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, 1998

COMMISSION FILE NUMBER 001-06351

---

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

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

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, 1998:

Class Number of Shares Outstanding
----- ----------------------------

Common 1,099,699,808

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,
1998 1997 1998 1997
--------------------------------------------------------
(Dollars in millions except per-share data)

Net Sales........................... $2,573.2 $2,160.1 $7,183.0 $6,101.8

Cost of sales....................... 667.3 587.8 1,895.5 1,677.9
Research & development.............. 441.6 345.4 1,225.0 973.3
Acquired technology................. 127.5 - 127.5 -
Marketing & administrative.......... 680.5 587.2 1,900.6 1,631.6
Asset impairment.................... - - - 2,443.0
Gain on sale of DowElanco........... - (13.6) - (631.8)
Interest expense.................... 45.7 57.3 137.4 180.4
Other income - net.................. (4.8) (16.3) (77.9) (72.8)
-------- -------- -------- --------
1,957.8 1,547.8 5,208.1 6,201.6
-------- -------- -------- --------

Income (loss) before income taxes
and extraordinary item........... 615.4 612.3 1,974.9 (99.8)

Income taxes........................ 97.2 155.4 437.1 742.8
-------- -------- -------- --------

Income (loss) before
extraordinary item............... 518.2 456.9 1,537.8 (842.6)

Extraordinary item
Loss on early redemption
of debt, net of tax.............. - - (7.2) -
-------- -------- -------- --------

Net income (loss)................... $ 518.2 $ 456.9 $1,530.6 $ (842.6)
======== ======== ======== ========

Earnings (loss) per share
Income (loss) before
extraordinary item............. $ 0.47 $ 0.41 $ 1.40 $ (0.77)
Extraordinary item............... 0.00 0.00 (0.01) 0.00
-------- -------- -------- --------
Net income (loss)................ $ 0.47 $ 0.41 $ 1.39 $ (0.77)
======== ======== ======== ========

Earnings (loss) per share-diluted
Income (loss) before
extraordinary item............. $ 0.46 $ 0.40 $ 1.37 $ (0.77)
Extraordinary item............... 0.00 0.00 (0.01) 0.00
-------- -------- -------- --------
Net income (loss)................ $ 0.46 $ 0.40 $ 1.36 $ (0.77)
======== ======== ======== ========

Dividends paid per share............ $ 0.20 $ 0.18 $ 0.60 $ 0.54
======== ======== ======== ========

See Notes to Consolidated Condensed Financial Statements.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

Eli Lilly and Company and Subsidiaries

Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---------------------------------------------------
(Dollars in millions except per-share data)

Net income (loss)............ $518.2 $456.9 $1,530.6 $ (842.6)

Other comprehensive income
(expense).................. 67.1 (43.0) 34.7 (173.1)
------ ------ -------- ---------
Comprehensive income (loss).. $585.3 $413.9 $1,565.3 $(1,015.7)
====== ====== ======== =========

See Notes to Consolidated Condensed Financial Statements.

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

September 30, December 31,
1998 1997
------------------------------
(Millions)

ASSETS
CURRENT ASSETS
Cash and cash equivalents................................ $1,543.5 $1,947.5
Short-term investments.................................. 72.9 77.1
Accounts receivable, net of allowances for
doubtful amounts of $61.3 (1998) and
$53.3 (1997).......................................... 1,796.7 1,544.3
Other receivables....................................... 191.0 338.9
Inventories............................................. 1,028.5 900.7
Deferred income taxes................................... 365.9 325.7
Prepaid expenses........................................ 331.4 186.5
-------- --------
TOTAL CURRENT ASSETS.................................... 5,329.9 5,320.7

