofﬁ cer of Deloitte and Touche, LLP
from 1989 until his retirement in 1999. He joined Deloitte, Haskins & Sells in 1964
and served as chairman and chief executive ofﬁ cer from 1986 through 1989. Mr. Cook
is a member of the Advisory Council of the Public Company Accounting Oversight
Board and is a trustee of The Scripps Research Institute. He serves on the boards of
Comcast Corporation, The Dow Chemical Company, International Flavors & Fra-
grances Inc., and Northrop Grumman Corporation. He is chairman of the Account-
ability Advisory Council to the Comptroller General of the United States. He was a
member of the National Association of Corporate Directors Blue Ribbon Panel on
Corporate Governance and was named the 62nd member of the Accounting Hall of
Fame in 1999. He has been serving under interim election since February 2005.

Franklyn G. Prendergast, M.D., Ph.D.
Edmond and Marion Guggenheim Professor of Biochemistry and Molecular Biol-
ogy and Professor of Molecular Pharmacology and Experimental Therapeutics,
Mayo Medical School
Director, Mayo Clinic Cancer Center
Director since 1995

Age 59

Dr. Prendergast is the Edmond and Marion Guggenheim Professor of Biochemistry
and Molecular Biology and Professor of Molecular Pharmacology and Experimental
Therapeutics at Mayo Medical School and the director of the Mayo Clinic Cancer
Center. He has held several other teaching positions at the Mayo Medical School
since 1975. Dr. Prendergast serves on the board of trustees of the Mayo Foundation
and its executive committee.

Kathi P. Seifert
Retired Executive Vice President, Kimberly-Clark Corporation
Director since 1995

Age 55

Ms. Seifert served as executive vice president for Kimberly-Clark Corporation until
June 2004. She joined Kimberly-Clark in 1978 and served in several capacities
in connection with both the domestic and international consumer products busi-
nesses. Prior to joining Kimberly-Clark, Ms. Seifert held management positions at
Procter & Gamble, Beatrice Foods, and Fort Howard Paper Company. She is chair
of Pinnacle Perspectives, LLC. Ms. Seifert serves on the boards of Albertsons, Inc.;
Appleton Papers Inc.; Theda Care Health Group; the U.S. Fund for UNICEF; and the
Fox Cities Performing Arts Center.

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Highlights of the Company’s Corporate Governance Guidelines

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

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

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

compensating other executive ofﬁ cers.

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

Selection of Director Candidates
The board is responsible for selecting candidates for board membership and for establishing the criteria to be
used in identifying potential candidates. The board delegates the screening process to the directors and corporate
governance committee. For more information on the director nomination process, including the current selection
criteria, see Directors and Corporate Governance Committee Matters on pages 66–67.

Independence Determinations
The board annually determines the independence of directors based on a review by the directors and corporate
governance committee. No director is considered independent unless the board has determined that he or she has
no material relationship with the company, either directly or as a partner, shareholder, or ofﬁ cer of an organization
that has a material relationship with the company. Material relationships can include commercial, industrial, bank-
ing, consulting, legal, accounting, charitable, and familial relationships, among others. To evaluate the materiality
of any such relationship, the board has adopted categorical independence standards consistent with the revised
New York Stock Exchange listing guidelines adopted in November 2003 and amended in November 2004.

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

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

previous three years:

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

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

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

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

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

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

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

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

Additionally, members of the audit, compensation, and directors and corporate governance committees must

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

The board has determined that all 11 of the nonemployee directors listed on pages 58–61 are independent pur-

suant to the above criteria and that the board committee members meet all applicable independence standards.

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

• Nonemployee directors will resign from the board effective at the annual meeting of shareholders following their

seventy-second birthday. (Consistent with this policy, Dr. Beering will retire on April 18, 2005.)

• Employee directors will resign from the board when they retire or otherwise cease to be active employees of the

company.

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

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

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

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

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

IV. Key Responsibilities of the Board
Selection of Chairman and Chief Executive Ofﬁ cer; Succession Planning
The board customarily combines the roles of chairman and chief executive ofﬁ cer, believing this generally provides
the most efﬁ cient and effective leadership model. The board recognizes that, in certain occasional circumstances,
such as leadership transition, it may be desirable to assign these roles to two different persons for a relatively
short period of time. The chair of the compensation committee recommends to the board an appropriate process
by which a new chairman and chief executive ofﬁ cer will be selected depending on the circumstances at the time.

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

Evaluation of Chief Executive Ofﬁ cer
The chair of the compensation committee leads the independent directors annually in assessing the performance
of the chief executive ofﬁ cer. The results of this review are discussed with the chief executive ofﬁ cer and consid-
ered by the compensation committee in establishing his or her compensation for the next year.

Corporate Strategy
Once each year, the board, together with senior management, devotes an extended meeting to discussing and pro-
viding direction for the corporate strategic plan. Throughout the year, signiﬁ cant corporate strategy decisions are
brought to the board for approval.

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

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

and to our board of directors

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

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

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

upon request to the company’s secretary.

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

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

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

Presiding Director
The chair of the compensation committee (currently Dr. Beering) leads the process for selecting and evaluating the
chief executive ofﬁ cer. The chair of the compensation committee also presides at other executive sessions of inde-
pendent directors unless the directors decide that, due to the subject matter of the session, another independent
director should preside. Following Dr. Beering’s retirement, Ms. Horn will replace him as chair of the compensation
committee.

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

To avoid any appearance of a conﬂ ict, board decisions on certain matters of corporate governance are made
solely by the independent directors. These include executive compensation and the selection, evaluation, and re-
moval of the chief executive ofﬁ cer.

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

Director Access to Management and Independent Advisers
Independent directors have direct access to members of management whenever they wish. In addition, the inde-
pendent directors and the committees are free to retain their own independent advisers, at company expense,
whenever they wish.

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

VI. Board Committees
Number, Structure, and Independence
The duties and membership of the six board-appointed committees are described below. Only independent direc-
tors may serve on the audit, compensation, directors and corporate governance, and public policy and compliance
committees. All other committees must have a majority of independent directors, and only independent directors
may chair any committee.

Committee membership and selection of committee chairs are recommended to the board by the directors
and corporate governance committee after consulting the chairman of the board and after considering the desires
of the board members.

Functioning of Committees
Each committee reviews its own charter annually, and the directors and corporate governance committee reviews
all committee charters annually. The board may form new committees or disband a current committee (except the
audit, compensation, and directors and corporate governance committees) as appropriate. The chair of the com-
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mittee determines the frequency, length, and agenda of committee meetings.

All six committee charters are available online at http://investor.lilly.com/board-committees.cfm or in paper

form upon request to the company’s secretary.

Committees of the Board of Directors

Audit Committee
The duties of the audit committee are described in the audit committee report found on page 68 of this proxy state-
ment and the committee charter attached as Appendix A.

Directors and Corporate Governance Committee
The duties of the directors and corporate governance committee are described on pages 66–67.

Compensation Committee

• establishes compensation for executive ofﬁ cers
• administers Deferred Compensation Plan, management stock plans, and the company’s cash bonus plan.

The compensation committee report is shown on pages 69–72 of this proxy statement.

Public Policy and Compliance Committee

• reviews policies and practices and monitors compliance in areas of legal and social responsibility
• reviews emerging political, social, and public policy issues that may affect the company.

Finance Committee

• reviews and makes recommendations regarding capital structure and strategies, including dividends, share

repurchases, capital expenditures, complex business transactions, and borrowings

• oversees ﬁ nancial risk management policies.

Science and Technology Committee

• reviews and makes recommendations regarding the company’s strategic research goals and objectives
• reviews new developments, technologies, and trends in pharmaceutical research and development.

Membership and Meetings of the Board and Its Committees

In 2004, each director attended more than 80 percent of the total number of meetings of the board and the com-
mittees on which he or she serves. In addition, all board members are expected to attend the annual meetings of
shareholders, and all but one attended in 2004. Current committee membership and the number of meetings of the
full board and each committee in 2004 are shown in the table below.

Board

Audit

Compensation

Directors and
Corporate Governance

Finance

Public Policy
and Compliance

Science and
Technology

Dr. Beering

Sir Winfried Bischoff

Mr. Cook1

Dr. Feldstein

Mr. Fisher

Dr. Gilman

Mr. Golden

Ms. Horn

Ms. Marram

Dr. Prendergast

Sir John Rose

Ms. Seifert

Mr. Taurel

Number of 2004 Meetings

Member

Chair

Member

Chair

Member

Chair

Member

Chair

Member

Chair

Member

Chair

1 Mr. Cook joined the board in February 2005.

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Directors’ Compensation

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

In 2004, we provided the following annual compensation to directors who are not employees:

Cash compensation

• retainer of $3,750 per month
• $1,600 for each board meeting attended (or $1,600 per day for multi-day meetings)
• $1,600 for each committee or other meeting attended if not held on the same day as a board meeting
• $2,000 to the committee chairpersons for each committee meeting attended as compensation for the

chairperson’s preparation time

• reimbursement for customary and usual travel expenses.

Stock Compensation

• 700 shares of Lilly stock in a deferred stock account in the Lilly Directors’ Deferral Plan (as described below),

payable after service on the board has ended.

• Stock options under the 2002 Lilly Stock Plan for 2,800 shares of Lilly stock. The option price is the fair market

value at the time of grant. The options are exercisable after 3 years and expire after 10 years.

In 2005, the cash compensation is unchanged. However, we have discontinued stock option grants and instead

will increase the deferred stock shares from 700 to 1,500.

Lilly Directors’ Deferral Plan
This plan allows directors to defer receipt of all or part of their retainer and meeting fees until after their service
on the board has ended. Each director can choose to invest the funds in either of two accounts:

• Deferred Compensation Account. Funds in this account earn interest each year at an annual rate of 120 percent

of the applicable federal long-term rate as established for the preceding December by the U.S. Treasury
Department under Section 1274(d) of the Internal Revenue Code with monthly compounding. The rate for
2005 is 5.5 percent. The aggregate amount of interest that accrued in 2004 for the participating directors was
$193,735.11 at a rate of 5.99 percent.

• Deferred Share Account. This account allows the director, in effect, to invest his or her deferred cash

compensation in Lilly stock. In addition, the annual award of shares to each director noted above (700 shares in
2004; 1,500 shares in 2005) is credited to this account. Funds in this account are credited as hypothetical shares
of Lilly stock based on the market price of the stock at the time the compensation would otherwise have been
earned. Hypothetical dividends are “reinvested” in additional shares based on the market price of the stock on
the date dividends are paid. All shares in the deferred share accounts are hypothetical and are not issued or
transferred until the director ends his or her service on the board or dies.

Both accounts may be paid in a lump sum or in annual installments for up to 10 years. The deferred compen-

sation account may also be paid in monthly installments for up to 10 years. Amounts in the deferred share account
are paid in the form of shares of Lilly stock.

Directors and Corporate Governance Committee Matters

Overview
The directors and corporate governance committee recommends candidates for membership on the board and
board committees. The committee also oversees matters of corporate governance, director independence, direc-
tor compensation, and board performance. The committee’s charter is available online at http://investor.lilly.
com/board-committees.cfm or in paper form upon request to the company’s secretary.

All committee members are independent as deﬁ ned in the New York Stock Exchange listing requirements.

Director Nomination Process
The board seeks independent directors who represent a mix of backgrounds and experiences that will enhance the
quality of the board’s deliberations and decisions. Candidates shall have substantial experience with one or more

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publicly traded national or multinational companies or shall have achieved a high level of distinction in their chosen
ﬁ elds. Board membership should reﬂ ect diversity in its broadest sense, including persons diverse in geography, gen-
der, and ethnicity. The board is particularly interested in maintaining a mix that includes the following backgrounds:
• active or retired chief executive ofﬁ cers and senior executives, particularly those with experience in operations,

ﬁ nance/banking, and marketing/sales

• international business
• medicine and science
• government and public policy
• information technology.

The board delegates the screening process to the directors and corporate governance committee, which

receives direct input from other board members. Potential candidates are identiﬁ ed by recommendations from
several sources, including:
• incumbent directors
• management
• shareholders
• an independent executive search ﬁ rm retained by the committee to assist in locating candidates meeting the

board’s selection criteria.

The committee employs the same process for evaluating all candidates, including those submitted by share-

holders. The committee initially evaluates the candidate based on publicly available information and any additional
information supplied by the party recommending the candidate. If the candidate appears to satisfy the selection
criteria and the committee’s initial evaluation is favorable, the committee, assisted by management, gathers ad-
ditional data on the candidate’s qualiﬁ cations, availability, probable level of interest, and any potential conﬂ icts
of interest. If the committee’s subsequent evaluation continues to be favorable, the candidate is contacted by the
chairman of the board and one or more of the independent directors for direct discussions to determine the mutual
levels of interest in pursuing the candidacy. If these discussions are favorable, the committee makes a ﬁ nal recom-
mendation to the board to nominate the candidate for election by the shareholders (or to select the candidate to ﬁ ll
a vacancy, as applicable).

Sir John Rose, who is standing for election at this annual meeting of shareholders, was referred to the com-

pany by an independent executive search ﬁ rm.

