SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934

FOR THE QUARTER ENDED JUNE 30, 2001

COMMISSION FILE NUMBER 001-6351

ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)

INDIANA (State or other jurisdiction of incorporation or organization)

35-0470950 (I.R.S. Employer Identification No.)

LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of principal executive offices)

Registrant's telephone number, including area code (317) 276-2000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes x		No
o

The number of shares of common stock outstanding as of July 31, 2001:

Class	Number of Shares Outstanding
Common	1,124,010,516

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES

	Three Months Ended June 30,						Six Months Ended June 30,
		2001		2000				2001		2000
	(Dollars in millions except per-share data)
Net sales	$	3,033.5		$	2,621.5		$	5,839.2		$	5,072.6
Cost of sales		522.2			491.7			1,044.5			1,000.4
Research and development		563.7			508.8			1,079.2			967.3
Marketing and administrative		899.9			795.4			1,668.8			1,483.7
Interest expense		40.4			45.5			81.8			92.3
Other (income) expense - net		(53.8	)		(74.0	)		(130.6	)		(347.7	)
		1,972.4			1,767.4			3,743.7			3,196.0
Income before income taxes		1,061.1			854.1			2,095.5			1,876.6
Income taxes		233.4			187.9			461.0			364.9
Net income	$	827.7		$	666.2		$	1,634.5		$	1,511.7
Earnings per share - basic	$	.77		$	.62		$	1.52		$	1.40
Earnings per share - diluted	$	.76		$	.61		$	1.50		$	1.38
Dividends paid per share	$	.28		$	.26		$	.56		$	.52

      See Notes to Consolidated Condensed Financial Statements.

CONSOLIDATED CONDENSED BALANCE SHEETS

ELI LILLY AND COMPANY AND SUBSIDIARIES

		June 30, 2001			December 31, 2000
		(Dollars in millions)
			(Unaudited)
ASSETS
CURRENT ASSETS
	Cash and cash equivalents	$	2,971.8		$	4,114.9
	Short-term investments		527.1			503.3
	Accounts receivable, net of allowances for doubtful     amounts of $107.2 (2001) and $115.3 (2000)		1,521.8			1,630.7
	Other receivables		254.5			335.4
	Inventories		956.8			883.1
	Deferred income taxes		199.0			269.5
	Prepaid expenses		433.5			206.1
	TOTAL CURRENT ASSETS		6,864.5			7,943.0
OTHER ASSETS
	Prepaid retirement		1,045.8			1,032.5
	Investments		2,230.5			395.7
	Sundry		1,249.4			1,143.0
			4,525.7			2,571.2
PROPERTY AND EQUIPMENT
	Land, buildings, equipment, and construction-in-progress		7,918.6			7,784.7
	Less allowances for depreciation		(3,675.3	)		(3,608.1	)
			4,243.3			4,176.6
		$	15,633.5		$	14,690.8
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
	Short-term borrowings	$	430.0		$	184.3
	Accounts payable		477.5			661.9
	Employee compensation		286.2			468.3
	Dividends payable		314.8			315.4
	Income taxes payable		2,204.2			2,200.2
	Other liabilities		1,240.2			1,130.6
	TOTAL CURRENT LIABILITIES		4,952.9			4,960.7
LONG-TERM DEBT			2,898.4			2,633.7
DEFERRED INCOME TAXES			90.7			91.6
RETIREE MEDICAL BENEFIT OBLIGATION			84.8			83.3
OTHER NONCURRENT LIABILITIES			843.3			874.6
			3,917.2			3,683.2
COMMITMENTS AND CONTINGENCIES			—			—
SHAREHOLDERS' EQUITY
	Common stock		703.3			704.4
	Additional paid-in capital		2,610.0			2,610.0
	Retained earnings		7,057.6			6,223.2
	Employee benefit trust		(2,635.0	)		(2,635.0	)
	Deferred costs-ESOP		(128.5	)		(135.0	)
	Accumulated other comprehensive loss		(735.2	)		(611.2	)
			6,872.2			6,156.4
	Less cost of common stock in treasury		108.8			109.5
			6,763.4			6,046.9
		$	15,633.5		$	14,690.8

See Notes to Consolidated Condensed Financial Statements.

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES

			Six Months Ended June 30,
			2001					2000
			(Dollars in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income			$	1,634.5			$	1,511.7
Adjustments to reconcile net income to cash
	flows from operating activities:
		Changes in operating assets and liabilities		(513.2	)			(182.8	)
		Depreciation and amortization		247.8				237.4
		Change in deferred taxes		158.0				87.7
		Gain related to sale of Kinetra, net of tax		—				(214.4	)
		Other, net		20.5				15.7
NET CASH PROVIDED BY OPERATING ACTIVITIES				1,547.6				1,455.3
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of property and equipment				(342.6	)			(276.0	)
Purchase of investments				(1,852.5	)			(726.8	)
Proceeds from sale of investments				4.9				497.5
Other, net				(50.0	)			(66.1	)
NET CASH USED FOR INVESTING ACTIVITIES				(2,240.2	)			(571.4	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid				(603.3	)			(563.3	)
Purchase of common stock and other capital
	transactions			(362.9	)			(502.4	)
Issuances under stock plans				85.4				76.4
Net change in short-term borrowings				247.3				(186.8	)
Net change in long-term debt				268.2				(14.0	)
NET CASH USED FOR FINANCING ACTIVITIES				(365.3	)			(1,190.1	)
Effect of exchange rate changes on cash and cash equivalents				(85.2	)			(23.7	)
NET DECREASE IN CASH AND CASH EQUIVALENTS				(1,143.1	)			(329.9	)
Cash and cash equivalents at January 1				4,114.9				3,700.4
CASH AND CASH EQUIVALENTS AT JUNE 30			$	2,971.8			$	3,370.5