OTHER ASSETS
Prepaid retirement...................................... 599.6 579.1
Investments............................................. 248.9 465.6
Goodwill and other intangibles, net of
allowances for amortization of
$157.3 (1998) and $119.3 (1997)...................... 1,501.4 1,550.5
Sundry.................................................. 855.9 559.8
--------- ---------
3,205.8 3,155.0
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress............................. 7,163.0 7,034.9
Less allowances for depreciation........................ 3,117.4 2,933.2
--------- ---------
4,045.6 4,101.7
--------- ---------
$12,581.3 $12,577.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings................................... $ 397.4 $ 227.6
Accounts payable........................................ 881.8 985.5
Employee compensation................................... 553.0 456.6
Dividends payable....................................... - 221.7
Income taxes payable.................................... 1,162.2 1,188.0
Other liabilities....................................... 1,013.5 1,112.2
--------- ---------
TOTAL CURRENT LIABILITIES............................... 4,007.9 4,191.6

LONG-TERM DEBT............................................. 2,268.9 2,326.1
DEFERRED INCOME TAXES...................................... 516.6 215.5
RETIREE MEDICAL BENEFIT OBLIGATION......................... 110.1 118.3
OTHER NONCURRENT LIABILITIES............................... 1,008.8 920.3
--------- ---------
3,904.4 3,580.2
COMMITMENTS AND CONTINGENCIES.............................. - -
MINORITY INTEREST IN SUBSIDIARY............................ 160.0 160.0

SHAREHOLDERS' EQUITY
Common stock............................................ 686.2 694.7
Retained earnings....................................... 4,325.8 4,497.3
Deferred costs-ESOP..................................... (147.5) (155.7)
Accumulated comprehensive income........................ (246.5) (281.2)
--------- ---------
4,618.0 4,755.1

Less cost of common stock in treasury................... 109.0 109.5
--------- ---------
4,509.0 4,645.6
--------- ---------
$12,581.3 $12,577.4
========= =========

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,
1998 1997
-------------------------
(Millions)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... $ 1,530.6 $ (842.6)
Adjustments to reconcile net income (loss) to cash
flows from operating activities:
Changes in operating assets and liabilities............. (348.9) (154.5)
Change in deferred taxes................................ 133.2 (44.5)
Depreciation and amortization........................... 358.8 399.8
Net gain from sale of DowElanco......................... - (303.5)
Asset impairment, net of tax............................ - 2,429.6
Other items, net........................................ (99.4) (42.9)
--------- ---------

NET CASH FLOWS FROM OPERATING ACTIVITIES................ 1,574.3 1,441.4

CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment................. (264.1) (213.7)
Additions to sundry assets and intangibles.............. (82.0) (24.4)
Reduction of investments................................ 192.6 355.3
Additions to investments................................ (35.1) (251.6)
Proceeds from sale of DowElanco......................... - 1,211.1
--------- ---------

NET CASH FROM (USED FOR) INVESTING ACTIVITIES........... (188.6) 1,076.7

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid.......................................... (662.3) (594.8)
Purchases of common stock and other capital
transactions.......................................... (1,278.7) (179.5)
Net additions (reductions) to short-term borrowings..... 150.9 (948.5)
Net additions (reductions) to long-term debt............ (23.4) 5.6
--------- ---------

NET CASH USED FOR FINANCING ACTIVITIES.................. (1,813.5) (1,717.2)

Effect of exchange rate changes on cash................. 23.8 (110.5)
--------- ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (404.0) 690.4

Cash and cash equivalents at January 1.................. 1,947.5 813.7
--------- ---------

CASH AND CASH EQUIVALENTS AT SEPTEMBER 30............... $ 1,543.5 $ 1,504.1
========= =========

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
presentation 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 revenue from the Company's health-care management operations,
primarily PCS Health Systems, Inc. (PCS).

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 recoveries 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 the 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. The Company has also settled
with a large number of the remaining retail pharmacies. Still pending are
related suits brought in federal and some state courts by a large number of
retail pharmacies involving claims of price discrimination or claims under other
pricing laws. 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 $329
million at September 30, 1998. Estimated insurance recoverables have been
reflected as assets in the consolidated balance sheet of approximately $243
million at September 30, 1998.

