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 QUARTER ENDED SEPTEMBER 30, 1997

COMMISSION FILE NUMBER 1-6351

---

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

INDIANA 35-0470950
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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
--- ---

The number of shares of common stock outstanding as of October 31,
1997:

Class Number of Shares Outstanding
----- ----------------------------
Common 1,109,314,830

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)

Eli Lilly and Company and Subsidiaries

Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---------------------------------------------------
(Dollars in millions except per-share data)

Net Sales................................. $2,160.1 $1,803.9 $6,101.8 $5,285.5

Cost of sales............................. 587.8 502.9 1,677.9 1,526.0
Research & development.................... 345.4 290.7 973.3 840.1
Marketing & administrative................ 587.2 473.1 1,631.6 1,412.1
Asset impairment.......................... - - 2,443.0 -
Interest expense.......................... 57.3 74.1 180.4 219.5
Other (income) - net...................... (16.3) (96.3) (72.8) (260.7)
Gain on sale of DowElanco................. (13.6) - (631.8) -
------- ------- ------- -----
1,547.8 1,244.5 6,201.6 3,737.0
------- ------- ------- -------
Income (loss) before income
taxes.................................. 612.3 559.4 (99.8) 1,548.5
Income taxes.............................. 155.4 143.8 742.8 398.0
------- ------- ------- -------

Net income (loss)......................... $ 456.9 $ 415.6 $(842.6) $1,150.5
======= ======= ======= ========

Earnings (loss) per share................. $ .41 $ .38 $ (.77) $ 1.05

Dividends paid per share.................. $ .18 $ .1713 $ .54 $ .5138

See Notes to Consolidated Condensed Financial Statements.

CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries

September 30, December 31,
1997 1996
-----------------------------
(Millions)
ASSETS

CURRENT ASSETS
Cash and cash equivalents................................... $1,504.1 $813.7
Short-term investments...................................... 36.8 141.4
Accounts receivable, net of allowances for
doubtful amounts of $61.4 (1997) and
$82.4 (1996).............................................. 1,579.7 1,474.6
Other receivables........................................... 156.0 262.5
Inventories................................................. 914.7 881.4
Deferred income taxes....................................... 225.3 145.2
Prepaid expenses............................................ 192.5 172.5
--------- ---------
TOTAL CURRENT ASSETS........................................ 4,609.1 3,891.3

OTHER ASSETS
Prepaid retirement.......................................... 570.8 512.9
Investments................................................. 416.9 443.5
Goodwill and other intangibles, net of
allowances for amortization of
$106.6 (1997) and $311.0 (1996).......................... 1,544.1 4,028.2
Sundry...................................................... 583.1 1,124.3
--------- ---------
3,114.9 6,108.9
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress................................. 7,023.3 7,096.4
Less allowances for depreciation............................ 2,928.1 2,789.4
--------- ---------
4,095.2 4,307.0
--------- ---------
$11,819.2 $14,307.2
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings....................................... $423.4 $1,212.9
Accounts payable............................................ 729.5 829.3
Employee compensation....................................... 385.1 388.4
Dividends payable........................................... 221.1 198.8
Income taxes payable........................................ 926.5 691.8
Other liabilities........................................... 961.4 901.0
--------- ---------
TOTAL CURRENT LIABILITIES................................... 3,647.0 4,222.2

LONG-TERM DEBT................................................. 2,343.8 2,516.5
DEFERRED INCOME TAXES.......................................... 387.6 376.0
RETIREE MEDICAL BENEFIT OBLIGATION............................. 118.2 136.4
OTHER NONCURRENT LIABILITIES................................... 931.7 956.0
--------- ---------
3,781.3 3,984.9

COMMITMENTS AND CONTINGENCIES.................................. - -

SHAREHOLDERS' EQUITY
Common stock................................................ 702.0 355.6
Additional paid-in capital.................................. - 67.4
Retained earnings........................................... 5,302.4 7,207.3
Deferred costs-ESOP......................................... (164.5) (176.9)
Currency translation adjustments............................ (233.7) (57.4)
--------- ---------
5,606.2 7,396.0

