Notice of 2010 Annual Meeting and Proxy Statement

March 8, 2010

Dear Shareholder:

You are cordially invited to attend our annual meeting of shareholders on Monday, April 19, 2010, at the Lilly Center Auditorium, Lilly Corporate Center, Indianapolis, Indiana, at 11:00 a.m. EDT.

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

     Please note our procedures for admission to the meeting described on page 5.

     I look forward to seeing you at the meeting.

John C. Lechleiter, Ph.D.
Chairman, President, and Chief Executive Officer

Important notice regarding the availability of proxy materials for the shareholder meeting to be held April 19, 2010: The annual report and proxy statement are available at _________

Notice of Annual Meeting of Shareholders

April 19, 2010

The annual meeting of shareholders of Eli Lilly and Company will be held at the Lilly Center Auditorium, Lilly Corporate Center, Indianapolis, Indiana, on Monday, April 19, 2010, at 11:00 a.m. EDT for the following purposes:

	•		to elect five directors of the company to serve three-year terms
	•		to ratify the appointment by the audit committee of Ernst & Young LLP as principal independent auditor for the year 2010
	•		to approve amendments to the articles of incorporation to provide for annual election of all directors
	•		to approve amendments to the articles of incorporation to eliminate all supermajority voting requirements
	•		to consider and vote on a shareholder proposal requesting that the board amend the bylaws to allow holders of 10 percent of the outstanding shares of stock to call special meetings of shareholders
	•		to consider and vote on a shareholder proposal requesting that the board of directors adopt a policy of prohibiting CEOs from serving on the compensation committee of the board
	•		to consider and vote on a shareholder proposal requesting that the board of directors adopt a policy of asking shareholders to ratify the compensation of named executive officers at the annual meeting of shareholders
	•		to consider and vote on a shareholder proposal requesting that the compensation committee of the board of directors establish a policy requiring senior executives to retain equity awards until two years after leaving the company.

     Shareholders of record at the close of business on February 12, 2010, will be entitled to vote at the meeting and at any adjournment of the meeting.

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

     This combined proxy statement and annual report to shareholders and the proxy voter card are being mailed on or about March 8, 2010.

By order of the board of directors,

James B. Lootens
Secretary

March 8, 2010
Indianapolis, Indiana

General Information

Why did I receive this proxy statement?
The board of directors of Eli Lilly and Company is soliciting proxies to be voted at the annual meeting of shareholders (the annual meeting) to be held on Monday, April 19, 2010, and at any adjournment of the annual meeting. When the company asks for your proxy, we must provide you with a proxy statement that contains certain information specified by law.

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

	•		election of directors
	•		ratification of the appointment of principal independent auditor
	•		amending the company’s articles of incorporation to provide for annual election of all directors
	•		amending the company’s articles of incorporation to eliminate all supermajority voting requirements
	•		a shareholder proposal on allowing shareholders to call special meetings of shareholders
	•		a shareholder proposal on prohibiting CEOs from serving on the compensation committee
	•		a shareholder proposal on shareholder ratification of executive compensation
	•		a shareholder proposal on executives holding equity awards into retirement.

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

Who is entitled to vote?
Shareholders as of the close of business on February 12, 2010 (the record date) may vote at the annual meeting. You have one vote for each share of common stock you held on the record date, including shares:

	•		held directly in your name as the shareholder of record
	•		held for you in an account with a broker, bank, or other nominee
	•		attributed to your account in The Eli Lilly and Company Employee 401(k) Plan (the 401(k) plan).

What constitutes a quorum?
A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the annual meeting. As of the record date, _________ shares of company common stock were issued and outstanding.

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

	•		The five nominees for director will be elected if the votes cast for the nominee exceed the votes cast against the nominee. Abstentions will not count as votes cast either for or against a nominee.
	•		The following items of business will be approved if the votes cast for the proposal exceed those cast against the proposal:

			— the appointment of principal independent auditor
			— the shareholder proposals.

     Abstentions will not be counted either for or against these proposals.

•

The management proposals to amend the articles of incorporation to provide for annual election of all directors and to eliminate all supermajority voting requirements require the vote of 80 percent of the outstanding shares. For these items, abstentions have the same effect as a vote against the proposals.

Broker discretionary voting. If your shares are held by a broker, the broker will ask you how you want your shares to be voted. If you give the broker instructions, your shares will be voted as you direct. If you do not give instructions, one of two things can happen, depending on the type of proposal. For the ratification of the auditor and the management proposals on amending the articles of incorporation to provide for annual election of all directors and to eliminate all supermajority voting requirements, the broker may vote your shares in its discretion. For all other proposals, the broker may not vote your shares at all.

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

By mail. Sign and date each proxy card you receive and return it in the prepaid envelope. Sign your name exactly as it appears on the proxy. If you are signing in a representative capacity (for example, as an attorney-in-fact, executor, administrator, guardian, trustee, or the officer or agent of a corporation or partnership), please indicate your name and your title or capacity. If the stock is held in custody for a minor (for example, under the Uniform Transfers to Minors Act), the custodian should sign, not the minor. If the stock is held in joint ownership, one owner may sign on behalf of all owners. If you return your signed proxy but do not indicate your voting preferences, we will vote on your behalf for the election of the nominees for director listed below, for the ratification of the appointment of the independent auditor, for the management proposals on amending the articles of incorporation to provide for annual election of all directors and to eliminate all supermajority voting requirements, and against the shareholder proposals.

     If you did not receive a proxy card in the materials you received from the company and you wish to vote by mail rather than by telephone or on the Internet as discussed below, you may request a paper copy of these materials and a proxy card by calling 317-433-5112. If you received an e-mail message notifying you of the electronic availability of these materials, please provide the control number from the e-mail, along with your name and mailing address.

By telephone. Shareholders in the United States, Puerto Rico, and Canada may vote by telephone by following the instructions on your notice or proxy card or, if you received these materials electronically, by following the instructions in the e-mail message that notified you of their availability. Voting by telephone has the same effect as voting by mail. If you vote by telephone, do not return your proxy card. Telephone voting will be available until 11:59 p.m. EDT, April 18, 2010.

On the Internet. You may vote online at www.proxyvote.com. Follow the instructions on your notice or proxy card or, if you received these materials electronically, follow the instructions in the e-mail message that notified you of their availability. Voting on the Internet has the same effect as voting by mail. If you vote on the Internet, do not return your proxy card. Internet voting will be available until 11:59 p.m. EDT, April 18, 2010.

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

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

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

How do I vote my shares in the 401(k) plan?
You may instruct the plan trustee on how to vote your shares in the 401(k) plan by mail, by telephone, or on the Internet as described above, except that, if you vote by mail, the card that you use will be a voting instruction card rather than a proxy card.

How many shares in the 401(k) plan can I vote?
You may vote all the shares allocated to your account on the record date. In addition, unless you decline, your vote will also apply to a proportionate number of other shares held in the 401(k) plan for which voting directions are not received. These undirected shares include:

	•		shares credited to the accounts of participants who do not return their voting instructions (except for a small number of shares from a prior stock ownership plan, which can be voted only on the directions of the participants to whose accounts the shares are credited)
	•		shares held in the plan that are not yet credited to individual participants’ accounts.

     All participants are named fiduciaries under the terms of the 401(k) plan and under the Employee Retirement Income Security Act (ERISA) for the limited purpose of voting shares credited to their accounts and the portion of undirected shares to which their vote applies. Under ERISA, fiduciaries are required to act prudently in making voting decisions.

     If you do not want to have your vote applied to the undirected shares, you should check the box marked “I decline.” Otherwise, the trustee will automatically apply your voting preferences to the undirected shares proportionally with all other participants who elected to have their votes applied in this manner.

What happens if I do not vote my 401(k) plan shares?
Your shares will be voted by other plan participants who have elected to have their voting preferences applied proportionally to all shares for which voting instructions are not otherwise received.

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

What does it mean if I did not receive a proxy card?
You may have elected to receive your proxy statement electronically, in which case you should have received an email with directions on how to access the proxy statement and how to vote your shares. You may also have received a letter notifying you that the proxy statement is available online and providing directions on how to access it and how to vote your shares. If you wish to request a paper copy of these materials and a proxy card, please call 317-433-5112.

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

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

     Parking will be available on a first-come, first-served basis in the garage indicated on the map on page 69. If you have questions about admittance or parking, you may call 317-433-5112.

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

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

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

How do I submit a shareholder proposal for the 2011 annual meeting?
The company’s 2011 annual meeting is scheduled for April 18, 2011. If a shareholder wishes to have a proposal considered for inclusion in next year’s proxy statement, he or she must submit the proposal in writing so that we receive it by November 8, 2010. Proposals should be addressed to the company’s corporate secretary, Lilly Corporate Center, Indianapolis, Indiana 46285. In addition, the company’s bylaws provide that any shareholder wishing to propose any other business at the annual meeting must give the company written notice by November 8, 2010. That notice must provide certain other information as described in the bylaws. Copies of the bylaws are available online at http://investor.lilly.com/governance.cfm or in paper form upon request to the company’s corporate secretary.

Does the company offer an opportunity to receive future proxy materials electronically?
Yes. If you are a shareholder of record or a member of the 401(k) plan, you may, if you wish, receive future proxy statements and annual reports online. If you elect this feature, you will receive an e-mail message notifying you when the materials are available, along with a web address for viewing the materials and instructions for voting by telephone or on the Internet. If you have more than one account, you may receive separate e-mail notifications for each account.

     You may sign up for electronic delivery in two ways:

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

     If you received these materials electronically, you do not need to do anything to continue receiving materials electronically in the future.

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

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

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

Can I change my mind later?
Yes. You may discontinue electronic delivery at any time. For more information, call 317-433-5112.

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

     Shareholders who participate in householding will continue to receive separate proxy cards. Householding will not affect dividend check mailings.

     Beneficial shareholders can request information about householding from their banks, brokers, or other holders of record.

What if I want to receive a paper copy of the annual report and proxy statement?
If you wish to receive a paper copy of the 2009 annual report and 2010 proxy statement, or future annual reports and proxy statements, please call 1-800-542-1061 or write to: Householding Department, 51 Mercedes Way, Edgewood, New York 11717. We will deliver the requested documents to you promptly upon your request.

Board of Directors

Directors’ Biographies

Class of 2010
The following five directors’ terms will expire at this year’s annual meeting. Each of these directors has been nominated and is standing for election to serve a term that will expire in 2013. See pages 53-54 of this proxy statement for more information.