See Notes to Consolidated Condensed Financial Statements.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES

	Three Months Ended June 30,						Six Months Ended June 30,
	2001			2000			2001			2000
	(Dollars in millions)
Net income	$  827.7			$  666.2			$  1,634.5			$  1,511.7
Other comprehensive loss1	(26.1	)		(58.5	)		(124.0	)		(146.7	)
Comprehensive income	$  801.6			$  607.7			$  1,510.5			$  1,365.0

	1 The significant component of other comprehensive loss was a loss of $33.4 million and $125.1 million from foreign currency translation adjustments for the three months and six months ended June 30, 2001, respectively, as compared to a loss of $50.6 million and $120.5 million for the three months and six months ended June 30, 2000, respectively.
	See Notes to Consolidated Condensed Financial Statements.

SEGMENT INFORMATION

The company operates in one significant business segment - pharmaceutical products. Operations of the animal health business are not material and share many of the same economic characteristics as pharmaceutical products. The company's business segments are distinguished by the ultimate end user of the product: humans or animals. Performance is evaluated based on profit or loss from operations before income taxes. Income before income taxes for the animal health business was $45 million and $35 million, respectively, for the three months ended June 30, 2001 and 2000 and $95 million and $80 million, respectively, for the six months ended June 30, 2001 and 2000.

SALES BY PRODUCT CATEGORY

Worldwide sales by product category for the three months and six months of 2001 and 2000 were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2001		2000		2001		2000
	(Dollars in millions)
Net sales - to unaffiliated customers
Neurosciences	$1,492.6		$1,236.4		$2,813.9		$2,340.6
Endocrinology	807.7		648.7		1,513.9		1,224.0
Anti-infectives	187.2		221.6		388.2		454.2
Oncology	164.6		114.1		342.4		255.3
Animal health	156.2		151.3		320.3		306.7
Cardiovascular	147.0		149.0		292.4		307.0
Gastrointestinal	70.2		85.6		146.0		153.5
Other pharmaceuticals	8.0		14.8		22.1		31.3
Net sales	$3,033.5		$2,621.5		$5,839.2		$5,072.6

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the requirements of Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. In the opinion of management, the financial statements reflect all adjustments, all of which are of a normal recurring nature, that are necessary for a fair statement of the results of operations for the periods shown. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.

CONTINGENCIES

Barr Laboratories, Inc. (Barr), and Geneva Pharmaceuticals, Inc. (Geneva), each submitted an Abbreviated New Drug Application (ANDA) seeking U.S. Food and Drug Administration (FDA) approval to market generic forms of Prozac® before the expiration of the company's patents. The ANDAs assert that two U.S. patents held by Lilly covering Prozac are invalid and unenforceable. The company filed suit against Barr and Geneva in federal court in Indianapolis seeking a ruling that the challenge to Lilly's patents is without merit. In January 1999, the trial court granted summary judgment in favor of Lilly on two of the four claims raised by Barr and Geneva against Lilly's patents. That decision was appealed to the Court of Appeals for the Federal Circuit. Barr and Geneva dismissed their other two claims in exchange for a $4 million payment. On August 9, 2000, the Court of Appeals upheld the 2001 compound patent but held that the 2003 method of use patent was invalid. The company filed a petition requesting a rehearing by the Court of Appeals. On May 30, 2001, the Court of Appeals accepted the company's request for a rehearing and vacated the August 9, 2000 decision, but simultaneously issued a new decision on rehearing that also found the 2003 patent invalid based on different legal reasoning. On July 18, 2001, the Court of Appeals denied the company's request to rehear the second decision. The company intends to seek review of the decision by the U.S. Supreme Court.

Several other generic manufacturers have also filed ANDAs for generic forms of Prozac in various dosage forms, challenging one or both of the patents. These companies include Alphapharm Pty. Ltd. (Alphapharm); Teva Pharmaceuticals USA (Teva); companies affiliated with Dr. Reddy's Laboratories Ltd., including Cheminor Drugs, Ltd. (Reddy); Zenith Goldline Pharmaceuticals, Inc. (Zenith); Novex Pharma, a division of Apotex, Inc.; Carlsbad Technology, Inc.; and Mallinckrodt, Inc. The company filed lawsuits in federal district court in Indianapolis seeking rulings that all these challenges to the patent(s) are without merit. On July 26, 2001, the District Court entered judgment against Lilly in all these cases based on the second decision of the Court of Appeals.

Assuming the Prozac patent ruling is not overturned by the Supreme Court, the company expects a very substantial decline in Prozac sales in the U.S. in the 12 months following the entry of generic fluoxetine in the U.S. market, which began in early August 2001. Prozac sales in the U.S. have historically represented a significant portion of the company's overall sales, accounting for approximately 19 percent of the company's consolidated worldwide sales in the second quarter of 2001. The company believes that the Prozac patent litigation will not have a material adverse effect on the company's consolidated financial position or liquidity.

