10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 000-31135

INSPIRE PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	04-3209022
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
4222 Emperor Boulevard, Suite 200 Durham, North Carolina	27703
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (919) 941-9777

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer   ¨    Accelerated Filer   x    Non-Accelerated Filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of March 31, 2007, there were 42,399,345 shares of Inspire Pharmaceuticals, Inc. common stock outstanding.

TABLE OF CONTENTS

	Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	3
Condensed Balance Sheets – March 31, 2007 and December 31, 2006	3
Condensed Statements of Operations – Three months ended March 31, 2007 and 2006	4
Condensed Statements of Cash Flows – Three months ended March 31, 2007 and 2006	5
Notes to Condensed Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosures about Market Risk	34
Item 4. Controls and Procedures	34
PART II: OTHER INFORMATION
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	37
Item 6. Exhibits	60
Signatures	61

2

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

INSPIRE PHARMACEUTICALS, INC.

Condensed Balance Sheets

(in thousands, except per share amounts)

(Unaudited)

	March 31, 2007			December 31, 2006
Assets
Current assets:
Cash and cash equivalents	$	33,695		$	50,190
Investments		27,103			45,377
Receivables from Allergan		9,623			8,245
Prepaid expenses and other receivables		2,551			3,530
Other assets		397			404
Total current assets		73,369			107,746
Property and equipment, net		1,950			1,754
Investments		14,981			6,714
Other assets		391			485
Total assets	$	90,691		$	116,699
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,277		$	6,297
Accrued expenses		7,749			8,359
Deferred revenue		2,430			—
Short-term debt and capital leases		4,413			3,435
Total current liabilities		18,869			18,091
Capital leases – noncurrent		142			267
Long-term debt		16,447			17,655
Other long-term liabilities		2,315			2,315
Total liabilities		37,773			38,328
Commitments and contingencies (See Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value, 2,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.001 par value, 100,000 shares authorized; 42,399 and 42,238 shares issued and outstanding, respectively		42			42
Additional paid-in capital		324,208			323,606
Accumulated other comprehensive loss		(92	)		(152	)
Accumulated deficit		(271,240	)		(245,125	)
Total stockholders’ equity		52,918			78,371
Total liabilities and stockholders’ equity	$	90,691		$	116,699

The accompanying notes are an integral part of these condensed financial statements.

3

INSPIRE PHARMACEUTICALS, INC.

Condensed Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended
	March 31, 2007			March 31, 2006
Revenues:
Product co-promotion	$	7,204		$	4,218
Collaborative research agreements		—			1,250
Total revenue		7,204			5,468
Operating expenses:
Research and development		22,765			9,109
Selling and marketing		7,521			7,096
General and administrative		3,639			4,446
Total operating expenses		33,925			20,651
Loss from operations		(26,721	)		(15,183	)
Other income (expense):
Interest income		1,061			1,208
Interest expense		(455	)		(30	)
Loss on investments		—			(22	)
Other income, net		606			1,156
Net loss	$	(26,115	)	$	(14,027	)
Basic and diluted net loss per common share	$	(0.62	)	$	(0.33	)
Weighted average common shares used in computing basic and diluted net loss per common share		42,273			42,212

The accompanying notes are an integral part of these condensed financial statements.

4

INSPIRE PHARMACEUTICALS, INC.

Condensed Statements of Cash Flows

(in thousands)

(Unaudited)

	Three Months Ended
	March 31, 2007			March 31, 2006
Cash flows from operating activities:
Net loss	$	(26,115	)	$	(14,027	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization expense		101			51
Depreciation of property and equipment		209			296
Loss on disposal of property and equipment		—			2
Loss on investments		—			22
Stock-based compensation expense		446			360
Changes in operating assets and liabilities:
Receivables from Allergan		(1,378	)		(1,059	)
Prepaid expenses and other receivables		979			(956	)
Accounts payable		(2,020	)		(52	)
Accrued expenses		(610	)		(664	)
Deferred revenue		2,430			1,829
Net cash used in operating activities		(25,958	)		(14,198	)
Cash flows from investing activities:
Purchase of investments		(13,273	)		(28,238	)
Proceeds from sale of investments		23,340			16,215
Purchase of property and equipment		(405	)		(352	)
Net cash provided by (used in) investing activities		9,662			(12,375	)
Cash flows from financing activities:
Issuance of common stock, net		156			1
Payments on notes payable and capital lease obligations		(355	)		(130	)
Net cash used in financing activities		(199	)		(129	)
Decrease in cash and cash equivalents		(16,495	)		(26,702	)
Cash and cash equivalents, beginning of period		50,190			65,018
Cash and cash equivalents, end of period	$	33,695		$	38,316

The accompanying notes are an integral part of these condensed financial statements.

5

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

1. Organization

Inspire Pharmaceuticals, Inc. (the “Company” or “Inspire”) was incorporated in October 1993 and commenced operations in March 1995. Inspire is located in Durham, North Carolina, adjacent to the Research Triangle Park.

Inspire has incurred losses and negative cash flows from operations since inception. The Company expects it has sufficient liquidity to continue its planned operations through 2007. The Company’s liquidity needs will largely be determined by key development and regulatory events. In order to continue its operations beyond 2007 it will need to: (1) obtain product candidate approvals, which would trigger milestone payments to the Company, (2) out-license rights to certain of its product candidates, pursuant to which the Company would receive income, (3) raise additional capital through equity or debt financings or from other sources, and/or (4) reduce expenditures and spending on one or more research and development programs. The Company receives revenue from its co-promotion of Elestat® (epinastine HCl ophthalmic solution) 0.05% and Restasis® (cyclosporine ophthalmic emulsion) 0.05%, but will continue to incur operating losses until co-promotion and product revenues reach a level sufficient to support ongoing operations. Elestat and Restasis are trademarks owned by Allergan, Inc. (“Allergan”).

2. Basis of Presentation

The accompanying unaudited Condensed Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America and applicable Securities and Exchange Commission (“SEC”) regulations for interim financial information. These financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is presumed that users of this interim financial information have read or have access to the audited financial statements from the preceding fiscal year contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the Company’s financial position and operations for the interim periods presented have been made. Operating results for the interim periods presented are not indicative of the results that may be expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results will differ from those estimates.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding and dilutive potential common shares then outstanding. Dilutive potential common shares consist of shares issuable upon the exercise of stock options and restricted stock units that are paid in shares of the Company’s stock upon conversion. The calculation of diluted earnings per share for the three months ended March 31, 2007 and 2006 does not include 557 and 465, respectively, of potential common shares, as their impact would be antidilutive.

6

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), using the modified prospective transition method. Under this transition method, stock-based compensation expense for all periods presented includes (i) expense for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”); and (ii) expense for all share-based payments granted after January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company recognizes these compensation costs net of an expected forfeiture rate and recognizes the compensation costs on a straight-line basis for only those shares expected to vest over the requisite service period of the award, which is generally three to five years. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB No. 107”) regarding the SEC’s interpretation of SFAS No. 123(R) and the valuation of share-based payments for public companies. The Company has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R). See Note 4 to the accompanying Condensed Financial Statements for a further discussion on stock-based compensation.

Risks from Third Party Manufacturing Concentration

The Company relies on single source manufacturers for each of its product candidates. In addition, Allergan is responsible for the manufacturing of both Elestat and Restasis and relies on single source manufacturers for the active pharmaceutical ingredients in both products, which are co-promoted by the Company. Accordingly, delays in the manufacture of any product or product candidate could adversely impact the marketing of the Company’s products or the development of the Company’s product candidates. Furthermore, the Company has no control over the manufacture of products for which it is entitled to receive revenue and the overall product supply chain.

Significant Customers and Risk

All co-promotion revenues recognized and recorded for each of the three months ended March 31, 2007 and 2006, were from one collaborative partner. The Company is entitled to receive co-promotion revenue from net sales of Elestat and Restasis under the terms of its collaborative agreements with Allergan, and accordingly, all trade receivables are concentrated with Allergan. Due to the nature of these agreements, Allergan has significant influence over the commercial success of these products.

Revenue Recognition

The Company records all its revenue from product co-promotion activities and collaborative research agreements in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements.”

The Company recognizes co-promotion revenue based on net sales for Elestat and Restasis, as defined in the co-promotion agreements, and as reported to Inspire by Allergan. The Company actively promotes both Elestat and Restasis through its commercial organization and shares in any risk of loss due to returns and other allowances, as determined by Allergan. Accordingly, the Company’s co-promotion revenues are based upon Allergan’s revenue recognition policy and other accounting policies over which it has limited or no control and on the underlying terms of the co-promotion agreements. Allergan recognizes revenue from product sales when goods are shipped and title and risk of loss transfers to the customer. The co-promotion agreements provide for gross sales to be reduced by estimates of sales returns, credits and allowances, normal trade and cash discounts, managed care sales rebates and other allocated costs as defined in the agreements, all of which are determined by Allergan and are outside the Company’s control. The Company records a percentage of Allergan’s net sales for both Elestat and Restasis, reported to Inspire by Allergan, as co-promotion revenue. The Company receives monthly sales information from Allergan and performs analytical reviews and trend analyses using prescription information that it receives from IMS Health, an independent

7

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

provider of pharmaceutical data. In addition, the Company exercises its audit rights under the contractual agreements with Allergan to annually perform an examination of Allergan’s sales records of both Elestat and Restasis. The Company makes no adjustments to the amounts reported to it by Allergan other than reductions in net sales to reflect the incentive programs managed by the Company. The Company offers and manages certain incentive programs associated with Elestat, which are utilized by it in addition to those programs managed by Allergan. The Company reduces revenue by estimating the portion of Allergan’s sales that are subject to these incentive programs based on information reported to it by a third-party administrator of the incentive program. For fiscal years 2006, 2005 and 2004, the amount of rebates associated with the Company’s incentive programs in each year was less than one-half of one percent of co-promotion revenues. The rebates associated with the programs that the Company manages represent an insignificant amount, as compared to the rebate and discount programs administered by Allergan and as compared to the Company’s aggregate co-promotion revenue. Under the co-promotion agreement for Elestat, the Company is obligated to meet predetermined minimum calendar year net sales target levels. If the annual minimum is not satisfied, the Company records revenues using a reduced percentage of net sales based upon its level of achievement of predetermined calendar year net sales target levels. Amounts receivable from Allergan in excess of recorded co-promotion revenue are recorded as deferred revenue.