Less cost of common stock in treasury....................... 1,215.3 1,295.9
--------- ---------
4,390.9 6,100.1
--------- ---------
$11,819.2 $14,307.2
========= =========

See Notes to Consolidated Condensed Financial Statements.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

Eli Lilly and Company and Subsidiaries

Nine Months Ended
September 30,
1997 1996
-------- ---------
(Millions)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................... $(842.6) $1,150.5
Adjustments to reconcile net income (loss) to cash
flows from operating activities:
Changes in operating assets and liabilities..................... (154.5) (259.6)
Change in deferred taxes........................................ (44.5) 147.9
Depreciation and amortization................................... 399.8 404.8
Gain from sale of DowElanco, net of tax......................... (303.5) -
Asset impairment, net of tax.................................... 2,429.6 -
Other items, net................................................ (42.9) (155.6)
-------- ------

NET CASH FLOWS FROM OPERATING ACTIVITIES........................ 1,441.4 1,288.0

CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment......................... (213.7) (360.9)
Additions to sundry assets and intangibles...................... (24.4) (32.1)
Reduction of investments........................................ 356.1 330.1
Additions to investments........................................ (251.6) (192.2)
Proceeds from sale of DowElanco................................. 1,211.1 -
Acquisitions.................................................... (0.8) (93.3)
-------- ------

NET CASH FROM (USED FOR) INVESTING ACTIVITIES................... 1,076.7 (348.4)

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid.................................................. (594.8) (562.3)
Purchases of common stock and other capital
transactions.................................................. (179.5) (171.8)
Net reductions to short-term borrowings......................... (948.5) (439.4)
Net additions to long-term debt................................. 5.6 8.9
-------- ------

NET CASH USED FOR FINANCING ACTIVITIES.......................... (1,717.2) (1,164.6)

Effect of exchange rate changes on cash......................... (110.5) (36.4)
-------- ------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 690.4 (261.4)

Cash and cash equivalents at January 1.......................... 813.7 999.5
-------- ------

CASH AND CASH EQUIVALENTS AT SEPTEMBER 30....................... $1,504.1 $738.1
======== ======

See Notes to Consolidated Condensed Financial Statements.

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 that are necessary for a fair
statement of the results 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.

As presented herein, sales include sales of the Company's life-sciences products
and service revenues from PCS Health Systems, Inc. (PCS) and Integrated Medical
Systems, Inc.

STOCK SPLIT

On September 15, 1997, the Company's Board of Directors declared a two-for-one
stock split to be effected in the form of a 100 percent stock dividend payable
to shareholders of record at the close of business September 24, 1997. The
outstanding and weighted-average number of shares of common stock and per share
data in these financial statements and exhibits have been adjusted to reflect
the impact of the stock split. Treasury shares held by the Company were not
split.

CONTINGENCIES

The Company has been named as a defendant in numerous product liability lawsuits
involving primarily two products, diethylstilbestrol and Prozac'r'. The Company
has accrued for its estimated exposure, including costs of litigation, with
respect to all current product liability claims. In addition, the Company has
accrued for certain future anticipated product liability claims 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 certain 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 providing for coverage for certain
environmental liabilities and has instituted litigation seeking coverage from
certain excess carriers.

The Company has been named, along with numerous other U.S. prescription drug
manufacturers, as a defendant in a large number of related actions brought by
retail pharmacies alleging violations of federal and state antitrust and pricing
laws. The federal suits include a class action on behalf of the majority of U.S.
retail pharmacies. The Company and several other manufacturers agreed to settle
the federal class action case and the anticipated settlement was accrued in the
fourth quarter of 1995. The settlement is now final. Separately, in June 1997
the Company reached a settlement with a large number of the remaining plaintiffs
in the federal cases. Related suits, brought in federal and several state courts
by a large number of retail pharmacies involving claims of price discrimination
or claims under other pricing laws, remain pending. Additional cases have been
brought on behalf of consumers in several states.