Process for Submitting Recommendations and Nominations
A shareholder who wishes to recommend a director candidate for evaluation by the committee pursuant to this
process should forward the candidate’s name and information about the candidate’s qualiﬁ cations to the chairman
of the directors and corporate governance committee, in care of the corporate secretary, at Lilly Corporate Center,
Indianapolis, Indiana 46285. The candidate must meet the selection criteria described above and must be willing
and expressly interested in serving on the board.

Under Section 1.9 of the company’s bylaws, a shareholder who wishes to directly nominate a director candi-
date at the 2006 annual meeting (i.e., to propose a candidate for election who is not otherwise nominated by the
board through the recommendation process described above) must give the company written notice by November
8, 2005. The notice should be addressed to the corporate secretary at Lilly Corporate Center, Indianapolis, Indiana
46285. The notice must contain prescribed information about the candidate and about the shareholder proposing
the candidate as described in more detail in Section 1.9 of the bylaws. A copy of the bylaws is available online at
http://investor.lilly.com/bylaws.cfm. The bylaws will also be provided by mail without charge upon request to the
corporate secretary.

Audit Committee Matters

Audit Committee Membership
All members of the audit committee are independent as deﬁ ned in both the New York Stock Exchange listing stan-
dards and the Securities and Exchange Commission standards applicable to audit committee members. The board of
directors has determined that Sir Winfried Bischoff and Mr. J. Michael Cook are audit committee ﬁ nancial experts as
deﬁ ned in the rules of the Securities and Exchange Commission. The board has also determined that Mr. Cook’s ser-
vice on more than three public company audit committees does not impair his ability to serve on our audit committee.

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Audit Committee Report
The audit committee reviews the company’s ﬁ nancial reporting process on behalf of the board. Management has
the primary responsibility for the ﬁ nancial statements and the reporting process, including the systems of inter-
nal controls and disclosure controls. In this context, we have met and held discussions with management and the
independent auditors. Management represented to us that the company’s consolidated ﬁ nancial statements were
prepared in accordance with generally accepted accounting principles, and we have reviewed and discussed the
audited ﬁ nancial statements and related disclosures with management and the independent auditors, including a
review of the signiﬁ cant management judgments underlying the ﬁ nancial statements and disclosures.

The independent auditors report to us and to the board. We have sole authority to appoint (subject to share-

holder ratiﬁ cation) and to terminate the engagement of the independent auditors.

We have discussed with the independent auditors matters required to be discussed by Statement on Auditing
Standards No. 61 (Communication With Audit Committees), including the quality, not just the acceptability, of the
accounting principles, the reasonableness of signiﬁ cant judgments, and the clarity of the disclosures in the ﬁ nan-
cial statements. In addition, we have received the written disclosures and the letter from the independent auditors
required by the Independence Standards Board Standard No. 1 (Independence Discussions With Audit Committees)
and have discussed with the independent auditors the auditors’ independence from the company and its manage-
ment. In concluding that the auditors are independent, we determined, among other things, that the nonaudit ser-
vices provided by Ernst & Young (as described below) were compatible with their independence. Consistent with the
requirements of the Sarbanes-Oxley Act of 2002, we have adopted additional policies to ensure the independence of
the independent auditors, such as prior committee approval of nonaudit services and required audit partner rotation.
We discussed with the company’s internal and independent auditors the overall scope and plans for their
respective audits including internal control testing under Section 404 of the Sarbanes-Oxley Act. We periodically
meet with the internal and independent auditors, with and without management present, to discuss the results of
their examinations, their evaluations of the company’s internal controls, and the overall quality of the company’s
ﬁ nancial reporting. We also periodically meet in executive session.

In reliance on the reviews and discussions referred to above, we recommended to the board (and the board
subsequently approved the recommendation) that the audited ﬁ nancial statements be included in the company’s
annual report on Form 10-K for the year ended December 31, 2004, for ﬁ ling with the Securities and Exchange Com-
mission. We have also appointed the company’s independent auditors, subject to shareholder ratiﬁ cation for 2005.

Audit Committee
Sir Winfried Bischoff, Chair
J. Michael Cook (from February 1, 2005)
Martin S. Feldstein, Ph.D.
Franklyn G. Prendergast, M.D., Ph.D.
Kathi P. Seifert

Services Performed by the Independent Auditor
The audit committee preapproves all audit and nonaudit services performed by the independent auditor in order to
assure that the provision of such services does not impair the auditor’s independence. The committee’s policy and
procedures are as follows:

• All audit services must be preapproved by the committee. The committee approves the annual audit services

engagement and, if necessary, any changes in terms, conditions, and fees resulting from changes in audit scope,
company structure, or other matters. The committee may also grant preapproval for other audit services, which
are those services that only the independent auditor reasonably can provide. Beginning in 2004, audit services
include internal controls attestation work under Section 404 of the Sarbanes-Oxley Act.

• Audit-related services are assurance and related services that are reasonably related to the performance of
the audit, and that are traditionally performed by the independent auditor. The committee believes that the
provision of these services does not impair the independence of the auditor. All audit-related services must be
preapproved by the committee.

• All tax services must be separately preapproved by the committee. The committee believes that, in appropriate

cases, the independent auditor can provide tax compliance services, tax planning, and tax advice without
impairing the auditor’s independence.

• Nonaudit services classiﬁ ed as “all other services” must be separately preapproved by the committee. The
committee may approve such services if (i) the services are permissible under SEC rules, (ii) the committee
believes the provision of the services would not impair the independence of the auditor, and (iii) management

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believes that the auditor is the best choice to provide the service.

• Process. At the beginning of each audit year, management requests prior committee approval of the annual
audit, statutory audits, and quarterly reviews for the upcoming audit year as well as any other engagements
known at that time. Management will also present at that time an estimate of all fees for the upcoming audit
year. As speciﬁ c engagements are identiﬁ ed thereafter, they are brought forward to the committee for approval.
To the extent approvals are required between regularly scheduled committee meetings, preapproval authority is
delegated to the committee chair.

For each engagement, management provides the committee with information about the services and fees suf-
ﬁ ciently detailed to allow the committee to make an informed judgment about the nature and scope of the services
and the potential for the services to impair the independence of the auditor.

After the end of the audit year, management provides the committee with a summary of the actual fees in-

curred for the completed audit year.

Independent Auditor Fees
The following table shows the fees incurred for services rendered on a worldwide basis by Ernst & Young LLP, the
company’s independent auditor, in 2004 and 2003. All such services were preapproved by the committee in accor-
dance with the preapproval policy.

2004 (millions)

2003 (millions)

Audit Fees

• Annual audit of consolidated and subsidiary ﬁ nancial statements, including Sarbanes-Oxley

404 attestation in 2004

• Reviews of quarterly ﬁ nancial statements
• Other services normally provided by auditor in connection with statutory and regulatory ﬁ lings

$5.2

$3.9

Audit-Related Fees

• Assurance and related services reasonably related to the performance of the audit or reviews

of the ﬁ nancial statements:

—2004 and 2003: primarily related to internal control reviews, employee beneﬁ t plan audits,

$0.5

$0.9

and accounting consultations

Tax Fees

• 2004 and 2003: primarily related to tax planning and various compliance services

All Other Fees

• 2004: primarily related to upgrading and maintaining on-line training programs

Total

$2.4

$0.4

$8.5

$2.4

None

$7.2

Executive Compensation

Compensation Committee Report
The following is a report of the compensation committee of the board regarding executive compensation. The
committee’s membership and duties are described on page 65.

Executive Compensation Policy
Philosophy. The compensation committee bases its executive compensation policy on the same principles that
guide the company in establishing all its compensation programs. We design programs to attract, retain, and moti-
vate highly talented individuals at all levels of the organization. In particular:

• We base compensation on the level of job responsibility, individual performance, and company performance.
As employees progress to higher levels in the organization, an increasing proportion of their pay is linked to
company performance and shareholder returns.

• We reﬂ ect in our compensation the value of the job in the marketplace. To attract and retain a highly skilled work

force, we must remain competitive with the pay of other premier employers who compete with us for talent.

• We develop and administer our compensation programs to foster the long-term focus required for success in our

industry.

The program consists of both annual and long-term components, which are considered together in assessing

whether the program is attaining its objectives.

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Methodology. We consider various measures of company and industry performance, including sales, earnings per
share, total market value, and total shareholder return. These data assist us in exercising judgment in establishing
total compensation ranges. We do not assign these performance measures relative weights. Instead, we make a
subjective determination after considering all such measures collectively.

We also compare, or benchmark, our programs with other global pharmaceutical companies of comparable

size and stature to the company. For this benchmarking, we use the peer group identiﬁ ed on page 77. We compare
the executive compensation programs as a whole, and we also compare the pay of individual executives if we be-
lieve the jobs are sufﬁ ciently similar to make the comparison meaningful.

We use the peer group data primarily to ensure that the executive compensation program as a whole is within the

broad middle range of comparative pay of the peer group companies when the company achieves the targeted per-
formance levels. We do not target a speciﬁ c position in the range of comparative data for each individual or for each
component of compensation. We establish individual amounts in view of the comparative data and such other factors
as level of responsibility, prior experience, and our judgment as to individual performance. We do not apply formulas
or assign these factors speciﬁ c mathematical weights; instead, we exercise judgment and discretion.

We also retain an independent compensation consultant to assist us in evaluating our executive compensation
programs and in setting our chief executive ofﬁ cer’s compensation. The consultant reports directly to the commit-
tee. The use of an independent consultant provides additional assurance that our programs are reasonable and
consistent with the company’s objectives.

Components of Executive Compensation for 2004
Annual Compensation. Annual cash compensation for 2004 consisted of base salary and a cash bonus.

• We determined base salaries based on company and individual performance for the previous year, internal
relativity, and market conditions, including pay at the peer group companies. As noted above, we used the
peer group and other market data to test for reasonableness and competitiveness of base salaries, but we
also exercised subjective judgment in view of our compensation objectives. Our merit budget processes for
executives are no different from those used for all employees.

• Cash bonuses for all management employees worldwide, as well as most non-management employees in the
U.S, were determined under the Eli Lilly and Company Bonus Plan, a shareholder-approved formula-based
bonus plan adopted in 2004. Under the plan, bonus target amounts, expressed as a percentage of base salary,
are established for participants each year based on job responsibilities. Bonus payouts for the year are then
determined by the company’s performance relative to predetermined goals that are based 25 percent on sales
growth and 75 percent on earnings per share growth (adjusted for unusual items). In establishing the company
performance measures, we considered the expected performance of Lilly and the other companies in our peer
group. For the executive ofﬁ cers, we established bonus targets based on job responsibilities, internal relativity,
and peer group data. Our objective was to set bonus targets such that total annual cash compensation was
within the broad middle range of peer group companies and a substantial portion of that compensation was
linked to company performance. Under the plan formula, payouts can range from zero to 200 percent of target
depending on company performance. While the company achieved good growth in both sales and adjusted
earnings per share in 2004, the results were somewhat below the predetermined goals, and therefore the
bonuses paid for 2004 were 90 percent of target.

Long-Term Incentives. We normally employ two forms of long-term equity incentives granted under the 2002 Lilly
Stock Plan: stock options and performance awards. These incentives foster the long-term perspective necessary
for continued success in our business. They also ensure that our leaders are properly focused on shareholder
value. Our objective is to have a combined grant value of stock options and performance awards that is competi-
tive within the broad middle range of peer company long-term incentive grant amounts. Stock options and perfor-
mance awards have traditionally been granted broadly and deeply within the organization, with approximately 4,950
management and professional employees now participating.

• Stock options align employee incentives with shareholders because options have value only if the stock
price increases over time. Our 10-year options, granted at the market price on the date of grant, ensure
that employees are focused on long-term growth. In addition, options help retain key employees because
they typically cannot be exercised for three years and, if not exercised, are forfeited if the employee leaves
the company before retirement. The three-year vesting also helps keep employees focused on long-term
performance. In determining the size of option grants, we consider job responsibility, individual performance,
peer group data, and the number of options previously granted. Generally, we granted stock options in 2004 in
amounts the same as the previous year. The increase for Mr. Taurel is discussed on page 72, and the increases

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for Drs. Lechleiter and Paul are a result of their promotions.

• Performance awards provide employees with shares of Lilly stock if certain company performance goals are
achieved. The awards, normally granted annually, are structured as a schedule of shares of Lilly stock based
on the company’s achievement of speciﬁ c earnings-per-share (EPS) levels over speciﬁ ed time periods of
one or more years. We granted performance awards for 2004 with possible payouts ranging from zero to 200
percent of the target amount, depending on 2004 EPS growth as adjusted based on predetermined criteria. In
establishing the company performance measures, we considered the expected performance of Lilly and the
other companies in our peer group. In determining the size of the grants, we considered job responsibility,
individual performance, peer group data, and the size of performance awards previously granted. Generally,
the award sizes were the same as the previous year, except in the case of promotions. Actual adjusted EPS
performance for 2004 resulted in a payout of 100 percent of target. For executive ofﬁ cers, the payout was in the
form of restricted stock, as noted below.