In February 2001, the company was notified that Zenith had submitted an ANDA seeking permission to market a generic version of Zyprexa® in various dosage forms, prior to the expiration of the company's U.S. patents for the product, alleging that the patents are invalid or not infringed. On April 2, 2001, the company filed suit against Zenith in federal district court in Indianapolis seeking a ruling that Zenith's challenge to the U.S. compound patent (expiring in 2011) is without merit. In May 2001, the company was notified that Reddy had also filed an ANDA covering two dosage forms, alleging that the patents are invalid or not infringed. On June 26, 2001, the company filed suit against Reddy in federal district court in Indianapolis seeking a ruling that Reddy's patent challenge is without merit. On July 11, 2001, Reddy filed a parallel suit against the company in federal district court in Newark, New Jersey. The company believes that the generic manufacturers' patent claims are without merit and expects to prevail in this litigation. However, it is not possible to predict or determine the outcome of this litigation and accordingly there can be no assurance that the company will prevail. An unfavorable outcome could have a material adverse impact on the company's consolidated results of operations, liquidity, and financial position.

The company has been named as a defendant in numerous product liability lawsuits involving primarily two products, diethylstilbestrol (DES) and Prozac. The company has accrued for its estimated exposure with respect to all current product liability claims. In addition, the company has accrued for certain claims incurred, but not filed, to the extent the company can formulate a reasonable estimate of their costs. The company's estimates of these expenses are based primarily on historical claims experience and data regarding product usage. The company expects the cash amounts related to the accruals to be paid out over the next several years. The majority of costs associated with defending and disposing of these suits are covered by insurance. The company's estimate of insurance recoverables is based on existing deductibles, coverage limits, and the existing and projected future level of insolvencies among its insurance carriers.

Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Superfund, the company has 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. The company also continues remediation of certain of its own sites. The company has 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. The company has reached a settlement with its primary liability insurance carrier and certain excess carriers providing for coverage for certain environmental liabilities. Litigation seeking coverage from certain other excess carriers is ongoing.

The environmental liabilities and litigation accruals have been reflected in the company's consolidated balance sheet at the gross amount of approximately $151.2 million at June 30, 2001. Estimated insurance recoverables of approximately $63.2 million at June 30, 2001 have been reflected as assets in the consolidated balance sheet.

The company is nearing completion of a routine examination by the Internal Revenue Service (IRS) for tax years 1996 and 1997. Discussions between the company and the IRS are currently underway related to one remaining issue.

While it is not possible to predict or determine the outcome of the patent, product liability, or other legal actions brought against the company, the ultimate cost of environmental matters, or the resolution of the examination by the IRS, the company believes that, except as noted above with respect to the patent litigation, the costs associated with all such matters will not have a material adverse effect on its consolidated financial position or liquidity but could possibly be material to the consolidated results of operations in any one accounting period.

EARNINGS PER SHARE

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

SHAREHOLDERS' EQUITY

The company announced a $3 billion share repurchase program in 2000. Approximately 4.7 million shares were repurchased during the first six months of 2001, at a cost of approximately $371.0 million. In connection with the share repurchase program, the company has entered into agreements to purchase shares of the company's stock. The company has agreements to purchase up to approximately 4.6 million shares of company stock from an independent third party at various times through December 2003, at prices ranging from $76 to $100 per share. The number of shares to be purchased will be reduced ratably each quarter through the expiration of the agreements. In addition, as of June 30, 2001, written equity put options, purchased call options and other derivative contracts, which provide for purchase of a total of approximately 4.6 million shares, remain outstanding at prices ranging from $74 to $90 per share with expiration dates ranging from December 2001 to November 2002. If the options are exercised, the contracts allow the company, at its discretion, to repurchase the shares for cash or deliver to the holder cash or shares for the difference between the contractual exercise price and the market price of the company's stock. The company's objective with the above agreements is to reduce the average price of repurchased shares.

ACCOUNTING CHANGES

The company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. The statement requires the company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Hedge ineffectiveness, the amount by which the change in the value of a hedge does not exactly offset the change in the value of the hedged item, will be immediately recognized in earnings. The adoption of Statement 133 on January 1, 2001, did not have a material effect on the consolidated results of operations or financial position of the company, as it increased other income by less than $1 million and decreased other comprehensive income by approximately $15 million.

IMPLEMENTATION OF NEW FINANCIAL ACCOUNTING PRONOUNCEMENT

On July 20, 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets". This statement applies to all acquired intangible assets. Goodwill and other identifiable intangible assets with an indefinite useful life will not be amortized, but are required to be tested for impairment at least annually. Goodwill is required to be tested for impairment on an interim basis if an event occurs or circumstances change that could trigger an impairment. Identifiable intangible assets will be amortized when their useful life is determined to no longer be indefinite. The company will adopt this statement on January 1, 2002. Currently, the company does not expect this statement will have a material impact on its financial position or its results of operations.

DERIVATIVE FINANCIAL INSTRUMENTS

The company's derivative activities are initiated within the guidelines of documented corporate risk-management policies and do not create additional risk because gains and losses on derivative contracts offset losses and gains on the assets, liabilities, and transactions being hedged. As derivative contracts are initiated, the company designates the instruments individually as either a fair value hedge or a cash flow hedge. Management reviews the correlation and effectiveness of its derivatives on a periodic 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 flow hedges, the effective portion of gains and losses on these contracts is reported as a component of other comprehensive income and reclassified into earnings in the same period the hedged transaction affects earnings. Hedge ineffectiveness is immediately recognized in earnings. Derivative contracts that are not designated as hedging instruments are recorded at fair value with the gain or loss recognized in current earnings during the period of change.