Ralph Alvarez		Age 54		Director since 2009

Retired President and Chief Operating Officer, McDonald’s Corporation

Mr. Alvarez served as president and chief operating officer of McDonald’s Corporation from August 2006 until December 2009. Previously, he served as president of McDonald’s North America, with responsibility for all the McDonald’s restaurants in the U.S. and Canada. Prior to that, he was president of McDonald’s USA. Mr. Alvarez joined McDonald’s in 1994 and has held a variety of leadership roles throughout his career, including chief operations officer and president of the central division, both with McDonald’s USA, and president of McDonald’s Mexico. Prior to joining McDonald’s, he held leadership positions at Burger King Corporation and Wendy’s International, Inc. Mr. Alvarez serves on the President’s Council and the International Advisory Board of the University of Miami, and he is a member of the board of trustees for Chicago’s Field Museum. He previously served on the boards of McDonald’s Corporation and KeyCorp. Mr. Alvarez has been serving under interim election since April 2009.
Board Committees: finance and public policy and compliance

Sir Winfried Bischoff		Age 68		Director since 2000

Chairman, Lloyds Banking Group plc

Sir Winfried Bischoff has been chairman of Lloyds Banking Group plc since September 2009. He served as chairman of Citigroup Inc. from December 2007 until February 2009. He served as chairman of Citigroup Europe from 2000 to 2007. From 1995 to 2000, he was chairman of Schroders plc. He joined the Schroder Group in 1966 and held a number of positions there, including chairman of J. Henry Schroder & Co. and group chief executive of Schroders plc. He is a nonexecutive director of Lloyds and The McGraw-Hill Companies, Inc. He previously served on the boards of Citigroup Inc., Prudential plc, Land Securities plc, and Akbank T.A.S.
Board Committees: directors and corporate governance and finance (chair)

R. David Hoover		Age 64		Director since 2009

Chairman and Chief Executive Officer, Ball Corporation

Mr. Hoover is chairman and chief executive officer of Ball Corporation. Mr. Hoover joined Ball Corporation in 1970 and has held a variety of leadership roles throughout his career, including vice president and treasurer, senior vice president and chief financial officer, executive vice president, and vice chairman. He is a member of the boards of Ball Corporation; Energizer Holdings, Inc.; and Qwest Communications International Inc. Mr. Hoover previously served on the board of Irwin Financial Corporation. He is the chair of the board of trustees of DePauw University and on the Indiana University Kelley School of Business Dean’s Council. He is also a director of Boulder Community Hospital and a member of the Colorado Forum. Mr. Hoover has been serving under interim election since June 2009.
Board Committees: audit and compensation

Franklyn G. Prendergast, M.D., Ph.D.		Age 65		Director since 1995

Edmond and Marion Guggenheim Professor of Biochemistry and Molecular Biology and Professor of Molecular Pharmacology and Experimental Therapeutics, Mayo Medical School; Director, Mayo Clinic Center for Individualized Medicine; and Director Emeritus, Mayo Clinic Cancer Center

Dr. Prendergast is the Edmond and Marion Guggenheim Professor of Biochemistry and Molecular Biology and Professor of Molecular Pharmacology and Experimental Therapeutics at Mayo Medical School and the director of the Mayo Clinic Center for Individualized Medicine. He has held several other teaching positions at the Mayo Medical School since 1975. Dr. Prendergast serves on the board of trustees of the Mayo Foundation.
Board Committees: public policy and compliance and science and technology

Kathi P. Seifert		Age 60		Director since 1995

Retired Executive Vice President, Kimberly-Clark Corporation

Ms. Seifert served as executive vice president for Kimberly-Clark Corporation until June 2004. She joined Kimberly-Clark in 1978 and served in several capacities in connection with both the domestic and international consumer products businesses. Prior to joining Kimberly-Clark, Ms. Seifert held management positions at Procter & Gamble, Beatrice Foods, and Fort Howard Paper Company. She is chairman of Katapult, LLC. Ms. Seifert serves on the boards of Supervalu Inc.; Revlon Consumer Products Corporation; Lexmark International, Inc.; Appleton Papers Inc.; the U.S. Fund for UNICEF; and the Fox Cities Performing Arts Center.
Board Committees: audit and public policy and compliance

Class of 2011
The following four directors will continue in office until 2011.

Michael L. Eskew		Age 60		Director since 2008

Former Chairman and Chief Executive Officer, United Parcel Service, Inc.

Mr. Eskew served as chairman and chief executive officer of United Parcel Service, Inc., from January 2002 until December 2007. He continues to serve on the UPS board of directors. Mr. Eskew began his UPS career in 1972 as an industrial engineering manager and held various positions of increasing responsibility, including time with UPS’s operations in Germany and with UPS Airlines. In 1993, Mr. Eskew was named corporate vice president for industrial engineering. Two years later he became group vice president for engineering. In 1998, he was elected to the UPS board of directors. In 1999, Mr. Eskew was named executive vice president and a year later was given the additional title of vice chairman. He serves as chairman of the board of trustees of The Annie E. Casey Foundation. Mr. Eskew also serves on the boards of 3M Corporation and IBM Corporation.
Board Committees: audit (chair) and compensation

Alfred G. Gilman, M.D., Ph.D.		Age 68		Director since 1995

Chief Scientific Officer, Cancer Prevention and Research Institute of Texas

Dr. Gilman is the chief scientific officer of the Cancer Prevention and Research Institute of Texas and regental professor of pharmacology emeritus at the University of Texas Southwestern Medical Center at Dallas. Dr. Gilman was on the faculty of the University of Virginia School of Medicine from 1971 to 1981 and was named a professor of pharmacology there in 1977. He previously served as executive vice president for academic affairs and provost of the University of Texas Southwestern Medical Center at Dallas, dean of the University of Texas Southwestern Medical School, and professor of pharmacology at the University of Texas Southwestern Medical Center. He held the Raymond and Ellen Willie Distinguished Chair of Molecular Neuropharmacology; the Nadine and Tom Craddick Distinguished Chair in Medical Science; and the Atticus James Gill, M.D., Chair in Medical Science at the university and was named a regental professor in 1995. He is a director of Regeneron Pharmaceuticals, Inc. Dr. Gilman was a recipient of the Nobel Prize in Physiology or Medicine in 1994.
Board Committees: public policy and compliance and science and technology (chair)

Karen N. Horn, Ph.D.		Age 66		Director since 1987

Retired President, Private Client Services, and Managing Director, Marsh, Inc.

Ms. Horn serves as the board’s presiding director. She served as president of private client services and managing director of Marsh, Inc. from 1999 until her retirement in 2003. Prior to joining Marsh, she was senior managing director and head of international private banking at Bankers Trust Company; chairman and chief executive officer of Bank One, Cleveland, N.A.; president of the Federal Reserve Bank of Cleveland; treasurer of Bell Telephone Company of Pennsylvania; and vice president of First National Bank of Boston. Ms. Horn serves as director of T. Rowe Price Mutual Funds; Simon Property Group, Inc.; and Norfolk Southern Corporation and vice chairman of The U.S. Russia Foundation. She previously served on the board of Fannie Mae and Georgia-Pacific Corporation. Ms. Horn has been senior managing director of Brock Capital Group since 2004.

Board Committees: compensation (chair) and directors and corporate governance

John C. Lechleiter, Ph.D.		Age 56		Director since 2005

Chairman, President, and Chief Executive Officer

Dr. Lechleiter is chairman, president, and chief executive officer of Eli Lilly and Company. He served as president and chief operating officer from 2005 to 2008. He joined Lilly in 1979 as a senior organic chemist and has held management positions in England and the U.S. He was named vice president of pharmaceutical product development in 1993 and vice president of regulatory affairs in 1994. In 1996, he was named vice president for development and regulatory affairs. Dr. Lechleiter became senior vice president of pharmaceutical products in 1998 and executive vice president for pharmaceutical products and corporate development in 2001. He was named executive vice president for pharmaceutical operations in 2004. He is a member of the American Chemical Society, Business Roundtable, and Business Council. Dr. Lechleiter serves on the boards of Pharmaceutical Research and Manufacturers of America (PhRMA); Xavier University (Cincinnati, Ohio); Fairbanks Institute (Indianapolis); Indianapolis Downtown, Inc.; the Central Indiana Corporate Partnership; and the United Way of Central Indiana. He also serves on the board of Nike, Inc. and previously served on the board of Great Lakes Chemical Corporation.

Board Committees: none

Class of 2012
The following four directors will continue in office until 2012.

Martin S. Feldstein, Ph.D.		Age 70		Director since 2002

George F. Baker Professor of Economics, Harvard University

Dr. Feldstein is the George F. Baker Professor of Economics at Harvard University and president emeritus of the National Bureau of Economic Research. From 1982 through 1984, he served as chairman of the Council of Economic Advisers and President Ronald Reagan’s chief economic adviser. Dr. Feldstein served as president and chief executive officer of the National Bureau of Economic Research from 1977 to 1982 and 1984 to 2008. In 2009, President Obama appointed him to the President’s Economic Recovery Advisory Board. He is a member of the American Philosophical Society, a corresponding fellow of the British Academy, a fellow of the Econometric Society, and a fellow of the National Association for Business Economics. Dr. Feldstein is a trustee of the Council on Foreign Relations and a member of the Trilateral Commission, the Group of 30, the American Academy of Arts and Sciences, and the Council of Academic Advisors of the American Enterprise Institute and past president of the American Economic Association. He previously served on the boards of American International Group, Inc. and HCA Inc.

Board Committees: audit, finance, and public policy and compliance (chair)

J. Erik Fyrwald		Age 50		Director since 2005

Chairman, President, and Chief Executive Officer, Nalco Company

Mr. Fyrwald joined Nalco Company (a leading integrated water treatment and process improvement company) as chairman, president, and chief executive officer in February 2008 following a 27-year career at DuPont. From 2003 to 2008, Mr. Fyrwald served as group vice president of the agriculture and nutrition division at DuPont. From 2000 until 2003, he was vice president and general manager of DuPont’s nutrition and health business. In 1999, Mr. Fyrwald was vice president for corporate strategic planning and business development. At DuPont, he held a broad variety of assignments in a number of divisions covering many industries. He has worked in several locations throughout North America and Asia. In addition to serving as chairman of Nalco’s board of directors, Mr. Fyrwald serves as a director of the Society of Chemical Industry and the American Chemistry Council and is a trustee of the Field Museum of Chicago.

Board Committees: compensation and science and technology

Ellen R. Marram		Age 63		Director since 2002

President, The Barnegat Group LLC

Ms. Marram is the president of The Barnegat Group LLC, a firm that provides business advisory services. She was a managing director at North Castle Partners, LLC from 2000 to 2005 and is currently an advisor to the firm. Prior to joining North Castle, she served briefly as the chief executive officer of a start-up B2B exchange for the food and beverage industry. From 1993 to 1998, Ms. Marram was president and chief executive officer of Tropicana and the Tropicana Beverage Group. From 1988 to 1993, she was president and chief executive officer of the Nabisco Biscuit Company, the largest operating unit of Nabisco, Inc.; from 1987 to 1988, she was president of Nabisco’s grocery division; and from 1970 to 1986, she held a series of marketing positions at Nabisco/Standard Brands, Johnson & Johnson, and Lever Brothers. Ms. Marram is a member of the board of directors of Ford Motor Company and The New York Times Company, as well as several private companies. She previously served on the board of Cadbury plc. She also serves on the boards of Institute for the Future, New York-Presbyterian Hospital, Lincoln Center Theater, and Families and Work Institute.

Board Committees: compensation and directors and corporate governance (chair)

Douglas R. Oberhelman		Age 57		Director since 2008

Vice Chairman and Chief Executive Officer-Elect, Caterpillar Inc.

Mr. Oberhelman is vice chairman and chief executive officer-elect of Caterpillar Inc. He will join the Caterpillar board and become chief executive officer on July 1, 2010 and chairman on November 1, 2010. He joined Caterpillar in 1975 and has held a variety of positions, including senior finance representative based in South America for Caterpillar Americas Co; region finance manager and district manager for the company’s North American commercial division; and managing director and vice general manager for strategic planning at Caterpillar Japan Ltd. Mr. Oberhelman was elected a vice president in 1995, serving as Caterpillar’s chief financial officer from 1995 to November 1998. In 1998, he became vice president with responsibility for the engine products division and he was elected a group president and member of Caterpillar’s executive office in 2002. Mr. Oberhelman serves on the boards of Ameren Corporation, The Nature Conservancy—Illinois Chapter, the National Association of Manufacturers, the Manufacturing Institute, and the Wetlands America Trust.

Board Committees: audit and finance

Highlights of the Company’s Corporate Governance Guidelines

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

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

	•		providing general oversight of the business
	•		approving corporate strategy
	•		approving major management initiatives
	•		providing oversight of legal and ethical conduct
	•		overseeing the company’s management of significant business risks
	•		selecting, compensating, and evaluating directors
	•		evaluating board processes and performance
	•		selecting, compensating, evaluating, and, when necessary, replacing the chief executive officer, and compensating other senior executives
	•		ensuring that a succession plan is in place for all senior executives.

II. Composition of the Board
Mix of Independent Directors and Officer-Directors

There should always be a substantial majority (75 percent or more) of independent directors. The chief executive officer should be a board member. Other officers may, from time to time, be board members, but no officer other than the chief executive officer should expect to be elected to the board by virtue of his or her position in the company.

Selection of Director Candidates

The board is responsible for selecting candidates for board membership and for establishing the criteria to be used in identifying potential candidates. The board delegates the screening process to the directors and corporate governance committee. For more information on the director nomination process, including the current selection criteria, see “Directors and Corporate Governance Committee Matters” on pages 21-22.