• 2005 long-term incentive grants were made by the committee on February 11, 2005. We maintained our two-

part, long-term incentive award but increased our emphasis on performance awards and decreased emphasis
on stock options. In addition, we lowered overall grant values signiﬁ cantly, consistent with marketplace trends,
while maintaining broad-based employee participation.

• Share retention guidelines help foster a focus on long-term growth. We expect our executive ofﬁ cers to retain all
net shares received from stock options and performance awards, net of taxes, for at least one year. Consistent
with this objective, performance award shares earned for 2004 performance were issued in the form of
restricted stock that is subject to forfeiture if the executive leaves the company prior to February 2006, except in
the case of death, disability, retirement, or by consent of the committee.

Deductibility Cap on Executive Compensation. Under U.S. federal income tax law, the company cannot take a tax
deduction for certain compensation paid in excess of $1 million to the ﬁ ve executive ofﬁ cers listed below. However,
performance-based compensation, as deﬁ ned in the tax law, is fully deductible if the programs are approved by
shareholders and meet other requirements. Our policy is to qualify our incentive compensation programs for full
corporate deductibility to the extent feasible and consistent with our overall compensation goals. The company has
taken steps to qualify compensation under the Eli Lilly and Company Bonus Plan, as well as stock options and per-
formance awards under its management stock plans, for full deductibility as “performance-based compensation.”
We may make payments that are not fully deductible if, in our judgment, such payments are necessary to achieve
our compensation objectives and to protect shareholder interests.

Adjustments for Unusual Items. Consistent with past practice and based on predetermined criteria, we adjusted
the earnings results on which 2004 bonuses and performance awards were determined to eliminate the effect
of certain unusual items. The adjustments are intended to ensure that award payments represent the underly-
ing growth of the core business and are not artiﬁ cially inﬂ ated or deﬂ ated due to such unusual items either in the
award year or the previous (comparator) year. For the 2004 awards calculation, we adjusted EPS to eliminate the
effect in both 2003 and 2004 of major asset impairments, restructuring and other special charges, acquired in-
process research charges, as well as a one-time tax expense for the expected repatriation of earnings under the
American Jobs Creation Act in 2004, and a one-time gain on a technology licensing transaction in 2003.

Other Compensation. In 2003 and 2004, we undertook a total executive compensation review with the guidance of
our independent consultant. In addition to the primary compensation elements of salary, cash bonuses, and long-
term incentives discussed above, we reviewed the deferred compensation program, other annual compensation,
and payments that would be required under various severance and change-in-control scenarios. We determined
that these elements of compensation were reasonable in the aggregate. Following our review, we recommended
to the board, and it approved, amendments to the deferred compensation and change-in-control severance pay
programs that modestly reduced the future beneﬁ t levels under those programs.

Chief Executive Ofﬁ cer Compensation for 2004
In establishing Mr. Taurel’s compensation for 2004, we applied the principles outlined above in the same man-
ner as they were applied to the other executives. We compared company performance with that of the peer group
companies, including EPS growth, economic value added, market value added, and total shareholder return. We
did not assign these performance measures relative weights but rather made a subjective determination after con-
sidering the data collectively. In addition, consistent with our annual process, in an executive session including all
independent directors, we assessed Mr. Taurel’s 2003 performance. We considered the company’s and Mr. Taurel’s

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accomplishment of objectives that had been established at the beginning of the year and our own subjective as-
sessment of his performance. We noted that under Mr. Taurel’s leadership the company achieved strong 14 percent
sales growth and met external earnings expectations despite signiﬁ cant investments in research and develop-
ment, sales and marketing, and manufacturing. In addition, during the year the company successfully launched
three major products (Strattera, Forteo, and Cialis) and made substantial progress in its comprehensive manu-
facturing improvement plan, clearing the way for several product approvals in 2004. Mr. Taurel also led important
initiatives to improve the company’s productivity and reduce its cost structure to enable it to continue to compete in
an increasingly challenging business environment.

In recognition of his continued strong leadership in 2003, we increased Mr. Taurel’s annual salary by 5 percent

to $1.52 million effective April 2004. Mr. Taurel’s 2004 target bonus remained at 110 percent of his base salary. As
previously discussed under “Cash bonuses,” the actual payout of $1.45 million was below target.

Our review of peer group data available in late 2003 suggested that Mr. Taurel’s total equity compensation in

2003 was signiﬁ cantly below the median. Based on his individual performance and our review of the peer group
data, we increased his stock option grant from 350,000 shares to 400,000 shares. The option shares vest after
three years and expire after 10 years. We granted Mr. Taurel a performance award to be earned based on 2004 EPS
growth, with a target payout of 28,000 shares, the same size as the previous year. As discussed under “Perfor-
mance awards” above, the performance award paid out at 100 percent of target and, for executive ofﬁ cers, includ-
ing Mr. Taurel, was paid in the form of restricted stock.

Effective February 11, 2005 consistent with our annual practice, we granted Mr. Taurel and other members
of management equity awards under the long-term incentive program previously described . Mr. Taurel’s award
consisted of a stock option grant of 255,621 shares and a performance award with a target payout of 51,752 shares,
which, if earned, will be paid out in restricted stock. The combined value of these awards at the time of grant was
$7.2 million using the company’s trinomial lattice method of 30.37 percent of the option price and a stock price of
$55.65 to value the award.

In determining the size of the stock option and performance award grants for both years, we took into consid-
eration Mr. Taurel’s individual performance, internal relativity, peer group data, and the size of grants previously
made to Mr. Taurel. As noted above, in 2005 we adjusted the mix of awards to increase emphasis on performance
awards and decrease emphasis on stock options.

Conclusion
The committee and the board believe that the caliber and motivation of all our employees, and especially our
executive leadership, are essential to the company’s performance. We believe our management compensation pro-
grams contribute to our ability to differentiate our performance from others in the marketplace. We will continue
to evolve and administer our compensation program in a manner that we believe will be in shareholders’ interests
and worthy of shareholder support.

Compensation Committee
Steven C. Beering, M.D., Chair
J. Michael Cook (from February 1, 2005)
George M.C. Fisher
Karen N. Horn, Ph.D.
Ellen R. Marram

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7272

Summary Compensation Table

Name and
Principal Position

Year

Annual Compensation

Long-Term Compensation (1)

Awards

Sidney Taurel
Chairman of the Board,
President, and
Chief Executive Ofﬁ cer

John C. Lechleiter, Ph.D.
Executive Vice President,
Pharmaceutical
Operations

Charles E. Golden
Executive Vice President
and Chief Financial
Ofﬁ cer

Steven M. Paul, M.D.
Executive Vice President,
Science and Technology

Robert A. Armitage
Senior Vice President,
General Counsel

2004
2003
2002

Salary

($)

1,501,050
1,432,860
1 (6)

894,000
725,625
675,000

813,210
789,540
789,540

763,020
630,090
553,260

578,175
550,020
390,420

Other Annual

Restricted Stock

Number of Securities

Bonus (2)

Compensation (3)

Awards (4)

Underlying Options

All Other Compensation

($)

Granted

($)

1,486,040
1,193,595
0

70,524
138,372
164,343

1,590,120 (4)

603,450
417,657
0

548,917
444,117
0

515,039
303,949
0

338,232
268,137
0

795,060 (4)

511,110 (4)

318,024 (4)

2,894
6,249
9,248

3,366
6,492
14,852

3,099
1,086
0

3,060
28,899
31,640

400,000
350,000
350,000

200,000
120,000
120,000

120,000
120,000
120,000

120,000
50,000
46,000

80,000
80,000
23,800

72,050 (5)
68,777
142,862

42,912 (5)
34,830
20,250

39,034 (5)
37,898
24,186

36,625 (5)
30,244
17,098

27,752 (5)
26,401
73,570

(1) No stock appreciation rights were granted during the years indicated.
(2) For 2004, represents the individual’s earned bonus under the Eli Lilly and Company Bonus Plan, based on the

company’s actual growth in sales and adjusted earnings per share for the year. For 2003, represents a one-time
discretionary bonus equivalent to 75 percent of the individual’s normal bonus target under the company’s prior
bonus plan, the EVA® Bonus Plan. For 2002, represents the individuals’ “declared bonus” under the EVA Bonus
Plan, which was zero due to company performance.

(3) Amounts in this column represent primarily above-market interest on deferred compensation and tax reim-

bursements on personal use of the corporate aircraft. Beginning in 2004, the deferred compensation program
was revised to provide for interest at a rate that is considered a market rate under Securities and Exchange
Commission proxy reporting rules, 120 percent of the applicable federal long-term rate (6.16 percent in 2004).
For Mr. Taurel, the amounts include the company’s incremental cost to provide company aircraft to him for
his personal travel, as follows: 2004, $41,050; 2003, $90,678; and 2002, $94,044. Under board policy, for secu-
rity reasons Mr. Taurel must generally use the company-owned aircraft for both business and personal travel.
In past proxy statements, we reported personal use of company aircraft using the Standard Industry Fare

Level (SIFL) tables published by the Internal Revenue Service. The SIFL tables are used to determine the
amount of compensation income that is imputed to the executive for tax purposes for personal use of corporate
aircraft. Beginning with this proxy statement, for all three years in the table, we are using a revised methodol-
ogy that calculates the incremental cost to the company based on the cost of fuel, trip-related maintenance,
crew travel expenses, on-board catering, landing fees, trip-related hangar/parking costs and smaller variable
costs. Since the company-owned aircraft are used primarily for business travel, we do not include the ﬁ xed
costs that do not change based on usage, such as pilots’ salaries, the purchase costs of the company-owned
aircraft, and the cost of maintenance not related to trips.

For this table we have recalculated the incremental cost of personal use of company-owned aircraft for all
named executives in the previously reported years 2003 and 2002 using the new methodology. For executives
other than Mr. Taurel, the recalculation did not change the reported amounts of other annual compensation as
prescribed by the SEC reporting rules. For Mr. Taurel, the recalculation increased his reported amounts for
both years. For 2003, his reported amount in this column was originally $126,561, with $78,867 attributable
to personal use of the corporate aircraft. For 2002, his reported amount in this column was $57, 299, with his
personal use of the corporate aircraft falling below the SEC reporting thresholds.

Beginning in 2005, the company and Mr. Taurel have entered into a time-sharing arrangement under which

he will pay the company a time-share fee for the use of the aircraft for personal ﬂ ights. See page 76.

(4) All eligible global management received a payout of shares of Lilly stock under the performance award pro-
gram based on earnings per share growth in 2004. For most management employees, the payout was in the
form of freely tradeable shares. However, consistent with our stock retention guidelines for executive ofﬁ -

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cers, the payout for executive ofﬁ cers was in the form of restricted stock that vests on February 1, 2006. Mr.
Taurel received 28,000 shares; Dr. Lechleiter received 14,000 shares; Mr. Golden received 9,000 shares; Dr.
Paul received 9,000 shares, and Mr. Armitage received 5,600 shares. The table reﬂ ects the value of the shares
awarded, based on the stock price of $56.79, the average of the high and low price of stock on January 14, 2005,
the day the restricted shares were issued. Dividends will be paid on the restricted shares. In addition to the
restricted shares awarded from the performance award payout, Dr. Paul held 8,000 shares of restricted stock
valued at $454,000, as of December 31, 2004, and Mr. Armitage held 5,000 shares of restricted stock valued at
$283,750, as of December 31, 2004.

(5) Company contribution to the named individual’s account in the company’s employee savings plan (“Savings

Plan”).

(6) During the 2002 calendar year, Mr. Taurel chose to accept an annual salary of $1.00 as a reﬂ ection of his con-
ﬁ dence in, and commitment to, the company during a period of transition. Under normal circumstances, his
annual base salary would have been $1,391,100 for 2002.

Option Shares Granted in the Last Fiscal Year (1)

Name

Sidney Taurel

John C. Lechleiter, Ph.D.

Charles E. Golden

Steven M. Paul, M.D.

Robert A. Armitage

Individual Grants

Number of Securities

% of Total Option Shares

Underlying

Granted to Employees in

Exercise or

Base Price

Options Granted

Fiscal Year

Per Share (2)

Expiration Date

400,000

200,000

120,000

80,000

2.04

1.02

0.61

0.41

$73.11

February 14, 2014

$73.11

February 14, 2014

$73.11

February 14, 2014

Grant Date

Present

Value (3)

$10,792,000

$ 5,396,000

$ 3,237,600

$ 2,158,400

(1) No stock appreciation rights were granted in 2004.
(2) Options are granted at the market price of company common stock on the date of grant. Options are exercisable

three years after their grant date.

(3) These values were established using the Black-Scholes stock option valuation model, consistent with the model
used for our 2004 ﬁ nancial reporting. Assumptions used to calculate the grant date present value of option
shares granted during 2004 were in accordance with SFAS 123 as follows:
(a) Expected Volatility—The standard deviation of the continuously compounded rates of return calculated on

the average daily stock price over a period of time immediately preceding the grant and equal in length to the
expected life. The volatility was 35.20 percent.