Barr Laboratories, Inc. ("Barr"), Geneva Pharmaceuticals, Inc. ("Geneva"),
Zenith Goldline Pharmaceuticals, Inc. ("Zenith") and Teva Pharmaceuticals USA,
("Teva") 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 one or more of 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. In October 1998, the Company
brought similar suits in the same court against Zenith and Teva. The patent
validity aspects of the Barr and Geneva cases are currently set for trial on
January 25, 1999. While the Company believes that the claims of the four
companies are without merit, there can be no assurance that the Company will
prevail. An unfavorable outcome of this litigation could have a material adverse
effect on the Company's consolidated financial position, liquidity, or results
of operations.

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.

EARNINGS PER SHARE

To reflect the impact of the Company's September 1997 stock split, previously
reported outstanding and weighted-average number of shares of common stock and
per share data have been adjusted.

At December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share",
which requires presentation of both basic earnings per share and diluted
earnings per share on the income statement. Accordingly, earnings per share
data for previous periods has been restated. All per share amounts, unless
otherwise noted in the footnotes, are presented on a diluted basis, that is,
based on the weighted-average number of outstanding common shares and the effect
of all potentially dilutive common shares (primarily unexercised stock options).

ICOS COLLABORATION

During the quarter, the Company announced a collaboration with ICOS Corporation
to jointly develop and globally commercialize phosphodiesterase type 5
inhibitors (PDE5) as oral therapeutic agents for the treatment of both male and
female sexual dysfunction. The combined impact of the up-front payment to ICOS
plus certain other payments resulted in a one-time expense of $127.5 million for
acquired technology, which reduced earnings per share by approximately $.07 in
the third quarter.

ACCOUNTING CHANGES

Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". Under provisions of
this statement, the Company has included a financial statement presentation of
comprehensive income to conform to these new requirements. SFAS No. 130
requires unrealized gains or losses on the Company's available-for-sale
securities, minimum pension liability adjustments and foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity to be included in other comprehensive income. As a
consequence of this change, certain balance sheet reclassifications were
necessary for previously reported amounts to achieve the required presentation
of comprehensive income. Implementation of this disclosure standard did not
affect the Company's financial position or results of operations.

Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement requires capitalization of certain costs incurred
in the development of internal-use software, including external direct material
and service costs, employee payroll and payroll-related costs, and capitalized
interest. Prior to adoption of SOP 98-1, the Company expensed these costs as
incurred. The effect of this change in accounting principle on consolidated
earnings during the current period is immaterial.

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. 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 the Company's financial position or results
of operations.

In December 1997, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", was issued and is effective for the Company's 1998
fiscal year. The statement revises current disclosure requirements for
employers' pensions and other retirees' benefits. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations.

In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. Statement No. 133 is required to be adopted in years
beginning after June 15, 1999. The statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The statement will require
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 Company has
not yet determined what the effect of Statement No. 133 will be on the Company
or when the statement will be adopted.

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

OPERATING RESULTS:

The Company's sales for the third quarter of 1998 increased 19 percent compared
with the third quarter of 1997. Sales inside the United States increased 25
percent while sales outside of the United States increased 8 percent. Compared
with the third quarter of 1997, worldwide sales reflected volume growth of 17.6
percent and a 3.1 percent increase in selling prices which were partially offset
by the unfavorable impact of exchange rates of 1.5 percent.

The Company's sales for the first nine months of 1998 increased 18 percent
compared with the same period in 1997. Sales inside the United States increased
23 percent while sales outside the United States increased 8 percent. Compared
with the first nine months of 1997, worldwide sales reflected volume growth of
17.3 percent and a 2.6 percent increase in selling prices which were partially
offset by an unfavorable exchange rate impact of 2.2 percent.