Independence Determinations
The board annually determines and discloses the independence of directors based on a review by the directors and corporate governance committee. No director is considered independent unless the board has determined that he or she has no material relationship with the company, either directly or as a partner, significant shareholder, or officer of an organization that has a material relationship with the company. Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable, and familial relationships, among others. To evaluate the materiality of any such relationship, the board has adopted categorical independence standards consistent with the New York Stock Exchange listing standards, except that the “look-back period” for determining whether a director’s prior relationship with the company impairs independence is extended from three to four years.

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

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

•

a director who is an employee of Lilly, or whose immediate family member is an executive officer of Lilly. Temporary service by an independent director as interim chairman or chief executive officer will not disqualify the director from being independent following completion of that service.

	•		a director who receives any direct compensation from Lilly other than the director’s normal director compensation, or whose immediate family member receives more than $120,000 per year in direct compensation from Lilly other than for service as a nonexecutive employee.
	•		a director who is employed (or whose immediate family member is employed as an executive officer) by another company where any Lilly executive officer serves on the compensation committee of that company’s board.
	•		a director who is employed by, who is a 10 percent shareholder of, or whose immediate family member is an executive officer of a company that makes payments to or receives payments from Lilly for property or services that exceed the greater of $1 million or two percent of that company’s gross revenue in a single fiscal year.
	•		a director who is an executive officer of a nonprofit organization that receives grants or contributions from Lilly in a single fiscal year exceeding the greater of $1 million or two percent of that organization’s gross revenue in a single fiscal year.

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

     In February 2010, the directors and corporate governance committee reviewed directors’ responses to a questionnaire asking about their relationships with the company (and those of their immediate family members) and other potential conflicts of interest, as well as material provided by management related to transactions, relationships, or arrangements between the company and the directors or parties related to the directors. The committee determined that all 12 nonemployee directors listed below are independent, and that the members of each committee also meet the independence standards referenced above. The committee recommended this conclusion to the board and explained the basis for its decision, and this conclusion was adopted by the full board. The committee and the board determined that none of the 12 directors listed below has had during the last four years (i) any of the relationships listed above or (ii) any other material relationship with the company that would compromise his or her independence. The table below includes a description of categories or types of transactions, relationships, or arrangements considered by the board (in addition to those listed above) in reaching its determination that the directors are independent. All of these relationships and transactions were entered into at arm’s length in the normal course of business and, to the extent they are commercial relationships, have standard commercial terms. None of these relationships or transactions exceeded the thresholds described above or otherwise compromises the independence of the named directors.

Name		Independent		Transactions/Relationships/Arrangements
Mr. Alvarez
Sir Winfried Bischoff
Mr. Eskew
Dr. Feldstein
Mr. Fyrwald
Dr. Gilman
Mr. Hoover
Ms. Horn
Ms. Marram
Mr. Oberhelman
Dr. Prendergast
Ms. Seifert

Director Tenure and Retirement Policy
Subject to the company’s charter documents, the following are the board’s expectations for director tenure:

	•		A company officer-director, including the chief executive officer, will resign from the board at the time he or she retires or otherwise ceases to be an active employee of the company.
	•		Nonemployee directors will retire from the board not later than the annual meeting of shareholders that follows their seventy-second birthday.
	•		Directors may stand for reelection even though the board’s retirement policy would prevent them from completing a full three-year term.
	•		A nonemployee director who retires or changes principal job responsibilities will offer to resign from the board. The directors and corporate governance committee will assess the situation and recommend to the board whether to accept the resignation.

Other Board Service
Effective November 1, 2009, no new director may serve on more than three other public company boards, and no incumbent director may accept new positions on public company boards that would result in service on more than three other public company boards. The directors and corporate governance committee or the chairperson of that committee may approve exceptions to this limit upon a determination that such additional service will not impair the director’s effectiveness on the Lilly board.

Voting for Directors
In an uncontested election, any nominee for director who fails to receive a majority of the votes cast shall promptly tender his or her resignation following certification of the shareholder vote. The directors and corporate governance committee will consider the resignation offer and recommend to the board whether to accept it. The board will act on the committee’s recommendation within 90 days following certification of the shareholder vote. Board action on the matter will require the approval of a majority of the independent directors.

     The company will disclose the board’s decision on a Form 8-K furnished to the Securities and Exchange Commission within four business days after the decision, including a full explanation of the process by which the decision was reached and, if applicable, the reasons why the board rejected the director’s resignation. If the resignation is accepted, the directors and corporate governance committee will recommend to the board whether to fill the vacancy or reduce the size of the board.

     Any director who tenders his or her resignation under this provision will not participate in the committee or board deliberations regarding whether to accept the resignation offer. If all members of the directors and corporate governance committee fail to receive a majority of the votes cast at the same election, then the independent directors who did receive a majority of the votes cast will appoint a committee amongst themselves to consider the resignation offers and recommend to the board whether to accept them.

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

     Directors should hold meaningful equity ownership positions in the company; accordingly, a significant portion of overall director compensation is in the form of company equity. Directors are required to hold Lilly stock valued at not less than five times their annual cash retainer; new directors are allowed five years to reach this ownership level.

IV. Key Responsibilities of the Board
Selection of Chairman and Chief Executive Officer; Succession Planning

The board currently combines the role of chairman of the board with the role of chief executive officer, coupled with a presiding director position to further strengthen the governance structure. The board believes this provides an efficient and effective leadership model for the company. Combining the chairman and CEO roles fosters clear accountability, effective decision-making, and alignment on corporate strategy. To assure effective independent oversight, the board has adopted a number of governance practices, including:

	•		a strong, independent, clearly-defined presiding director role (see below for a full description of the role)
	•		executive sessions of the independent directors after every board meeting
	•		annual performance evaluations of the chairman and CEO by the independent directors.

     However, no single leadership model is right for all companies and at all times. The board recognizes that depending on the circumstances, other leadership models, such as a separate independent chairman of the board, might be appropriate. Accordingly, the board periodically reviews its leadership structure.

     The presiding director recommends to the board an appropriate process by which a new chairman and chief executive officer will be selected. The board has no required procedure for executing this responsibility because it believes that the most appropriate process will depend on the circumstances surrounding each such decision.

     A key responsibility of the CEO and the board is ensuring that an effective process is in place to provide continuity of leadership over the long term at all levels in the company. Each year, succession planning reviews are held at every significant organizational level of the company, culminating in a full review of senior leadership talent by the independent directors. During this review, the CEO and the independent directors discuss future candidates for senior leadership positions, succession timing for those positions, and development plans for the highest-potential candidates. This process ensures continuity of leadership over the long term, and it forms the basis on which the company makes ongoing leadership assignments. It is a key success factor in managing the long planning and investment lead times of our business.

     In addition, the CEO maintains in place at all times, and reviews with the independent directors, a confidential plan for the timely and efficient transfer of his or her responsibilities in the event of an emergency or his or her sudden incapacitation or departure.

Evaluation of Chief Executive Officer
The presiding director is responsible for leading the independent directors in executive session to assess the performance of the chief executive officer at least annually. The results of this assessment are reviewed with the chief executive officer and considered by the compensation committee in establishing the chief executive officer’s compensation for the next year.

Succession Management and Election of Officers
The independent directors are responsible for overseeing the succession and management development program for senior leadership. The chief executive officer develops and maintains a process for advising the board on succession planning for the chief executive officer and other key senior leadership positions. The chief executive officer reviews this plan with the independent directors at least annually.

     Consistent with the succession management plan, the chief executive officer recommends to the board candidates for the company’s principal corporate officers.

Corporate Strategy
Once each year, the board devotes an extended meeting to an update from management regarding the strategic issues and opportunities facing the company, allowing the board an opportunity to provide direction for the corporate strategic plan. These strategy sessions also provide the board an opportunity to interact extensively with the company’s senior leadership team. This assists the board in its succession management responsibilities.

     Throughout the year, significant corporate strategy decisions are brought to the board for approval.

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

	•		The Red Book, a comprehensive code of ethical and legal business conduct applicable to all employees worldwide and to our board of directors
	•		Code of Ethical Conduct for Lilly Financial Management, a supplemental code for our chief executive officer and all members of financial management that recognizes the unique responsibilities of those individuals in assuring proper accounting, financial reporting, internal controls, and financial stewardship.

     Both documents are available online at http://www.lilly.com/about/compliance/conduct/ or in paper form upon request to the company’s corporate secretary.

     The audit committee and public policy and compliance committee assist in the board’s oversight of compliance programs with respect to matters covered in the code of ethics.

Risk Oversight
The company has an enterprise risk management program overseen by its chief compliance officer and senior vice president, enterprise risk management, who reports directly to the CEO and is a member of the company’s top leadership committee. Enterprise risks are identified and prioritized by management, and each prioritized risk is assigned to a board committee or the full board for oversight. For example, strategic risks are overseen by the full board; financial risks are overseen by the audit or finance committees; compliance and reputational risks are typically overseen by the public policy and compliance committee; and scientific risks are overseen by the science and technology committee. Management regularly reports on each such risk to the relevant committee or the board. The enterprise risk management program as a whole is reviewed at a joint meeting of the audit and public policy and compliance committees annually, as well as at an annual board strategy session. Additional review or reporting on enterprise risks is conducted as needed or as requested by the board or committee. Also, the compensation committee periodically reviews the most important enterprise risks to ensure that compensation programs do not encourage excessive risk-taking.

V. Functioning of the Board
Executive Session of Directors
The independent directors meet alone in executive session and in private session with the chief executive officer at every regularly scheduled board meeting.

Presiding Director
The board annually appoints a presiding director from among the independent directors (currently Ms. Horn). The presiding director:

	•		leads the board’s processes for selecting and evaluating the chief executive officer;
	•		presides at all meetings of the board at which the chairman is not present, including executive sessions of the independent directors unless the directors decide that, due to the subject matter of the session, another independent director should preside;
	•		serves as a liaison between the chairman and the independent directors;
	•		approves meeting agendas and schedules and generally approves information sent to the board;
	•		has the authority to call meetings of the independent directors; and
	•		has the authority to retain advisors to the independent directors.

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

     To avoid any conflict or appearance of a conflict, board decisions on certain matters of corporate governance are made solely by the independent directors. These include executive compensation and the selection, evaluation, and removal of the chief executive officer.

Review and Approval of Transactions with Related Persons
The board has adopted a written policy and written procedures for review, approval, and monitoring of transactions involving the company and “related persons” (directors and executive officers, their immediate family members, or shareholders owning five percent or greater of the company’s outstanding stock). The policy covers any related-person transaction that meets the minimum threshold for disclosure in the proxy statement under the relevant SEC rules (generally, transactions involving amounts exceeding $120,000 in which a related person has a direct or indirect material interest).

Policy

	•		Related-person transactions must be approved by the board or by a committee of the board consisting solely of independent directors, who will approve the transaction only if they determine that it is in the best interests of the company. In considering the transaction, the board or committee will consider all relevant factors, including (i) the company’s business rationale for entering into the transaction; (ii) the alternatives to entering into a related-person transaction; (iii) whether the transaction is on terms comparable to those available to third parties, or in the case of employment relationships, to employees generally; (iv) the potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and (v) the overall fairness of the transaction to the company.
	•		The board or relevant committee will periodically monitor the transaction to ensure that there are no changed circumstances that would render it advisable for the company to amend or terminate the transaction.

Procedures

	•		Management or the affected director or executive officer will bring the matter to the attention of the chairman, the presiding director, the chair of the directors and corporate governance committee, or the secretary.
	•		The chairman and the presiding director shall jointly determine (or, if either is involved in the transaction, the other shall determine in consultation with the chair of the directors and corporate governance committee) whether the matter should be considered by the board or by one of its existing committees consisting only of independent directors.
	•		If a director is involved in the transaction, he or she will be recused from all discussions and decisions about the transaction.
	•		The transaction must be approved in advance whenever practicable, and if not practicable, must be ratified as promptly as practicable.
	•		The board or relevant committee will review the transaction annually to determine whether it continues to be in the company’s best interests.

There are currently no related-person transactions.