(b) Risk-Free Interest Rate—The rate available at the time the grant was made on zero-coupon U.S. government

issues with a remaining term equal to the expected life. The risk-free interest rate was 3.42 percent.
(c) Dividend Yield—The expected dividend yield was 1.50 percent based on the historical dividend yield over a

period of time immediately preceding the grant date equal in length to the expected life of the grant.

(d) Expected Life—The expected life of the grant was seven years, calculated based on the historical expected

life of previous grants.

(e) Forfeiture Rate— Under SFAS 123, forfeitures may be estimated or assumed to be zero. The forfeiture rate

was assumed to be zero, based on the immateriality of actual calculated forfeiture rates.

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Aggregate Option Shares Exercised in the Last Fiscal Year and Fiscal Year-End Option Values (1)

Name

Sidney Taurel

John C. Lechleiter, Ph.D.

Charles E. Golden

Steven M. Paul, M.D.

Robert A. Armitage

Number of
Shares
Acquired
On Exercise

80,000

27,728

-0-

18,700

-0-

Value Realized

$4,091,400

$1,223,429

$916,347

Number of
Securities Underlying
Unexercised Options at
Fiscal Year-End

Value of
Unexercised,
In-the-Money Options
at Fiscal Year-End (2)

Exercisable

2,081,521

451,793

758,683

329,900

44,100

Unexercisable

Exercisable

Unexercisable

751,317

321,317

241,317

316,000

183,800

$13,119,533

$290,452

$ 4,971,000

$1,349,700

(1) No stock appreciation rights were exercised during 2004 and none were outstanding on December 31, 2004.
(2) Represents the amount by which the market price of Lilly stock exceeded the exercise prices of unexercised op-

tions held by the named individuals on December 31, 2004.

Retirement Plan
Pension Plan Table

Average Annual
Earnings (Highest
5 of Last 10 Years)

Years of Service

$ 500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

$ 103,295

$ 137,725

$ 172,165

$ 206,580

$ 241,020

$ 249,000

211,090

318,890

426,685

534,470

642,265

750,060

857,855

965,640

1,073,435

1,181,230

1,289,030

281,450

425,170

568,895

712,620

856,345

1,000,070

1,143,790

1,287,515

1,431,240

1,574,965

1,718,690

351,815

531,470

711,120

890,785

1,070,435

1,250,090

1,429,750

1,609,405

1,789,055

1,968,720

2,148,370

422,170

637,750

853,345

1,068,935

1,284,515

1,500,110

1,715,690

1,931,280

2,146,860

2,362,450

2,578,045

492,540

744,060

995,570

1,247,090

1,498,610

1,750,130

2,001,650

2,253,155

2,504,675

2,756,195

3,007,715

492,540

744,060

995,570

1,247,090

1,498,610

1,750,130

2,001,650

2,253,155

2,504,675

2,756,195

3,007,715

498,010

747,010

996,010

1,247,090

1,498,610

1,750,130

2,001,650

2,253,155

2,504,675

2,756,195

3,007,715

The named executive ofﬁ cers will, upon retirement, be eligible for beneﬁ ts under The Lilly Retirement Plan
(retirement plan). The above table sets forth a range of annual retirement beneﬁ ts for various levels of average
annual earnings and years of service, assuming the employee retires at age 65 with a 50 percent survivor income
beneﬁ t. The retirement plan beneﬁ ts shown in the table are generally paid as a monthly annuity for the life of the
retiree. The amounts shown in the table are not subject to reduction for Social Security beneﬁ ts or any other offset
amounts except that the ultimate pension beneﬁ ts for Mr. Golden will be reduced by the amount of the pension pay-
ments he receives from his previous employer. The annual beneﬁ t under the plan is calculated using the average of
the annual earnings for the highest 5 out of the last 10 years of service (average annual earnings). Annual earn-
ings covered by the retirement plan consist of salary, bonus, and, for years prior to 2004, long-term incentive plan
payouts as set forth in the Summary Compensation Table on page 73 but calculated for the amount of bonus paid
(rather than credited) and for the year in which earnings are paid (rather than earned or credited). For purposes of
determining the annual beneﬁ t under the retirement plan shown in the table:

Named Executive

Mr. Taurel

Dr. Lechleiter

Mr. Golden

Dr. Paul

Mr. Armitage

Years of Service at
Age 65

Current Average Annual
Earnings

$4,618,368

$1,480,212

$2,486,772

$1,221,492

$1,047,600

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Mr. Golden received additional service credit when be began his employment in 1996. His retirement beneﬁ ts will
include the standard retiree medical beneﬁ ts that would be available to retirees of the same age and with the same
number of years of service credited. Dr. Paul, who joined the company in 1993, will receive additional service credit
if he remains employed by the company past age 60. His retirement beneﬁ t will not be reduced for early retire-
ment. This additional service credit is included in the table above. When Mr. Armitage joined the company in 1999,
the company agreed to provide him with a retirement beneﬁ t based on his actual years of service and earnings at
age 60. Mr. Armitage will be eligible to retire under the retirement plan at age 61.

Section 415 of the Internal Revenue Code (Code) generally places a limit of $170,000 on the amount of an-
nual pension beneﬁ ts that may be paid at age 65 from a plan such as the retirement plan. Under an unfunded plan
adopted in 1975, however, the company will make payments as permitted by the Code to any employee who is a
participant in the retirement plan in an amount equal to the difference, if any, between the beneﬁ ts that would have
been payable under the plan without regard to the limitations imposed by the Code and the actual beneﬁ ts payable
under the plan as so limited.

Change-in-Control Severance Pay Arrangements
The company has adopted a Change-in-Control Severance Pay Program (program) covering most employees of the
company and its subsidiaries, including the company’s executive ofﬁ cers. In general, the program would provide
severance payments and beneﬁ ts for eligible employees and executive ofﬁ cers in the event their employment is ter-
minated under certain circumstances within ﬁ xed periods of time following a change in control. A change in control
would occur if 15 percent or more of the company’s voting stock were acquired by an entity other than the company,
a subsidiary, an employee beneﬁ t plan of the company, or Lilly Endowment, Inc. There are additional conditions that
could result in a change-in-control event. The program may not be amended by the board, whether prior to or fol-
lowing a change in control, in any manner adverse to a participant without his or her prior written consent.

Under the portion of the program covering the named executive ofﬁ cers, each would be entitled to severance
payments and beneﬁ ts in the event that his or her employment is terminated following a change in control (i) with-
out cause by the company or (ii) for good reason by the executive ofﬁ cer, each as is deﬁ ned in the program. In such
case, the executive ofﬁ cer would be entitled to a severance payment equal to three times his or her current annual
cash compensation. Additional beneﬁ ts would include a pension supplement and full and immediate vesting of all
stock options and other equity incentives. In the event that any payments made or beneﬁ ts realized in connection
with the change in control would be subject to the excise tax imposed under Section 4999 of the Internal Revenue
Code as a result of the aggregate compensation payments and beneﬁ ts made to the individual, under the program
or otherwise, the company would cover the cost of the excise tax.

Related Transaction
As noted above, under board policy, for security reasons Mr. Taurel must generally use the company aircraft for all
travel. Beginning in 2005, the company has entered into a time-share arrangement with Mr. Taurel in connection
with his personal use of company aircraft. Under the time-share agreement, Mr. Taurel will lease the company air-
craft, including crew and ﬂ ight services, for personal ﬂ ights. He will pay a time-share fee based on the company’s
cost of the ﬂ ight but capped at the greater of (i) the Standard Industry Fare Levels as discussed in footnote 3 on
page 73 or (ii) an amount equivalent to ﬁ rst-class airfare for the relevant ﬂ ight (if such is commercially available).

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Performance Graph

This graph compares the return on Lilly stock with that of the Standard & Poor’s 500 Stock Index and our peer
group* for the years 2000 through 2004. The graph assumes that, on December 31, 1999, a person invested $100
each in Lilly stock, the S&P 500 Stock Index, and the peer group’s common stock. The graph measures total share-
holder return, which takes into account both stock price and dividends. It assumes that dividends paid by a com-
pany are reinvested in that company’s stock.

Comparison of Five-Year Cumulative Total Return Among Lilly, S&P 500 Stock Index, and Peer Group*

Value of $100 invested on last business day of 1999

Dec. 1999

Dec. 2000

Dec. 2001

Dec. 2002

Dec. 2003

Dec. 2004

Lilly

S&P 500

Peer Group

1999

$100.00

2000

$141.74

$ 90.89

$128.26

2001

$121.36

$ 81.14

$110.98

2002

$100.10

$ 62.47

$ 86.41

2003

$113.23

$ 80.35

$ 94.96

2004

$93.44

$89.07

$91.41

* We constructed the peer group as the industry index for this graph. It comprises the eight companies in the

pharmaceutical industry that we use to benchmark compensation of executive ofﬁ cers: Abbott Laboratories;
Bristol-Myers Squibb Company; Glaxo SmithKline (including the results of SmithKline Beecham plc up to the
time of its merger with Glaxo Holdings plc); Johnson & Johnson; Merck & Co.; Pﬁ zer, Inc. (including the results
of Warner Lambert Company and Pharmacia Corporation up to the time of their mergers with Pﬁ zer); Schering-
Plough Corporation; and Wyeth (formerly American Home Products Corporation).

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7777

Ownership of Company Stock

Common Stock Ownership by Directors and Executive Ofﬁ cers
The following table sets forth the number of shares of company common stock beneﬁ cially owned by the directors,
the named executive ofﬁ cers, and all directors and executive ofﬁ cers as a group, as of February 4, 2005. The table
shows shares held by named executives in the Lilly Employee Savings Plan, shares credited to the accounts of
outside directors in the Directors’ Deferral Plan, and total shares beneﬁ cially owned by each individual, including
the shares in the respective plans. In addition, the table shows shares that may be purchased pursuant to stock
options that are exercisable within 60 days of February 4, 2005.

Name of Individual or Identity of Group

Robert A. Armitage

Steven C. Beering, M.D.

Sir Winfried F. W. Bischoff

J. Michael Cook

Martin S. Feldstein, Ph.D.

George M. C. Fisher

Alfred G. Gilman, M.D., Ph.D.

Charles E. Golden

Karen N. Horn, Ph.D.

John C. Lechleiter, Ph.D.

Ellen R. Marram

Steven M. Paul, M.D.

Franklyn G. Prendergast, M.D., Ph.D.

Sir John Rose

Kathi P. Seifert

Sidney Taurel

Savings Plan
Shares

631

—

1,142

—

11,340

—

2,350

—

14,976

All directors and executive ofﬁ cers as a group (20 persons):

Directors’ Deferral Plan
Shares (1)

Total Shares Owned
Beneﬁ cially (2)

Stock Options Exercisable
within 60 days of
February 4, 2005

—

1,232

768

—

736

1,973

885

—

1,135

—

736

—

994

1,561

1,241

—

19,089

28,080

5,657

1,800

3,158

18,050

9,090

48,273

22,866

177,646(3)

3,158

70,824

14,263

1,689

13,756

877,647

1,488,563

67,900

8,400

5,600

—

2,800

5,600

8,400

760,000

8,400

453,110

—

375,900

8,400

—

8,400

2,082,838

(1) See description of the Directors’ Deferral Plan, page 66.
(2) Unless otherwise indicated in a footnote, each person listed in the table possesses sole voting and sole

investment power with respect to the shares shown in the table to be owned by that person. No person listed
in the table owns more than 0.0775 percent of the outstanding common stock of the company. All directors and
executive ofﬁ cers as a group own 0.131 percent of the outstanding common stock of the company.

(3) The shares shown for Dr. Lechleiter include 12,151 shares that are owned by a family foundation for which he
is a director. Dr. Lechleiter has shared voting power and shared investment power over the shares held by the
foundation.

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Principal Holders of Stock
To the best of the company’s knowledge, the only beneﬁ cial owners of more than 5 percent of the outstanding
shares of the company’s common stock are Lilly Endowment, Inc. (the “Endowment”) and Capital Research and
Management Company. The following table sets forth information regarding this ownership:

Name and Address

Lilly Endowment, Inc.
2801 North Meridian Street
Indianapolis, Indiana 46208

Number of Shares
Beneﬁ cially Owned

151,180,804
(as of February 4, 2005)

Capital Research and Management Company
333 South Hope Street
Los Angeles, California 90071

70,067,500
(as of December 31, 2004)

Percent of
Class

13.35%

6.2%

The Endowment has sole voting and sole investment power with respect to its shares. The board of directors of the
Endowment is composed of Mr. Thomas M. Lofton, chairman; Mr. N. Clay Robbins, president; Mrs. Mary K. Lisher;
Drs. Otis R. Bowen and William G. Enright; and Messrs. Daniel P. Carmichael, Eli Lilly II, and Eugene F. Ratliff
(Emeritus Director). Each of the directors is a shareholder of the company.

Capital Research and Management Company acts as investment adviser to various registered investment

companies. It has no voting power and sole investment power with respect to its shares.

Items of Business To Be Acted Upon at the Meeting

Item 1. Election of Directors

Under the company’s articles of incorporation, the board is divided into three classes with approximately one-third
of the directors standing for election each year. The term for directors elected this year will expire at the annual
meeting of shareholders held in 2008. Each of the nominees listed below has agreed to serve that term. If any
director is unable to stand for election, the board may, by resolution, provide for a lesser number of directors or
designate a substitute. In the latter event, shares represented by proxies may be voted for a substitute director.