The Company recognizes revenue under its collaborative research and development agreements when it has performed services under such agreements or when the Company or its collaborative partner have met a contractual milestone triggering a payment to the Company. The Company recognizes revenue from its research and development service agreements ratably over the estimated service period as related research and development costs are incurred and the services are substantially performed. Upfront non-refundable fees and milestone payments received at the initiation of collaborative agreements for which the Company has an ongoing research and development commitment are deferred and recognized ratably over the period in which the services are substantially performed. This period, if not defined in the collaborative agreement, is based on estimates by the Company’s management and the progress towards agreed upon development events as set forth in the collaborative agreements. These estimates are subject to revision as the Company’s development efforts progress and it gains knowledge regarding required additional development. Revisions in the commitment period are made in the period that the facts related to the change first become known. If the estimated service period is subsequently modified, the period over which the upfront fee or revenue related to ongoing research and development services is modified on a prospective basis. The Company is also entitled to receive milestone payments under its collaborative research and development agreements based upon the achievement of agreed upon development events that are substantively at-risk by its collaborative partners or the Company. This collaborative research revenue is recognized upon the achievement and acknowledgement of the Company’s collaborative partner of a development event, which is generally at the date payment is received from the collaborative partner or is reasonably assured. Accordingly, the Company’s revenue recognized under its collaborative research and development agreements may fluctuate significantly from period to period.

8

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss is comprised of unrealized gains and losses on marketable securities and is disclosed as a component of stockholders’ equity. The Company had $92 and $152 of unrealized losses on its investments that are classified as accumulated other comprehensive loss at March 31, 2007 and December 31, 2006, respectively. Comprehensive loss consists of the following components:

	Three Months Ended March 31,
	2007			2006
Net loss	$	(26,115	)	$	(14,027	)
Adjustment for realized losses in net loss		—			22
Change in unrealized gain/(losses) on investments		60			(63	)
Total comprehensive loss	$	(26,055	)	$	(14,068	)

3. Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” (“SFAS No. 159”). SFAS No. 159 permits companies to elect to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis. Companies electing the fair value option would be required to recognize changes in fair value in earnings. The Company is currently evaluating the impact, if any, of SFAS No. 159 on its financial statements. If elected, SFAS No. 159 would be effective as of January 1, 2008.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within that fiscal year. The Company is currently evaluating the impact of adopting this statement.

4. Stock-Based Compensation

For the three months ended March 31, 2007 and 2006, the Company recognized total compensation expense of $446 and $360, respectively, related to its two equity compensation plans.

Total stock-based compensation was allocated as follows:

	Three Months Ended March 31,
	2007		2006
Research and development	$	126	$	154
Selling and marketing		115		51
General and administrative		205		155
Total stock-based compensation expense	$	446	$	360

9

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

Equity Compensation Plans

The Company has two stock-based compensation plans, the Amended and Restated 1995 Stock Plan (the “1995 Plan”) and the 2005 Equity Compensation Plan (the “2005 Plan”), that allow for share-based payments to be granted to directors, employees and consultants. Non-qualified stock options and restricted stock may be granted under the 1995 Plan. For the 2005 Plan, both incentive and non-qualified stock options, as well as stock appreciation rights, restricted stock and restricted stock units, may be granted. The Board of Directors, or an appropriate committee of the Board of Directors, shall determine the terms, including the vesting schedule, of all options and other equity arrangements under both plans. The maximum term for any option grant under the 1995 Plan and the 2005 Plan are ten and seven years, respectively, from the date of the grant. Prior to July 2006, options granted to employees under both plans generally vested 25% upon completion of one full year of employment from date of grant and on a monthly basis over the following three years of their employment and the term of the options was the maximum permitted under the applicable plan. Beginning in July 2006, the Compensation Committee of the Company’s Board of Directors authorized stock option grants with a three-year vesting period and a maximum term of five years for all future issuances to non-executive employees. Under these new terms, options granted to non-executive employees will vest 33% upon completion of one full year of employment from date of grant and on a monthly basis over the following two years of their employment. The vesting period typically begins on the date of hire for new employees and on the date of grant for existing employees.

Also in July 2006, the Compensation Committee authorized the issuance of restricted stock units to each of the Company’s executive officers. The restricted stock units vest annually over five years from the date of grant or earlier upon the event of a change in control. Any restricted stock units that have not vested at the time of termination of service to the Company are forfeited. The restricted stock units do not have voting rights and the shares underlying the restricted stock units are not considered issued and outstanding until conversion. The total number of restricted stock units granted was 195 and will convert into an equivalent number of shares of common stock upon vesting.

At March 31, 2007, there were 727 and 316 shares available for grant as options or other forms of share-based payments under the 1995 Plan and 2005 Plan, respectively.

Basis for Fair Value Estimate of Share-Based Payments

Prior to fiscal 2007, the Company used a blended volatility calculation utilizing volatility of peer group companies with similar operations and financial structures in addition to the Company’s own historical volatility to estimate its future volatility for purposes of valuing the share-based payments granted during the twelve months ended December 31, 2006. In fiscal 2007, the Company began using only its own historical volatility to estimate its future volatility due to the lower expected life associated with the stock option grants with five-year terms that the Company began issuing in the second half of 2006 and the insignificant difference between its own historical volatility and the volatility of the peer group based on the new expected life period. However, actual volatility, and future changes in estimated volatility, may differ substantially from the Company’s current estimates.

In 2005, the Company adopted and began granting options under the 2005 Plan. Due to the lack of historical data with regard to exercise activity under the 2005 Plan, the Company adopted a simplified method of calculating the expected life of options for grants made to its employees in accordance with the guidance set forth in SAB No. 107. Prior to fiscal 2007, for options issued under the 1995 Plan, the Company utilized the historical data available regarding employee and director exercise activity to calculate an expected life of the options. Beginning in fiscal 2007, the Company began granting non-qualified stock options under the 1995 Plan with option terms similar to those granted under the 2005 Plan of five and seven years. Due to the lack of historical data with regard to these shorter option terms, the Company has used the guidance set forth in SAB No. 107 when calculating the expected life for new options granted to its employees under the 1995 Plan. For options granted to directors under the 2005 Plan or 1995

10

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

Plan, the Company uses the contractual term of seven years as the expected life of options. The Company will continue with these assumptions in determining the expected life of options under the 1995 Plan and the 2005 Plan until such time that adequate historical data is available.

The table below presents the weighted average expected life in years of options granted under the two plans as described above. The risk-free rate of the stock options is based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds with the expected term of the option granted. The fair value of share-based payments, granted during the period indicated, was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values as follows:

	Stock Options for Three Months Ended March 31,
	2007			2006
Risk-free interest rate		4.46	%		4.34	%
Dividend yield		0	%		0	%
Expected volatility		70	%		79	%
Expected life of options (years)		3.7			4.6
Weighted average fair value of grants	$	3.49		$	3.37

The following table summarizes the stock option activity for both the 1995 Plan and 2005 Plan:

	Shares		Weighted Average Exercise Price (per share)		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2006	6,606		$	9.90	5.7	$	5,534
Granted	374			6.51
Exercised	(161	)		1.47
Forfeited/cancelled/expired	(225	)		12.24
Outstanding at March 31, 2007	6,594		$	9.83	5.4	$	3,314
Vested and exercisable at March 31, 2007	4,956		$	11.25	5.4	$	2,547

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first quarter of fiscal 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2007. These amounts change based on the fair market value of the Company’s stock. Total intrinsic value of stock options exercised for the three months ended March 31, 2007 was $791. Cash received from stock option exercises for the three months ended March 31, 2007 was $236. Due to the Company’s net loss position, no windfall tax benefits have been realized during the three months ended March 31, 2007.

11

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

As of March 31, 2007, approximately $4,823 of total unrecognized compensation cost related to unvested stock options is expected to be recognized over a weighted-average period of 2.8 years.

The value of the restricted stock units is based on the closing market price of the Company’s common stock on the date of grant and is amortized on a straight-line basis over the five year requisite service period. At the date of grant, the restricted stock units had a total fair value of $811. As of March 31, 2007, there was approximately $611 of unrecognized share-based compensation expense related to unvested restricted stock units, which is expected to be recognized over the next 4.3 years.

5. Income Taxes

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN No. 48”). On January 1, 2007, the Company adopted the provisions of FIN No. 48. FIN No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. At the adoption date of January 1, 2007, the Company had $110,008 of unrecognized deferred tax benefits, all of which was subject to a full valuation allowance, effectively reducing the deferred tax benefits to $0, since realization of these benefits could not be reasonably assured. As a result of implementing FIN No. 48, the Company has reduced its unrecognized deferred tax benefits by approximately $4,000. Consequently, the Company also reduced its full valuation allowance against the adjusted deferred tax benefits by the same amount. The Company expects that any future changes in the unrecognized tax benefit will have no impact on its financial statements due to the existence of the valuation allowance.

6. Contingencies

Litigation

On February 15, 2005, the first of five identical purported shareholder class action complaints was filed in the United States District Court for the Middle District of North Carolina against the Company and certain of its senior officers. Each complaint alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Securities and Exchange Commission Rule 10b-5, and focused on statements that are claimed to be false and misleading regarding a Phase 3 clinical trial of the Company’s dry eye product candidate, Prolacria^TM. Each complaint sought unspecified damages on behalf of a purported class of purchasers of the Company’s securities during the period from June 2, 2004 through February 8, 2005.