The environmental liabilities and litigation accruals have been reflected in the
Company's consolidated balance sheet at the gross amount of approximately $390
million at September 30, 1997. Estimated insurance recoverables have been
reflected as assets in the consolidated balance sheet of approximately $240
million at September 30, 1997.

Barr Laboratories, Inc. (Barr) and Geneva Pharmaceuticals, Inc. (Geneva) have
each submitted Abbreviated New Drug Applications (ANDAs) seeking FDA approval to
market generic forms of Prozac before the expiration of the Company's patents.
The ANDAs assert that Lilly's U.S. patents covering Prozac are invalid and
unenforceable. In April 1996, the Company filed suit against Barr in federal
court in Indianapolis seeking a ruling that Barr's challenge to Lilly's patents
is without merit. In June 1997, the Company filed a similar suit against Geneva
in the same court. While the Company believes that the claims of Barr and Geneva
are without merit, there can be no assurance that the Company will prevail. An
unfavorable outcome of this litigation could have a material adverse effect on
the Company's consolidated financial position, liquidity, or results of
operations.

While it is not possible to predict or determine the outcome of the product
liability, antitrust, patent, or other legal actions brought against the
Company, or the ultimate cost of environmental matters, the Company believes
that, except as noted above, the costs associated with all such 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.

ASSET IMPAIRMENT

Pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," the Company evaluated the
recoverability of the long-lived assets, including intangibles, of its PCS
health-care-management businesses. While revenues and profits are growing and
new capabilities are being developed at PCS, the rapidly changing, competitive
and highly regulated environment in which PCS operates has prevented the Company
from significantly increasing PCS' operating profits from levels which existed
prior to the acquisition. In addition, since the acquisition, the health-care
industry trend toward highly managed care has been slower than originally
expected and the possibility of selling a portion of PCS' equity to a strategic
partner has not been realized. In the second quarter of 1997, concurrent with
PCS' annual planning process, the Company determined that PCS' estimated future
undiscounted cash flows were below the carrying value of PCS' long-lived assets.
Accordingly, during the second quarter, the Company adjusted the carrying value
of PCS' long-lived assets, primarily goodwill, to their estimated fair value of
approximately $1.5 billion resulting in a noncash impairment loss of
approximately $2.4 billion ($2.21 per share). The estimated fair value was based
on anticipated future cash flows, discounted at a rate commensurate with the
risk involved.

GAIN ON SALE OF DOWELANCO JOINT VENTURE

On June 30, 1997, The Dow Chemical Company acquired the Company's 40% interest
in DowElanco. The cash purchase price was $1.2 billion resulting in a gain of
$631.8 million ($303.5 million after-tax, or $.28 per share).

EARNINGS PER SHARE

Earnings per share are calculated based on the weighted-average number of
outstanding common shares.

ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS

In the normal course of business, operations of the Company are exposed to
fluctuations in currency values and interest rates. These fluctuations can vary
the costs of financing, investing and operating. The Company addresses these
risks through a controlled program of risk management that includes the use of
derivative financial instruments. The Company's derivative activities, all of
which are for purposes other than trading, 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 derivative financial instruments
individually to underlying financial instruments or anticipatory transactions
(i.e., underlying exposures). Management reviews the correlation and
effectiveness of its derivatives on a periodic basis. Derivative contracts which
do not qualify for deferral hedge accounting are marked to market.

For terminations of derivatives receiving deferral accounting, gains and losses
are deferred when the related underlying exposures remain outstanding and are
included in the measurement of the related transaction or balance. In addition,
upon termination of the underlying exposures, the derivative is marked to market
and the resulting gain or loss is included with the gain or loss on the
terminated transaction. The Company may re-designate the remaining derivative
instruments to other underlying exposures.