The board recommends that you vote FOR each of the following nominees:
• George M.C. Fisher
• Alfred G. Gilman, M.D., Ph.D.
• Karen N. Horn, Ph.D.
• Sir John Rose

Biographical information about these nominees can be found on pages 58–59 of this proxy statement.

Item 2. Proposal To Ratify the Appointment of Principal Independent Auditors

The audit committee has appointed the ﬁ rm of Ernst & Young LLP as principal independent auditors for the com-
pany for the year 2005. In accordance with the bylaws, this appointment is being submitted to the shareholders for
ratiﬁ cation. Ernst & Young served as the principal independent auditors for the company in 2004. Representatives
of Ernst & Young are expected to be present at the annual meeting and will be available to respond to appropriate
questions. Those representatives will have the opportunity to make a statement if they wish to do so.

The board recommends that you vote FOR ratifying the appointment of Ernst & Young LLP as principal indepen-
dent auditors for 2005.

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7979

Shareholder Proposals

Proponent Information
The following six proposals were submitted by shareholders. We will provide the names and addresses of the pro-
ponents of these proposals, as well as the number of shares of Lilly stock owned by them, upon request by phone
at 317-433-5112, by e-mail at annualmeeting@lilly.com, or in writing to the company’s secretary at Lilly Corporate
Center, Indianapolis, Indiana 46285.

Item 3. Shareholder Proposal Regarding Separating the Roles of Chairman and Chief Executive Ofﬁ cer

The board recommends that you vote AGAINST this proposal.

Separating the Roles of Chairman and Chief Executive Ofﬁ cer
Resolved, The shareholders of Lilly (Eli) and Company (the “Company”) request the Board of Directors establish a
policy of, whenever possible, separating the roles of Chairman and Chief Executive Ofﬁ cer, so that an independent
director who has not served as an executive ofﬁ cer of the Company serves as Chair of the Board of Directors.

This proposal shall not apply to the extent that complying would necessarily breach any contractual obliga-

tions in effect at the time of the 2005 shareholder meeting.

Statement of Support: We believe in the principle of the separation of the roles of Chairman and Chief Executive
Ofﬁ cer. This is a basic element of sound corporate governance practice. In addition, the lack of access to medicines
has created a leadership crisis at our company which a separation of the Chair and CEO would begin to address.

We believe an independent Board Chair—separated from the CEO—is the preferable form of corporate gover-

nance. The primary purpose of the Board of Directors is to protect shareholder’s interests by providing indepen-
dent oversight of management and the CEO. The Board gives strategic direction and guidance to our Company.

The Board will likely accomplish both roles more effectively by separating the roles of Chair and CEO. An inde-
pendent Chair will enhance investor conﬁ dence in our Company and strengthen the integrity of the Board of Directors.
A number of respected institutions recommend such separation. CalPER’s Corporate Core Principles and
Guidelines state: “the independence of a majority of the Board is not enough” and that “the leadership of the board
must embrace independence, and it must ultimately change the way in which directors interact with management.”

An independent board structure will also help the board address complex policy issues facing our company,

foremost among them the crisis in access to pharmaceutical products.

Millions of Americans and others around the world have no access to our company’s life-saving medicines.
This is an emergency, and our company’s charitable work, while laudable, is neither a sufﬁ cient nor strategic re-
sponse. We believe an independent Chair and vigorous Board will bring greater focus to this ethical imperative, and
be better able to forge solutions for shareholders and patients to address this crisis.

The current business model of the pharmaceutical sector is undergoing signiﬁ cant challenges. The industry
has generated substantial revenue from American purchasers, who pay higher prices for medicines than people
in other developed countries. Pressure on drug pricing and dependence on this business model may impact our
company’s long-term value.

In order to ensure that our Board can provide the proper strategic direction for our Company with indepen-

dence and accountability, we urge a vote FOR this resolution.

Statement in Opposition to the Proposal Regarding Separating the Roles of Chairman and Chief Executive Ofﬁ cer
The directors and corporate governance committee and the public policy and compliance committee of the board
have reviewed this proposal, and believe that the strategy of combining the roles of board chair and chief execu-
tive ofﬁ cer (“CEO”) generally provides the most efﬁ cient and effective leadership model for the company and that
the board’s corporate governance principles ensure the board’s independence. In addition, while there is an urgent
need for health care reforms in the United States, the board does not agree that the means outlined under this
proposal will achieve greater pharmaceutical access or allow us to better address the pressures on our business.
Lilly has a strong, independent board that operates under sound principles of corporate governance. See
pages 62–65 for a full description of the board’s governance principles. The board is currently composed entirely of
independent, nonemployee members with two exceptions, the chief ﬁ nancial ofﬁ cer and the CEO, who also serves
as chair. The board’s policy is that there should always be a substantial majority (75 percent or more) of inde-
pendent, nonemployee directors. The independent chair of the compensation committee serves as the presiding
director of the board. He or she recommends to the board the process by which a new chairman and chief execu-

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tive ofﬁ cer will be selected, depending upon the circumstances at the time. Additionally, the independent directors
meet in executive session after every regular board meeting, and at least annually to consider the performance of
the company and the CEO. The compensation committee chair serves as presiding director for these sessions.

The public policy and compliance committee (the “committee”), which is responsible for non-ﬁ nancial compli-

ance and issues of public policy, is composed solely of independent directors, who provide appropriate independent
oversight of public policy issues for the board. The committee considers compliance matters and political, social
and legal trends and issues that may have an impact on the business or reputation of the company. The committee
also oversees corporate policies and practices that relate to public policy and compliance. For example, in the past
two years the committee has considered, among other things, pharmaceutical pricing and access to medicines, the
United States Medicare Modernization Act, importation, and intellectual property.

With regard to the concerns about pharmaceutical access that prompted this shareholder proposal, we agree

that signiﬁ cant changes are needed in the United States health care system. We recognize and embrace the need
for sustainable reforms that will improve patient access to health care and cut waste and inefﬁ ciency out of the
system, while preserving the free-market, competitive environment that produces innovative new health care
solutions for patients. Until such a comprehensive solution is reached, we are working to address the immediate
needs of those without access to health care while maintaining our ability to discover and develop new medicines.
Our most recently introduced access program is LillyAnswers, a program designed to provide needy seniors
with access to the company’s medicines. Patients enrolled in LillyAnswers pay only a $12 administrative fee for a
30-day supply of any Lilly prescription medication at participating pharmacies. Medicare-eligible individuals who
do not have public or private coverage for prescription medicine, and who have an income below 200 percent of
the federal poverty level, are eligible for LillyAnswers. This program is also available to patients through the new
Medicare discount card program. From its inception to December 31, 2004, LillyAnswers has enrolled more than
330,000 members and ﬁ lled approximately 1,525,000 prescriptions.

In addition, under our long-standing Lilly Cares program, we offer free medication, through physicians, to
patients who are otherwise unable to obtain their Lilly medicine. In 2004, we responded to more than 280,000 Lilly
Cares requests, providing more than $166 million in free products to people in need.

We also assist patients in obtaining reimbursement and product supplies through programs designed speciﬁ -

cally for several products, including:

• Gemzar® (cancer)
• Humatrope® (human growth hormone)
• Forteo® (severe osteoporosis)
• Xigris® (severe sepsis)
• Alimta® (malignant pleural mesothelioma and non-small cell lung cancer)

On the international front, in 1999, the company initiated a program to improve access to tuberculosis care

worldwide, and in June 2003 we announced the Lilly MDR-TB Partnership. Working with the World Health Organi-
zation (WHO) and Médecins Sans Frontières (MSF), we now distribute a signiﬁ cant amount of our production of ca-
preomycin and cycloserine for multi-drug resistant tuberculosis (MDR-TB) via the WHO at a fraction of production
cost. As part of this program, we are transferring—free of charge—the technology to manufacture these drugs in
nations where the disease is most prevalent. We are partnering with the WHO, the U.S. Department of Health and
Human Services Center for Disease Control, Brigham and Women’s Hospital, and Purdue University to increase
both the number of trained personnel and the supply of drugs available to treat MDR-TB.

Finally, we have a number of other philanthropic efforts under way to increase access to medicines, including

ﬁ nancial support to organizations involved in:

• patient advocacy
• disease and treatment research
• relevant education
• improving access to medical care
• programs that assist patients in getting appropriate treatment and living with their diseases.

We believe our ultimate responsibility is to continue to provide innovative products that address patients’
needs and to provide payers with demonstrable value. We are working hard to ﬁ nd ways to do this more efﬁ ciently
and at lower cost.

In summary, we share the proponents’ goal of improved access to health care but not their approach. The

company will continue to be a strong advocate for reforms that improve access to needed medicines while main-
taining a free-market health care system and protecting our ability to deliver breakthrough medicines.

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Item 4. Shareholder Proposal Regarding Importation of Drugs

The board recommends that you vote AGAINST this proposal.

Re-Importation of Drugs
Resolved, That the shareholders of Eli Lilly Inc. (“Lilly”) request that the Board of Directors (1) adopt a policy that
does not constrain the reimportation of prescription drugs into the U.S. by limiting the supply of drugs in foreign
markets, and (2) prepare a report to shareholders on that policy, at reasonable cost and omitting proprietary infor-
mation, by September 2005.

Statement of Support: Increasingly U.S. citizens, especially seniors, are purchasing prescription drugs abroad
because such drugs are substantially cheaper. The Congressional Budget Ofﬁ ce has conﬁ rmed that brand name
drugs cost, on average, 33 to 55 percent less in other industrialized countries than in the U.S. A Civil Society Insti-
tute survey indicates that as many as 18 percent of citizens are splitting or skipping pills to cut drug costs, placing
them at health risk. The escalating cost of prescription drugs has been the subject of intense media attention, and
spurred the enactment of a Medicare prescription drug beneﬁ t in 2003.

The importation of prescription drugs is a growing business. Canada has been a principal source for such
exports to the U.S. These exports have grown from $50 million in 1998 to nearly $1 billion in 2004. State and local
governments, which provide health beneﬁ ts to state employees, retirees, and others, are encouraging reimporta-
tion. Minnesota, New Hampshire, North Dakota, Wisconsin and Illinois have established web sites to connect state
residents with Canadian pharmacies the states have deemed safe. Vermont is suing the Food and Drug Administra-
tion for wrongfully denying permission to set up a reimportation program.

Lilly announced in October 2003 that it would limit the supply of its prescription drug products to 24 drug
wholesalers in Canada. In its letter to wholesalers, Lilly stated that it would limit sales of its drugs to amounts that
Lilly estimates are sufﬁ cient to supply the Canadian market only, and that its contracts with wholesalers in Canada
do not allow exports. In March 2004, Lilly identiﬁ ed retail pharmacies that could purchase Lilly products through
wholesalers only after submitting purchase orders to Lilly Canada corporate headquarters “for review and ap-
proval of their purchase order quantities.”

We believe that depriving U.S. citizens of affordable access to Lilly’s products may be harmful to Lilly’s brand

name and reputation, and puts Lilly in conﬂ ict with programs supported by its customers. By actively limiting sales
and creating artiﬁ cial shortages of our products, many of which are category leaders or the only drug available for a
particular condition, Lilly is forsaking long-term market development and reputation for near-term higher proﬁ ts.

We are also concerned that the strategy entails regulatory risk. In U.S. federal district court in Minnesota,
class action certiﬁ cation is being sought in suits brought by the Minnesota Seniors Organization and United Senior
Action of Indiana alleging violations of U.S. antitrust laws.

Statement in Opposition to the Proposal Regarding Importation of Drugs
The public policy and compliance committee of the board has reviewed the shareholder proposal and ﬁ nds that it is
not in the best of interest of shareholders as it asks us to develop and promulgate a policy that is in direct conﬂ ict
with existing laws of the United States and our objective of ensuring safe supply of our drugs around the world. In
addition, such a policy would harm our ability to discover and develop innovative drugs.

Importation of pharmaceuticals into the United States is illegal, and the safety of illegally imported products

cannot be ensured. Efforts to open the Canadian system to supply the much larger United States market would
open United States consumers to threats of counterfeit products, product tampering, and product integrity prob-
lems with their medicines. The Canadian government has stated that it will not establish regulatory processes to
address the safety and integrity of pharmaceuticals passing through Canada destined for other countries. The U.S.
Food and Drug Administration has repeatedly stated that it cannot guarantee the safety of medicine coming into the
United States from outside the current regulatory framework. In fact, at the end of last year, the U.S. Department of
Health and Human Services Task Force on Drug Importation (HHS task force) reported on its year-long examination
of the risks and beneﬁ ts of importation. The HHS task force, composed of leaders from across federal government,
gathered information from around the world, heard testimony from stakeholders of all kinds, and concluded that
allowing importation from other countries would open a channel for potentially dangerous counterfeit drugs.