On March 27, 2006, following consolidation of the lawsuits into a single civil action and appointment of lead plaintiffs, the plaintiffs filed a Consolidated Class Action Complaint (the “CAC”). The CAC asserts claims against the Company and certain of its present or former senior officers or directors. The CAC asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 based on statements alleged to be false and misleading regarding a Phase 3 clinical trial of Prolacria, and also adds claims under sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The CAC also asserts claims against certain parties that served as underwriters in the Company’s securities offerings during the period relevant to the CAC. The CAC seeks unspecified damages on behalf of a purported class of purchasers of the Company’s securities during the period from May 10, 2004 through February 8, 2005. In May 2006, the plaintiffs agreed to voluntarily dismiss their claims against the underwriters on the basis that they were time-barred. On June 30, 2006, the Company and other defendants moved that the court dismiss the CAC on the grounds that it fails to state a claim upon which relief can be granted and does not satisfy the pleading requirements under applicable law. Briefing on that motion is now complete and it is currently pending before the court.

12

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

The Company intends to defend the litigation vigorously. As with any legal proceeding, the Company cannot predict with certainty the eventual outcome of these pending lawsuits, nor can a reasonable estimate of the amounts of loss, if any, be made.

SEC Investigation

On August 30, 2005, the SEC notified the Company that it is conducting a formal, nonpublic investigation which the Company believes relates to its Phase 3 clinical trial of the Company’s dry eye product candidate, Prolacria. On October 19, 2006, the Company received a Wells Notice letter from the staff of the SEC, issued in connection with this investigation. The Company’s Chief Executive Officer and its Executive Vice President, Operations and Communications, also received Wells Notices.

The Wells Notices provide notification of the SEC staff’s determination that it intends to recommend to the SEC that it bring a civil action against the Company and the two officers regarding possible violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and SEC Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13a-14 thereunder. Under the process established by the SEC, the Company and the two officers have the opportunity to respond in writing to the Wells Notice before the staff makes any formal recommendation to the SEC regarding what action, if any, should be brought by the SEC. The Company and the officers receiving these notices provided written submissions to the SEC in response to the Wells Notices during December 2006, and may seek a further meeting with the SEC staff.

The Company cannot predict with certainty the eventual outcome of this investigation, nor can a reasonable estimate of the costs that might result from the SEC’s investigation be made.

7. Subsequent Events

On April 27, 2007, the U.S. Food and Drug Administration approved AzaSite^™ (azithromycin ophthalmic solution) 1% for the treatment of bacterial conjunctivitis. Based on current manufacturing and commercialization plans, the Company intends to launch AzaSite in the latter part of the third quarter of 2007.

In April 2007, the Company’s Board of Directors approved an Amended and Restated 2005 Equity Compensation Plan, subject to the approval of its stockholders. If approved by the Company’s stockholders at the 2007 Annual Meeting on June 8, 2007, the number of shares of the Company’s common stock reserved for issuance under any form of stock award under the amended plan will be increased from 3,000,000 shares to 8,000,000 shares.

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

CAUTIONARY STATEMENT

The discussion below contains forward-looking statements regarding our financial condition and our results of operations that are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted within the United States, as well as projections for the future. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. We are subject to risks common to biopharmaceutical companies, including risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory actions and marketing approvals, reliance on collaborative partners, enforcement of patent and proprietary rights, the need for future capital, competition associated with products, potential competition associated with our product candidates and retention of key employees. In order for one of our product candidates to be commercialized, it will be necessary for us, or our collaborative partners, to conduct preclinical tests and clinical trials, demonstrate efficacy and safety of the product candidate to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, obtain market acceptance and adequate reimbursement from government and private insurers. We cannot provide assurance that we will generate significant revenues or achieve and sustain profitability in the future. Statements contained in Management’s Discussion and Analysis of Financial Conditions and Results of Operations which are not historical facts are, or may constitute, forward-looking statements. Forward-looking statements involve known and unknown risks that could cause our actual results to differ materially from expected results. These risks are discussed in the section entitled “Risk Factors,” as well as in our Annual Report on Form 10-K for the year ended December 31, 2006. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Our revenues are difficult to predict and depend on several factors. Our co-promotion revenues are based upon Allergan’s revenue recognition policy and other accounting policies, over which we have limited or no control, and on the underlying terms of our co-promotion agreements. Our co-promotion revenues are impacted by the number of governmental and commercial formularies upon which Restasis and Elestat are listed, the discounts and pricing under such formularies, as well as the estimated and actual amount of rebates, all of which are managed by Allergan. Other factors that are difficult to predict and that impact our co-promotion revenues are the extent and effectiveness of Allergan’s sales and marketing efforts as well as our own sales and marketing efforts, coverage and reimbursement under Medicare Part D and the marketing and sales activities of competitors, among others. Based on current manufacturing and commercialization plans, we intend to launch AzaSite in the latter part of the third quarter of 2007. The effectiveness of our ability and the ability of third parties on which we rely to help us manufacture, distribute and market AzaSite, physician and patient acceptance of AzaSite, as well as competitor response to the launch of AzaSite are all factors, among others, that will impact the level of revenue recorded for AzaSite in 2007 and subsequent future periods. Revenues related to development activities are dependent upon the progress toward and the achievement of developmental milestones by us or our collaborative partners.

Our operating expenses are also difficult to predict and depend on several factors. Research and development expenses, including expenses for development milestones, drug synthesis and manufacturing, preclinical testing and clinical research activities, depend on the ongoing requirements of our development programs, completion of business development transactions, availability of capital and direction from regulatory agencies, which are difficult to predict. Management may in some cases be able to control the timing of research and development expenses, in part by accelerating or decelerating preclinical testing, basic research activities, and clinical trial activities, but many of these expenditures will occur irrespective of whether our product candidates are approved when anticipated or at all. We

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have incurred and expect to continue to incur significant selling and marketing expenses to commercialize our products. Once again, management may in some cases be able to control the timing and magnitude of these expenses. We have incurred and expect to incur significant costs related to the anticipated commercial launch of AzaSite. In addition, we have incurred and expect to incur significant general and administrative expenses as we work to resolve our current stockholder litigation and Securities and Exchange Commission, or SEC, investigation.

As a result of these factors, we believe that period to period comparisons are not necessarily meaningful and you should not rely on them as an indication of future performance. Due to all of the foregoing factors, it is possible that our operating results will be below the expectations of market analysts and investors. In such event, the prevailing market price of our common stock could be materially adversely affected.

OVERVIEW

We are a biopharmaceutical company dedicated to discovering, developing and commercializing prescription pharmaceutical products in disease areas with significant commercial potential or unmet medical needs. Our goal is to build and commercialize a sustainable pipeline of new treatments based upon our technical and scientific expertise, focusing in the ophthalmic and respiratory/allergy therapeutic areas. Our portfolio of products and product candidates include:

PRODUCTS AND PRODUCT CANDIDATES	THERAPEUTIC AREA/ INDICATION	COLLABORATIVE PARTNER (1)	CURRENT STATUS IN THE UNITED STATES
Products
Elestat®	Allergic conjunctivitis	Allergan	Co-promoting
Restasis®	Dry eye disease	Allergan	Co-promoting
AzaSite™	Bacterial conjunctivitis	InSite Vision	FDA Approved (2)
Product Candidates in Clinical Development
ProlacriaTM (diquafosol tetrasodium)	Dry eye disease	Allergan and Santen Pharmaceutical	Phase 3; Second FDA approvable letter received December 2005
Bilastine	Seasonal allergic rhinitis	FAES Farma	Phase 3
Denufosol tetrasodium	Cystic fibrosis	None	Phase 3
Epinastine nasal spray	Seasonal allergic rhinitis	Boehringer Ingelheim	Phase 2
INS115644	Glaucoma	Wisconsin Alumni Research Foundation	Phase 1

(1) See our Annual Report on Form 10-K for the year ended December 31, 2006 for a detailed description of our collaborative agreements with these collaborative partners.

(2) On February 15, 2007, we entered into a license agreement with InSite Vision Incorporated, or InSite Vision, pursuant to which we licensed exclusive rights to commercialize AzaSite, a topical anti-infective product candidate for the treatment of bacterial conjunctivitis, as well as other potential topical anti-infective products containing azithromycin for use in the treatment of human ocular or ophthalmic indications. On April 27, 2007, AzaSite was approved by the FDA for the treatment of bacterial conjunctivitis. Based on current manufacturing and commercialization plans, we intend to launch AzaSite in the latter part of the third quarter of 2007. AzaSite is a trademark owned by InSite Vision.

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Inspire employs a U.S. sales force for the promotion of AzaSite for bacterial conjunctivitis, Elestat for allergic conjunctivitis and Restasis for dry eye disease. We co-promote Elestat and Restasis in the United States under agreements with Allergan, Inc., or Allergan, and we receive co-promotion revenue based upon Allergan’s net sales of these products. Elestat and Restasis are trademarks owned by Allergan.

Our ophthalmic products and product candidates are currently concentrated in the allergic conjunctivitis, bacterial conjunctivitis, dry eye disease, and glaucoma indications. Our respiratory/allergy product candidates are currently concentrated in the treatment of respiratory complications of cystic fibrosis and seasonal allergic rhinitis indications.

Elestat

Overview. Elestat (epinastine HCl ophthalmic solution) 0.05%, a topical antihistamine with mast cell stabilizing and anti-inflammatory activity, was developed by Allergan for the prevention of ocular itching associated with allergic conjunctivitis. Elestat was approved by the U.S. Food and Drug Administration, or FDA, in October 2003 and is indicated for adults and children at least three years old. Elestat is a seasonal product with product demand mirroring seasonal trends for topical allergic conjunctivitis products. Typically, demand is highest during the Spring months followed by moderate demand in the Summer and Fall months. The lowest demand is during the Winter months.

In December 2003, we entered into an agreement with Allergan to co-promote Elestat in the United States. Under the agreement, we have the responsibility for promoting and marketing Elestat to ophthalmologists, optometrists and allergists in the United States and paying the associated costs. In addition, we have the right to conduct, and from time-to-time do conduct, Phase 4 clinical trials and other studies in collaboration with Allergan relating to Elestat. We receive co-promotion revenue from Allergan on its U.S. net sales of Elestat. Allergan records sales of Elestat and is responsible for other product costs.