The company enters into foreign currency forward and option contracts to reduce the effect of fluctuating currency exchange rates (principally the Japanese yen and the euro). 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 foreign currency balances. 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 flow hedges of those future transactions and the impact on earnings is included in cost of sales. The company may enter into foreign currency forward contracts and currency swaps as fair value hedges of firm commitments. Forward and option contracts generally have maturities not exceeding 12 months.

In the normal course of business, operations of the company are exposed to fluctuations in interest rates. These fluctuations can vary the costs of financing, investing, and operating. The company addresses a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings of fluctuations in interest rates. The company's primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, the company strives to achieve an acceptable balance between fixed and floating rate debt and investment positions and may enter into interest rate swaps or collars to help maintain that balance. Interest rate swaps or collars that convert the company's fixed-rate debt or investments to a floating-rate are designated as fair value hedges of the underlying debt. Interest rate swaps or collars that convert floating-rate debt or investments to a fixed-rate are designated as cash flow hedges. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements.

During the three and six months ended June 30, 2001, net losses related to ineffectiveness and net losses related to the portion of fair value and cash flow hedging instruments excluded from the assessment of effectiveness, were not material.

At June 30, 2001, the amount reflected in accumulated other comprehensive loss related to derivative financial instruments is not material. The company expects to reclassify approximately $33 million of net gains on cash flow hedges from accumulated other comprehensive loss to earnings during the next twelve months.

UNUSUAL ITEMS

During the first quarter of 2000, the company sold its interest in Kinetra LLC, a joint venture between the company and EDS, to WebMD Corporation (WebMD) in exchange for shares of WebMD common stock. A gain of $214.4 million was recognized on the combined effect of the transaction and the subsequent sale of the majority of those shares of WebMD stock. The gain is included in other income in the consolidated condensed statement of income.

During the fourth quarter of 1999, the company realized an estimated $91 million of sales as a result of year-2000-related wholesaler buying that normally would have been realized during the first quarter of 2000.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OPERATING RESULTS

Net income was $827.7 million, or $.76 per share, for the second quarter of 2001, compared with $666.2 million, or $.61 per share, for the second quarter of 2000, representing increases in earnings and earnings per share of 24 percent and 25 percent, respectively. Reported net income was $1.63 billion, or $1.50 per share, for the first six months of 2001, compared with $1.51 billion, or $1.38 per share, for the first six months of 2000. Comparisons between the six month periods are made difficult by the impact of two unusual items that are reflected in the company's operating results in the first quarter of 2000. Excluding these unusual items, which are discussed further below, net income for the six month period of 2000, would have been $1.36 billion, or $1.24 per share. Net income and earnings per share for the first six months of 2001 increased 20 and 21 percent, respectively from these adjusted results. Net income for the second quarter and six month period was favorably affected by increased sales, improved gross margins, increased interest income, and operating expenses (as defined below) growing at a lesser rate than sales. Earnings per share for the second quarter and six month period of 2001 benefited slightly from a lower number of shares outstanding resulting from the company's share repurchase programs.

As noted above, two unusual items are reflected in the company's operating results for the first quarter of 2000. These transactions are summarized as follows (see "Unusual Items" in the Notes to Consolidated Condensed Financial Statements for additional information):

–	The company recognized a gain of $214.4 million on the sale of its interest in Kinetra LLC to WebMD and the subsequent sale of WebMD stock, which increased earnings  per share by approximately $.20 in the first quarter of 2000.
–	The company realized an estimated $91 million of sales as a result of year-2000-related wholesaler buying during the fourth quarter of 1999 that normally would have been realized in the first quarter of 2000, which decreased earnings per share by approximately $.06 in the first quarter of 2000.

The company's sales for the second quarter of 2001 increased 16 percent, to $3.03 billion, compared with the second quarter of 2000. Sales growth was led by Zyprexa, diabetes care products, Evista®, and Gemzar®, partially offset by lower sales of anti-infectives. Sales in the U.S. increased 22 percent, to $2.02 billion, for the second quarter of 2001, compared with the second quarter of 2000. Sales outside the U.S. increased 5 percent, to $1.01 billion, for the second quarter of 2001, compared with the second quarter of 2000. Worldwide sales for the second quarter reflected volume growth of 17 percent and a 2 percent increase in global selling prices, partially offset by an unfavorable exchange rate impact of 3 percent.

The company's reported sales for the first six months of 2001 increased 15 percent, to $5.84 billion, compared with the first six months of 2000. Adjusting for the impact of year-2000-related wholesaler buying, worldwide sales increased 13 percent. Sales growth was led by Zyprexa, diabetes care products, Evista, and Gemzar, partially offset by lower sales of anti-infectives. Reported sales in the U.S. increased 21 percent, to $3.82 billion, for the six month period of 2001 compared with the six month period of 2000. Reported sales outside the U.S. increased 6 percent, to $2.02 billion, for the six month period of 2001, compared with the six month period of 2000. Worldwide sales reflected volume growth of 16 percent and a 1 percent increase in global selling prices, partially offset by an unfavorable exchange rate impact of 2 percent.