Maintaining product integrity is essential to patient safety. The company’s decision to supply Canadian whole-

salers only sufﬁ cient product to meet local Canadian demand is consistent with historical company contract
requirements and with our evaluation of the safety of the Canadian system. If the company does not take steps to
protect the United States and Canadian supply chains from counterfeiting and tampering, patients could be placed

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at risk and we could face legal and ﬁ nancial threats and harm to our reputation.

In addition, the Canadian government places price controls on medicines. Importing artiﬁ cially low pharma-
ceutical prices from Canada introduces price controls into the United States’ free market system. Price controls
around the world discourage investment in research and development, limiting innovation. The HHS task force
found that legalized importation would likely adversely effect incentives for research and development, thereby
slowing the ﬂ ow of new drugs. This conclusion is supported by a report from the U.S. Department of Commerce
(DOC), which estimated that price controls in developed countries cost U.S drug companies lost sales sufﬁ cient to
fund research and development that could produce up to three to four new drugs per year.

The company understands that some individuals struggle to pay for our medicines. The HHS task force also
found that total savings to consumers from legalized importation would be a small percentage relative to total drug
spending in the U.S. (about 1 to 2 percent). In the interest of patients, we supported the addition of a pharmaceutical
beneﬁ t program to Medicare. In addition, we have taken steps to ensure access to our medicines through our Lil-
lyAnswers and Lilly Cares programs. We fully support new approaches to providing greater access to pharmaceu-
ticals while protecting the incentives to invest in the safe and effective cures of tomorrow. Providing greater access
at the expense of patient safety and product integrity is not the right solution. More information on both our patient
assistance programs and industry websites and call centers can be found at www.lilly.com/products/access/.

Item 5. Shareholder Proposal Regarding Limiting Product Supply to Canada

The board recommends that you vote AGAINST this proposal.

Limiting Product Supply to Canada
Whereas, current business practices of the company have resulted in a pricing structure that charges United
States customers signiﬁ cantly higher prices for the same prescription medicines made available at signiﬁ cantly
lower prices in Canada, other developed countries and world markets; and

Whereas, governmental agencies and individuals in the United States are demanding affordable drug prices

and are taking actions to access lower priced products from Canada and other world markets; and

Whereas, according to published reports, the company has cut supplies of its medicines to Canadian whole-
salers and companies that it claims allowed its product to be sold to Americans seeking lower prices available in
the Canadian market; and

Whereas, according to published reports, the company’s actions have resulted in lawsuits and threatened

lawsuits; and

Whereas, the company’s actions to limit supply of medicines in Canada may violate local, national and interna-
tional laws and could result in large settlements, large awards of damages and potential punitive damages which
would negatively impact the economic stability of the company and the value of its shares.

Resolved, Shareholders request the Board of Directors to prepare a report on the effects on the long-term

economic stability of the company and on the risks of liability to legal claims that arise from the company’s policy
of limiting the availability of the company’s products to Canadian wholesalers or pharmacies that allow purchase of
its products by U.S. residents. The report should be prepared at reasonable cost and omitting proprietary informa-
tion, by September 30, 2005.

Statement of support: We urge shareholders to vote FOR this proposal.

Statement in Opposition to the Proposal Regarding Limiting Product Supply to Canada
The public policy and compliance committee of the board has reviewed this proposal and believes that creating
such a report is an unnecessary, resource-intensive exercise that detracts from the company’s ability to meet its
current business priorities—including addressing the issue of uninsured and under-insured Americans in a safer,
more meaningful way.

We disclose material ﬁ nancial and legal risks to the company in Forms 10-Q, 10-K, and 8-K ﬁ lings with the
Securities and Exchange Commission (SEC), and public policy issues such as access to medicines in our annual
Corporate Responsibility Report (available on our website at responsible.lilly.com). We believe the business risks
from our supply chain management practices are immaterial, do not warrant further discussion in our SEC ﬁ lings,
and do not rise to the level of a special report. We have acted independently to develop supply chain management
systems, policies, and associated customer contracts. We do not believe we will assume regulatory risk by em-
ploying our current global strategy linking supply of our products to Canadian wholesalers to Canadian patient
demand. Moreover, while we have disclosed in our SEC ﬁ lings that we (along with several other pharmaceutical

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companies) have been named in lawsuits alleging that our conduct in preventing commercial importation of pre-
scription drugs violates antitrust laws, we believe the suits are without merit and will not have a material impact
on our operations.

The Federal Food, Drug, and Cosmetic Act makes it illegal to import unapproved, misbranded, and adulter-

ated drugs into the United States, which includes foreign versions of U.S.-approved medications. We adhere to
these laws. Importation of pharmaceutical products puts patients at greater risk of buying and receiving product
that is outdated or otherwise compromised, or counterfeit copies of our products that contain inert or overly potent
ingredients.

We have taken steps to ensure access to our medicines through our LillyAnswers and Lilly Cares programs.

We fully support new approaches to providing greater access to pharmaceuticals while protecting the incentives to
invest in the safe and effective cures of tomorrow. Importing medicines at the expense of patient safety and prod-
uct integrity is not the right solution.

Item 6. Shareholder Proposal Regarding Reports on the Company’s Political Contributions

The board recommends that you vote AGAINST this proposal.

Resolved, that the shareholders of Eli Lilly (“Company”) hereby request that the Company provide a report updated
semi-annually, disclosing the Company’s:
(1) Policies and procedures for political contributions (both direct and indirect) made with corporate funds.
(2) Monetary and non-monetary contributions to political candidates, political parties, political committees and

other political entities organized and operating under 26 USC Sec. 527 of the Internal Revenue Code including
the following:

a. An accounting of the Company’s funds contributed to any of the persons described above;
b. The business rationale for each of the Company’s political contributions; and
c.

Identiﬁ cation of the person or persons in the Company who participated in making the decisions to
contribute.

This report shall be posted on the company’s website to reduce costs to shareholders.

Statement of Support: As long-term shareholders of Eli Lilly, we support policies that apply transparency and
accountability to corporate political giving. In our view, such disclosure is consistent with public policy in regard to
public company disclosure.

There are various disclosure requirements for political contributions but they are difﬁ cult for shareholders to
access and are not complete. Although the Bi-Partisan Campaign Reform Act enacted in 2002 prohibits corporate
contributions to political parties at the federal level, corporate soft money state-level contributions are legal in 49
states and disclosure standards vary widely.

Corporations can also make unlimited contributions to “Section 527” organizations, political committees
formed for the purpose of inﬂ uencing elections but not supporting or opposing speciﬁ c candidates. These do not
have to be reported.

Between January 1, 1991 and December 31, 2002 the Pharmaceutical Research and Manufacturers Associa-
tion (PhRMA)—of which the company is a dues-paying member—gave $35.5 million in soft money political contri-
butions. (Follow the Dollar Report, July 1, 2003, Common Cause).

Company executives exercise wide discretion over the use of corporate resources for political purposes. They
make decisions without a stated business rationale for such donations. In 2001-02, the last fully reported election
cycle, Eli Lilly contributed at least $853,024 (The Center for Responsive Politics, Soft Money Donors, http://www.
opensecrets.org/softmoney).

Relying only on the limited data available from Federal Election Commission and the Internal Revenue Ser-
vice, the Center for Responsive Politics, a leading campaign ﬁ nance watchdog organization, provides an incomplete
picture of the Company’s political donations.

Proponents believe our company should be using its resources to win in the marketplace through superior
products and services to its customers, not because it has superior access to political leaders. Political power can
change, leaving companies relying on this strategy vulnerable.

Finally, the requested report represents a minimal cost to the company, as presumably management already

monitors corporate resources used for such purposes. Although lacking a business rationale for such contribu-
tions, our peer company Pﬁ zer discloses these contributions on an annual basis.

There is currently no single source of information that provides the information sought by this resolution. That

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is why we urge your support for this critical governance reform.

Statement in Opposition to the Proposal Regarding Reports on the Company’s Political Contributions
The public policy and compliance committee of the board has reviewed this proposal and recommends a vote
against it as we have agreed to publish most of the information requested by the shareholder. The additional re-
porting requirements would place an undue administrative burden on the company and, for some elements, would
violate our employee privacy policy.

Beginning in the ﬁ rst quarter of 2005, we will publish the following information for both company and employ-

ee political action committee (PAC) contributions in the United States on our website (www.lilly.com):

—candidate names and party afﬁ liation listed by state
—candidate districts
—PAC donations to each candidate’s campaign
—company donations to each candidate’s campaign
—company and PAC donations to state political organizations and Section 527 organizations.

This information will be updated annually.
We are committed to participation in the political process as a responsible corporate citizen to help inform the
debate in the United States over health care and pharmaceutical innovation. As a company that operates in a highly
competitive and regulated industry, we must participate in the political process in order to fulﬁ ll our ﬁ duciary
responsibility to our shareholders.

The company sponsors an employee PAC, funded by voluntary contributions from eligible employees. In addi-
tion to the information available on our website, detailed federal PAC contribution data are available to the public
on the Federal Election Committee (FEC) website and through the individual states’ agencies. The company does
not contribute corporate funds to any federal political candidate or national political party.

The employee PAC board of directors, representing a cross-section of PAC-eligible employees, oversees
the donations made by the PAC and the company. After establishing a budget for PAC and company contributions
within each state and a budget for federal PAC contributions, the following factors are considered when evaluating
candidates to support: dedication to improving the relationship between business and government; demonstrated
potential for legislative leadership; degree of company involvement in the relevant community (e.g., presence of
a Lilly facility or concentration of employees or retirees); historic voting record or announced positions on issues
of importance to the company; and demonstrated leadership on key committees of key importance to our busi-
ness. Members of the company’s government affairs group bring forward speciﬁ c recommendations for PAC and
company contributions in the United States; additional approvals by the chief ﬁ nancial ofﬁ cer and general counsel
of the company are required for company contributions.

Item 7. Shareholder Proposal Regarding Performance-Based Stock Options

The board recommends that you vote AGAINST this proposal.

Performance-Based Stock Options
Resolved, The shareholders of Eli Lilly & Co. (“Lilly”) urge the Board of Directors to adopt a policy that a signiﬁ -
cant portion of future stock option grants to senior executives shall be performance-based. “Performance-based”
stock options are deﬁ ned as:

(1) indexed options, whose exercise price is linked to an industry index;
(2) premium-priced stock options, whose exercise price is above the market price on the grant date; or
(3) performance-vesting options, which vest when the market price of the stock exceeds a speciﬁ c target.

Statement of Support: As shareholders, we support compensation policies for senior executives that provide
challenging performance objectives and motivate executives to achieve long-term shareholder value. We are con-
cerned, however, that Lilly is not tying the award of stock options closely enough to the Company’s performance.

At present, Lilly awards stock options at the market price on the date they are granted. In our view, standard

stock options can give windfalls to executives who are lucky enough to hold them during a bull market and penalize
executives who hold them during a bear market. Investors and market observers, including Warren Buffett, Alan
Greenspan and Al Rappaport, criticize standard options as inappropriately rewarding mediocre or poor perfor-
mance. Mr. Buffett has characterized standard stock option plans as “really a royalty on the passage of time,” and
all three favor using indexed options.

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Performance-based options tie compensation more closely to company performance. Premium-priced and
performance-vesting options encourage senior executives to set and meet ambitious but realistic performance tar-
gets. Indexed options may have the added beneﬁ t of discouraging repricing in the event of an industry downturn.

We believe that adopting performance-based options is the logical next step for Lilly to better align its com-

pensation practices with long term shareholder interests.

The need for clearer standards is, we believe, illustrated by the compensation award to the Chairman and

Chief Executive Ofﬁ cer (“CEO”). In 2003, the CEO received a raise in each of these categories: salary, bonus, and
long-term compensation. The 350,000 stock options that he received in 2003 (identical to the number awarded in
2002) were not based upon objective performance measures with relative weights assigned, but were based upon
“internal relativity, peer group data, and the size of grants previously made.” His total 2003 compensation exceed-
ed the median for CEOs in Lilly’s peer group and came to an estimated $9.9 million when the value of 350,000 stock
options granted is added to salary, bonus and all other compensation totaling over $2.8 million.

We believe that equity compensation for senior executives should be more closely tied to Lilly’s performance.

Lilly stock has consistently underperformed the S&P 500 index for the one-, three- and ﬁ ve-year periods ending
November 10, 2004. In addition, average earnings have trailed Lilly’s peers in recent years, as the company has
experienced the early loss of patent protection for Prozac, as well as a hiring freeze and layoffs.

Statement in Opposition to the Performance Based Stock Option Proposal
The compensation committee of the board of directors has reviewed this proposal and believes that, on balance, it
is not in the best interests of shareholders.