In February 2004, we launched Elestat in the United States and are promoting it to ophthalmologists, optometrists and allergists. We work with Allergan collaboratively on overall product strategy and management in the United States. The commercial exclusivity period for Elestat under the Hatch-Waxman Act will expire in October 2008 at which time competitors will be able to submit to the FDA an abbreviated New Drug Application or a 505(b)(2) application for a generic version of epinastine HCl ophthalmic solution. We cannot predict the time frame for FDA review of such applications, if any. We are aware that several generic pharmaceutical companies have expressed intent to commercialize the ocular form of epinastine after the commercial exclusivity period expires.

Restasis

Overview. Restasis (cyclosporine ophthalmic emulsion) 0.05% is the first approved prescription product in the United States for the treatment of dry eye disease. It is indicated to increase tear production in patients whose tear production is presumed to be suppressed due to ocular inflammation associated with keratoconjunctivitis sicca, or dry eye disease. In December 2002, Restasis was approved for sale by the FDA and Allergan launched Restasis in the United States in April 2003.

In June 2001, we entered into an agreement with Allergan to develop and commercialize our product candidate, Prolacria^TM (diquafosol tetrasodium), for the treatment of dry eye disease. The agreement also provided us with a royalty on worldwide (except most Asian markets) net sales of Allergan’s Restasis and granted us the right to co-promote Restasis in the United States.

In January 2004, we began co-promotion of Restasis to eye care professionals and allergists in the United States. We began receiving co-promotion revenue on Allergan’s net sales of Restasis beginning in April 2004. The manufacture and sale of Restasis is protected in the United States under a use patent which expires in August 2009 and a formulation patent which expires in May 2014.

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For the three months ended March 31, 2007, Allergan recognized approximately $78 million of revenue from net sales of Restasis. In March 2007, Allergan provided initial guidance for 2007 net sales of Restasis to be in the range of $320-$340 million.

AzaSite

Overview. AzaSite (azithromycin ophthalmic solution) 1% is a topical anti-infective, in which azithromycin is formulated into an ophthalmic solution utilizing DuraSite^®, a novel ocular drug delivery system. Azithromycin is a semi-synthetic antibiotic that is derived from erythromycin and has been available under the trade name Zithromax® by Pfizer Inc. since 1992. On April 27, 2007, AzaSite was approved by the FDA for the treatment of bacterial conjunctivitis. Based on current manufacturing and commercialization plans, we intend to launch AzaSite in the latter part of the third quarter of 2007. We plan to expand our existing sales force to a total of 98 representatives who will call on targeted specialists and select pediatricians and primary care providers.

Market Opportunity. The current ocular antibiotic market is approximately $600 million in annual sales in the United States based on data compiled by IMS Health as of December 31, 2006. This includes approximately $360 million for the single-entity product market and approximately $245 million in the combination products market. Total prescriptions in the ocular antibiotic market were approximately 15 million for the twelve months ended December 31, 2006, up 7% from the prior year according to data compiled from IMS Health.

Collaborative Agreement. On February 15, 2007, we entered into a license agreement with InSite Vision pursuant to which we licensed exclusive rights to commercialize AzaSite, as well as other potential topical anti-infective products containing azithromycin for use in the treatment of human ocular or ophthalmic indications. AzaSite is azithromycin formulated with DuraSite, InSite Vision’s patented drug-delivery vehicle. The license agreement also grants us exclusive rights to develop, make, use, market, commercialize and sell the product in the United States and Canada and their respective territories.

Pursuant to the license agreement, we paid InSite Vision an upfront license fee of $13.0 million. We will pay InSite Vision an additional $19.0 million milestone related to the FDA approval of AzaSite. In addition, we are also obligated to pay a 20% royalty for the first two years of commercialization and a 25% royalty thereafter on net sales of AzaSite in the United States and Canada. We are obligated to pay royalties under the agreement for the longer of (i) eleven years from the launch of the subject product and (ii) the period during which a valid claim under a patent licensed from InSite Vision covers a subject product. Under the terms of the agreement, our obligation to pay royalties to InSite Vision is subject to annual minimum royalty payments which commence on the first quarter start date that is at least one year after the first commercial sale of any subject product, and may continue for a period of up to five years.

Under the terms of the agreement, InSite Vision is responsible for obtaining regulatory approval of AzaSite in the United States and Canada. No more than twenty-five days after obtaining regulatory approval for a country, InSite Vision will be responsible for transferring the applicable regulatory documentation to us regarding AzaSite, including the New Drug Application, or NDA, and Canadian equivalent. Thereafter, we will be responsible for all regulatory obligations and strategies relating to the further development and commercialization of products in the United States and Canada. The license agreement can be terminated by us for convenience after the earlier of (i) the regulatory approval of the AzaSite product in the United States or (ii) April 27, 2008. We may also terminate the license agreement prior to the first commercial sale of a subject product upon 90 days notice to InSite Vision and after the first commercial sale of a subject product upon 180 days notice to InSite Vision.

We have exercised our option to negotiate a license from InSite Vision for AzaSite Plus^TM, a combination antibiotic/corticosteroid product formulated with DuraSite technology.

Contemporaneously with our license agreement, InSite Vision entered into an exclusive license agreement with Pfizer for certain Pfizer patent rights relating to the treatment of ocular infection with azithromycin for certain products. Under the terms of our license agreement with InSite Vision, we obtained from InSite Vision an exclusive sublicense to such Pfizer patent rights, in addition to the license to the InSite Vision patent rights, subject to certain limitations.

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Also, Inspire and Pfizer have entered into a related agreement that provides for the continuation of our sublicense rights under the Pfizer patent rights upon a termination of the license agreement between InSite Vision and Pfizer. The agreement between us and Pfizer also provides an opportunity to cure any breaches by InSite Vision of the license agreement between InSite Vision and Pfizer and the opportunity to maintain and enforce such Pfizer patent rights under certain circumstances. In combination with the DuraSite patents held by InSite Vision, AzaSite is expected to have patent protection until 2019.

Inspire and InSite Vision have also entered into a trademark license agreement on February 15, 2007 under which InSite Vision granted to us an exclusive license to the AzaSite trademark and domain name and a nonexclusive license to the DuraSite trademark in connection with the commercialization of subject products in the United States and Canada under the terms of the license agreement. In addition, we have entered into a supply agreement dated February 15, 2007 with InSite Vision for the active pharmaceutical ingredient azithromycin. Previously, InSite Vision has entered into a third-party supply agreement for the production of such active ingredient. Under the supply agreement, InSite Vision has agreed to supply our requirements of active ingredient, pursuant to certain forecasting and ordering procedures. The initial term of the supply agreement is until 2012, subject to certain customary termination provisions, such as termination for material breach of the agreement. Either we or InSite Vision may terminate the supply agreement upon 180 days notice to the other party. After 2012, the supply agreement automatically renews for successive three-year periods unless terminated pursuant to such termination provisions. The supply agreement requires that InSite Vision produce for us a specified stockpile of active ingredient. The supply agreement also contains certain provisions regarding the rights and responsibilities of the parties with respect to manufacturing specifications, delivery arrangements, quality assurance, and regulatory compliance, as well as certain other customary matters.

InSite Vision previously entered into an agreement with Cardinal Health PTS, LLC, or Cardinal, for the manufacture of the finished product AzaSite. Under the terms of our license agreement, the parties have agreed to arrangements intended to facilitate our access to finished product manufactured by Cardinal on an interim basis and to facilitate execution of a longer-term arrangement for finished product supply.

Prolacria (diquafosol tetrasodium) for the treatment of dry eye disease

Overview. Diquafosol tetrasodium is a dinucleotide that we discovered, which functions as an agonist at the P2Y₂ receptor and is being developed for the treatment of dry eye disease. Prolacria, the proposed U.S. tradename for diquafosol tetrasodium ophthalmic solution 2%, is designed to stimulate the release of three components of natural tears – mucin, lipids and fluid.

We are developing Prolacria as an eye drop for dry eye disease. To date, we have completed four Phase 3 clinical trials of Prolacria for the treatment of dry eye disease. In total, we have conducted placebo-controlled clinical trials of Prolacria in more than 2,000 subjects. If approved, Prolacria could be the second FDA approved pharmacologically active agent to treat dry eye disease and the first one with this mechanism of action. Since Prolacria and Restasis have different mechanisms of action, we consider them complementary products and, if Prolacria is approved by the FDA, we believe there is commercial opportunity for both of these products.

Under our agreement with Allergan, we are responsible for the development of Prolacria. In 2003, we exercised our right to co-promote Prolacria with Allergan in the United States. If and when we receive FDA approval and Prolacria is launched, we expect to begin promoting this product. Pursuant to this agreement, Allergan is responsible for obtaining regulatory approval of diquafosol tetrasodium in Europe. In the United States, Prolacria is expected to have patent protection until 2017.

Development Status. In June 2003, we filed an NDA with the FDA for Prolacria for the treatment of dry eye disease. In response to that NDA, we were granted a “Priority Review” designation and subsequently, received an approvable letter in December 2003. In June 2005, we submitted an amendment to our NDA for Prolacria and received a second approvable letter in December 2005. We had two formal meetings in 2006 and an additional formal meeting in early 2007 with the FDA about Prolacria and dry eye disease. Based on those meetings, we have provided

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additional information to the FDA. We have utilized key experts and corneal specialists throughout this process to engage in a meaningful dialogue regarding the clinical aspects of the diagnosis and treatment of dry eye.

Based on our most recent meeting with the FDA, we are focusing our attention on staining scores in the central region of the cornea. In addition to the data we have already submitted to the FDA to support the importance of the central cornea, we are continuing to work to validate a clinically relevant endpoint based on staining scores in the central region of the cornea. The FDA has agreed to work with us on this pathway provided we can appropriately validate the endpoint. If we are able to validate this endpoint and come to agreement with the FDA, we expect to request a Special Protocol Assessment prior to conducting an additional clinical trial.

Our partner, Santen Pharmaceutical Co., Ltd., or Santen, is currently developing diquafosol tetrasodium in Japan. Our agreement with Santen allows Santen to develop diquafosol tetrasodium for the therapeutic treatment of ocular surface diseases, such as dry eye disease, in Japan and nine other Asian countries and provides for certain milestones to be earned by us upon achievement of development milestones by Santen. In 2006, Santen began Phase 3 clinical trials in Japan for diquafosol tetrasodium.