Worldwide pharmaceutical sales and services for the quarter were $2,423 million
and for the nine month period were $6,749 million, reflecting increases of 20
percent and 19 percent, respectively, compared with the same periods of 1997.
Sales growth in both periods was led by the antidepressant Prozac and three of
the Company's newer products, the oncolytic product Gemzar(R), the
cardiovascular agent ReoPro(R), and Zyprexa(R), indicated for schizophrenia.
Sales in both periods also benefited from increased health care management
revenues and from sales of Evista(R), the osteoporosis prevention agent launched
in the first quarter. Revenue growth for both the quarter and the nine month
period was partially offset by lower sales of anti-infective products and the
anti-ulcer agent Axid(R), due to continuing generic competition and other
competitive pressures. Total U.S. pharmaceutical sales and services for the
quarter increased 25 percent to $1,699 million and for the nine month period
increased 24 percent to $4,550 million. Growth in both periods was driven
primarily by increased volumes. International pharmaceutical sales for both the
quarter and nine months increased 9 percent to $723 million and $2,199 million,
respectively. Strong volume growth drove these increases, offset by the effect
of unfavorable exchange rates with selling prices remaining stable. The exchange
rate impact in the Asia Pacific region did not have a material impact on
worldwide sales.

Worldwide sales of Prozac for the quarter were $793 million and for the nine
month period were $2,077 million, representing increases over the same periods
of 1997 of 12 percent and 11 percent, respectively. Prozac sales in the U.S.
increased 15 percent to $666 million for the quarter and 14 percent to $1,681
million for the nine month period. Sales of Prozac outside the U.S. were flat
to 1997 at $127 million for the quarter, but reflected an increase of 1 percent
to $396 million for the nine month period. Both periods were affected by
unfavorable exchange rates and continued competitive pressures.

Zyprexa posted worldwide sales for the quarter of $396 million and $1,011
million for the nine month period, representing increases of $194 million and
$548 million, respectively, over the same periods of 1997. U.S. sales of
Zyprexa increased $149 million to $312 million for the quarter and increased

$418 million to $798 million for the nine month period. Sales outside the U.S.
increased $45 million to $84 million for the quarter and increased $130 million
to $213 million for the nine month period.

Worldwide insulin sales, composed of Humulin(R), Humalog(R), and Iletin(R),
increased in the quarter by 10 percent to $288 million and, for the nine month
period, increased 9 percent to $816 million. Insulin sales in the U.S. for the
quarter increased by 6 percent to $179 million and for the nine month period
increased 5 percent to $487 million. Insulin sales outside the U.S. increased by
18 percent to $109 million for the quarter and increased 15 percent to $330
million for the nine month period. Worldwide Humulin sales increased 6 percent
for the quarter and 4 percent for the nine month period. U.S. Humulin sales
increased for the quarter by 3 percent, but for the nine month period were flat
with 1997. Humulin sales outside the U.S. increased by 12 percent and 10 percent
for the quarter and nine month period, respectively, despite unfavorable
exchange rates. The Company expects Humulin sales for the full year to increase
from 3 to 5 percent over 1997 levels. Worldwide Humalog sales were $32 million
for the quarter and $86 million for the nine month period, representing
substantial increases over the same periods of 1997.

Worldwide sales of anti-infectives decreased by 9 percent to $232 million for
the quarter and by 12 percent to $777 million for the nine month period. U.S.
anti-infective sales declined 6 percent for the quarter and 23 percent for the
nine month period. International anti-infective sales declined by 10 percent
and 7 percent for the same time periods. These declines were due in part to
continued generic competition in certain markets and the impact of unfavorable
exchange rates. Cefaclor and Vancocin(R) accounted for the majority of the
decline in anti-infective sales. Sales of cefaclor declined 7 percent for the
quarter and 12 percent for the nine month period. Vancocin sales declined 15
percent in the quarter and 10 percent for the nine month period.

Worldwide Axid sales decreased by 27 percent to $97 million for the quarter and
by 23 percent to $319 million for the nine month period due to continuing
competition from other branded and generic anti-ulcer agents. The Company
expects continued declines in Axid sales.

Worldwide ReoPro sales of $87 million for the quarter and $258 million for the
nine month period reflected increases of 37 percent and 47 percent over the same
periods of 1997, respectively.

Worldwide Gemzar sales of $69 million for the quarter and $212 million for the
nine month period reflected increases of 46 percent and 74 percent over the same
periods of 1997, respectively.