Foreign Exchange Risk Management: The Company enters into foreign currency
forward and option contracts to reduce the effect of fluctuating currency
exchange rates (principally European currencies 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 and purchased options are principally used to manage exposures arising
from affiliate foreign currency balances. These contracts are marked to market
with gains and losses recognized currently in income to offset the respective
losses and gains recognized on the underlying exposures. The Company also enters
into option contracts to hedge anticipated foreign currency transactions,
primarily intercompany inventory purchases expected to occur within the next
year, and foreign currency forward contracts and currency swaps to hedge firm
commitments. Gains and losses on these contracts that qualify as hedges are
deferred and recognized as an adjustment of the subsequent transaction when it
occurs. Forward and option contracts generally have maturities not exceeding 12
months.

Interest Rate Risk Management: The Company enters into interest rate swaps to
lower funding costs and to manage interest rate exposures. The Company
designates the interest rate swaps as hedges of the underlying debt. Interest
expense on the debt is adjusted to include the payments made or received under
the swap agreements.

ACCOUNTING CHANGES

Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". This statement requires that each
party to a transfer analyze the components of financial asset transfers and
recognize only assets it controls and liabilities it has incurred, derecognize
assets only when control has been surrendered and derecognize liabilities only
when they have been extinguished. Adoption of this statement did not have a
material impact on the Company's consolidated results of operations or financial
position.

In February 1997, SFAS No. 128, "Earnings per Share", was issued. The statement
must be adopted by the Company on December 31, 1997 for the fourth quarter and
the year then ended. Under provisions of this statement, the Company will be
required to change the method currently used to compute earnings per share as
presented on the income statement and Exhibit 11 to the Form 10-Q and present
both "basic" and "diluted" earnings per share on the income statement. As a
consequence of this change, earnings per share for previously reported periods
will be restated. Basic earnings per share, for the Company, is expected to be
the same as reported earnings per share. Diluted earnings per share is expected
to be substantially the same as fully-diluted earnings per share reported in
Exhibit 11 of the Company's 10-K and 10-Q filings.

In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. The
statement must be adopted by the Company in the first quarter of 1998. Under
provisions of this statement, the Company will be required to change the
financial statement presentation of comprehensive income and its components to
conform to these new requirements. As a consequence of this change, certain
reclassifications will be necessary to previously reported amounts to achieve
the required presentation of comprehensive income. Implementation of this
disclosure standard will not affect financial position or results of operations.

In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued. The statement must be adopted by the Company
on December 31, 1998 for the year then ended. Under provisions of this
statement, the Company will be required to modify or expand the financial
statement disclosures for operating segments, products and services, and
geographic areas. Implementation of this disclosure standard will not affect
financial position or results of operations.

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

OPERATING RESULTS OF CONTINUING OPERATIONS:

The Company's sales for the third quarter of 1997 increased 20 percent from the
third quarter of 1996. Sales inside the United States increased 30 percent while
sales outside the United States increased 5 percent. Compared with the third
quarter of 1996, worldwide sales reflected volume growth of 22 percent and a 2
percent increase in global selling prices which were offset, in part, by the
unfavorable effect of exchange rates of 4 percent.

The Company's sales for the first nine months of 1997 increased 15 percent when
compared with the same period in 1996. Sales in the United States increased 27
percent, while sales outside the United States were unchanged. Worldwide sales
volume growth of 18 percent and a 1 percent increase in global selling prices
was partially offset by an unfavorable exchange rate comparison of 4 percent.

Worldwide pharmaceutical sales increased 20 percent and 16 percent for the third
quarter and nine months, respectively, compared with the same periods of 1996.
Sales growth for both periods was led by three of the Company's newer products,
Gemzar'r', ReoPro'tm', and Zyprexa'r'. In addition, the quarter and first nine
months of the year benefited from increased Prozac sales and additional
health-care-management revenues. Revenue growth for both periods was partially
offset by lower sales of anti-infective products. Total U.S. pharmaceutical
sales and services increased 30 percent ($313.4 million) during the quarter and
27 percent ($787.0 million) for the nine month period, primarily as a result of
increased volume. International pharmaceutical sales increased 5 percent
compared with the third quarter of 1996 and were unchanged for the first nine
months compared with 1996. For the quarter, sales volume growth outside the U.S.
of 18 percent was mitigated largely by unfavorable exchange rate comparisons (11
percent) and decreased selling prices (2 percent). For the nine month period,
international pharmaceutical sales volume growth of 11 percent was offset by
exchange rate comparisons (9 percent) and decreased prices (2 percent).