Depending on the outcome of our validation exercise and subsequent discussions with the FDA, estimated subsequent costs necessary to amend our NDA submission for Prolacria and resubmit the application for commercial approval in the United States are projected to be in the range of $4 million to $10 million, depending on our approach to achieving NDA approval of the product. This range includes costs for regulatory and consulting activities, conducting a validation exercise and related studies, completing one additional Phase 3 clinical trial, salaries for development personnel, and other unallocated development costs, but excludes the cost of pre-launch inventory which is Allergan’s responsibility. Currently, we have not initiated an additional Phase 3 clinical trial for Prolacria and we do not anticipate initiating an additional Phase 3 clinical trial until the validation exercise and subsequent discussions with the FDA are complete. If we are required to do more than one additional Phase 3 clinical trial, our costs will likely be higher than the projected range. The projected costs associated with Prolacria are difficult to determine due to the ongoing interaction with the FDA and the uncertainty of the FDA’s scientific review and interpretation of what is required to demonstrate safety and efficacy sufficient for approval. Actual costs could be materially different from our estimate. For a more detailed discussion of the risks associated with the development of Prolacria and our other development programs, including factors that could result in a delay of a program and increased costs associated with such a delay, please see the Risk Factors described elsewhere in this report.

Bilastine for seasonal allergic rhinitis

Overview. Bilastine is a non-sedating oral H1-antihistamine compound being developed for the treatment or prevention of allergic rhinitis. Rhinitis is a condition that primarily results from exposure to allergens, either at specific times of the year (seasonal allergic rhinitis) or year-round (perennial allergic rhinitis), or from exposure to irritants, such as cigarette smoke or perfume. Symptoms most often include nasal congestion or stuffiness, rhinorrhea (runny nose), sneezing, and ocular and nasal itching.

In October 2006, we entered into a licensing agreement with FAES Farma, S.A., or FAES, for the U.S. and Canadian development and commercialization of bilastine. Under the agreement with FAES, we are responsible for the development and commercialization of bilastine in the United States and Canada, including conducting any additional necessary clinical trials. In the United States, bilastine is covered by a composition of matter patent until 2017.

Development Status. FAES has sponsored clinical trials assessing the efficacy, tolerability and safety of bilastine in the once-daily oral tablet formulation in multiple clinical trials, including two large, potentially pivotal Phase 3 seasonal allergic rhinitis clinical trials conducted outside the United States that had met their primary (and secondary) pre-specified endpoints. In these clinical trials, bilastine appeared to have an attractive tolerability profile. More than 4,000 subjects have been studied in clinical trials to date. Multiple studies have been completed in the development of this compound, including standard toxicology, carcinogenicity, cardiac safety, and food and drug interaction studies. FAES announced the acceptance of an Investigational New Drug Application, or IND, by the FDA in April 2006, and the IND was transferred to Inspire in December 2006. A thorough QT/QTc clinical trial has been

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completed by FAES in the United States. We anticipate providing an update during the second quarter of 2007 regarding the thorough QT/QTc clinical trial. The results of this clinical trial will be reviewed by Inspire, as well as several cardiac specialists. This clinical trial represents an important “go/no go” decision point in our U.S. program. There is a potential $8.0 million milestone payment to FAES related to these QT/QTc results.

In addition to the completed clinical trials evaluating bilastine, FAES is sponsoring other ex-U.S. clinical trials. A clinical trial to assess onset and duration of effect in an allergen-challenge model (or a controlled pollen exposure unit) has been completed in Vienna, Austria. These top-line clinical trial results are expected to be available by mid-year 2007. Also, FAES is conducting a multinational clinical trial evaluating the effectiveness of bilastine compared with placebo and an active comparator, levocetirizine, for the treatment of chronic idiopathic urticaria.

Several abstracts have been submitted to the Congress of the European Academy of Allergology and Clinical Immunology, which will be held in mid-June 2007 in Sweden. At that conference, we expect data from two large European Phase 3 trials of bilastine to be presented.

Estimated subsequent costs necessary to submit an NDA for bilastine for the treatment of seasonal allergic rhinitis are projected to be in the range of $12 million to $20 million and are contingent upon acceptable results of the QT/QTc clinical trial. This range includes an $8.0 million milestone payment to FAES relating to the QT/QTc clinical trial results, conducting a Phase 3 clinical trial which may be required, and if such clinical trial is acceptable, paying an additional $2.0 million milestone payment to FAES, manufacturing bilastine for clinical trials, producing qualification lots consistent with current Good Manufacturing Practice, or cGMP, standards, salaries for development personnel, other unallocated development costs and regulatory preparation and filing costs, but excludes the cost of pre-launch inventory. These costs are difficult to project and actual costs could be materially different from our estimate. For example, results from the QT/QTc clinical trial may be unacceptable, which could result in a cancellation of the program. In addition, results from the planned Phase 3 clinical trial may change our planned development program, and an anticipated NDA filing could be delayed. For a more detailed discussion of the risks associated with our development programs, please see the Risk Factors described elsewhere in this report.

Denufosol tetrasodium for the treatment of cystic fibrosis

Overview. We are developing denufosol tetrasodium as an inhaled product candidate for the treatment of cystic fibrosis. We believe that our product candidate could be the first FDA approved product that mitigates the underlying ion transport defect in the airways of patients with cystic fibrosis. If approved, we expect denufosol to be an early intervention therapy for cystic fibrosis. This product candidate has been granted orphan drug status and fast-track review status by the FDA, and orphan drug status by the European Medicines Agency, or EMEA. Denufosol is designed to enhance the lung’s innate mucosal hydration and mucociliary clearance mechanisms, which in cystic fibrosis patients are impaired due to a genetic defect. By hydrating airways and stimulating mucociliary clearance through activation of the P2Y₂ receptor, we expect denufosol to help keep the lungs of cystic fibrosis patients clear of thickened mucus, reduce infections and limit the damage that occurs as a consequence of the prolonged retention of thick and tacky infected secretions. In the United States, denufosol tetrasodium for the treatment of cystic fibrosis is expected to have patent protection until 2017.

Cystic fibrosis is a life-threatening disease involving a genetic mutation that disrupts the cystic fibrosis transmembrane regulator protein, an ion channel. In cystic fibrosis patients, a defect in this ion channel leads to poorly hydrated lungs and severely impaired mucociliary clearance. Chronic secondary infections invariably occur, resulting in progressive lung dysfunction and deterioration. Respiratory infections and complications account for more than 90% of the mortality associated with this disease. According to the U.S. Cystic Fibrosis Foundation, as published in 2006, the median life expectancy for patients is approximately 37 years.

Development Status. We have conducted Phase 1 and Phase 2 clinical trials of denufosol, including multiple clinical trials in cystic fibrosis patients, and various preclinical and toxicology testing. In January 2006, we had an End-of-Phase 2 meeting with the FDA and decided to initiate a Phase 3 program to advance denufosol for the treatment

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of cystic fibrosis. The focus of our Phase 3 program is to develop denufosol as an early intervention therapy for treatment of patients with mild lung disease (FEV₁ (Forced Expiratory Volume in one second) > 75% predicted). According to the U.S. Cystic Fibrosis Foundation’s 2004 Patient Registry, approximately two-thirds of cystic fibrosis patients have lung disease defined as mild as measured by the standard pulmonary function test, FEV₁ > 70% predicted. In the pediatric population under 18 years of age, approximately 80% of patients have mild or early lung disease.

Based on the End-of-Phase 2 meeting with the FDA, we plan to conduct two pivotal Phase 3 clinical trials in cystic fibrosis patients. The two Phase 3 clinical trials are designated TIGER-1 and TIGER-2. In July 2006, we initiated our TIGER-1 clinical trial, which is designed to be approximately one year in duration, with a 24-week efficacy treatment period, followed by a 24-week safety extension period. The efficacy portion of the clinical trial is a randomized, double-blind comparison of 60 mg of denufosol to placebo by inhalation three-times daily in approximately 350 patients with mild cystic fibrosis lung disease at approximately 70 clinical centers across North America. In March 2007, Health Canada approved our Clinical Trial Application so that we can conduct cystic fibrosis clinical trials in Canada. We plan on including Canadian sites in TIGER-1 and TIGER-2. Based on current enrollment rates, we expect to complete enrollment in our TIGER-1 Phase 3 clinical trial in the fourth quarter of 2007. As TIGER-1 enrollment proceeds, the safety data will be reviewed by an independent data monitoring committee that we established for this clinical trial. We intend to unblind, analyze and announce the top-line results within two to three months following completion of the initial 24-week placebo-controlled efficacy portion of the clinical trial. We do not expect this unblinding of efficacy data to result in any statistical penalty.

We intend to use TIGER-1 to fulfill the long-term safety regulatory requirement to study denufosol in a specified number of patients for one year. The primary efficacy endpoint is the change from baseline in FEV₁ (in liters) at the 24-week time point. Secondary endpoints include other lung function parameters, pulmonary exacerbations, requirements for concomitant cystic fibrosis medications and health related quality of life. The clinical trial is enrolling cystic fibrosis patients aged five years and above. Use of standard cystic fibrosis therapies approved by the FDA, including Pulmozyme®, TOBI®, macrolides and digestive enzymes, is permitted. The use of hypertonic saline is not permitted to be used by those patients enrolled in the clinical trial.

The size of the TIGER-1 clinical trial was based on multiple considerations including the need for adequate long-term safety exposure at the intended dose of 60 mg and sufficient statistical power required to detect meaningful treatment effects. The TIGER-1 clinical trial has statistical power of greater than 90% to detect at least a 75 ml treatment effect relative to placebo for the primary efficacy endpoint of change from baseline in FEV₁ (in liters). The statistical power calculation was based on numerous assumptions and does not represent a probability of success of the trial.

The protocol and specific timing of initiation of TIGER-2 are dependant on a number of factors, including discussions with regulatory agencies outside the United States, as well as the FDA, discussions with potential partners and enrollment progress in TIGER-1. The duration of TIGER-2 is expected to be no longer than 24 weeks. In 2006, we conducted several meetings with the EMEA to negotiate various aspects of our program, including the potential inclusion of European clinical sites in TIGER-2 and the discussions are continuing.