Orientation of New Directors; Director Education
A comprehensive orientation process is in place for new directors. In addition, directors receive ongoing continuing education through educational sessions at meetings, the annual strategy retreat, and periodic communications between meetings. We hold periodic mandatory training sessions for the audit committee, to which other directors and executive officers are invited. We also afford directors the opportunity to attend external director education programs.

Director Access to Management and Independent Advisors
Independent directors have direct access to members of management whenever they deem it necessary. The independent directors and committees are also free to retain their own independent advisors, at company expense, whenever they feel it would be desirable to do so. In accordance with New York Stock Exchange listing standards, the audit, compensation, and directors and corporate governance committees have sole authority to retain independent advisors to their respective committees.

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

VI. Board Committees
Number, Structure, and Independence
The duties and membership of the six board-appointed committees are described below. Only independent directors may serve on the committees.

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

Functioning of Committees
Each committee reviews and approves its own charter annually, and the directors and corporate governance committee reviews and approves all committee charters annually. The chair of each committee determines the frequency and agenda of committee meetings. In addition, the audit, compensation, and public policy and compliance committees meet alone in executive session on a regular basis; all other committees meet in executive session as needed.

     All six committee charters are available online at http://investor.lilly.com/governance.cfm.

Committees of the Board of Directors

Audit Committee
The duties of the audit committee are described in the “Audit Committee Report” found on page 23.

Directors and Corporate Governance Committee
The duties of the directors and corporate governance committee are described on page 21.

Compensation Committee
The duties of the compensation committee are described on pages 25-26, and the “Compensation Committee Report” is shown on pages 39-40.

Finance Committee

•

reviews and makes recommendations regarding capital structure and strategies, including dividends, stock repurchases, capital expenditures, financings and borrowings, and significant business development projects.

Public Policy and Compliance Committee

	•		oversees the processes by which the company conducts its business so that the company will do so in a manner that complies with laws and regulations and reflects the highest standards of integrity
	•		reviews and makes recommendations regarding policies, practices, and procedures of the company that relate to public policy and social, political, and legal trends and issues.

Science and Technology Committee

	•		reviews and makes recommendations regarding the company’s strategic research goals and objectives
	•		reviews new developments, technologies, and trends in pharmaceutical research and development
	•		oversees matters of scientific and medical integrity and risk management.

Membership and Meetings of the Board and Its Committees

In 2009, each director attended more than 90 percent of the total number of meetings of the board and the committees on which he or she serves. In addition, all board members are expected to attend the annual meeting of shareholders, and all attended in 2009. Current committee membership and the number of meetings of the board and each committee in 2009 are shown in the table below.

Directors and

Public

Corporate

Policy and

Science and

Name

Board

Audit

Compensation

Governance

Finance

Compliance

Technology

Mr. Alvarez 1

Member

Member

Member

Sir Winfried Bischoff

Member

Member

Chair

Mr. J. Michael Cook 2

Mr. Eskew

Member

Chair

Member

Dr. Feldstein

Member

Member

Member

Chair

Mr. Fyrwald

Member

Member

Member

Dr. Gilman

Member

Member

Chair

Mr. Hoover 3

Member

Member

Member

Ms. Horn

Presiding Director

Chair

Member

Dr. Lechleiter

Chair

Ms. Marram

Member

Member

Chair

Mr. Oberhelman

Member

Member

Member

Dr. Prendergast

Member

Member

Member

Ms. Seifert

Member

Member

Member

Number of 2009 Meetings

7

10

8

7

6

6

4

Directors’ Compensation

Director compensation is reviewed and approved annually by the board, on the recommendation of the directors and corporate governance committee. Directors who are employees receive no additional compensation for serving on the board or its committees.

Cash Compensation

The company provides nonemployee directors the following cash compensation:

	•		retainer of $80,000 per year (payable monthly)
	•		$1,000 for each committee meeting attended
	•		$2,000 to the committee chairpersons for each committee meeting conducted as compensation for the chairperson’s preparation time
	•		retainer of $20,000 per year to the presiding director ($30,000 beginning in 2010)
	•		reimbursement for customary and usual travel expenses.

Stock Compensation

Stock compensation for nonemployee directors consists of shares of Lilly stock equaling $145,000, deposited annually in a deferred stock account in the Lilly Directors’ Deferral Plan (as described below), payable after service on the board has ended.

Lilly Directors’ Deferral Plan

This plan allows nonemployee directors to defer receipt of all or part of their retainer and meeting fees until after their service on the board has ended. Each director can choose to invest the funds in one or both of two accounts:

	•		Deferred Stock Account. This account allows the director, in effect, to invest his or her deferred cash compensation in Lilly stock. In addition, the annual award of shares to each director noted above (4,040 shares in 2009) is credited to this account on a pre-set annual date. Funds in this account are credited as hypothetical shares of Lilly stock based on the market price of the stock at the time the compensation would otherwise have been earned. Hypothetical dividends are “reinvested” in additional shares based on the market price of the stock on the date dividends are paid. Actual shares are issued or transferred after the director ends his or her service on the board.
	•		Deferred Compensation Account. Funds in this account earn interest each year at a rate of 120 percent of the applicable federal long-term rate, compounded monthly, as established the preceding December by the U.S. Treasury Department under Section 1274(d) of the Internal Revenue Code. The rate for 2010 is 4.9 percent. The aggregate amount of interest that accrued in 2009 for the participating directors was $189,802, at a rate of 5.2 percent.

     Both accounts may be paid in a lump sum or in annual installments for up to 10 years, beginning the second January following the director’s departure from the board. Amounts in the deferred stock account are paid in shares of Lilly stock.

In 2009, we provided the following compensation to directors who are not employees:

Directors’ Compensation

										All Other
		Fees Earned				Stock Awards				Compensation and				Total
Name		or Paid in Cash ($)1				($)2				Payments ($)3				($) 4, 5
Current
Mr. Alvarez		$	69,000			$	145,000			$	1,134			$	215,134
Sir Winfried Bischoff		$	105,000			$	145,000			$	22,179			$	272,179
Mr. Eskew		$	115,000			$	145,000			$	1,321			$	261,321
Dr. Feldstein		$	110,000			$	145,000			$	37,545			$	292,545
Mr. Fyrwald		$	98,000			$	145,000			$	23,150			$	266,150
Dr. Gilman		$	98,000			$	145,000			$	32,204			$	275,204
Mr. Hoover		$	57,667			$	145,000			$	32,877			$	235,543
Ms. Horn		$	134,000			$	145,000			$	6,795			$	285,795
Ms. Marram		$	110,000			$	145,000			$	33,304			$	288,304
Mr. Oberhelman		$	94,000			$	145,000			$	1,836			$	240,836
Dr. Prendergast		$	90,000			$	145,000			$	0			$	235,000
Ms. Seifert		$	95,000			$	145,000			$	40,000			$	280,000
Retired
Mr. Cook		$	37,667			$	48,333			$	31,000			$	117,000

1

The following directors deferred 2009 cash compensation into their deferred stock accounts under the Lilly Directors’ Deferral Plan (further described above):

Name		2009 Cash Deferred				Shares
Mr. Fyrwald		$	98,000				2,871
Mr. Hoover		$	57,667				1,684

2		Each nonemployee director, other than Mr. Cook, received an award of stock valued at $145,000 (4,040 shares). Mr. Cook received an award of 1,347 shares which was prorated for the time he was a director in 2009. This stock award and all prior stock awards are fully vested in that they are not subject to forfeiture; however, the shares are not issued until the director ends his or her service on the board, as further described above under “Lilly Directors’ Deferral Plan.” The table shows the grant date fair value for each director’s stock award. Aggregate outstanding stock awards in the table are shown on page 52 under “Ownership of Company Stock” in the “Directors’ Deferral Plan Shares” column. Aggregate stock options are shown in the table below under “Directors’ Outstanding Stock Options”.
3		This column includes amounts donated by the Eli Lilly and Company Foundation, Inc. under its matching gift program, which is generally available to U.S. employees as well as the outside directors. Under this program, the foundation matches 100 percent of charitable donations over $25 made to eligible charities, up to a maximum of $90,000 per year for each individual. For all directors except Dr. Prendergast, Ms. Seifert, and Mr. Cook, the amounts in this column also include tax reimbursements related to expenses for the directors’ spouses to travel to and participate in board functions that included spouse participation. For Sir Winfried Bischoff, this column also includes $14,210 for expenses for his spouse to travel to and participate in board functions that included spouse participation.
		The foundation matched the donations in the table below for outside directors in 2009 via payments made directly to the recipient charity.

		Amount of
Name		Matching Donation
Dr. Feldstein		$	36,000
Mr. Fyrwald		$	22,000
Dr. Gilman		$	29,210
Mr. Hoover		$	31,100
Ms. Horn		$	5,475
Ms. Marram		$	32,500
Ms. Seifert		$	40,000
Retired
Mr. Cook		$	31,000

4		Directors do not participate in a Lilly pension plan or non-equity incentive plan.
5		Nonemployee directors received no stock options in 2009. The company discontinued granting stock options to nonemployee directors in 2005.

Directors’ Outstanding Stock Options

														Outstanding
														Stock Options
Name		Grant Date				Expiration Date				Exercise Price				(Exercisable)
Mr. Alvarez			—				—				—				0
Sir Winfried Bischoff			2/20/2001				2/18/2011			$	73.98				2,800
			2/19/2002				2/17/2012			$	75.92				2,800
			2/18/2003				2/18/2013			$	57.85				2,800
			2/17/2004				2/17/2014			$	73.11				2,800
															11,200
Mr. Eskew			—				—				—				0
Dr. Feldstein			2/19/2002				2/17/2012			$	75.92				2,800
			2/18/2003				2/18/2013			$	57.85				2,800
			2/17/2004				2/17/2014			$	73.11				2,800
															8,400
Mr. Fyrwald			—				—				—				0
Dr. Gilman			4/20/2000				4/19/2010			$	75.94				2,800
			2/20/2001				2/18/2011			$	73.98				2,800
			2/19/2002				2/17/2012			$	75.92				2,800
			2/18/2003				2/18/2013			$	57.85				2,800
			2/17/2004				2/17/2014			$	73.11				2,800
															14,000
Mr. Hoover			—				—				—				0
Ms. Horn			4/20/2000				4/19/2010			$	75.94				2,800
			2/20/2001				2/18/2011			$	73.98				2,800
			2/19/2002				2/17/2012			$	75.92				2,800
			2/18/2003				2/18/2013			$	57.85				2,800
			2/17/2004				2/17/2014			$	73.11				2,800
															14,000
Ms. Marram			2/18/2003				2/18/2013			$	57.85				2,800
			2/17/2004				2/17/2014			$	73.11				2,800
															5,600
Mr. Oberhelman			—				—				—				0
Dr. Prendergast			4/20/2000				4/19/2010			$	75.94				2,800
			2/20/2001				2/18/2011			$	73.98				2,800
			2/19/2002				2/17/2012			$	75.92				2,800
			2/18/2003				2/18/2013			$	57.85				2,800
			2/17/2004				2/17/2014			$	73.11				2,800
															14,000
Ms. Seifert			4/20/2000				4/19/2010			$	75.94				2,800
			2/20/2001				2/18/2011			$	73.98				2,800
			2/19/2002				2/17/2012			$	75.92				2,800
			2/18/2003				2/18/2013			$	57.85				2,800
			2/17/2004				2/17/2014			$	73.11				2,800
															14,000

Directors and Corporate Governance Committee Matters

Overview

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

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

Director Qualifications

The board seeks independent directors who represent a mix of backgrounds and experiences that will enhance the quality of the board’s deliberations and decisions. Candidates shall have substantial experience with one or more publicly traded national or multinational companies or shall have achieved a high level of distinction in their chosen fields.

     Board membership should reflect diversity in its broadest sense, including persons diverse in geography, gender, and ethnicity. The board is particularly interested in maintaining a mix that includes the following backgrounds:

•

active or retired chief executive officers and senior executives, particularly those with experience in operations, finance, accounting, banking, or marketing and sales

	•		international business
	•		science and medicine
	•		government and public policy
	•		health care system (public or private).