Worldwide sales of Prozac in the third quarter of 1997 were $705.1 million, an
increase of 11 percent from the third quarter of 1996. For the nine month
period, worldwide Prozac sales were $1,866.1 million, an increase of 6 percent
over the same period in 1996. Prozac sales in the U.S. increased 17 percent to
$577.8 million in the third quarter and 14 percent to $1,472.6 million in the
nine month period. International sales of Prozac experienced declines of 11
percent and 15 percent for the quarter and nine months, respectively, due
largely to the effects of unfavorable exchange rates, continuing generic
competition in Canada, and competitive pressures in France. The Company expects
moderate growth in Prozac sales for the full year of 1997.

Launched in the fourth quarter of 1996, Zyprexa posted worldwide sales of $201.8
million and $463.2 million for the quarter and nine months, respectively.
Zyprexa contributed $162.7 million and $379.8 million to U.S. pharmaceutical
sales for the quarter and first nine months of 1997.

Worldwide ReoPro sales of $63.3 million in the third quarter and $174.9 million
in the nine month period reflected increases of $24.8 million (64 percent) and
$76.3 million, (77 percent) respectively, as compared with the same periods in
1996. Of the third quarter and year-to-date U.S. pharmaceutical sales increases,
ReoPro contributed $20.9 million and $61.9 million, respectively.

Worldwide Gemzar sales grew to $47.3 million in the third quarter and $121.4
million in the nine month period, representing increases over the same periods
in 1996 of $27.3 million and $85.7 million, respectively. Gemzar sales in the
U.S. increased $15.1 million in the third quarter and $50.5 million in the nine
month period.

Among other major products, worldwide Humulin'r' sales of $226.4 million were
essentially unchanged for the third quarter and increased 2 percent to $655.2
million for the first nine months of 1997. U.S. Humulin sales increased 1
percent for the quarter and declined 2 percent for the nine month period. The
year-to-date decline is largely due to the combined effect of competition from
oral anti-diabetic agents and increased sales of the Company's insulin analogue,
Humalog'r'. International Humulin sales decreased 2 percent in the third quarter
and increased 9 percent for the nine month period. Axid'r' sales increased 4
percent to $132.2 million and 5 percent to $415.2 million for the respective
periods.

Worldwide anti-infective sales decreased $33.7 million (12 percent) in the third
quarter and $122.9 million (12 percent) in the nine month period. This decline
was due in part to continued generic competition in certain markets and the
impact of unfavorable exchange rates. Ceclor'r' accounted for the majority of
the decline in anti-infective sales. Sales of Ceclor decreased 17 percent in the
third quarter and 15 percent in the nine month period. The Company anticipates
that 1997 worldwide sales of anti-infectives will be below 1996 levels largely
due to continued pricing pressures as a result of generic competition. U.S.
anti-infective sales declined 21 percent in the quarter and 11 percent for the
first nine months. International anti-infective sales decreased 8 percent and 13
percent in both the third quarter and year-to-date period, respectively.

Worldwide sales of animal health products increased 11 percent over the third
quarter of 1996 and 7 percent for the nine month period, driven by volume growth
rates of 14 percent and 10 percent in each of those periods, respectively.

Health-care-management revenues increased 42 percent for the third quarter and
44 percent for the nine month period of 1997, largely due to increased mail
order pharmacy sales.

Gross margin improved to 72.8 percent of sales for the third quarter and 72.5
percent of sales for the first nine months, as compared to 72.1 percent and 71.1
percent for the third quarter and first nine months of 1996, respectively. The
increases for both periods were primarily the result of continued productivity
improvements, enhanced plant utilization, and favorable changes in product mix.
These improvements were offset in part by increased health-care-management
service revenues, which have lower margins than pharmaceutical products. For the
year, the Company anticipates that gross margin will be higher than 1996 levels.