Evista, launched in the first quarter, had worldwide sales of $33 million for
the quarter and $82 million for the nine month period. The Company expects to
have introduced Evista in approximately 16-20 countries by the end of 1998.
Assuming that current new prescription trends continue, the Company anticipates
worldwide Evista sales for the full year of 1998 to be in the range of $125
million to $140 million.

Health-care management revenues increased 61 percent for the quarter to $207
million and 54 percent for the nine months to $565 million, driven largely by
increased mail order pharmacy sales.

Worldwide sales of animal health products increased 6 percent over the third
quarter of 1997 to $149 million and 6 percent for the nine month period to $428
million. This sales growth was driven primarily by Micotil(R), Tylan(R) and
Surmax(R).

Cost of sales decreased in the third quarter to 25.9 percent of sales as
compared with 27.2 percent of sales in the same quarter of 1997. Cost of sales
for the first nine months of 1998 was 26.4 percent of sales as compared with
27.5 percent in the prior year. The decreases for both periods were primarily
the result of favorable changes in product mix, continued productivity
improvements, and enhanced plant utilization. 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 cost of sales as a percent of sales will be below 1997 levels due to the
factors cited above and the expiration of a royalty obligation on Humulin and
Humalog sales in August 1998.

Operating expenses for 1998, excluding the effect of the one-time expenses of
the ICOS collaboration, increased 20 percent in both the third quarter and the
first nine months. The increases reflect 28 percent and 26 percent growth rates
in research and development for the third quarter and nine month periods,
respectively. This growth is the result of greater investments in both internal
research efforts and external research collaborations. The Company expects
research and development expenses for the full year to increase from 23 to 25
percent over 1997 levels excluding the ICOS expenses. Marketing and
administrative expenses increased 16 percent in both the third quarter and the
first nine months. This increase was driven by increased expenditures to
support continued new product launches around the world, including the U.S.
launch of Evista, enhancements of the Company's global information technology
capabilities, including expenditures relating to the Company's Year 2000
computer initiatives, and direct-to-consumer advertising campaigns in the U.S.

Two transactions occurred in the first nine months of 1997 that affect
comparisons with 1998. First, in the second quarter of 1997 the Company
recognized an asset impairment (a noncash charge) of approximately $2.4 billion
to adjust the carrying value of PCS health-care-management businesses (PCS)
long-lived assets, primarily goodwill, to their fair value of approximately $1.5
billion. 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. Second, on June 30, 1997, The Dow Chemical Company acquired the
Company's 40 percent interest in DowElanco. The cash purchase price was $1.2
billion resulting in a gain of $631.8 million ($303.5 million after-tax).

Compared to the third quarter and first nine months of 1997, interest expense
decreased $12 million (20 percent) and $43 million (24 percent), respectively,

due largely to declines in the Company's short-term borrowings.

Net other income for the quarter of $5 million reflected a decrease of $12
million from 1997. Net other income for the nine month period was $78 million,
an increase of $5 million over 1997. The first nine months of 1998 benefited
from a decrease in goodwill amortization expense, gains on the sale of certain
investments, the exchange of Somatogen stock for Baxter stock as part of their
merger, and increased interest income. Also, the first nine months comparison
benefited from the inclusion in the 1997 amount of the charges associated with
the discontinuance of a collaboration with Somatogen, Inc. These increases were
partially offset by the absence of DowElanco joint venture income and certain
license fee income in the first nine months of 1998.

The Company's effective tax rate for the third quarter and first nine months was
16 percent and 22 percent, respectively. The 1998 tax rate for the year had
been forecasted at 25 percent, the same rate as in 1997. However, after
confirmation in the third quarter of evolving operating and tax trends outside
the U.S., the estimated effective tax rate for the year was revised to
approximately 23 percent, resulting in a third quarter benefit of $.03 per share
attributable to the catch-up effect. This new rate is primarily the result of
various tax strategies that have led to changes in the mix of earnings between
jurisdictions with lower tax rates and those with higher rates. The Company
expects that the new tax rate will be sustainable under present law for the
foreseeable future. For the first nine months of 1997 the Company's effective
tax rate was distorted by the impacts of the PCS impairment and the gain from
the sale of DowElanco. The Company's estimated tax rate for the first nine
months of 1997, excluding the impacts of these items, was 25 percent.