The shareholder states that executive compensation policies should “provide challenging performance objec-

tives and motivate executives to achieve long-term shareholder value.” We agree. For many years our executive
compensation policy has been grounded on the principle that compensation should foster the long-term focus
necessary for success in the pharmaceutical industry. We do not agree, however, that the best way to achieve that
objective is to adopt the mandate suggested by the shareholder. Although in some circumstances the types of stock
options recommended by the shareholder may be useful, we believe that the compensation committee needs ﬂ ex-
ibility to grant other forms of options, including the currently used market-price options, as circumstances require.
For Lilly executives, cash and equity compensation are tied closely to both individual and company perfor-

mance. The compensation committee takes into account individual performance in establishing base salaries as
well as the size of bonus and equity targets. As to company performance, a signiﬁ cant proportion of total cash com-
pensation is awarded under the company’s bonus plan, which is based on growth in sales and earnings per share. In
establishing the performance targets under the plan, we consider the expected performance of Lilly and the other
companies in our peer group. With respect to equity compensation, we use a mix of stock options and performance
awards, which are stock grants that are payable only if the company achieves certain earnings-per-share growth
targets. As with the cash bonuses, we set the targets for performance awards with reference to our projections of
peer group performance. Finally, as we move into 2005 and beyond, we are reducing the size of stock option grants
at all levels of management in favor of a greater emphasis on performance awards.

The past three years demonstrate that pay for performance is very much a part of both cash and equity com-
pensation at Lilly. The company has faced a number of difﬁ cult internal and external challenges in that time, and
executive compensation reﬂ ects those challenges:
• There were no cash bonuses paid for 2002.
• Cash bonuses for 2003 and 2004 were below target.
• There were no performance awards earned with respect to 2002 or 2003.

Additionally, as of early February 2005, virtually all stock options granted since 1997 are “under water”—that is, the
exercise price is higher than the current market price of the stock. We do not reprice options.

Regarding Mr. Taurel’s 2003 compensation, we note that while he did receive an increase in base salary, Mr.

Taurel—at his own request—worked for a $1 base salary in 2002. Further, his 2003 salary was only a 4 percent
increase over his 2001 salary. His increase in cash bonus in 2003 was a result of there being no bonus payout in
2002. Finally, with respect to his long-term compensation in 2003, he did not receive a performance award payout,
and his stock option grant was the same number of shares as the previous year.

The compensation committee, aided by its independent compensation consultant, will continue to review
compensation trends and consider new ideas, including performance-based options. However, to ensure that the
company attracts and retains talented leadership and motivates its leaders to deliver long-term growth in share-
holder value, the compensation committee must have ﬂ exibility to design programs as it deems most appropriate,
without being restricted by mandates such as the one proposed by the shareholder.

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Item 8. Shareholder Proposal Regarding Animal Testing

The board recommends that you vote AGAINST this proposal.

Animal Testing
Whereas, statistics published by research oversight bodies in North America and Europe document that the vast
majority of painful and distressing animal experiments are conducted to satisfy outdated, government-mandated
testing requirements2 and that such testing is on the rise;3 and

Whereas, nearly 60% of animals used in regulatory testing suffer pain ranging from moderate to severe, all

the way to pain near, at, or above the pain tolerance threshold,4 generally without any pain relief; and

Whereas, non-animal test methods are generally less expensive,5 more rapid, and always more humane, than

animal-based tests; and

Whereas, unlike animal tests, non-animal methods have been scientiﬁ cally validated and/or accepted as total

replacements for the following ﬁ ve toxicity endpoints: skin corrosion (irreversible tissue damage), skin irritation
(milder and reversible damage), skin absorption (the rate of chemical penetration), phototoxicity (an inﬂ ammatory
reaction caused by the interaction of a chemical with sunlight), and pyrogencity (a fever-like reaction that can oc-
cur when certain intravenous drugs interact with the immune system);

Now Therefore Be It Resolved, that the shareholders request that the Board:
(1) Commit speciﬁ cally to using only non-animal methods for assessing skin corrosion, irritation, absorption,

phototoxicity, and pyrogenicity.

(2) Conﬁ rm that it is in the Company’s best interest to commit to replacing animal-based tests with non-ani-

mal methods.

(3) Petition the relevant regulatory agencies requiring safety testing for the Company’s products to accept

as total replacements for animal-based methods, those approved non-animal methods described above,
along with any others currently used and accepted by the Organization for Economic Cooperation and De-
velopment (OECD) and other developed countries.

Statement of Support: This Resolution is designed to harmonize the interests of sound science with the elimina-
tion of animal-based test methods where non-animal methodologies exist. It seeks to encourage the relevant
regulatory agencies to join their peers in accepting validated in vitro and other non-animal test methods. It will not
compromise consumer safety or violate applicable statutes and regulations.

Further, this Resolution commits the Company to end animal testing for ﬁ ve speciﬁ c endpoints in favor of valid
non-animal methods. These include the 3T3 Neutral Red Uptake Phototoxicity Test, human skin equivalent tests for
corrosivity, and a human blood-based test for pyrogenicity, all of which have been successfully validated through
the European Centre for the Validation of Alternative Methods.6 Several non-animal methods have also been
adopted as Test Guidelines by the OECD7 (an alliance of 30 member countries including the US, EU, Japan, Canada
and Australia). Regulatory agencies in OECD member countries are not at liberty to reject data from non-animal
tests for skin corrosion, skin absorption and phototoxicity where such data have been generated in accordance with
an OECD Test Guideline.

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Statement in Opposition to the Animal Testing Proposal
The public policy and compliance committee of the board has reviewed this proposal and recommends that you
vote against it. We are committed to the responsible treatment of all laboratory animals and work to eliminate or
reduce their use in our pharmaceutical research. Where animals must be used, we take every measure to assure
that the fewest number of animals are used and that discomfort and distress are either eliminated or minimized.
All animals at the company are cared for under the close supervision of experienced veterinarians and trained ani-

2 CCAC Animal Use Survey-2001: http://www.ccac.ca/english/FACTS/Facframeaus2001.htm
3 Statistics of Scientiﬁ c Procedures on Living Animals—Great Britain—2002.http://www.ofﬁ cial-documents.co.uk/
document/cm58/5886/5886.htm
4 CCAC Animal Use Survey—2001
5 Derelanko MJ and Hollinger MA (Eds.). (2002). Handbook of Toxicology, Second Ed, 1414 pp. Washington, DC: CRC
Press.
6 ECVAM website: http://ecvam.jrc.it
7 OECD test guidelines: http://www.oecd.org/document/22/0,2340,en_2649_34377_1916054_1_1_1_1,00.htm

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mal caretakers. Our animal care and use policies and guidelines are published in our Corporate Citizenship Report
on our website (www.lilly.com). We have been accredited by the Association for the Assessment and Accreditation
of Laboratory Animal Care, International for more than 30 years.

Speciﬁ cally, we are committed to using non-animal methods for assessing skin corrosion, irritation, absorp-

tion, phototoxicity and pyrogenicity where appropriate. This type of testing is already a rare occurrence at the
company, due to the focus of our research and development programs. We replace animal testing with analysis by
computer models or other non-animal adjunct methods whenever appropriate. We use animals only in pre-clinical
research to conﬁ rm safety and efﬁ cacy of medicines when there are no alternatives that adequately model the hu-
man body. We continually evaluate testing methods that involve fewer animals, or no animals at all.

However, we are currently required by regulators such as the U.S. Food and Drug Administration and the
International Conference on Harmonization (ICH) to conduct conﬁ rmatory testing on animals for veriﬁ cation of
product safety prior to administering investigational drugs and biologics to human beings. In many cases, the use
of non-animal methods can replace animal testing; however, while there are cases where a non-animal screen can
indicate the probability that a compound is safe, an animal test is scientiﬁ cally necessary to conﬁ rm this ﬁ nding.
Because our top priority must always be the safety of research volunteers and patients, we cannot in good con-
science petition the regulatory agencies that currently require safety testing on animals to accept only non-animal
testing methods until those testing methods are deemed by a consensus of the research community and the regu-
lators to be of equal accuracy, quality and reliability to testing in a complex living organism.

Other Matters

Section 16(a) Beneﬁ cial Ownership Reporting Compliance
Under Securities and Exchange Commission rules, our directors and executive ofﬁ cers are required to ﬁ le with the
Securities and Exchange Commission reports of holdings and changes in beneﬁ cial ownership of company stock.
We have reviewed copies of reports provided to the company, as well as other records and information. Based
on that review, we concluded that all reports were timely ﬁ led except: Mr. Gerhard Mayr (now retired) was late in
reporting a stock option grant; Dr. Steven Paul was late in reporting shares of stock withheld to pay taxes due upon
vesting of a restricted stock grant; and Mr. Sidney Taurel was late in reporting a gift of shares to his wife. Upon
discovery, these matters were promptly addressed.

Other Information Regarding the Company’s Proxy Solicitation
We will pay all expenses in connection with our solicitation of proxies. We will pay brokers, nominees, ﬁ ducia-
ries, or other custodians their reasonable expenses for sending proxy material to and obtaining instructions from
persons for whom they hold stock of the company. We expect to solicit proxies primarily by mail, but directors,
ofﬁ cers, and other employees of the company may also solicit in person or by telephone, telefax, or electronic mail.
We have retained Georgeson Shareholder Communications Inc. to assist in the distribution and solicitation of prox-
ies. Georgeson may solicit proxies by personal interview, telephone, telefax, mail, and electronic mail. We expect
that the fee for those services will not exceed $17,000 plus reimbursement of customary out-of-pocket expenses.

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By order of the board of directors,
Alecia A. DeCoudreaux
Secretary
March 8, 2005

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Appendix A

Audit Committee Charter
Purpose
The audit committee’s primary function is to assist the board of directors in fulﬁ lling its oversight responsibilities
by monitoring:

• The integrity of ﬁ nancial information which will be provided to the shareholders and others;
• The systems of internal controls and disclosure controls which management has established;
• The performance of internal and external audit functions; and
• The company’s compliance with legal and regulatory requirements.

Composition
The committee shall consist of no fewer than three directors. All committee members must meet applicable
New York Stock Exchange (NYSE) and Securities and Exchange Commission (SEC) independence and experience
requirements. All committee members shall be ﬁ nancially literate or must become ﬁ nancially literate within a
reasonable period of time after appointment to the committee. At least one member of the committee shall be an
audit committee ﬁ nancial expert as determined by the board in accordance with NYSE listing standards. At least
one member of the committee shall serve concurrently on the public policy and compliance committee.

The committee members shall be appointed for one-year terms at the annual meeting of the board. The board

shall designate the chairperson.

Administrative Matters
The committee shall meet not less than six times per year and shall report at the next board meeting following
each such committee meeting. The committee shall meet at least annually with the public policy and compliance
committee. This meeting will allow the audit committee to review non-ﬁ nancial legal and regulatory compliance as
well as the risk assessment and risk management processes, which are overseen by the public policy and compli-
ance committee. The committee shall meet periodically with management, the internal auditors, and the indepen-
dent auditor in separate executive sessions. The committee may request an ofﬁ cer or employee of the company,
the company’s outside counsel, or representatives of the company’s independent auditor to attend a meeting of the
committee or to meet with any members of, or advisors to, the committee. The committee may, at any time, retain
its own outside advisors at the company’s expense.

Supporting Corporate Staff
General Auditor
Ofﬁ ce of the Corporate Secretary
Chief Accounting Ofﬁ cer

Duties and Responsibilities
To fulﬁ ll its duties and responsibilities, the committee shall:

1. Annually review and reassess this charter.
2. Maintain a clear understanding with management and the independent auditors that the committee is directly

responsible for compensation and oversight of the work of the independent auditor, including:
• Having the sole authority (subject to shareholder ratiﬁ cation) to appoint or replace the independent auditor;
• Approving the compensation of the independent auditor;
• Reviewing and evaluating the lead partner of the independent audit team;
• Reviewing the audit scope and audit plan of the independent auditor;
• Obtaining and reviewing, at least annually, a report from the independent auditor which describes the ﬁ rm’s

internal compliance procedures, any issues raised from peer reviews, or other quality reviews of the ﬁ rm, any
steps taken to deal with the issues, and all relationships between the ﬁ rm and Lilly;

• Ensuring rotation of the lead audit partner as required by law (or any stricter policies as may be established by

the committee);

• Setting clear hiring policies for employees or former employees of the independent auditor; and
• Resolving disagreements between management and the independent auditor regarding ﬁ nancial reporting.

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3. Pre-approve all audit services and approve permitted non-audit services (including fees and terms) to be per-
formed for Lilly by the independent auditor, consistent with the requirements of the SEC and NYSE or any stricter
standards as may be adopted by the committee.

4. Oversee the internal audit function, including:

• Reviewing the appointment and replacement of the general auditor;
• Reviewing and approving the internal audit plan;
• Reviewing signiﬁ cant reports to management prepared by internal audit (and management’s response); and
• Discussing with the independent auditor and management the responsibilities, budget, and stafﬁ ng of the

internal audit function.

The general auditor will report directly to the chair of the audit committee, with a secondary reporting rela-

tionship to the chief ﬁ nancial ofﬁ cer for administrative purposes.

5. Prepare a report for inclusion in the company’s annual proxy statement in accordance with SEC regulations.

6. Review, with management and the independent auditors, the annual and quarterly ﬁ nancial results before they
are ﬁ led in periodic reports with the SEC or other regulators. These reviews shall include discussions with man-
agement and the independent auditor regarding signiﬁ cant ﬁ nancial reporting issues and judgments made in
connection with the preparation of Lilly’s ﬁ nancial statements and any special steps adopted in light of material
control deﬁ ciencies. The committee shall also receive regular reports from the independent auditor on the criti-
cal accounting policies and practices of Lilly and signiﬁ cant alternative treatments of ﬁ nancial information within
GAAP that have been discussed with management. The committee shall discuss with the independent auditor the
auditor’s assessment of the quality, not just the acceptability, of the company’s accounting principles as required
by SAS No. 61.