Director Nomination Process

     The board delegates the screening process to the directors and corporate governance committee, which receives direct input from other board members. Potential candidates are identified through recommendations from several sources, including:

	•		incumbent directors
	•		management
	•		shareholders
	•		an independent executive search firm retained by the committee to assist in locating and screening candidates meeting the board’s selection criteria.

     The committee employs the same process for evaluating all candidates, including those submitted by shareholders. The committee initially evaluates a candidate based on publicly available information and any additional information supplied by the party recommending the candidate. If the candidate appears to satisfy the selection criteria and the committee’s initial evaluation is favorable, the committee, assisted by management or the search firm, gathers additional data on the candidate’s qualifications, availability, probable level of interest, and any potential conflicts of interest. If the committee’s subsequent evaluation continues to be favorable, the candidate is contacted by the chairman of the board and one or more of the independent directors for direct discussions to determine the mutual levels of interest in pursuing the candidacy. If these discussions are favorable, the committee makes a final recommendation to the board to nominate the candidate for election by the shareholders (or to select the candidate to fill a vacancy, as applicable). Mr. Alvarez and Mr. Hoover, who are standing for election, were referred to the committee by an independent executive search firm.

Process for Submitting Recommendations and Nominations

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

     Under Section 1.9 of the company’s bylaws, a shareholder who wishes to directly nominate a director candidate at the 2011 annual meeting (i.e., to propose a candidate for election who is not otherwise nominated by the board through the recommendation process described above) must give the company written notice by November 8, 2010. The notice should be addressed to the corporate secretary at Lilly Corporate Center, Indianapolis, Indiana 46285. The notice must contain prescribed information about the candidate and about the shareholder proposing the candidate as described in more detail in Section 1.9 of the bylaws. A copy of the bylaws is available online at http://investor.lilly.com/governance.cfm. The bylaws will also be provided by mail without charge upon request to the corporate secretary.

Audit Committee Matters

Audit Committee Membership

All members of the audit committee are independent as defined in the New York Stock Exchange listing standards applicable to audit committee members. The board of directors has determined that Mr. Eskew, Mr. Hoover, and Mr. Oberhelman are audit committee financial experts, as defined in the rules of the Securities and Exchange Commission.

Audit Committee Report

The audit committee (“we” or “the committee”) reviews the company’s financial reporting process on behalf of the board. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls and disclosure controls. In this context, we have met and held discussions with management and the independent auditor. Management represented to us that the company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles, and we have reviewed and discussed the audited financial statements and related disclosures with management and the independent auditor, including a review of the significant management judgments underlying the financial statements and disclosures.

     The independent auditor reports to us. We have sole authority (subject to shareholder ratification) to appoint and to replace the independent auditor.

     We have discussed with the independent auditor matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended and as adopted by the Public Company Accounting Oversight Board (PCAOB) in Rule 3200T, including the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of the disclosures in the financial statements. In addition, we have received the written disclosures and the letter from the independent auditor required by applicable requirements of the PCAOB regarding communications with the audit committee concerning independence, and have discussed with the independent auditor the auditor’s independence from the company and its management. In concluding that the auditor is independent, we determined, among other things, that the nonaudit services provided by Ernst & Young LLP (as described below) were compatible with its independence. Consistent with the requirements of the Sarbanes-Oxley Act of 2002, we have adopted policies to avoid compromising the independence of the independent auditor, such as prior committee approval of nonaudit services and required audit partner rotation.

     We discussed with the company’s internal and independent auditors the overall scope and plans for their respective audits, including internal control testing under Section 404 of the Sarbanes-Oxley Act. We periodically meet with the internal and independent auditors, with and without management present, and in private sessions with members of senior management (such as the chief financial officer and the chief accounting officer) to discuss the results of their examinations, their evaluations of the company’s internal controls, and the overall quality of the company’s financial reporting. We also periodically meet in executive session.

     In reliance on the reviews and discussions referred to above, we recommended to the board (and the board subsequently approved the recommendation) that the audited financial statements be included in the company’s annual report on Form 10-K for the year ended December 31, 2009, for filing with the Securities and Exchange Commission. We have also appointed the company’s independent auditor, subject to shareholder ratification, for 2010.

Audit Committee
Michael L. Eskew, Chair
Martin S. Feldstein, Ph.D.
R. David Hoover
Douglas R. Oberhelman
Kathi P. Seifert

Services Performed by the Independent Auditor

The audit committee preapproves all services performed by the independent auditor, in part to assess whether the provision of such services might impair the auditor’s independence. The committee’s policy and procedures are as follows:

•

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

	•		Audit-related services are assurance and related services that are reasonably related to the performance of the audit, and that are traditionally performed by the independent auditor. The committee believes that the provision of these services does not impair the independence of the auditor.
	•		Tax services. The committee believes that, in appropriate cases, the independent auditor can provide tax compliance services, tax planning, and tax advice without impairing the auditor’s independence.
	•		The committee may approve other services to be provided by the independent auditor if (i) the services are permissible under SEC and PCAOB rules, (ii) the committee believes the provision of the services would not impair the independence of the auditor, and (iii) management believes that the auditor is the best choice to provide the services.
	•		Process. At the beginning of each audit year, management requests prior committee approval of the annual audit, statutory audits, and quarterly reviews for the upcoming audit year as well as any other engagements known at that time. Management will also present at that time an estimate of all fees for the upcoming audit year. As specific engagements are identified thereafter, they are brought forward to the committee for approval. To the extent approvals are required between regularly scheduled committee meetings, preapproval authority is delegated to the committee chair.

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

     After the end of the audit year, management provides the committee with a summary of the actual fees incurred for the completed audit year.

Independent Auditor Fees

The following table shows the fees incurred for services rendered on a worldwide basis by Ernst & Young LLP, the company’s independent auditor, in 2009 and 2008. All such services were preapproved by the committee in accordance with the preapproval policy.

		2009				2008
		(millions)				(millions)
Audit Fees		$	___			$	8.0
• Annual audit of consolidated and subsidiary financial statements, including Sarbanes-Oxley 404 attestation
• Reviews of quarterly financial statements
• Other services normally provided by the auditor in connection with statutory and regulatory filings
Audit-Related Fees		$	___			$	0.8
• Assurance and related services reasonably related to the performance of the audit or reviews of the financial statements
• 2009 and 2008: primarily related to employee benefit plan and other ancillary audits, and due diligence services on potential acquisitions
Tax Fees		$	___			$	1.7
• 2009 and 2008: primarily related to consulting and compliance services
All Other Fees		$	___			$	0.2
• 2009 and 2008: primarily related to compliance services outside the U.S.
Total		$	___			$	10.7

Compensation Committee Matters

Scope of Authority

The compensation committee oversees the company’s global compensation philosophy and establishes the compensation of executive officers. The committee also acts as the oversight committee with respect to the company’s deferred compensation plans, management stock plans, and other management incentive compensation programs. In overseeing those plans, the committee may delegate authority to company officers for day-to-day plan administration and interpretation, including selecting participants, determining award levels within plan parameters, and approving award documents. However, the committee may not delegate any authority for matters affecting the executive officers.

The Committee’s Processes and Procedures

The committee’s primary processes for establishing and overseeing executive compensation can be found in the “Compensation Discussion and Analysis” section under “The Committee’s Processes and Analyses” on pages 28-29. Additional processes and procedures include:

	•		Meetings. The committee meets several times each year (eight times in 2009). Committee agendas are established in consultation with the committee chair and the committee’s independent compensation consultant. The committee meets in executive session after each meeting.
	•		Role of Independent Consultant. The committee has retained Frederic W. Cook and his firm, Frederic W. Cook & Co., as its independent compensation consultant to assist the committee. Mr. Cook reports directly to the committee, and neither he nor his firm is permitted to perform any services for management. The consultant’s duties include the following:

	—		Review committee agendas and supporting materials in advance of each meeting and raise questions with the company’s global compensation group and the committee chair as appropriate
	—		Review the company’s total compensation philosophy, peer group, and target competitive positioning for reasonableness and appropriateness
	—		Review the company’s executive compensation program and advise the committee of plans or practices that might be changed in light of evolving best practices
	—		Provide independent analyses and recommendations to the committee on the CEO’s pay
	—		Review draft Compensation Discussion and Analysis report and related tables for the proxy statement
	—		Proactively advise committee on best practices for board governance of executive compensation
	—		Undertake special projects at the request of the committee chair.

			The consultant interacts directly with members of Lilly management only on matters under the committee’s oversight and with the knowledge and permission of the committee chairperson.
	•		Role of Executive Officers and Management. With the oversight of the CEO and the senior vice president of human resources, the company’s global compensation group formulates recommendations on matters of compensation philosophy, plan design, and the specific compensation recommendations for executive officers (other than the CEO as noted below). The CEO gives the committee a performance assessment and compensation recommendation for each of the other executive officers. Those recommendations are then considered by the committee with the assistance of its compensation consultant. The CEO and the senior vice president of human resources attend committee meetings but are not present for executive sessions or for any discussion of their own compensation. (Only nonemployee directors and the committee’s consultant attend executive sessions.)

     The CEO normally does not participate in the formulation or discussion of his pay recommendations; however, for 2010 Dr. Lechleiter requested that no increases be made to his base salary or incentive targets. The CEO has no prior knowledge of the recommendations that the consultant makes to the committee.

•

Risk assessment. With the help of its compensation consultant, in 2009 the committee reviewed the company’s compensation policies and practices for all employees, including executive officers, and determined that our compensation programs will not have a material adverse effect on the company. The committee also reviewed our compensation programs for certain design features which have been identified by experts as having the potential to encourage excessive risk-taking, including:

	—		too much focus on equity
	—		compensation mix overly weighted toward annual incentives
	—		highly leveraged payout curves and uncapped payouts
	—		unreasonable goals or thresholds
	—		and steep payout cliffs at certain performance levels that may encourage short-term business decisions to meet payout thresholds.

     The committee noted several design features of Lilly cash and equity incentive programs for all employees that reduce the likelihood of excessive risk-taking:

	—		The program design provides a balanced mix of cash and equity, annual and longer-term incentives, and performance metrics (revenue, earnings, and total shareholder return).
	—		Maximum payout levels for bonuses and PAs are capped at 200 percent of target.
	—		All regular U.S. employees participate in the same bonus plan.
	—		Bonus and equity programs have minimum payout levels for nonexecutive officers.
	—		The company currently does not grant stock options.
	—		The compensation committee has downward discretion over incentive program payouts.
	—		The executive compensation recovery policy allows the company to “claw back” payments made using materially inaccurate financial results.
	—		Executive officers are subject to share ownership and retention guidelines.
	—		Compliance and ethical behaviors are integral factors considered in all performance assessments.

     The committee determined that, for all employees, the company’s compensation programs do not encourage excessive risk and instead encourage behaviors that support sustainable value creation. Nonetheless, as a result of the review, the committee is implementing certain changes to the bonus and equity incentive plan designs for 2010 to further reduce incentives to incur excessive risk as follows:

	—		Key risks to the business strategy are reviewed by the board as part of the company’s annual long-range planning process. These risks will be an input into an annual review by the compensation committee to assess the potential for compensation programs to encourage excessive risk-taking (or excessively risk-averse behaviors).
	—		The annual bonus plan has been modified to allow for greater differentiation based on individual performance and smoother payout curves.
	—		A linear payout formula for the PA is replacing the nine discrete earnings-per-share (EPS) ranges, eliminating payout “cliffs” between ranges. Additionally, the threshold payout level will be increased from zero to 50 percent of target and maximum payout level will be lowered from 200 percent to 150 percent of target for all participants.
	—		The committee expanded the executive compensation recovery policy (described in more detail on page 39).

Compensation Committee Interlocks and Insider Participation
None of the compensation committee members:

	•		has ever been an officer or employee of the company
	•		is or was a participant in a related-person transaction in 2009 (see page 16 for a description of our policy on related-person transactions)
	•		is an executive officer of another entity, at which one of our executive officers serves on the board of directors.