In 2006, we completed a 52-week inhalation toxicology study in one animal species and we have submitted the final study report to the FDA. There were no signs of pulmonary or systemic toxicity at doses well above the Phase 3 clinical dose. In addition, in November 2006, we initiated the required two-year inhalation carcinogenicity study in rats and the study is ongoing. This carcinogenicity study must be completed prior to submitting an NDA filing. The time from initiation of this study to receipt of the final study report is expected to be up to three years. We expect to receive the final study report for this carcinogenicity study in the second half of 2009.

We intend to initiate a small clinical trial to enhance the scientific data regarding the mechanism of action of denufosol. The single-dose clinical trial is designed as a double-blind, two-way crossover evaluation of the effects of 60 mg of denufosol on mucociliary clearance, compared to placebo, in 12 patients with cystic fibrosis lung disease. In addition, although not requested by the FDA, we may conduct further clinical trials to evaluate denufosol in patients with lower lung function, to gain a better understanding of the initial dose tolerability of denufosol in a patient

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population with more significant airflow obstruction.

Estimated subsequent costs necessary to submit an NDA for denufosol for the treatment of cystic fibrosis are projected to be in the range of $30 million to $50 million. This estimate includes any additional Phase 2 clinical trials, conducting two Phase 3 clinical trials and any required toxicology and carcinogenicity studies, manufacturing denufosol for clinical trials, producing qualification lots consistent with current cGMP standards, salaries for development personnel, other unallocated development costs and regulatory preparation and filing costs, but excludes the cost of pre-launch inventory and any potential development milestones payable to the Cystic Fibrosis Foundation Therapeutics, Inc. These costs are difficult to project and actual costs could be materially different from our estimate. For example, clinical trials, toxicology and carcinogenicity studies may not proceed as planned, results from future clinical trials may change our planned development program, additional Phase 3 clinical trials may be necessary, other parties may assist in the funding of our development costs, and an anticipated NDA filing could be delayed. For a more detailed discussion of the risks associated with our development programs, please see the Risk Factors described elsewhere in this report.

We intend to participate in the commercialization in North America for denufosol for the treatment of cystic fibrosis. We are seeking to secure a corporate partner to develop and commercialize this product candidate outside of North America. We would expect that a potential partner for development and commercialization outside of North America would provide assistance related to the design, funding and completion of future clinical trials conducted outside of North America.

Epinastine nasal spray for seasonal allergic rhinitis

Overview. Epinastine HCl is a topically active, direct H₁-receptor antagonist and inhibitor of histamine release from mast cells that is being developed by us as an intranasal treatment for seasonal allergic rhinitis.

In February 2006, we entered into a development and license agreement with Boehringer Ingelheim International GmbH, or Boehringer Ingelheim. The agreement grants us certain exclusive rights to develop and market an intranasal dosage form of epinastine, in the United States and Canada, for the treatment or prevention of rhinitis.

Development Status. In October 2006, our IND application for epinastine nasal spray was filed with the FDA and we began Phase 2 clinical trials. The Phase 2 program is expected to include several clinical and toxicology studies to determine the optimal formulation and dose. In late October 2006, the initial Phase 2 clinical trial, which compared several formulations and concentrations over one day, was completed.

We have recently completed an additional Phase 2 clinical trial to evaluate epinastine nasal spray for the treatment of seasonal allergic rhinitis. This Phase 2 clinical trial was a 14-day, randomized, double-blind comparison of two doses of epinastine nasal spray (0.05% and 0.1%) to placebo in 569 subjects who had a documented history of seasonal allergic rhinitis to mountain cedar pollen. Of the subjects randomized in the clinical trial, 95% completed the clinical trial and no serious adverse events were reported. While the most common adverse event observed was bitter taste, it was only reported by 4% of subjects in the 0.05% group and by 5% of subjects in the 0.1% group.

The primary endpoint of the clinical trial was the daily reflective change from baseline for total nasal symptom score, or TNSS, averaged over the 14-day treatment period. The endpoint of TNSS conforms to the FDA draft guidance document for seasonal allergic rhinitis and includes runny nose, nasal congestion, itchy nose and sneezing. Results of the clinical trial demonstrated statistically significant improvement (p < 0.05) in reflective TNSS for the 0.1% dose group, compared to placebo. Changes in TNSS for the 0.05% dose group were not statistically significant.

There were multiple secondary endpoints in this clinical trial. Among these, statistically significant improvements (p < 0.05) compared to placebo were demonstrated in the 0.1% dose group for the secondary endpoints of non-nasal symptom score (itchy eyes, watery eyes, and itchy throat/palate) and for total symptom score (TNSS plus non-nasal symptom score).

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Based on the results of this clinical trial and previous discussions with the FDA, we intend to initiate a required 6-month nasal toxicology study of epinastine in a single animal species to support longer-term clinical trials. In addition, a meeting with the FDA has been scheduled in the third quarter of 2007 to discuss the next steps in the clinical program.

Estimated subsequent costs necessary to submit an NDA for epinastine nasal spray for the treatment of seasonal allergic rhinitis are projected to be in the range of $25 million to $45 million. This estimate includes current and future Phase 2 clinical trials, conducting Phase 3 clinical trials and any required toxicology and carcinogenicity studies, manufacturing epinastine for clinical trials, producing qualification lots consistent with current cGMP standards, salaries for development personnel, other unallocated development costs and regulatory preparation and filing costs, but excludes the cost of pre-launch inventory. These costs are difficult to project and actual costs could be materially different from our estimate. For example, clinical trials, toxicology and carcinogenicity studies may not proceed as planned, results from future clinical trials may change our planned development program, additional Phase 2 clinical trials may be necessary, and an anticipated NDA filing could be delayed. For a more detailed discussion of the risks associated with our development programs, please see the Risk Factors described elsewhere in this report.

INS115644 for glaucoma

Overview. In November 2004, we licensed several patents for use in developing and commercializing new treatments for glaucoma from Wisconsin Alumni Research Foundation, or WARF. Under the technology licensed from WARF, we are evaluating new and existing compounds, including INS115644, that are active in disrupting the acto-cytoskeleton of the trabecular meshwork as potential treatments for glaucoma. The scientific hypothesis is that the mechanism of action may result in reduction of intraocular pressure by affecting the primary outflow pathway for aqueous humor.

Development Status. We have filed an IND for the first compound in a series of compounds and in the first quarter of 2007, we initiated a Phase 1 proof-of-concept dose-ranging clinical trial in glaucoma patients to evaluate the safety and tolerability of INS115644, as well as changes in intraocular pressure. Enrollment is ongoing in this clinical trial. We expect to report top-line results of this clinical trial by the fourth quarter of 2007. Given the limited data available and the early stage of development of this program, we are currently unable to reasonably project the future dates and costs that may be associated with clinical trials or a prospective NDA filing.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2007 and 2006

Revenues

Total revenues were approximately $7.2 million for the three months ended March 31, 2007, as compared to approximately $5.5 million for the same period in 2006. The increase in 2007 revenue of approximately $1.7 million, or 32%, was due to increased co-promotion revenue from net sales of Elestat and Restasis in 2007, as compared to 2006. Total revenues for the 2006 period also included the recognition of a development milestone of $1.25 million from Santen for diquafosol tetrasodium in accordance with our development, license and supply agreement.

Co-promotion revenue from net sales of Elestat for the three months ended March 31, 2007 was approximately $2.4 million, as compared to approximately $1.3 million for the same period in 2006. The increase in 2007 co-promotion revenue for Elestat of approximately $1.1 million, or 86%, was primarily due to a reduction in rebates and discounts, a price increase for Elestat that became effective during the first quarter of 2007, as well as an overall increase in the U.S. allergic conjunctivitis market, defined by branded prescription, topically applied products to treat allergic conjunctivitis. In addition, due to the overall increase in net sales of Elestat, we were able to defer a lesser percentage of total net sales of Elestat as of March 31, 2007, as compared to the same period in 2006. Co-promotion revenue from net sales of Restasis for the three months ended March 31, 2007 was approximately $4.8 million, as compared to approximately $2.9 million for the same period in 2006. Restasis is currently the only approved prescription product indicated for dry eye disease. The increase in 2007 co-promotion revenue for Restasis of approximately $1.9 million, or 64%, was primarily due to increased patient usage of Restasis, based on the increase of prescriptions year-over-year,

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a price increase that became effective during the first quarter of 2007, and to a lesser extent, an increase in the number of physicians prescribing Restasis. In addition, in April 2006, there was a scheduled increase of the percentage of net sales of Restasis to which we were entitled. In April 2007, there was a final scheduled increase of the percentage of net sales of Restasis to which we were entitled.

We began realizing co-promotion revenue from Elestat beginning in February 2004. All of our revenue related to Elestat is from net sales in the United States according to the terms of our collaborative agreement with Allergan. Elestat is a seasonal product with product demand mirroring seasonal trends for topical allergic conjunctivitis products. Typically, demand is highest during the Spring months followed by moderate demand in the Summer and Fall months. The lowest demand is during the Winter months.

For the three months ended March 31, 2007, Elestat was the second most prescribed allergic conjunctivitis product in the United States in our target universe, the top 200 highest prescribing ophthalmologists, optometrists, and allergists in each of our 64 sales territories, based upon prescription volume data as reported by IMS Health. Based upon national prescription data from IMS Health, Elestat had a market share of approximately 18% for total prescription volume in our target universe for the three months ended March 31, 2007, as compared to 19% for the same period in 2006. Based upon data from IMS Health, the total U.S. allergic conjunctivitis market, in terms of prescriptions, increased approximately 10% for three months ended March 31, 2007, compared to the same period in 2006. For the three months ended March 31, 2007, Elestat represented approximately 9% of the total U.S. allergic conjunctivitis market, as compared to approximately 10% for the same period in 2006. Based on current trends in prescriptions for Elestat, we expect no market share growth or declining market share in future periods, unless we expand our commercial rights to Elestat.