Zyprexa had worldwide sales of $736.6 million and $1.34 billion for the second quarter and six month period of 2001, respectively, representing increases of 34 percent and 36 percent, compared with the same periods of 2000. During the second quarter of 2001, Zyprexa was launched in Japan, the second largest antipsychotic market in terms of days of therapy. U.S. sales increased 32 percent, to $523.2 million, for the quarter and 40 percent, to $973.9 million, for the six month period. Sales outside the U.S. increased 38 percent, to $213.4 million, for the quarter and 28 percent, to $399.8 million, for the six month period. Adjusting for year-2000-related sales, worldwide Zyprexa sales grew by 34 percent for the first six months of 2001.

Prozac and Sarafem™ had combined reported worldwide sales of $692.4 million and $1.32 billion for the second quarter and six month period of 2001, respectively, representing increases of 10 percent and 7 percent, compared with the same periods of 2000. Sarafem, launched in the U.S. in August 2000 for the treatment of premenstrual dysphoric disorder (PMDD), had sales of $20.6 million and $33.5 million in the second quarter and first six months of 2001. Prozac and Sarafem combined sales in the U.S. increased 12 percent, to $605.7 million, for the quarter and 9 percent, to $1.15 billion, for the six month period. Prozac sales outside the U.S. decreased 1 percent, to $86.7 million, for the quarter and 4 percent, to $168.1 million, for the six month period, primarily due to continuing generic competition. Adjusting for year-2000-related sales, worldwide Prozac and Sarafem combined sales grew by 6 percent for the six month period. Reference is made to the discussion of the Prozac patent litigation under Part II, Item 1 of this Form 10-Q. Generic forms of fluoxetine were launched in the U.S. in early August 2001. For additional information on the expected financial impact of the entry of generic fluoxetine, see the "Financial Expectations" section below.

Diabetes care worldwide revenues, composed primarily of Humulin®, Humalog®, and Actos®, were $561.9 million and $1.04 billion for the quarter and six month period of 2001, respectively, representing increases of 28 percent and 24 percent compared with the same periods of 2000. Diabetes care revenues in the U.S. increased 39 percent, to $368.9 million, for the quarter and 33 percent, to $672.3 million, for the six month period. Sales outside the U.S. increased 10 percent, to $193.0 million, for the quarter and 9 percent, to $372.5 million, for the six month period. Worldwide Humulin sales of $264.7 million and $538.2 million remained flat for the quarter and six month period due to the continued shift by patients to Humalog and Humalog mix products and to increased competition. Worldwide Humalog sales of $145.6 million for the quarter and $270.8 million for the six month period increased 90 percent and 82 percent, respectively. Sales of Humalog for the quarter and six month period benefited from the U.S. launch of Humalog Mix75/25® Pen in March of 2000. The company received service revenues of $134.7 million and $198.7 million, respectively, for the second quarter and six month period of 2001 representing increases of 79 percent and 69 percent relating to sales of Actos. Actos sales for the second quarter benefited in part from U.S. wholesaler stocking. Actos is manufactured and sold in the U.S. by Takeda Chemical Industries, Ltd., and is copromoted by Takeda and the company. Adjusting for year-2000-related sales, worldwide diabetes care revenues grew by 20 percent for the six month period.

Gemzar had worldwide sales of $160.9 million and $334.9 million for the second quarter and six month period of 2001, respectively, representing increases of 49 and 37 percent, compared with the same periods of 2000. Sales in the U.S. increased 81 percent, to $88.9 million, for the quarter and 49 percent, to $190.3 million, for the six month period. This growth rate benefited in part from wholesaler buying patterns in the second quarter of 2001 and 2000. Sales outside the U.S. increased 22 percent, to $72.0 million, for the quarter and 25 percent, to $144.6 million, for the six month period. Adjusting for year-2000-related sales, worldwide Gemzar sales grew by 36 percent for the six month period.

Evista had worldwide sales of $167.0 million and $316.0 million for the second quarter and six month period of 2001, respectively, representing increases of 25 percent and 35 percent, compared with the same periods of 2000. Evista was launched in a number of European countries during the second quarter of 2000 as a treatment for postmenopausal osteoporosis. U.S. sales increased 19 percent, to $133.0 million, for the quarter and 30 percent, to $253.2 million, for the six month period. Sales outside the U.S. increased 56 percent, to $34.0 million, for the quarter and 61 percent, to $62.8 million, for the six month period. Adjusting for year-2000-related sales, worldwide Evista sales grew by 34 percent for the six month period.

ReoPro® had worldwide sales of $110.1 million and $220.8 million, for the second quarter and six month period of 2001, respectively, representing increases of 5 percent and 3 percent compared with the same periods of 2000. Relative to the fourth quarter of 2000, sales have improved following the release of the Merck-sponsored TARGET data which showed that ReoPro was superior to Aggrastat®* in reducing the risk of death, myocardial infarction, and urgent intervention based on 30-day data.

Anti-infectives had worldwide sales of $187.2 million and $388.2 million, for the second quarter and six month period of 2001, respectively, representing decreases of 16 percent and 15 percent, compared with the same periods of 2000. Lower sales of anti-infectives for both periods were due to continuing competitive pressures. Sales in the U.S. decreased 15 percent and 38 percent for the quarter and six month period, respectively. Sales outside the U.S. decreased 16 percent for the quarter and decreased 8 percent for the six month period. Cefaclor and Keflex® accounted for the majority of the decline in anti-infective sales.

* Aggrastat® is a registered trademark of Merck and Co., Inc.