Executive Compensation

Compensation Discussion and Analysis
Summary

Executive compensation for 2009 aligned well with the objectives of our compensation philosophy and with our performance, driven by these factors:

Executive Compensation Philosophy

Our strategy is to create value by accelerating the flow of innovative new medicines that provide improved outcomes for individual patients. We aim to discover, develop, or acquire innovative new therapies — medicines that make a real difference for patients and deliver clear value for payers. In addition, we must continually improve productivity in all that we do. To achieve these goals, we must attract, engage, and retain highly-talented individuals who are committed to the company’s core values of integrity, excellence, and respect for people. Our compensation and benefit programs are based on these objectives:

•

Compensation should reflect individual and company performance. We link all employees’ pay to individual and company performance.

	•		Compensation should foster a long-term focus. A long-term focus is critical to success in our industry and is consistent with our goal of retaining highly talented employees as they build their careers. Throughout the company, a competitive benefit program aids retention. As employees progress to higher levels of the organization, a greater portion of compensation is tied to our longer-term performance.
	•		Compensation should be based on the level of job responsibility and reflect the market. We seek internal pay relativity, meaning that pay differences among jobs should be commensurate with differences in job responsibility and impact. We aim to remain competitive with the pay of other premier employers with whom we compete for talent.
	•		Compensation should be egalitarian and efficient. We seek to deliver superior long-term shareholder returns and to share value created with employees in a cost-effective manner. While compensation will always reflect differences in job responsibilities, geographies, and marketplace considerations, the overall structure of compensation and benefit programs should be broadly similar across the organization.

The Committee’s Processes and Analyses
The compensation committee uses several tools to help it structure compensation programs that meet company objectives. Among those are:

•

Peer group analysis. The committee compares the company’s programs with a peer group of global pharmaceutical companies: Abbott Laboratories; Amgen Inc.; AstraZeneca plc; Bristol-Myers Squibb Company; GlaxoSmithKline plc; Hoffmann-La Roche Inc.; Johnson & Johnson; Merck & Co., Inc.; Novartis AG; Pfizer Inc.; Sanofi-Aventis; Schering-Plough Corporation; and Wyeth. Pharmaceutical companies’ needs for scientific and sales and marketing talent are unique to the industry and Lilly must compete with these companies for talent. The committee uses the peer group data in two ways:

	—		Overall competitiveness. The committee uses aggregated data and both company and individual performance as a reference point to ensure that the executive compensation program as a whole is competitive, meaning within the broad middle range of comparative pay at peer companies when the company achieves the targeted performance levels. The committee does not target a specific position within the range.
	—		Individual competitiveness. The committee compares the overall pay of individual executives, if the jobs are sufficiently similar to make the comparison meaningful. The individual’s pay is driven primarily by individual and company performance and internal relativity, rather than the peer group data; the peer group data is used as a “market check” to ensure that individual pay remains within the broad middle range of peer group pay. The committee does not target a specific position within the range.

The peer group is reviewed for appropriateness at least every three years. The group was reviewed in June 2008, and the new group was used for purposes of 2009 compensation decisions. The committee added four new companies (AstraZeneca plc, Hoffmann-La Roche Inc., Novartis AG, and Sanofi-Aventis) because over time the number of comparator companies had decreased due to industry consolidation. The committee desired an expanded peer group to have a better representation of companies that are direct competitors for our products, operate in a similar business model, and employ people with the unique skills required to operate an established biopharmaceutical company. The committee also considered market cap as of December 31, 2007 and 2007 revenue as measures of size; with the exception of Johnson & Johnson, all peer companies were between one-half to three times Lilly with regard to both measures. The committee included Johnson & Johnson, despite its size, because it competes directly with Lilly for talent at all management levels.

•

CEO compensation. To provide further assurance of independence, the compensation recommendation for the CEO is developed by the committee’s independent consultant (Frederic W. Cook and his firm, Frederic W. Cook & Co.) with limited support from company staff. The Cook firm prepares analyses showing competitive CEO compensation among the peer group for the individual elements of compensation and total direct compensation. Mr. Cook develops a range of recommendations for any change in the CEO’s base salary, annual incentive target, equity grant value, and equity mix. The recommendations take into account the peer competitive pay analysis, expected future pay trends, and importantly, the position of the CEO in relation to other senior company executives and proposed pay actions for all key employees of the company. The range allows the committee to exercise its discretion based on the CEO’s individual performance and other factors. The CEO has no prior knowledge of the recommendations and normally takes no part in the recommendations, committee discussions, or decisions. For 2010, Dr. Lechleiter requested that no increases be made to his base salary or incentive targets.

Executive Compensation for 2009

Overview—Establishment of Overall Pay
In making its pay decisions for 2009, the committee reviewed 2008 company performance data and peer group data as discussed above, and also considered expected competitive trends in executive pay. That review showed:

	•		Company performance. In 2008, Lilly performed in the upper tier of the peer group in adjusted earnings per share growth, sales growth, return on assets, and return on equity and in the lower tier in one-year and five-year total shareholder return.
	•		Pay relative to peer group. Lilly’s total pay to executive officers for 2008 was in the broad middle range of the peer group.

The committee determined the following:

•

Program elements. The 2009 program consisted of base salary, a cash incentive bonus award, and two forms of performance-based equity grants: PAs and SVAs. Executives also received the company employee

			benefit package. This program balances the mix of cash and equity compensation, the mix of current and longer-term compensation, the mix of financial and market goals, and the security of foundational benefits in a way that furthers the compensation objectives discussed above.
	•		Pay ranges and mix of pay elements. The company generally maintained the same pay ranges and mix of pay elements as in 2008. The committee believes this overall program continues to provide cost effective delivery of total compensation that:

	—		encourages retention and employee engagement by delivering competitive cash and equity components,
	—		maintains a strong link to company performance and shareholder returns through a balanced equity incentive program without encouraging excessive risk-taking,
	—		maintains appropriate internal pay relativity, and
	—		provides opportunity for total pay within the broad middle range of expected peer group pay given company performance comparable to that our peers.

2009 Target Compensation
The graphs below show the balance of target compensation determined by the committee.

2009 Actual Compensation
The graphs below show the ratio of pay elements in actual compensation received for 2009.

Base salary and bonus amounts are shown in the Summary Compensation Table on page 40. The PA payout for 2009 performance is shown in the table on page 42. The SVA payout for 2007-2009 performance was zero for all named executive officers except Mr. Carmine, who was not an officer when the award was granted. Mr. Carmine’s payout is shown in the Options Exercised and Stock Vested in 2009 table on page 45.

Base Salary
In setting base salaries for 2009, the committee considered the following:

•

Individual performance. As described above under “The Committee’s Processes and Analyses,” base salary increases were driven largely by individual performance assessments.

—

In assessing Dr. Lechleiter’s 2008 performance, the independent directors considered the company’s and Dr. Lechleiter’s accomplishment of objectives that had been established at the beginning of the year and their own subjective assessment of his performance. They noted that under Dr. Lechleiter’s leadership in 2008, the company:

	§		exceeded sales and earnings targets;
	§		successfully transitioned through the change in leadership with Mr. Taurel retiring at the end of 2008;
	§		aggressively expanded the product portfolio through business development transactions, including the acquisition of ImClone Systems Incorporated;
	§		implemented wide-ranging productivity improvements, including reducing layers of management.
			In establishing Dr. Lechleiter’s base salary, the committee also considered his assumption of the additional role of chairman of the board in 2009.

	—		With regard to Dr. Paul, the committee considered Lilly Research Laboratories’ progress with respect to pipeline goals, cycle time reductions, and transformation efforts, as well as his already-strong compensation.
	—		The committee considered Mr. Carmine’s effective leadership in driving strong operating results and reinforcing a culture of transparency, ethics, and compliance.
	—		The committee noted Mr. Rice’s continued strong leadership of the financial component, fostering a culture of controls and compliance, and overall contributions to company strategy.
	—		With regard to Mr. Armitage, the committee recognized his continued leadership in shaping intellectual property policy to foster innovation and driving a corporate culture of compliance and transparency.

Cash Incentive Bonuses
The company’s annual cash bonus program align employees’ goals with the company’s sales and earnings growth objectives for the current year. Cash incentive bonuses for all management employees worldwide, as well as most nonmanagement employees in the U.S., are determined under The Eli Lilly and Company Bonus Plan (the bonus plan). Under the plan, the company sets bonus targets for all participants at the beginning of each year. Bonus payouts range from zero to 200 percent of target amounts depending on the company’s financial results relative to predetermined performance measures. At the end of the performance period, the committee has discretion to adjust a bonus payout downward (but not upward) from the amount yielded by the formula for executive officers.

     The committee considered the following when establishing the 2009 awards:

•

Bonus targets. Bonus targets (expressed as a percentage of base salary) were based on job responsibilities, internal relativity, and peer group data. Consistent with our compensation objectives, as executives assume greater responsibilities, more of their pay is linked to company performance. For three named executive officers, the committee maintained the same bonus targets as 2008; for two named executive officers, targets were increased in order to appropriately reflect internal relativity and maintain cash compensation within the broad middle range of expected competitive pay, given median peer-group performance.

Name		2008				2009				Change
Dr. Lechleiter			140	%			140	%			0	%
Dr. Paul			85	%			90	%			5	%
Mr. Carmine			85	%			90	%			5	%
Mr. Rice			80	%			80	%			0	%
Mr. Armitage			80	%			80	%			0	%

•

Company performance measures. The committee established 2009 company performance measures with a 25 percent weighting on sales growth and a 75 percent weighting on growth in adjusted EPS (reported earnings per share adjusted as described below under “Adjustments for Certain Items”). This mix of performance

measures focuses employees appropriately on improving both top-line sales and bottom-line earnings, with special emphasis on earnings in order to tie rewards directly to productivity improvements. The measures are also effective motivators because they are easy for employees to track and understand.

(0.25 x sales multiple) + (0.75 x adjusted EPS multiple) = bonus multiple

Bonus multiple X bonus target X base salary earnings = payout

2009 sales and adjusted EPS multiples are illustrated by these charts:

2009 pro forma sales of $21,836 million represented 5.3 percent growth over 2008 pro forma sales of $20,732 million and resulted in a sales multiple of 1.23.

2009 pro forma adjusted EPS of $4.42 represented growth of 15.7 percent over 2008 pro forma adjusted EPS of $3.82 and resulted in an EPS multiple of 1.87.

Together, the sales multiple and the adjusted EPS multiple yielded a bonus multiple of 1.71.

(0.25 x 1.23) + (0.75 x 1.87) = 1.71 bonus multiple

See page 36 for a reconciliation of 2009 reported and pro forma sales and adjusted EPS.