In regards to co-promotion revenue from net sales of Elestat, we are entitled to an escalating percentage of net sales based upon predetermined calendar year net sales target levels. To date, we have recognized product co-promotion revenue associated with targeted net sales levels for Elestat achieved in the three months ending March 31, 2007. Amounts receivable from Allergan in excess of our recorded revenue are recognized as deferred revenue and will be realized in future quarters of 2007 to the extent additional annual net sales target levels are achieved. Accordingly, as of March 31, 2007, we have recorded $2.4 million of deferred revenue associated with net sales of Elestat. In comparison, as of March 31, 2006, we had recorded $1.8 million of deferred revenue associated with net sales of Elestat.

Since the launch of Elestat, Allergan has secured coverage on formularies of certain commercial and government plans. This coverage allows Allergan and us to increase and maintain prescription market share, but generally requires price concessions through rebate programs which impact the level of co-promotion revenue that we receive from net sales of Elestat. Due to the large number of competing products in the allergic conjunctivitis market, some of these price concessions have been significant. Since the beginning of 2006 when Medicare Part D became effective, there has been a decrease in prescriptions for Elestat reimbursed by state Medicaid programs which were partially offset by an increase of prescriptions reimbursed under Medicare Part D plans and to a lesser extent, commercial plans. This shift to Medicare Part D plans has resulted in lesser amounts of rebates than under Medicaid programs. Additionally, in 2006, Elestat lost coverage under several state Medicaid plans. While we do not expect the loss of these coverages to significantly impact our portion of the co-promotion revenue due to the large price concessions associated with these particular states, future loss of coverage under additional states or commercial plans may have a negative impact on our co-promotion revenue.

The commercial marketing exclusivity period for Elestat provided under the Hatch-Waxman Act will expire in October 2008, at which time competitors will be able to submit to the FDA an abbreviated New Drug Application or a 505(b)(2) application for a generic version of epinastine HCl ophthalmic solution. We cannot predict the time frame for FDA review of such applications, if any. Elestat could face generic or over-the-counter competition if there is no other intellectual property or marketing exclusivity protection covering Elestat. We are aware that several generic pharmaceutical companies have expressed intent to commercialize the ocular form of epinastine after the commercial exclusivity period expires. While we are exploring various possible forms of additional intellectual property coverage to protect the commercialization of Elestat in the United States, there can be no assurance that any form of intellectual

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property protection covering Elestat will be possible in the United States after the expiration of the commercial exclusivity period under the Hatch-Waxman Act in October 2008. If a generic form of Elestat is introduced into the market, our agreement with Allergan to co-promote Elestat will no longer be in effect, and our revenues attributable to Elestat will cease. Loss of our co-promotion revenue from Elestat will materially impact our results of operations and cash flows.

We began co-promotion activities related to Restasis in January 2004 and began receiving co-promotion revenue in April 2004. All of our revenue from Restasis is based on worldwide net sales of Restasis according to the terms of our collaborative agreement with Allergan. However, less than 2% of our co-promotion revenue from Restasis is derived from sales of Restasis outside of the United States. Our entitled percentage of net sales of Restasis increased in April 2006 and again, for the last time, in April 2007. Co-promotion revenue from Restasis is becoming a larger component of our total co-promotion revenue, and we expect that this trend will continue in 2007 and future reporting periods. For the three months ended March 31, 2007, Allergan recorded approximately $78 million of revenue from net sales of Restasis, as compared to approximately $66 million in the three months ended March 31, 2006.

Restasis, in terms of prescription volume, has grown significantly since it was first launched in April 2003. Total prescriptions, as reported by IMS Health, were nearly 800,000 for the three months ended March 31, 2007, a 22% increase over the same period in 2006.

Our future revenue will depend on various factors including the continued commercial success of Elestat and Restasis, pricing, rebates, discounts and returns for both products, coverage and reimbursement under commercial or government plans, seasonality of sales of Elestat and duration of market exclusivity of Elestat and Restasis. If Allergan significantly under-estimates or over-estimates rebate amounts, there could be a material effect on our revenue. In addition to sales of Elestat and Restasis, our future revenue will also depend on the effectiveness of our commercial launch of AzaSite in the latter part of the third quarter of 2007, our ability to enter into additional collaboration agreements and achieve milestones under existing or future collaboration agreements and whether we obtain regulatory approvals for our product candidates.

Research and Development Expenses

Research and development expenses were approximately $22.8 million for the three months ended March 31, 2007, as compared to approximately $9.1 million for the same period in 2006. The increase in research and development expenses of approximately $13.7 million, or 150%, for the three months ended March 31, 2007, as compared to the same period in 2006, was primarily due to approximately $13.1 million incurred related to AzaSite, including the payment of a $13.0 million upfront licensing fee upon the execution of the agreement with InSite Vision for the exclusive right to commercialize AzaSite in the United States and Canada. Costs associated with research and development activities on our other pipeline product candidates for the three months ended March 31, 2007, were approximately $9.7 million. These costs were primarily associated with our Phase 2 clinical trial for our epinastine nasal spray program for seasonal allergic rhinitis and our Phase 3 TIGER-1 clinical trial for denufosol for cystic fibrosis. We also incurred costs associated with our glaucoma program upon the initiation of a Phase 1 clinical trial, as well as our bilastine program for seasonal allergic rhinitis related to stability testing and active pharmaceutical ingredient manufacturing activities.

Research and development expenses include all direct and indirect costs, including salaries for our research and development personnel, consulting fees, clinical trial costs, sponsored research costs, clinical trial insurance, upfront license fees, milestone and royalty payments relating to research and development, and other fees and costs related to the development of product candidates. Research and development expenses vary according to the number of programs in preclinical and clinical development and the stage of development of our clinical programs. Later stage clinical programs tend to cost more than earlier stage programs due to the length of the clinical trial and the number of patients enrolled in later stage clinical trials.

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Our research and development expenses for the three months ended March 31, 2007 and 2006 and from the respective project’s inception are shown below and includes the percentage of overall research and development expenditures for the periods listed.

	(In thousands)
	Three Months Ended March 31,						Cumulative from Inception to March 31, 2007
	2007		%	2006		%			%
AzaSite (1)	$	13,115	58	$	—	—	$	13,115	6
Epinastine nasal spray for seasonal allergic rhinitis (2)		3,360	15		2,645	29		11,835	5
Denufosol tetrasodium for cystic fibrosis		2,578	11		1,938	21		35,126	15
INS115644 for glaucoma		782	4		713	8		4,425	2
Bilastine for seasonal allergic rhinitis		557	2		—	—		7,696	3
Prolacria (diquafosol tetrasodium) for dry eye disease		428	2		304	4		39,566	17
INS50589 for use in acute cardiac care (3)		39	—		1,299	14		13,008	5
Other research, preclinical and development costs (4)		1,906	8		2,210	24		112,807	47
Total	$	22,765	100	$	9,109	100	$	237,578	100

(1) Includes a $13.0 million upfront licensing fee upon the signing of the license agreement with InSite Vision.

(2) Expense in 2006 includes a $2.5 million upfront licensing fee upon the signing of the license and development agreement with Boehringer Ingelheim.

(3) As of March 31, 2007, this program was not in active development.

(4) Other research, preclinical and development costs represent all unallocated research and development costs or those costs allocated to preclinical programs, discontinued and/or inactive programs. These unallocated costs include personnel costs of our research, preclinical programs, internal and external general research costs and other internal and external costs of other research, preclinical and development programs.

Our future research and development expenses will depend on the results and magnitude or scope of our clinical, preclinical and research activities and requirements imposed by regulatory agencies. Accordingly, our research and development expenses may fluctuate significantly from period to period. In addition, if we in-license or out-license rights to product candidates, our research and development expenses may fluctuate significantly from prior periods.

Selling and Marketing Expenses

Selling and marketing expenses were approximately $7.5 million for the three months ended March 31, 2007, as compared to approximately $7.1 million for the same period in 2006. The increase in selling and marketing expenses for the three months ended March 31, 2007, as compared to the same period in 2006, resulted from an overall increase in promotional activities, primarily the increased costs associated with our sales force including increased salary, personnel related expenses and stock-based compensation expense, as well as activities related to the anticipated approval and launch of AzaSite. We adjust the timing, magnitude and targeting of our advertising, promotional, Phase 4 clinical trials and other commercial activities for Elestat and Restasis based on seasonal trends and other factors.

Our commercial organization currently focuses its promotional efforts for Elestat and Restasis on approximately 8,500 highly prescribing ophthalmologists, optometrists and allergists in our target universe. In launching AzaSite, we plan to expand our existing sales force to a total of 98 representatives who will call on eye care professionals, who we currently call on, and select high prescribing pediatricians and primary care physicians. Our selling and marketing expenses include all direct

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costs associated with the commercial organization, which include our sales force and marketing programs. Our sales force expenses include salaries, training and educational program costs, product sample costs, fleet management and travel. Our marketing and promotion expenses include product management, promotion, advertising, public relations, Phase 4 clinical trial costs, physician training and continuing medical education and administrative expenses.

Future selling and marketing expenses will depend on the level of our future commercialization activities. We expect selling and marketing expenses will increase in periods that immediately precede and follow product launches.

General and Administrative Expenses

General and administrative expenses were approximately $3.6 million for the three months ended March 31, 2007, as compared to approximately $4.4 million for the same period in 2006. The decrease in general and administrative expenses of approximately $800,000, or 18%, for the three months ended March 31, 2007, as compared to the same period in 2006, was primarily due to less legal and administrative expenses associated with our stockholder litigation and SEC investigation. Legal fees were approximately $652,000 for the three months ended March 31, 2007, as compared to approximately $1.3 million for the same period in 2006.

Our general and administrative expenses consist primarily of personnel, facility and related costs for general corporate functions, including business development, finance, accounting, legal, human resources, quality/compliance, facilities and information systems.

Future general and administrative expenses will depend on the level of our future research and development and commercialization activities, as well as the level of legal and administrative expenses incurred to resolve our SEC investigation and stockholder litigation, and to the extent our legal expenses associated with the stockholder litigation and SEC investigation are reimbursed by insurance. We expect our future professional fees to continue to increase as a result of our stockholder litigation and SEC investigation (See “Litigation” and “SEC Investigation” described elsewhere in this report).