Operating expenses for 1997 increased 22 percent for the third quarter and 16
percent for the nine month period. The increases reflect 19 percent and 16
percent growth rates in research and development expenses for the third quarter
and first nine months, respectively, due largely to clinical trial expenditures
and increased activity under external research collaborations. The Company
expects spending in research and development to increase approximately 14 to 16
percent for the entire year of 1997. Marketing and administrative expenses
increased 24 percent from the third quarter of 1996 and 16 percent from the
first nine months of 1996. These increases are driven by increased expenditures
to support continued new product launches around the world, enhancements of the
Company's global information technology capabilities, and accruals for the
Company's performance-based compensation programs. The year-to-date increase in
marketing and administrative expense also reflects the settlement of a
significant portion of the Company's remaining retail pharmacy pricing
litigation. Excluding that charge, marketing and administrative expenses would
have increased at a rate below that of sales. To continue supporting the global
sales of its newer products, including future product launches, the Company
expects the rate of growth of marketing and administrative expenses for 1997 to
approximate the rate of sales growth.

The asset impairment represents a noncash charge of approximately $2.4 billion
($2.21 per share), recorded in the second quarter of 1997, to adjust the
carrying value of PCS health-care-management businesses' long-lived assets,
primarily goodwill, to their fair value of approximately $1.5 billion. While

revenues and profits are growing and new capabilities are being developed at
PCS, the rapidly changing, competitive and highly regulated environment in which
PCS operates has prevented the Company from significantly increasing PCS'
operating profits from levels which existed prior to the acquisition. In
addition, since the acquisition, the health-care industry trend toward highly
managed care has been slower than originally expected and the possibility of
selling a portion of PCS' equity to a strategic partner has not been realized.
Consequently, in the second quarter, concurrent with PCS' annual planning
process, the Company determined that PCS' estimated future undiscounted cash
flows were below the carrying value of PCS' long-lived assets. As a consequence,
the carrying value was adjusted to estimated fair value based on anticipated
future cash flows, discounted at a rate commensurate with the risk involved.

Compared with the third quarter and nine month periods of 1996, interest expense
decreased $16.8 million (23 percent) and $39.1 million (18 percent),
respectively. These decreases are due to a decline in the Company's borrowings.

Net other income of $16.3 million for the quarter and $72.8 million for the nine
month period was $80.0 million lower and $187.9 million lower than the same
periods of 1996. Other income was lower in both periods primarily due to the
third quarter 1996 sale of U.S. marketing rights of Ceclor'r' CD and Keftab'r'
to Dura Pharmaceuticals, Inc. In addition, for the nine month period, other
income was lower due to a higher level of 1996 sales of equity securities held
by the Company, income realized during 1996 from the sale of certain marketing
rights, and the impact of a $24 million charge in the first quarter of 1997
related to the discontinuance of a research collaboration with Somatogen, Inc.

The Company's reported tax rates for the quarter and first nine months of 1997
reflect the effects of the significant transactions which occurred during the
year. The tax expense from the $631.8 million DowElanco gain was $328.3 million
while the tax benefit from the $2.4 billion PCS asset impairment was $13.4
million. The Company's estimated tax rate, excluding the impacts of those items,
was 25.0 percent for both the third quarter and the first nine months of 1997
compared to a tax rate of 25.7 percent for the same periods in 1996. This
estimated effective tax rate essentially equals the annual 1996 rate of 25.0
percent. The decline from the third quarter and first nine months of 1996 is
primarily the result of changes in the mix of earnings between jurisdictions
having different tax rates and the effectiveness of various tax planning
strategies. The Company expects current tax strategies will allow its 1997
effective tax rate, excluding the impacts of the DowElanco gain and PCS asset
impairment, to remain approximately the same as the 1996 annual rate.