Equity Incentives—Total Equity Program

We employ two forms of equity incentives granted under the 2002 Lilly Stock Plan: performance awards (PAs) and shareholder value awards (SVAs). These incentives are designed to focus our leaders on long-term shareholder value: SVAs have a three-year performance period and PAs, beginning in 2009, have a two-year performance period. For executive officers, PAs pay out in restricted stock units that vest one year after the performance period. Executive officers are required to hold net shares they earn from SVAs for one year after payout. The following illustration shows the holding periods for PA and SVA grants over time:

Target grant values ($000’s)

																		Percentage
Name		2008 PA				2009 PA				2008 SVA				2009 SVA				Increase (total)
Dr. Lechleiter		$	3,250			$	3,750			$	3,250			$	3,750				15	%
Dr. Paul		$	1,500			$	1,500			$	1,500			$	1,500				0	%
Mr. Carmine		$	1,500			$	1,500			$	1,500			$	1,500				0	%
Mr. Rice		$	1,200			$	1,500			$	1,200			$	1,500				25	%
Mr. Armitage		$	855			$	1,000			$	855			$	1,000				17	%

Equity Incentives—Performance Awards

PAs provide employees with shares of Lilly stock if certain company performance goals are achieved. The awards are structured as a schedule of shares of Lilly stock based on growth in adjusted EPS over specified time periods of one or more years. In 2009, the company granted both a one-year and a two-year award to all global management as a transition to a two-year performance period for all PAs granted beginning in 2010. (This design change was in response to shareholder feedback.) The two grants in 2009 provided the opportunity for participants to receive one and only one PA payout each year — without skipping a year. The 2009 PA paid in February 2010, while the 2009-2010 PA will pay out in February 2011, assuming performance targets are met (see Holding Periods for PAs and SVAs chart above). The fair market value at grant for both awards was the same. Possible payouts for both PAs range from zero to 200 percent of the target amount, depending on adjusted EPS growth over the performance period. No dividends are paid on the awards during the performance period. At the end of the performance period, the committee has discretion to adjust an award payout downward (but not upward) from the amount yielded by the formula. For the 2009 grants, the committee considered the following:

2009 PA

2009 EPS		Less than $3.90				$3.90-$3.96				$3.97-$4.04				$4.05-$4.12				$4.13-$4.19				$4.20-$4.27				$4.28-$4.34				Greater than $4.34
Percent of Target			0	%			50	%			75	%			100	%			125	%			150	%			175	%			200	%

     2009 pro forma adjusted EPS of $4.42 represented a growth over 2008 pro forma adjusted EPS ($3.82) of 15.7 percent. This top-tier growth within the peer group resulted in a 2009 PA payout at 200 percent of target. See page 36 for a reconciliation of 2009 reported and pro forma adjusted EPS.      Payouts for the 2009-2010 PA will be determined in 2011 based on the schedule below:

Aggregate 2009-2010 EPS		Less than $7.87				$7.87-$8.09				$8.10-$8.33				$8.34-$8.57				$8.58-$8.81				$8.82-$9.06				$9.07-$9.31				Greater than $9.31
Percent of Target			0	%			50	%			75	%			100	%			125	%			150	%			175	%			200	%

Equity Incentives—Shareholder Value Awards

In 2007, the company implemented the SVA which replaced our stock option program. SVAs are structured as a schedule of shares of Lilly stock based on the performance of the company’s stock over a three-year period. No dividends are paid on the awards during the performance period. Payouts range from zero to 140 percent of the target amount, depending on stock performance over the period. At the end of the performance period, the committee has discretion to adjust an award payout downward (but not upward) from the amount yielded by the formula. The SVA program delivers equity compensation that is strongly linked to long-term total shareholder returns. It is more cost-effective than the stock option program it replaced because the SVA program delivers, at a lower cost to the company, an equity incentive that is equally or more effective in aligning employee interests with long-term shareholder returns. For the 2009 grants, the committee considered the following:

     The starting price for the 2009-2011 SVAs was $34.74 per share, representing the average of the closing prices of Lilly stock for all trading days in November and December 2008. The ending price to determine payouts will be the average of the closing prices of Lilly stock for all trading days in November and December 2011.

     Payouts of the 2009-2011 SVA to executive officers will be determined by this grid when they are paid out in early 2012:

2009-2011 SVA

Ending Stock Price		Less than $28.57				$28.57-$32.78				$32.79-$36.99				$37.00-$39.49				$39.50-$41.99				$42.00-$44.49				Greater than $44.50
Compounded Annual Growth Rate (adjusted for dividends)		Less than (6.3%)					(6.3%)-(1.9	%)			(1.9%)-2.1	%			2.1%-4.4	%			4.4%-6.5	%			6.5% -8.6	%		Greater than 8.6%
Percent of Target			0	%			40	%			60	%			80	%			100	%			120	%			140	%

Stock Options

The company discontinued granting stock options in 2007. All outstanding stock options are currently “under water,” meaning they have no realizable value. The stock option granted in 1999 expired in 2009, and all of the named executive officers forfeited the award having realized no value. These awards (and other expired stock options) were not replaced.

Adjustments for Certain Items

Consistent with past practice, the committee adjusted the results on which 2009 bonuses and PAs were determined to eliminate the distorting effect of certain unusual income or expense items on year-over-year growth percentages. The adjustments are intended to:

•

align award payments with the underlying growth of the core business

	•		avoid volatile, artificial inflation or deflation of awards due to the unusual items in either the award year or the previous (comparator) year
	•		eliminate certain counterproductive short-term incentives—for example, incentives to refrain from acquiring new technologies or to defer disposing of underutilized assets or settling legacy legal proceedings in order to protect current bonus payments.

To assure the integrity of the adjustments, the committee establishes adjustment guidelines at the beginning of the year. These guidelines are consistent with the company guidelines for reporting adjusted earnings to the investment community, which are reviewed by the audit committee of the board. The adjustments apply equally to income and expense items and must exceed a materiality threshold. The committee reviews all adjustments and retains “downward discretion”—i.e., discretion to reduce compensation below the amounts that are yielded by the adjustment guidelines.

     For the 2009 awards calculation, the committee made these adjustments to EPS:

	•		For both 2009 and 2008: Eliminated the impact of (i) significant asset impairments and restructuring charges and (ii) one-time accounting charges for the acquisition of in-process research and development
	•		For 2009: Eliminated the impact of special charges related to litigation
	•		For 2008: Eliminated the impact of (i) a one-time benefit to income resulting from settlement of a tax audit and (ii) special charges related to the resolution of government investigations of prior sales and marketing practices of the company.

In addition, to eliminate the distorting effect of the acquisition of ImClone Systems Incorporated (completed in late November 2008) on year-over-year growth rates, the committee adjusted sales and EPS for 2008 on a pro forma basis as if the acquisition had been completed at the beginning of 2008.

     The adjustments were intended to align award payments more closely with underlying business growth trends and eliminate volatile swings (up or down) caused by the unusual items. This is demonstrated by the 2007, 2008, and 2009 adjustments:

Percent Growth vs. Prior Years

     Reconciliations of the adjustments to our reported sales and earnings per share are below. The bolded numbers are the growth percentages used to calculate payouts under the compensation programs.

											% Growth
		2009				2008					2009 vs. 2008
Sales as reported ($ millions)		$	21,836.0			$	20,371.9					7.2	%
Pro forma ICOS adjustment			—				—
Pro forma ImClone adjustment			—			$	360.3
Sales—pro forma adjusted		$	21,836.0			$	20,732.2					5.3	%
EPS as reported		$	3.94				($1.89	)				NM
Eliminate net impact associated with ImClone acquisition			—			$	4.46
Eliminate charges related to Zyprexa investigations and litigation		$	0.13			$	1.20
Eliminate IPR&D charges for acquisitions and in-licensing transactions		$	0.05			$	0.10
Eliminate asset impairments, restructuring and other special charges (including product liability charges)		$	0.29			$	0.34
Eliminate benefit from resolution of IRS audit			—				($0.19	)
EPS—adjusted		$	4.42			$	4.02
Pro forma ICOS adjustment			—				—
Pro forma ImClone adjustment			—				($0.20	)
EPS—pro forma adjusted		$	4.42			$	3.82					15.7	%

Equity Incentive Grant Mechanics and Timing

The committee approves target grant values for equity incentives prior to the grant date. On the grant date, those values are converted to shares based on:

	•		the closing price of Lilly stock on the grant date
	•		the same valuation methodology the company uses to determine the accounting expense of the grants under Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) Topic 718.

     The committee’s procedure for timing of equity grants assures that grant timing is not being manipulated for employee gain. The annual equity grant date for all eligible employees is in mid-February. The committee establishes this date is well in advance—typically in October. The mid-February grant date timing is driven by these considerations:

	•		It coincides with the company’s calendar-year-based performance management cycle, allowing supervisors to deliver the equity awards close in time to performance appraisals, which increases the impact of the awards by strengthening the link between pay and performance.
	•		It follows the annual earnings release by approximately two weeks, so that the stock price at that time can reasonably be expected to fairly represent the market’s collective view of our then-current results and prospects.

     Grants to new hires and other off-cycle grants are effective on the first trading day of the following month.

Employee and Post-Employment Benefits

The company offers core employee benefits coverage in order to:

•

provide our global workforce with a reasonable level of financial support in the event of illness or injury

•

enhance productivity and job satisfaction through programs that focus on work/life balance.

     The benefits available are the same for all U.S. employees and include medical and dental coverage, disability insurance, and life insurance.

     In addition, the 401(k) plan and The Lilly Retirement Plan (the retirement plan) provide a reasonable level of retirement income reflecting employees’ careers with the company. U.S. employees are eligible to participate in these plans. To the extent that any employee’s retirement benefit exceeds IRS limits for amounts that can be paid through a qualified plan, Lilly also offers a nonqualified

pension plan and a nonqualified savings plan. These plans provide only the difference between the calculated benefits and the IRS limits, and the formula is the same for all U.S. employees.

     The cost of both employee and post-employment benefits is partially borne by the employee, including each executive officer.

Perquisites

The company provides very limited perquisites to executive officers. The company aircraft is made available for the personal use of Dr. Lechleiter, where the committee believes the security and efficiency benefits to the company clearly outweigh the expense. Dr. Lechleiter did not use the corporate aircraft for personal flights during 2009. Until March 1, 2009, the company aircraft was made available to other executive officers for the more limited purpose of travel to outside board meetings. However, the company no longer allows this use. Depending on seat availability, family members of executive officers may travel on the company aircraft to accompany executives who are traveling on business. There is no incremental cost to the company for these trips.

The Lilly Deferred Compensation Plan

Executives may defer receipt of part or all of their cash compensation under The Lilly Deferred Compensation Plan (the deferred compensation plan). The plan allows executives to save for retirement in a tax-effective way at minimal cost to the company. Under this unfunded plan, amounts deferred by the executive are credited at an interest rate of 120 percent of the applicable federal long-term rate, as described in more detail following the Nonqualified Deferred Compensation in 2009 table on page 48.

Severance Benefits

Except in the case of a change in control of the company, the company is not obligated to pay severance to named executive officers upon termination of their employment; any such payments are at the discretion of the committee. See footnote 2 to the Potential Payments Upon Termination of Employment table on page 49 for a description of a severance arrangement for Dr. Paul.

     The company has adopted a change-in-control severance pay plan for nearly all employees of the company, including the executive officers. The plan is intended to preserve employee morale and productivity and encourage retention in the face of the disruptive impact of an actual or rumored change in control. In addition, for executives, the plan is intended to align executive and shareholder interests by enabling executives to consider corporate transactions that are in the best interests of the shareholders and other constituents of the company without undue concern over whether the transactions may jeopardize the executives’ own employment.

     Although there are some differences in benefit levels depending on the employee’s job level and seniority, the basic elements of the plan are comparable for all regular employees:

•

Double trigger. Unlike “single trigger” plans that pay out immediately upon a change in control, the Lilly plan generally requires a “double trigger”—a change in control followed by an involuntary loss of employment within two years thereafter. This is consistent with the purpose of the plan, which is to provide employees with a guaranteed level of financial protection upon loss of employment. A partial exception is made for outstanding PAs, a portion of which would be paid out upon a change in control on a pro-rated basis for time worked based on the

			forecasted payout level at the time of the change in control. The committee believes this partial payment is appropriate because of the difficulties in converting the Lilly EPS targets into an award based on the surviving company’s EPS. Likewise, if Lilly is not the surviving entity, a portion of outstanding SVAs is paid out on a pro-rated basis for time worked up to the change in control based on the merger price for Lilly stock.
	•		Covered terminations. Employees are eligible for payments if, within two years of the change in control, their employment is terminated (i) without cause by the company or (ii) for good reason by the employee, each as is defined in the plan. See pages 48-51 for a more detailed discussion, including a discussion of what constitutes a change in control.
	•		Two-year protections. Employees who suffer a covered termination receive up to two years of pay and benefit protection. These provisions assure employees a reasonable period of protection of their income and core employee benefits upon which they depend for financial security.

	•		Accelerated vesting of equity awards. Any unvested equity awards at the time of termination of employment would become vested.
	•		Excise tax. In some circumstances, the payments or other benefits received by the employee in connection with a change in control could exceed the certain limits established under Section 280G of the Internal Revenue Code. The employee would then be subject to an excise tax on top of normal federal income tax. Because of the way the excise tax is calculated, it can impose a large burden on some employees while similarly compensated employees will not be subject to the tax. The costs of this excise tax and associated gross-ups would be borne by the company. (Employees would pay income tax resulting from severance payments.) To avoid triggering the excise tax, payments that would otherwise be due under the plan that are up to three percent over the IRS limit will be cut back to the IRS limit. Effective in October 2010, this cutback threshold will be raised to five percent above the IRS limit.