For the second quarter of 2001, gross margins improved to 82.8 percent, compared with 81.2 percent for the second quarter of 2000. For the six month period of 2001, gross margins improved to 82.1 percent, compared with 80.3 percent for the six month period of 2000. During the quarter and six month period, higher margin products such as Zyprexa, Gemzar, Evista, and diabetes care products experienced strong growth, while lower margin products, such as anti-infectives, declined.

Operating expenses (the aggregate of research and development and marketing and administrative expenses) increased 12 percent for both the second quarter and six month period of 2001. Investment in research and development increased 11 percent, to $563.7 million, for the second quarter and 12 percent, to $1.08 billion, for the six month period as the company continued to invest in its internal pipeline and external research collaborations. Marketing and administrative expenses increased 13 percent from the second quarter of 2000 and 12 percent from the six month period of 2000 primarily due to worldwide sales force expansion in support of the company's growth products and upcoming product launches offset, in part, by a decline in administrative expenses. The increase in operating expenses was partially diminished by lower incentive-based compensation expense.

Net other income for the second quarter of 2001 decreased $20.2 million, to $53.8 million. Net other income for the six month period of 2001 decreased $3.7 million, to $130.6 million, excluding the first quarter 2000 gain on the sale of Kinetra LLC.

For both the second quarters of 2001 and 2000, the effective tax rate was 22.0 percent. The effective tax rate for the six month period of 2001 was 22.0 percent compared with 19.4 percent for the six month period of 2000. Excluding the impact of the unusual items discussed previously, the effective tax rate would have been 22.0 percent for the six month period ended June 30, 2000.

FINANCIAL CONDITION

As of June 30, 2001, cash, cash equivalents and short-term investments totaled $3.50 billion as compared with $4.62 billion at December 31, 2000. Investments as of June 30, 2001 totaled $2.23 billion compared to $395.7 million at December 31, 2000. Cash flow from operations of $1.55 billion and net cash from issuance of debt of $515.5 million as described further below were offset by purchase of long-term investments of $1.85 billion, dividends paid of $603.3 million, shares repurchased and other capital transactions of $362.9 million, and net capital expenditures of $342.6 million. The shares were repurchased pursuant to the company's previously announced $3 billion share repurchase program. The company has now completed roughly half of that program.

Total debt at June 30, 2001, was $3.33 billion, an increase of $510.4 million from December 31, 2000, primarily due to the issuance of $250 million of 4.25% one-year resettable notes in March 2001 and $250 million of 30-year debt in May 2001. In July 2001, the company issued $400 million of 5.5% notes due July 15, 2006.

The company believes that cash generated from operations in 2001, along with available cash and cash equivalents and debt issued to date, will be sufficient to fund essentially all of the 2001 operating needs, including debt service, capital expenditures, share repurchases, and dividends.

EURO CONVERSION

On January 1, 1999, 11 European nations adopted a common currency, the euro, and formed the European Economic and Monetary Union (EMU). For a three-year transition period, both the euro and individual participants' currencies will remain in circulation. After July 1, 2002, at the latest, the euro will be the sole legal tender for EMU countries. Greece has joined the original 11 countries adopting the euro in 2002. The adoption of the euro affects a multitude of financial systems and business applications as the commerce of these nations is transacted in the euro and the existing national currency.

The company has created the capability to transact in both the euro and the legacy currency and has converted the underlying information systems within the EMU countries from the legacy currencies to the euro. The company will continue to address euro-related issues and their impact on information systems, currency exchange rate risk, taxation, contracts, competition, and pricing. Action plans currently being implemented are expected to result in compliance with all laws and regulations; however, there can be no certainty that such plans will be successfully implemented or that external factors will not have an adverse effect on the company's operations. Any costs of compliance associated with the adoption of the euro are expensed as incurred and the company does not expect these costs to be material to its results of operations, financial condition, or liquidity.

OTHER MATTERS

As a result of observations noted by the FDA in two recent Lilly plant inspections, one of which resulted in a warning letter from the agency, the company is in the process of implementing comprehensive, company-wide improvements in its manufacturing quality operations to assure sustained compliance with current Good Manufacturing Practices (cGMP) regulations. In addition, the company has entered into agreements under which Lonza Biologics, PLC is manufacturing the bulk active ingredient for drotrecogin alfa (activated), the company's investigational compound for sepsis, and Catalytica Pharmaceuticals, Inc., a subsidiary of DSM N.V., is manufacturing the finished product. Prior to product approval both firms must successfully complete a pre-approval inspection by the FDA. Catalytica is also subject to a warning letter from the FDA with respect to cGMP matters not specifically related to drotrecogin alfa (activated). Lilly is working closely with the FDA to implement the necessary improvements in its own quality systems and procedures. It is also providing support and consultation to both Lonza and Catalytica to assist in their FDA inspections. Lilly does not currently expect a material financial impact from the cGMP issues discussed above or the cost of improvements that Lilly is implementing in its operations. However, the timing and nature of the resolution of cGMP issues will depend on the manufacturer's ability to demonstrate to the satisfaction of the FDA the quality and reliability of its manufacturing controls and procedures. A manufacturer subject to a warning letter that fails to correct cGMP deficiencies to the satisfaction of the FDA could be subject to product recalls or seizures, interruption of production, and the withholding of approvals of new drug applications pending resolution of the cGMP issues.