Third quarter net income was $518 million, or $.46 per share, compared to $457
million for the third quarter of 1997, or $.40 per share. For the nine month
period, net income was $1,531 million, or $1.36 per share, compared to an $843
million net loss ($.77 per share) for the same period in 1997. The third
quarter 1998 results were impacted by the previously mentioned ICOS
collaboration expenses. Excluding these non-recurring expenses, third quarter
net income increased 30 percent as compared to 1997. The results of the first
nine months of 1997 and 1998 were impacted by certain non-recurring significant
events described above: the PCS asset impairment, the retail pharmacy pricing
litigation settlement and the DowElanco sale in 1997 and the ICOS collaboration
expenses in 1998. Excluding these non-recurring significant events, net income
increased 24 percent over the first nine months of 1997. For the third quarter
and the first nine months, net income was favorably impacted by increased sales,
improved gross margin and a lower effective tax rate, offset somewhat by higher
research and development expenses as a percent of sales.

FINANCIAL CONDITION:

As of September 30, 1998, cash, cash equivalents and short-term investments
totaled $1,616 million as compared with $2,025 million at December 31, 1997, a
net decrease of $409 million. Total debt at September 30, 1998, was $2,666
million, an increase of $112 million from December 31, 1997. The decrease in
cash and increase in debt were due primarily to stock repurchases. During the
first nine months of 1998, the Company repurchased approximately 22.6 million
shares at a cost of $1,494 million. The Company expects to complete its
previously announced $2 billion share repurchase by the end of 1998.

The Company believes that cash generated from operations in 1998, along with
available cash and cash equivalents, will be sufficient to fund essentially all
of the 1998 operating needs, including debt service, repayment of short term
borrowing, capital expenditures, and dividends.

YEAR 2000 READINESS DISCLOSURE:

Many of the Company's global information technology (IT) systems and non-IT
systems including laboratory and process automation devices will require
modification or replacement in order to render the systems ready for the year
2000 (Y2K). The Company has undertaken a comprehensive program which began in
late 1996 to enable the Company to reduce the likelihood of a material impact on
the business. Utilizing both internal and external resources, the numerous
activities undertaken to enable the Company to obtain Y2K readiness are being
centrally managed through a program office. Monthly reporting occurs to senior
management and a business council comprised of various management
representatives. In addition, regular reporting has occurred with the Audit
Committee of the Board of Directors.

The Company's inventory of IT systems, including software applications, has been
divided into various categories. Those most critical to the Company's global
operations are generally being assessed and renovated, when necessary, first.
The Company has instituted a process to monitor all critical and essential
replacement and upgrade projects of existing systems to assist in managing them
toward completion in a timely manner. The Company expects to have completed
renovation of approximately 95 percent of its critical applications by January
31, 1999. Of applications deemed essential, the Company anticipates Y2K
readiness of approximately 95% by June 30, 1999.

The most important non-IT systems are various laboratory and process automation
devices. The Company has completed a global assessment of all critical devices
and anticipates completing assessment of all others by December 1, 1998. Based
on this assessment, only a small percentage (5-10%) of all automation devices
appears to require action. The Company has begun the process of either
remediating or replacing these devices and anticipates that this process will be
substantially complete by mid-1999.

The representatives of the program office have visited numerous global sites to
assess the progress being made toward site readiness. In addition, several
global training programs have occurred to foster the consistent application of
the chosen methodologies.

The Company has also mailed letters to thousands of vendors, service providers
and customers to determine the extent to which they are prepared for the Year
2000 issue. These activities are being coordinated through a global network of
site and functional coordinators. Responses have been received from many and
the Company is identifying those that are critical to the Company through a
business impact analysis. Analysis of the responses and follow-up interviews are
being made to those deemed critical in order to more thoroughly assess their
readiness.