Share Ownership and Retention Guidelines; Hedging Prohibition

Share ownership and retention guidelines help to foster a focus on long-term growth. The committee has adopted a guideline requiring the CEO to own Lilly stock valued at least five times his or her annual base salary. The committee revised the guidelines in 2009 for other executive officers to require ownership of a fixed number of shares based on position rather than a multiple of salary. The fixed number of shares eliminates volatility in the share ownership requirements that can occur with sharp movements in share price. Until the guideline level is reached, the executive officer must retain all existing holdings as well as 50 percent of net shares resulting from new equity payouts. Lilly executives have a long history of maintaining extensive holdings in Lilly stock, and all established executive officers already meet or exceed the guideline. All new executive officers are on track to meet or exceed the guideline within the next few years. Dr. Lechleiter currently holds shares valued, as of year-end 2009, at over 11 times his salary. The following table shows the required share levels for the remaining named executive officers:

Prior Share

Revised Share

Executive

Requirement

Requirement

Meets Requirement

Dr. Paul

54,393

55,000

Yes

Mr. Carmine

49,897

55,000

Yes

Mr. Rice

42,407

55,000

Yes

Mr. Armitage

42,008

42,000

Yes

     Executive officers are also required to retain all shares received from the company equity programs, net of acquisition costs and taxes, for at least one year, even once share requirements have been met. For PAs, this requirement is met by paying the award in the form of restricted stock units. As a result, executive officers experienced the same type of financial loss from the decline in stock value during 2009 as other Lilly shareholders. Employees are not permitted to hedge their economic exposures to Lilly stock through short sales or derivative transactions.

Tax Deductibility Cap on Executive Compensation

U.S. federal income tax law prohibits the company from taking a tax deduction for certain compensation paid in excess of $1,000,000 to certain executive officers. However, performance-based compensation is fully deductible if the programs are approved by shareholders and meet other requirements. Our policy is to qualify our incentive compensation programs for full corporate deductibility to the extent feasible and consistent with our overall compensation objectives.

     We have taken steps to qualify all incentive awards (bonuses, PAs, and SVAs) for full deductibility as “performance-based compensation.” The committee may make payments that are not fully deductible if, in its judgment, such payments are necessary to achieve the company’s compensation objectives and to protect shareholder interests. For 2009, the non-deductible compensation under this law was slightly less than the portion of each of Dr. Lechleiter’s and Dr. Paul’s base salaries that exceeded $1,000,000 as shown in the Summary Compensation Table.

Executive Compensation Recovery Policy and Other Risk Mitigation Tools

All incentive awards are subject to forfeiture prior to payment upon termination of employment or for disciplinary reasons. In 2009, the committee adopted an expanded executive compensation recovery policy applicable to executive officers. The company can recover incentive compensation (cash or equity) that was based on achievement of financial results that were subsequently the subject of a restatement if the executive officer engaged in intentional misconduct that caused or partially caused the need for the restatement and the effect of the wrongdoing was to increase the amount of bonus or incentive compensation. The expanded policy also permits the recovery or “claw back” of all or a portion of any incentive compensation or payment in the case of materially inaccurate financial statements or material errors in the performance calculation, whether or not they result in a restatement and whether or not the executive officer has engaged in wrongful conduct. Recoveries under this “no-fault” provision cannot extend back more than two years.

     The recovery policy applies to any incentive compensation awarded or paid to an employee at a time when he or she is an executive officer. Subsequent changes in status, including retirement or termination of employment, do not affect the company’s rights to recover compensation under the policy.

     In addition to the executive compensation recovery policy, the committee and management have implemented compensation program design features to mitigate the risk of compensation programs encouraging misconduct or excessive risk-taking. First, incentive programs are designed using a diversity of meaningful financial metrics (growth in total shareholder return, measured over three years, net sales, and EPS, measured over one and two years), thus providing a balanced approach between short- and long-term performance. The committee reviews incentive programs each year against the objectives of the programs, assesses any features that could encourage excessive risk-taking, and makes changes as necessary. Second, management has implemented effective controls that minimize unintended and willful reporting errors.

     The committee does not believe it is practical to apply a specific claw-back policy to SVAs since it is very difficult to isolate the amount, if any, by which the stock price might benefit from misstated earnings over a three-year performance period. In this case, the committee has the authority to exercise downward discretion to reduce or withhold payouts.

2010 Compensation Actions
Several changes to the company’s executive compensation program will take effect in 2010:

	•		In light of the business challenges the company faces, Dr. Lechleiter requested that he receive no increase in base salary or incentive targets in 2010. The committee agreed to maintain his 2009 compensation package for 2010.
	•		The transition from a one-year PA to a two-year PA will be completed, and PA targets will be revised to have a threshold payout of 50 percent of target (rather than zero) and a maximum payout of 150 percent of target (rather than 200 percent).
	•		Changes to the change in control severance pay plans that generally reduce benefits are effective October 2010.
	•		Changes to the retirement and retiree medical plans that reduce benefits for employees retiring prior to age 65 were effective January 2010.

Compensation Committee Report

The compensation committee (“we” or “the committee”) evaluates and establishes compensation for executive officers and oversees the deferred compensation plan, the company’s management stock plans, and other management incentive, benefit, and perquisite programs. Management has the primary responsibility for the company’s financial statements and reporting process, including the disclosure of executive compensation. With this in mind, we have reviewed and discussed with management the “Compensation Discussion and Analysis” found on pages 27-39 of this proxy statement. The committee is satisfied that the “Compensation Discussion and Analysis” fairly and completely represents the philosophy, intent,

and actions of the committee with regard to executive compensation. We recommended to the board of directors that the “Compensation Discussion and Analysis” be included in this proxy statement for filing with the Securities and Exchange Commission.

Compensation Committee
Karen N. Horn, Ph.D., Chair
Michael L. Eskew
J. Erik Fyrwald
R. David Hoover
Ellen R. Marram

Summary Compensation Table

																		Non-Equity
										Stock				Option				Incentive Plan				Change in				All Other				Total
Name and Principal						Salary				Awards				Awards				Compensation				Pension Value				Compensation				Compensation
Position		Year				($)				($)2				($) 2				($)3				($)4				($)5				($)
John C. Lechleiter, Ph.D. 1			2009			$	1,483,333			$	11,250,000			$	0			$	3,551,100			$	4,553,125			$	90,091			$	20,927,649
Chairman, President, and Chief			2008			$	1,339,125			$	8,125,000			$	0			$	2,709,053			$	2,221,597			$	87,107			$	14,481,882
Executive Officer			2007			$	1,149,083			$	4,972,500			$	0			$	2,160,277			$	921,394			$	70,761			$	9,274,015
Steven M. Paul, M.D.			2009			$	1,023,450			$	4,500,000			$	0			$	1,575,090			$	2,302,595			$	16,682			$	9,417,816
Executive Vice President, Science			2008			$	1,000,250			$	3,750,000			$	0			$	1,309,327			$	1,586,474			$	18,372			$	7,664,423
and Technology and President,			2007			$	960,333			$	3,000,000			$	0			$	1,534,613			$	738,461			$	13,500			$	6,246,907
Lilly Research Laboratories
Bryce D. Carmine			2009			$	916,667			$	4,500,000			$	0			$	1,410,750			$	1,776,537			$	57,001			$	8,660,955
Executive Vice President and			2008			$	783,113			$	3,750,000			$	0			$	1,006,135			$	1,158,720			$	53,497			$	6,751,465
President, Established Markets Business Unit
Derica W. Rice			2009			$	892,500			$	4,500,000			$	0			$	1,220,940			$	977,741			$	54,838			$	7,646,019
Executive Vice President, Global			2008			$	834,117			$	3,000,000			$	0			$	1,027,632			$	455,226			$	86,034			$	5,403,008
Services and Chief Financial			2007			$	747,583			$	2,137,500			$	0			$	1,054,093			$	194,469			$	78,787			$	4,212,432
Officer
Robert A. Armitage			2009			$	811,167			$	3,000,000			$	0			$	1,109,676			$	775,287			$	49,902			$	5,746,032
Senior Vice President and			2008			$	778,767			$	2,137,500			$	0			$	959,441			$	536,284			$	53,138			$	4,465,129
General Counsel			2007			$	741,667			$	2,137,500			$	0			$	1,045,750			$	297,722			$	45,551			$	4,268,190

																		Non-Equity
										Stock				Option				Incentive Plan				Change in				All Other				Total
Name and Principal						Salary				Awards				Awards				Compensation				Pension Value				Compensation				Compensation
Position		Year				($)				($)				($)				($)				($)				($)				($)
John C. Lechleiter, Ph.D.			2009			$	1,483,333			$	7,500,000			$	0			$	3,551,100			$	3,280,584			$	90,091			$	15,905,108
Chairman, President, and Chief			2008			$	1,339,125			$	8,125,000			$	0			$	2,709,053			$	2,221,597			$	87,107			$	14,481,882
Executive Officer			2007			$	1,149,083			$	4,972,500			$	0			$	2,160,277			$	921,394			$	70,761			$	9,274,015

     Without these two reporting anomalies, Dr. Lechleiter’s compensation would have increased 9.8 percent over 2008, which is consistent with his promotion to CEO during 2008, his assumption of the role of chairman of the board in 2009, and the company’s strong financial performance for 2009. The increase in Dr. Lechleiter’s 2009 total compensation includes increases to his base salary, bonus target, and equity grant targets and reflects strong company performance measured by growth in revenue and EPS, but lagging performance in total shareholder return. (See the “Compensation Discussion and Analysis,” beginning on page 27 for key company performance metrics and their associated impact on Dr. Lechleiter’s 2009 compensation.)

     The table below shows the minimum and maximum possible payout for each of the PA grants included in the “Stock Awards” column of the Summary Compensation Table (actual payouts for the 2009 PA are shown on page 42):

Name		Award Type		Payout Date				Minimum Payout				Maximum Payout
Dr. Lechleiter		2009 PA		January 2010				$	0			$	7,500,000
		2009-2010 PA		January 2011				$	0			$	7,500,000
Dr. Paul		2009 PA		January 2010				$	0			$	3,000,000
		2009-2010 PA		January 2011				$	0			$	3,000,000
Mr. Carmine		2009 PA		January 2010				$	0			$	3,000,000
		2009-2010 PA		January 2011				$	0			$	3,000,000
Mr. Rice		2009 PA		January 2010				$	0			$	3,000,000
		2009-2010 PA		January 2011				$	0			$	3,000,000
Mr. Armitage		2009 PA		January 2010				$	0			$	2,000,000
		2009-2010 PA		January 2011				$	0			$	2,000,000

																						Total
						Savings				Tax												“All Other
Name		Year				Plan Match				Reimbursements1				Perquisites				Other				Compensation”
Dr. Lechleiter			2009			$	89,000			$	1,091			$	0			$	0			$	90,091
			2008			$	80,348			$	6,759			$	0			$	0			$	87,107
			2007			$	68,945			$	1,816			$	0			$	0			$	70,761
Dr. Paul			2009			$	14,700			$	1,982			$	0			$	0			$	16,682
			2008			$	13,800			$	4,572			$	0			$	0			$	18,372
			2007			$	13,500			$	0			$	0			$	0			$	13,500
Mr. Carmine			2009			$	55,000			$	2,001			$	0			$	0			$	57,001
			2008			$	46,987			$	6,510			$	0			$	0			$	53,497
Mr. Rice			2009			$	53,550			$	1,288			$	0			$	0			$	54,838
			2008			$	50,047			$	6,246			$	29,741	2		$	0			$	86,034
			2007			$	44,855			$	15,030	3		$	0			$	18,902	4		$	78,787
Mr. Armitage			2009			$	48,670			$	1,232			$	0			$	0			$	49,902
			2008			$	46,726			$	6,412			$	0			$	0			$	53,138
			2007			$	44,500			$	1,051			$	0			$	0			$	45,551