In an unrelated matter, the company is conducting a strategic review of its worldwide manufacturing capacity. Based on the results to date, the company decided in July 2001 to close two facilities. The costs to be incurred in the third quarter of 2001 related to these two closings are not expected to be material to the company's consolidated results of operations, liquidity, or financial position. Other closings or asset retirements may be identified as the review is completed.

FINANCIAL EXPECTATIONS

As noted in Part II, Item 1 of this Form 10-Q, a U.S. federal appeals court has ruled that the company's 2003 method of use patent for Prozac is invalid. The company will seek review of the decision by the U.S. Supreme Court. However, the U.S. Supreme Court seldom grants such reviews in patent cases. The company expects a very substantial decline in Prozac sales in the U.S. in the 12 months following the entry of generic fluoxetine in the U.S. market, which began in early August 2001. Prozac sales in the U.S. have historically represented a significant portion of the company's overall sales, accounting for approximately 19 percent of the company's consolidated worldwide sales in the second quarter of 2001. The company believes that the loss of Prozac market exclusivity will not have a material adverse effect on the company's consolidated financial position or liquidity.

Based on the above, looking forward to full-year 2001 results, excluding unusual items, such as the costs related to the outcome of the strategic review of worldwide manufacturing capacity, the company expects earnings per share to be in the range of $2.76 to $2.84. For both the third and fourth quarters of 2001, the company expects earnings per share to be in the range of $.63 to $.67, excluding any unusual items. The company now expects ReoPro sales to be flat to slightly positive for 2001. Also, the gross margin percent for 2001 is expected to be approximately flat for the year due to a stronger than anticipated first half of the year. Marketing and administrative expenses are now expected to rise in the high single digits from prior year, while research and development expenses are expected to increase in the low double digits.

The company continues to anticipate single-digit sales and earnings per share growth for full-year 2002, excluding unusual items.

Actual results could differ materially and will depend on, among other things, the outcome of the company's request for review by the U.S. Supreme Court of the recent Prozac ruling; the timing, number of entrants, and pricing strategies of generic fluoxetine competitors; the continuing growth of the company's other currently marketed products; developments with competitive products; the timing of regulatory approvals, including the necessary FDA approvals of manufacturing operations in connection with pending new drug applications as discussed above under "Other Matters"; the timing and success of expected new product launches; foreign exchange rates; and the impact of government pricing and reimbursement measures.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company cautions investors that any forward-looking statements or projections made by the company, including those made in this document, are based on management's expectations at the time they are made, but they are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Economic, competitive, governmental, technological, and other factors that may affect the company's operations and prospects are discussed above and in Exhibit 99 to this Form 10-Q filing. The company undertakes no duty to update forward-looking statements.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

PROZAC PATENT LITIGATION

Barr Laboratories, Inc. (Barr), and Geneva Pharmaceuticals, Inc. (Geneva), each submitted an Abbreviated New Drug Application (ANDA) seeking U.S. Food and Drug Administration (FDA) approval to market generic forms of Prozac before the expiration of the company's patents. The ANDAs assert that two U.S. patents held by Lilly covering Prozac are invalid and unenforceable. The company filed suit against Barr and Geneva in federal court in Indianapolis seeking a ruling that the challenge to Lilly's patents is without merit. In January 1999, the trial court granted summary judgment in favor of Lilly on two of the four claims raised by Barr and Geneva against Lilly's patents. That decision was appealed to the Court of Appeals for the Federal Circuit. Barr and Geneva dismissed their other two claims in exchange for a $4 million payment. On August 9, 2000, the Court of Appeals upheld the 2001 compound patent but held that the 2003 method of use patent was invalid. The company filed a petition requesting a rehearing by the Court of Appeals. On May 30, 2001, the Court of Appeals accepted the company's request for a rehearing and vacated its August 9, 2000 decision, but simultaneously issued a new decision on rehearing that also found the 2003 patent invalid based on different legal reasoning. On July 18, 2001, the Court of Appeals denied the company's request to rehear the second decision. The company intends to seek review of the decision by the U.S. Supreme Court.

Several other generic manufacturers have also filed ANDAs for generic forms of Prozac in various dosage forms, challenging one or both of the patents. These companies include Alphapharm Pty. Ltd. (Alphapharm); Teva Pharmaceuticals USA (Teva); companies affiliated with Dr. Reddy's Laboratories Ltd., including Cheminor Drugs, Ltd. (Reddy); Zenith Goldline Pharmaceuticals, Inc. (Zenith); Novex Pharma, a division of Apotex, Inc.; Carlsbad Technology, Inc.; and Mallinckrodt, Inc. The company filed lawsuits in federal district court in Indianapolis seeking rulings that all these challenges to the patent(s) are without merit. On July 26, 2001, the District Court entered judgment against Lilly in all these cases based on the second decision of the Court of Appeals.

Generic forms of fluoxetine were launched in the U.S. in early August 2001. Under the patent-challenge provisions of the Hatch-Waxman Act of 1984, the FDA has granted exclusive ANDA marketing approvals for a period of approximately 180 days to the following companies: Barr (20 mg. capsules); Geneva (10 mg. capsules); Reddy (40 mg. capsules); Alphapharm (10 mg. and 20 mg. tablets); and Teva (liquid oral solution). Pharmaceutical Resources, Inc. has announced that during the 180-day exclusivity period, it will market exclusively the 10 mg. and 20 mg. tablets and 40 mg. capsules through its subsidiary Par Pharmaceuticals under arrangements with the respective ANDA holders.