7. Review and discuss with management Lilly’s earnings press releases, including the use of “pro forma” non-
GAAP information, as well as ﬁ nancial information and earnings guidance provided to analysts and rating agencies.

8. Provide an open avenue of communication between the independent auditor, the general auditor, and the board,
including sufﬁ cient opportunity for the independent auditor and the general auditor to meet with the committee
without members of management present.

9. Consider and review with the independent auditor, the chief accounting ofﬁ cer, and the general auditor:

• The independent auditor’s audit of ﬁ nancial statements and their report thereof;
• The adequacy of the company’s internal controls and disclosure controls;
• Any related signiﬁ cant ﬁ ndings and recommendations of the independent auditors or the internal auditors

together with management’s responses thereto;

• Any difﬁ culties encountered in the course of the audits, including any restriction on the scope of work or access

to required information; and

• Any material written communications between the independent auditor and management, including

management letters or schedules of unadjusted differences.

10. Oversee the company’s dissemination of and compliance with the company’s code of conduct, including but not
limited to those codes that apply speciﬁ cally to employees involved in matters that affect accounting, auditing, and
ﬁ nancial reporting.

11. Review procedures to promote and protect employee reporting of suspected fraud or wrongdoing relating to ac-
counting, auditing, or ﬁ nancial reporting, including procedures for:

• Receiving, retaining, and addressing complaints received by Lilly relating to such matters;
• Enabling employees to submit to the committee, on a conﬁ dential and anonymous basis, any concerns regarding

such matters; and

• Protecting reporting employees from retaliation.

12. Together with the public policy and compliance committee, assist the board in its oversight of legal and regula-
tory compliance. The audit committee shall have sole oversight over matters of ﬁ nancial compliance (accounting,

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auditing, ﬁ nancial reporting, and investor disclosures). As to all other areas of compliance (“non-ﬁ nancial compli-
ance”), the public policy and compliance committee shall have oversight responsibilities in the ﬁ rst instance; how-
ever, the two committees shall meet jointly at least annually to review the major non-ﬁ nancial compliance matters,
including:

• Overall state of compliance
• Signiﬁ cant legal or regulatory compliance exposure
• Material reports or inquiries from regulators.

13. Together with the public policy and compliance committee, review at least annually a summary of the risk as-
sessment and risk management processes and policies.

14. Inquire of management, the general auditor, and the independent auditors about signiﬁ cant ﬁ nancial risks or
exposures and evaluate the steps management has taken to assess and minimize such risks to the company, in-
cluding review of management’s ﬁ nancial risk management policies.

15. Review policies and procedures with respect to senior management’s expense accounts, including their use of
corporate assets, and consider the results of any review of these areas by the general auditor or the independent
auditor.

16. Conduct or authorize investigations into any matters within the committee’s scope of responsibilities. The com-
mittee may retain (at the company’s expense) independent counsel, accountants, or others to assist in the conduct
of any investigation.

17. The committee shall also undertake such additional activities within the scope of its primary functions as the
committee may from time to time determine.

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Senior Management

Sidney Taurel A, B

Chairman of the Board, President, and Chief Executive Ofﬁ cer

Lists are in alphabetical order

Robert A. Armitage A, B

Senior Vice President and General Counsel

Scott Canute A, B

President, Manufacturing Operations

Deirdre P. Connelly A, B

Senior Vice President, Human Resources

Charles E. Golden A, B

Executive Vice President and Chief Financial Ofﬁ cer

John C. Lechleiter, Ph.D. A, B

Executive Vice President, Pharmaceutical Operations

Steven M. Paul, M.D. A, B

Executive Vice President, Science and Technology

Gino Santini A, B

Senior Vice President, Corporate Strategy and Policy

Lorenzo Tallarigo, M.D. A, B

President, International Operations

Alpheus Bingham, Ph.D. B

Vice President, LRL Strategy and e.Lilly

Alan Breier, M.D. B

Bryce Carmine B

Vice President, Medical, and Chief Medical Ofﬁ cer

President, Global Brand Development Teams

Frank M. Deane, Ph.D. B

Vice President, Quality

Timothy R. Franson, M.D. B

Vice President, Global Regulatory Affairs

Michael C. Heim B

Patrick C. James B

Vice President and Chief Information Ofﬁ cer

President, Elanco Animal Health

Elizabeth H. Klimes B

Vice President, Six Sigma

Anne Nobles B

Richard D. Pilnik B

Steven R. Plump B

Lori V. Queisser B

Jacques Tapiero B

Vice President, Corporate Affairs

President, European Operations

Group Vice President, Global Marketing and Sales

Vice President and Chief Compliance Ofﬁ cer

President, Intercontinental Operations

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David E. Thompson B

Vice President, Corporate Strategy and Business Development

Albertus J. van den Bergh B

Vice President, Global Customer Solutions

Thomas R. Verhoeven, Ph.D. B

Vice President, Product Research and Development

Alfonso G. Zulueta B

Vice President, U.S. Sales and Marketing—Neuroscience, Family Health, and Diabetes

A Policy Committee

B Senior Management Forum

Establishes corporate strategy and policy and ensures compliance

Implements corporate strategies and ensures corporate performance, identiﬁ es issues and opportunities,
and facilitates communication and learning

Corporate Information

Annual meeting
The annual meeting of shareholders will be held at Lilly
Center Auditorium, Eli Lilly and Company, Indianapolis,
Indiana, on Monday, April 18, 2005, 11:00 a.m. EST
(Indianapolis time). For more information, see the proxy
statement section of this report.

10-K and 10-Q reports
Paper copies of the company’s Annual Report to the
Securities and Exchange Commission on Form 10-K will
be available in April. Quarterly reports on Form 10-Q are
also available upon request. Anyone wishing to receive
copies of the company’s 10-K or 10-Q reports may send a
written request to:

Eli Lilly and Company
P.O. Box 88665
Indianapolis, Indiana 46208-0665

To access these reports more quickly, you can ﬁ nd all our
SEC ﬁ lings online at: http://investor.lilly.com/edgar.cfm

Stock listings
Eli Lilly and Company common stock is listed on the U.S.
New York and Paciﬁ c stock exchanges and the London and
Swiss stock exchanges. NYSE ticker symbol: LLY. Most
newspapers list the stock as “Lilly (Eli) and Co.”

CEO and CFO Certiﬁ cations
The company’s chief executive ofﬁ cer and chief ﬁ nancial
ofﬁ cer have provided all certiﬁ cations required under
Securities and Exchange Commission regulations with
respect to the ﬁ nancial information and disclosures in
this report. The certiﬁ cations are available as exhibits to
the company’s Form 10-K and 10-Q reports.

In addition, the company’s chief executive ofﬁ cer has
ﬁ led with the New York Stock Exchange a certiﬁ cation to
the effect that, to the best of his knowledge, the company
is in compliance with all corporate governance listing
standards of the Exchange.

Transfer agent and registrar
Wells Fargo Shareowner Services
Mailing address:

Shareowner Relations Department
P.O. Box 64854
St. Paul, Minnesota 55164-0854

Overnight address:

161 North Concord Exchange
South St. Paul, Minnesota 55075
Telephone: 1-800-833-8699
E-mail: stocktransfer@wellsfargo.com
Internet: http://www.wellsfargo.com/com/
shareowner_services

Dividend reinvestment and stock purchase plan
Wells Fargo Shareowner Services administers the Share-
owner Service Plus Plan, which allows registered share-
holders to purchase additional shares of Lilly common
stock through the automatic investment of dividends.
The plan also allows registered shareholders and new
investors to purchase shares with cash payments, either
by check or by automatic deductions from checking or
savings accounts. The minimum initial investment for
new investors is $1,000. Subsequent investments must be
at least $50. The maximum cash investment during any
calendar year is $150,000. Please direct inquiries concern-
ing the Shareowner Service Plus Plan to:
Wells Fargo Shareowner Services
Shareowner Relations Department
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone: 1-800-833-8699

Online delivery of proxy materials
Shareholders may now elect to receive annual reports and
proxy materials online. This reduces paper mailed to the
shareholder’s home and saves the company printing and
mailing costs. To enroll, go to http://proxyonline.lilly.com
and follow the directions provided.

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Trademarks

(pioglitazone hydrochloride, Takeda), Takeda Chemical Industries, Ltd.
Actos®
(pemetrexed disodium, Lilly)
Alimta®
(ruboxistaurin mesylate, Lilly)
Arxxant™
(nizatidine, Lilly), Reliant Pharmaceuticals, LLC
Axid®
(cefaclor, Lilly)
Ceclor®
(tadalaﬁ l, ICOS), Lilly ICOS LLC
Cialis®
(monensin sodium, Elanco)
Coban®
(duloxetine hydrochloride, Lilly)
Cymbalta®
(raloxifene hydrochloride, Lilly)
Evista®
(teriparatide of recombinant DNA origin, Lilly)
Forteo®
(gemcitabine hydrochloride, Lilly)
Gemzar®
(insulin lispro of recombinant DNA origin, Lilly)
Humalog®
(somatropin of recombinant DNA origin, Lilly)
Humatrope®
(human insulin of recombinant DNA origin, Lilly)
Humulin®
(ractopamine hydrochloride, Elanco)
Paylean®
(pergolide mesylate, Lilly)
Permax®
(ﬂ uoxetine hydrochloride, Dista)
Prozac®
(ﬂ uoxetine hydrochloride, Lilly)
Prozac® Weekly™
(abciximab, Centocor), Lilly
ReoPro®
(monensin sodium, Elanco)
Rumensin®
(ﬂ uoxetine hydrochloride, Lilly) Galen (Chemicals) Limited
Sarafem®
(atomoxetine hydrochloride, Lilly)
Strattera®
(olanzapine/ﬂ uoxetine hydrochloride, Lilly)
Symbyax™
(tylosin, Elanco)
Tylan®
(vancomycin hydrochloride, Lilly)
Vancocin®
(drotrecogin alfa (activated), Lilly)
Xigris®
(duloxetine hydrochloride, Lilly)
Yentreve™
(olanzapine, Lilly)
Zyprexa®
Zyprexa® Zydis® (olanzapine, Lilly)

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

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Annual Meeting Admission Ticket

Eli Lilly and Company 2005 Annual Meeting of Shareholders
Monday, April 18, 2005
11 a.m. EST (Indianapolis time)

Lilly Center Auditorium
Lilly Corporate Center
Indianapolis, Indiana 46285

The top portion of this page will be required for admission to the meeting.

Please write your name and address in the space provided below and present this ticket when you enter the Lilly
Center.

A reception (beverages only) will be held from 9:30 to 10:45 a.m. in the Lilly Center.

Name

Address

City, State, and Zip Code

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Detach here

Directions and

From I-70 take Exit 79B; follow signs to McCarty Street. Turn right (east) on McCarty Street; go straight into
Lilly Corporate Center. You will be directed to parking. Be sure to take the admission ticket (the top portion of this
page) with you to the meeting and leave this parking pass on your dashboard.

Take the top portion of this page with you to the meeting.

Detach here

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Eli Lilly and Company
Annual Meeting of Shareholders
April 18, 2005

Complimentary Parking
Lilly Corporate Center

Please place this identiﬁ er on the dashboard of your car as you enter Lilly Corporate
Center so it can be clearly seen by security and parking personnel.

Year in Review

1 Financial Highlights

2 Letter to Shareholders

6 A Pipeline of Innovation at Lilly

8 Lilly: A Good Corporate Citizen

Financials

9 Review of Operations

15 Consolidated Statements of Income

17 Consolidated Balance Sheets

25 Consolidated Statements of Cash Flows

26 Consolidated Statements of Comprehensive Income

27 Segment Information

28 Selected Quarterly Data

29 Selected Financial Data

30 Notes to Consolidated Financial Statements

49 Management’s Report on Internal Control Over Financial Reporting

50 Report of Independent Registered Public Accounting Firm

52 Notice of 2005 Annual Meeting and Proxy Statement

62 Highlights of the Company’s Corporate Governance Guidelines

Proxy Statement

54 General Information

58 Board of Directors

67 Audit Committee Matters

69 Executive Compensation

77 Performance Graph

78 Ownership of Company Stock

88 Other Matters

89 Appendices

Items of Business To Be Acted Upon at the Meeting

Corporate Information

92 Senior Management

93 Corporate Information

94 Trademarks

95 Annual Meeting Admission Ticket

LillyAnswers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lillyanswers.com or call toll-free 1-877-RX-LILLY

Lilly Cares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lillycares.com or call toll-free 1-800-545-6962

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

Medicare reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.cms.hhs.gov/medicarereform

Pharmaceutical industry patient assistance programs . . . www.pparx.org

500002R

Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285 USA

www.lilly.com

Answers for Shareholders 2004

Eli Lilly and Company

2004 Annual Report

Notice of 2005 Annual Meeting

and Proxy Statement