Third quarter net income was $456.9 million and $.41 per share, representing
increases of 10 percent and 8 percent, respectively, as compared with the same
periods of 1996. For the quarter, net income was favorably impacted by increased
sales and improved gross margin, offset somewhat by higher operating expenses as
a percent of sales and decreased other income. Excluding the one-time gain
resulting from the third quarter 1996 sale of marketing rights to Dura
Pharmaceuticals, Inc., net income and earnings per share increased 32 percent
and 28 percent, respectively. The first nine months of 1997 reflected a net loss
of $842.6 million ($.77 per share) driven by the PCS impairment and the
litigation settlement, which were offset in part by the DowElanco gain. Without
these significant events, year-to-date net income and earnings per share would
be $1,298.8 million and $1.18, increases of 13 percent and 12 percent,
respectively. These increases are attributed to increased sales, improved gross
margin, and lower operating expenses as a percent of sales, partially offset by
decreased other income.

FINANCIAL CONDITION:

As of September 30, 1997, cash, cash equivalents and short-term investments
totaled $1,540.9 million as compared with $955.1 million at December 31, 1996, a
net increase of $585.8 million. Total debt at September 30, 1997, was $2,767.2
million, a decrease of $962.2 million from December 31, 1996. These changes in
cash, cash equivalents, short-term investments and debt are primarily due to
positive operating cash flows and proceeds from the sale of DowElanco.

The Company believes that cash generated from operations in 1997, along with
available cash and cash equivalents, will be sufficient to fund essentially all
of the 1997 operating needs, including debt service, capital expenditures, and
dividends. The Company anticipates that amounts available through existing
commercial paper programs should be adequate to fund maturities of short-term
borrowings. The outstanding commercial paper is supported by committed bank
credit facilities.

Following the Company's announcement on June 23, 1997 of the noncash charge for
the PCS asset impairment, the credit rating agencies affirmed the Company's
current commercial paper and long-term debt ratings.

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 are subject to risks and uncertainties which may
cause actual results to differ materially from those projected. Economic,
competitive, governmental, technological and other factors which may affect the
Company's operations are discussed in Exhibit 99 to this Form 10-Q filing.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to the discussion of In re Brand Name Prescription Drugs
Antitrust Litigation (MDL No. 997) and related cases contained in the "Legal
Proceedings" sections of the Company's 1996 Form 10-K and Form 10-Qs for the
first and second quarters of 1997. The settlement of the Federal Class Action,
which was originally provided for by the Company in the fourth quarter of 1995,
is now final and is in the process of being implemented.

There have also been developments in some of the related state court cases. A
new suit has been brought in state court in Mississippi on behalf of retailers
in that state. The trial judge in that case has denied an attempt to certify a
class of retailer plaintiffs. Among the consumer cases, the courts in Maine and
Michigan have denied the plaintiffs' class certification motions. In the Alabama
consumer case, pending in federal court in Chicago, the Seventh Circuit has
ruled that remand to the state court is appropriate.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits. The following documents are filed as exhibits to this
Report:

3. By-laws (amended through October 20, 1997)

11. Statement re: Computation of Earnings Per Share on Primary
and Fully Diluted Bases

12. Statement re: Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges

27. Financial Data Schedule

99. Cautionary Statement Under Private Securities Litigation
Reform Act of 1995 - "Safe Harbor" for Forward-Looking
Disclosures

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the third quarter of
1997.

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 November 11, 1997 /s/ Daniel P. Carmichael
-----------------------------------
Daniel P. Carmichael
Secretary and Deputy General Counsel

Date November 11, 1997 /s/ Arnold C. Hanish
-----------------------------------
Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting

STATEMENT OF DIFFERENCES
------------------------

The registered trademark symbol shall be expressed as ................... 'r'
The trademark symbol shall be expressed as .............................. 'tm'

INDEX TO EXHIBITS

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

Exhibit

3. By-laws (amended through October 20, 1997)

11. Statement re:
Computation of Earnings Per Share
on Primary and Fully Diluted Bases

12. Statement re:
Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges

27. Financial Data Schedule

99. Cautionary Statement Under Private Securities
Litigation Reform Act of 1995 - "Safe Harbor"
for Forward-Looking Disclosures