For additional information on the impact of the Prozac patent litigation, see the "Financial Expectations" under Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

ZYPREXA PATENT LITIGATION

In February 2001, the company was notified that Zenith had submitted an ANDA seeking permission to market a generic version of Zyprexa in various dosage forms prior to the expiration of the company's U.S. patents for the product, alleging that the patents are invalid or not infringed. On April 2, 2001, the company filed suit against Zenith in federal district court in Indianapolis seeking a ruling that Zenith's challenge to the U.S. compound patent (expiring in 2011) is without merit. In May 2001, the company was notified that Reddy had also filed an ANDA covering two dosage forms, alleging that the patents are invalid or not infringed. On June 26, 2001, the company filed suit against Reddy in federal district court in Indianapolis seeking a ruling that Reddy's patent challenge is without merit. On July 11, 2001, Reddy filed a parallel suit against the company in federal district court in Newark, New Jersey. The company believes that the generic manufacturers' patent claims are without merit and expects to prevail in this litigation. However, it is not possible to predict or determine the outcome of this litigation and accordingly there can be no assurance that the company will prevail. An unfavorable outcome could have a material adverse impact on the company's consolidated results of operations, liquidity, and financial position.

OTHER MATTERS

The U.S. Federal Trade Commission (FTC) has instituted an industrywide study into what it describes as "the use of agreements between and among pharmaceutical companies, and any other strategies, that may delay generic drug competition throughout the United States since January 1, 1991." In April 2001, the company received an order from the FTC for the production of documents and other information in connection with the agency's investigation. The FTC has indicated that orders are being issued to approximately 100 pharmaceutical companies. The company is cooperating with the agency and believes that all of its actions have been lawful and proper.

In March, 2001, the company received a subpoena, issued at the request of the Commonwealth's attorney for the Commonwealth of Massachusetts, for production of documents related to pricing and Medicaid reimbursement of company products in Massachusetts. The company believes that it is not the only pharmaceutical company to receive such a request. The company is cooperating with the inquiry and believes all of its practices have been lawful and proper.

Item 2. Changes in Securities and Use of Proceeds

Reference is made to the information on sales of put options and other equity derivatives related to repurchases of Lilly stock as described in the accompanying notes to consolidated condensed financial statements. All such transactions were exempt from registration under Section 4(2) of the Securities Act of 1933. No public offering or public solicitation was used in the offering of these securities. The transactions were privately negotiated, and all offerees and purchasers were accredited investors and/or qualified institutional buyers.

Item 4.  Submission of Matters to a Vote of Security Holders
The company held its annual meeting of shareholders on April 16, 2001. The following is a summary of the matters voted on at the meeting:
(a)	The four nominees for Director were elected to serve three-year terms ending in 2004, as follows:
	Nominee		For	Withhold Vote
	Dr. Steven C. Beering Sir Winfried F.W. Bischoff Dr. Franklyn G. Prendergast Ms. Kathi P. Seifert		964,095,993 964,930,568 965,346,219 965,178,978	8,397,383 7,562,808 7,147,157 7,314,398
The terms of the following directors continued after the meeting: George M.C. Fisher; Alfred G. Gilman, M.D., Ph.D.; Charles E. Golden; Karen N. Horn, Ph.D.; Kenneth L. Lay; Sidney Taurel; August M. Watanabe, M.D.; and Alva O. Way.
(b)	The appointment of Ernst & Young LLP as the company's principal independent auditors was ratified by the following shareholder vote:
	For: Against: Abstain:	947,544,547 21,213,458 3,735,461
(c)	By the following vote, the shareholders defeated a shareholder proposal regarding pharmaceutical pricing:
	For: Against: Abstain: Broker Nonvote:	38,265,834 786,203,980 23,726,260 124,297,302
Item 6.  Exhibits and Reports on Form 8-K

(a)	Exhibits.  The following documents are filed as exhibits to this Report:
	EXHIBIT 3.	By-laws, as amended and restated effective June 24, 2001
	EXHIBIT 11.	Statement re: Computation of Earnings Per Share
	EXHIBIT 12.	Statement re: Computation of Ratio of Earnings from Continuing Operations to Fixed Charges
	EXHIBIT 99.	Cautionary Statement Under Private Securities Litigation Reform Act of 1995 - "Safe Harbor" for Forward-Looking Disclosures
(b)	Reports on Form 8-K. The company filed a Form 8-K on July 12, 2001 in order to file as exhibits the underwriting agreement and form of note in connection with its issuance of $400,000,000 of 5.5% notes due 2006.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
	ELI LILLY AND COMPANY (Registrant)
Date       August 10, 2001	S/Alecia A. DeCoudreaux                                                     Alecia A. DeCoudreaux Secretary and Deputy General Counsel
Date       August 10, 2001	S/Arnold C. Hanish                                                                  Arnold C. Hanish Executive Director, Finance and      Chief Accounting Officer

INDEX TO EXHIBITS

The following documents are filed as a part of this Report:

	Exhibit
	3.	By-laws, as amended and restated effective June 24, 2001
	11.	Statement re: Computation of Earnings Per Share
	12.	Statement re: Computation of Ratio of Earnings from Continuing Operations to Fixed Charges
	99.	Cautionary Statement Under Private Securities Litigation Reform Act of 1995 - "Safe Harbor" for Forward-Looking Disclosures