Contingency plans will be developed for the Company and its critical vendors,
customers and suppliers to address the flow of products to the consumer. The
contingency planning will involve a multifaceted approach which may include
additional purchases of raw materials, manufacturing additional finished stock
of critical products, and/or locating inventories of products closer to the
consumer. Business continuity plans will be developed to address the Company

approach for dealing with extended disruptions. In addition, "rapid response"
teams will be established to respond to any issues that occur around the
millennium. The Company currently plans to complete analysis and have
contingency plans in place by September 30, 1999.

The Company has begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis and
contingency planning by September 30, 1999.

The costs of the Company's Year 2000 efforts are based upon management's best
estimates, which are derived using numerous assumptions regarding future events,
including the continued availability of certain resources, third-party
remediation plans, and other factors. There can be no assurance that these
estimates will prove to be accurate, and actual results could differ materially
from those currently anticipated. The Company currently estimates it will spend
between $160-190 million over the life of the program and that approximately 55-
60% of the anticipated costs will have been incurred by the end of 1998.
Expenses associated with addressing the Year 2000 issues are being recognized as
incurred.

The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations. Due to the uncertainty inherent in the Year 2000
problem, the Company is unable to determine, at this time, whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations. The Year 2000 project is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its vendors, service
suppliers and customers. The Company believes that with the completion of the
project as scheduled, the possibility of a material interruption of normal
operations should be reduced.

EURO CONVERSION

On January 1, 1999, certain member nations of the European Economic and Monetary
Union ("EMU") will adopt a common currency, the Euro. For a three-year
transition period, both the Euro and individual participants' currencies will
remain in circulation. After January 1, 2002, the Euro will be the sole legal
tender for EMU countries. The adoption of the Euro will affect a multitude of
financial systems and business applications as the commerce of these nations
will be transacted in the Euro and the existing national currency.

The Company is currently addressing Euro-related issues and its impact on
information systems, currency exchange rate risk, taxation, contracts,
competition, and pricing. Action plans currently being implemented are expected
to result in compliance with all laws and regulations; however, there can be no
certainty that such plans will be successfully implemented or that external
factors will not have an adverse effect on the Company's operations. Any costs
of compliance associated with the adoption of the Euro will be

expensed as incurred and the Company does not expect these costs to be material
to its results of operations, financial condition, or liquidity.

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 and elsewhere in this Form 10-Q
filing.

PART II OTHER INFORMATION
--------------------------

Item 1 - Legal Proceedings

Reference is made to the discussion of the Prozac patent litigation contained in
the "Legal Proceedings" section of the Company's 1997 Form 10-K and Form 10-Q
for the quarter ended June 30, 1998. In the third quarter of 1998, the Company
was informed that Zenith Goldline Pharmaceuticals, Inc. ("Zenith") and Teva
Pharmaceuticals, USA ("Teva") had each submitted similar ANDAs, but claiming
invalidity and unenforceability of the December 2003 patent only. In October
1998, the Company sued Zenith and Teva separately in the United States District
Court for the Southern District of Indiana (where the Barr and Geneva suits are
pending), seeking to enforce the December 2003 patent.

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" section of the Company's 1997 Form 10-K and in the Company's Form
10-Q for the quarter ended March 31, 1998. Of the eleven state court cases in
which settlements were awaiting court approval, the courts have approved the
settlements in Arizona, Michigan, and Wisconsin.

Item 6 - Exhibits and Reports on Form 8-K

(a) Exhibits

The following documents are filed as exhibits to this Report:

3 Amended Articles of Incorporation (amended through
October 20, 1998)

11 Statement re: Basic Computation of Earnings Per Share and
Diluted Earnings Per Share

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 1998.

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 12, 1998 /s/ Daniel P. Carmichael
----------------- ------------------------------------
Daniel P. Carmichael
Secretary and Deputy General Counsel

Date November 12, 1998 /s/ Arnold C. Hanish
----------------- ------------------------------------
Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting Officer

TO EXHIBITS

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

Exhibit
-------

3 Amended Articles of Incorporation (amended through October 20,
1998)

11 Statement re: Computation Of Basic Earnings Per Share and Diluted
Earnings Per Share

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