Other Income (Expense)

Other income, net was approximately $606,000 for the three months ended March 31, 2007, as compared to approximately $1.2 million for the same period in 2006. Other income fluctuates from year to year based upon fluctuations in the interest income earned on variable cash and investment balances and realized gains and losses on investments offset by interest expense on debt and capital lease obligations. The decrease in other income for three months ended March 31, 2007, as compared to the same period in 2006, was primarily due to interest expense of approximately $430,000 associated with borrowing $20.0 million of debt in December 2006 and a decrease in interest income resulting from lower average cash and investment balances. Future other income will depend on our future cash and investment balances, the return and change in fair market value on these investments, as well as levels of debt and the associated interest rates.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily through the sale of equity securities, including private sales of preferred stock and public offerings of common stock. In December 2006, we entered into a loan and security agreement in order to obtain debt financing of up to $40.0 million to fund in-licensing opportunities and related development, including the in-licensing of bilastine from FAES in November 2006 and AzaSite from InSite Vision in February 2007. We have borrowed $20.0 million under this agreement. All loan advances made under the agreement mature in March 2011. We also currently receive revenue from net sales of Elestat and Restasis, but do not expect this revenue to exceed our 2007 operating expenses.

At March 31, 2007, we had net working capital of approximately $54.5 million, a decrease of approximately $35.2 million from approximately $89.7 million at December 31, 2006. The decrease in working capital was principally due to the use of funds for our normal operating expenses, which exceeded the revenue we recognized. Our

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principal sources of liquidity at March 31, 2007 were approximately $33.7 million in cash and cash equivalents and approximately $41.4 million in investments, which are considered available-for-sale, and the potential to borrow an additional $20.0 million under our loan and security agreement.

On February 15, 2007, we signed an exclusive licensing agreement with InSite Vision for U.S. and Canadian commercialization of AzaSite. In conjunction with this licensing agreement, we paid InSite Vision an upfront license fee of $13.0 million. On April 27, 2007, AzaSite was approved by the FDA for the treatment of bacterial conjunctivitis. We will pay InSite Vision an additional $19.0 million milestone related to this FDA approval. The $19.0 million milestone will be capitalized and amortized on a straight-line basis over the term of the patent coverage. In addition, we are also obligated to pay InSite Vision a 20% royalty for the first two years of commercialization and a 25% royalty thereafter on net sales of AzaSite in the United States and Canada.

Our working capital requirements may fluctuate in future periods depending on many factors, including: the number, magnitude, scope and timing of our development programs; the costs related to the commercial launch of AzaSite; the costs related to the potential FDA approval of our other product candidates; the cost, timing and outcome of regulatory reviews, regulatory investigations, and changes in regulatory requirements; the costs of obtaining patent protection for our product candidates; the timing and terms of business development activities; the rate of technological advances relevant to our operations; the timing, method and cost of the commercialization of our product candidates; the efficiency of manufacturing processes developed on our behalf by third parties; the level of required administrative and legal support; the availability of capital to support product candidate development programs we pursue; the commercial potential of our products and product candidates; legal and administrative costs associated with resolving and satisfying any potential outcome of our stockholder litigation and SEC investigation; and any expansion of facility space.

We are revising our 2007 financial outlook to reflect the FDA’s recent approval of AzaSite. Our actual 2007 financial results will be largely dependent on the AzaSite launch, as well as the clinical and regulatory developments and timing of our bilastine, epinastine nasal spray, denufosol and Prolacria programs. The following revised full year 2007 forecasted guidance includes the expected impact of an AzaSite commercial launch in the latter part of the third quarter of 2007.

Based upon current Elestat and Restasis trends and anticipated launch activities and sales of AzaSite, we expect to record 2007 aggregate revenue in the range of $45-$57 million. Based on projected operating plans, we expect 2007 total operating expenses to be in the range of $120-$145 million. Costs of goods sold, amortization of the $19.0 million approval milestone, and royalty obligations to InSite Vision on any sales of AzaSite are expected to be in the range of $3-$6 million. Total estimated selling and marketing, and general and administrative, expenses are estimated to be in the range of $42-$50 million and $17-$21 million, respectively. Research and development expenses associated with the further development of our product candidates are estimated to be in the range of $58-$78 million.

The upper end of our range of forecasted research and development expenses assumes the following potential program progress:

• Proceed with the bilastine program, based on receiving acceptable QT/QTc clinical trial results in the second quarter of 2007 and depending on discussions with the FDA;

• Complete patient enrollment and continue dosing of our Phase 3 TIGER-1 clinical trial and initiate activities associated with the TIGER-2 clinical trial of denufosol tetrasodium for the treatment of cystic fibrosis;

• Validate staining scores in the central region of the cornea as a clinically relevant endpoint in dry eye and initiate an additional Phase 3 clinical trial of Prolacria, based on discussions with the FDA; and

• Meet with the FDA to discuss the epinastine nasal spray program and initiate next clinical trial and toxicology work.

Included within our operating expenses guidance are projected stock-based compensation costs of approximately $4 million. This estimate is based on the unvested portion of stock options and restricted stock units outstanding as of March 31, 2007, our current stock price, and an anticipated level of share-based payments granted during 2007, including the hiring of additional employees needed to support the launch of AzaSite in 2007. For the

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three months ended March 31, 2007, we recognized non-cash stock-based compensation expense of approximately $446,000.

Our revised 2007 forecasted results will be largely dependent on the effectiveness of our commercial launch of AzaSite and key development and regulatory events. We expect that we may have to adjust our guidance throughout 2007 as additional information concerning these events is obtained. The actual amount of operating expenses could differ significantly should our anticipated development plans change, based upon program progress and events associated with our portfolio of product candidates.

The expected cash usage in 2007 is expected to be in the range of $95-$125 million, excluding any additional borrowings under our debt facility and/or other financing transactions. The upper end of this range includes the payment of a $19.0 million FDA approval milestone for AzaSite and a potential $8.0 million milestone related to an acceptable QT/QTc clinical trial result for bilastine, as well as additional development of the Prolacria, epinastine nasal spray and bilastine programs.

We expect to have sufficient liquidity to continue our planned operations through 2007. Our liquidity needs will largely be determined by key development and regulatory events. In order for us to continue operations beyond 2007 we will need to: (1) obtain additional product candidate approvals, which would trigger milestone payments to us, (2) out-license rights to certain of our product candidates, pursuant to which we would receive income, (3) raise additional capital through equity or debt financings or from other sources and/or (4) reduce expenditures and spending on one or more research and development programs. It is likely that we will draw the remaining $20.0 million of debt under our existing loan facility. Additionally, we are likely to raise additional capital before the end of fiscal year 2007 to support our expanded commercial and development activities. We currently have the ability to sell approximately $13.9 million of common stock under an effective shelf registration statement, which we filed with the SEC on April 16, 2004. On March 9, 2007, we filed with the SEC an additional shelf registration statement on Form S-3. This shelf registration statement has been declared effective and allows us to sell up to $130 million of securities, including common stock, preferred stock, debt securities, depositary shares and securities warrants, from time to time at prices and on terms to be determined at the time of sale. The loan and security agreement that we entered into in December 2006 contains a financial covenant that requires us to maintain a certain level of liquidity based on our cash, investment and account receivables balances, as well as negative covenants that may limit us from assuming additional indebtedness and entering into other transactions as defined in the agreement.

Our ability to remain within our operating expense target range is subject to several other risks including unanticipated cost overruns, the need to expand the magnitude or scope of existing development programs, the need to change the number or timing of clinical trials, unanticipated regulatory requirements, costs to successfully commercialize our products and product candidates, commercial success of our products and product candidates, unanticipated professional fees or settlements associated with our stockholder litigation or SEC investigation and other factors described under the Risk Factors located elsewhere in this report.

Litigation

On February 15, 2005, the first of five identical purported shareholder class action complaints was filed in the United States District Court for the Middle District of North Carolina against us and certain of our senior officers. Each complaint alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Securities and Exchange Commission Rule 10b-5, and focused on statements that are claimed to be false and misleading regarding a Phase 3 clinical trial of our dry eye product candidate, Prolacria. Each complaint sought unspecified damages on behalf of a purported class of purchasers of our securities during the period from June 2, 2004 through February 8, 2005.

On March 27, 2006, following consolidation of the lawsuits into a single civil action and appointment of lead plaintiffs, the plaintiffs filed a Consolidated Class Action Complaint, or CAC. The CAC asserts claims against us and certain of our present or former senior officers or directors. The CAC asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 based on statements alleged to be false and misleading regarding a

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Phase 3 clinical trial of Prolacria, and also adds claims under sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The CAC also asserts claims against certain parties that served as underwriters in our securities offerings during the period relevant to the CAC. The CAC seeks unspecified damages on behalf of a purported class of purchasers of our securities during the period from May 10, 2004 through February 8, 2005. In May 2006, the plaintiffs agreed to voluntarily dismiss their claims against the underwriters on the basis that they were time-barred. On June 30, 2006, Inspire and other defendants moved that the court dismiss the CAC on the grounds that it fails to state a claim upon which relief can be granted and does not satisfy the pleading requirements under applicable law. Briefing on that motion is now complete and it is currently pending before the court.

We intend to defend the litigation vigorously. As with any legal proceeding, we cannot predict with certainty the eventual outcome of these pending lawsuits, nor can a reasonable estimate of the amounts of loss, if any, be made. Furthermore, we will have to incur expenses in connection with these lawsuits, which may be substantial. Moreover, responding to and defending the pending litigation will result in a diversion of management’s attention and resources and an increase in professional fees. We have various insurance policies related to the risk associated with our business, including directors and officers insurance. However, there is no assurance that our insurance coverage will be sufficient or that our insurance companies will cover the matters claimed. In the event of an adverse outcome, our business as well as our future results of operations, financial position and/or cash flows could be materially affected to the extent that our insurance fails to cover such costs.

SEC Investigation

On August 30, 2005, the SEC notified us that it is conducting a formal, nonpublic investigation which we believe relates to our Phase 3 clinical trial of our dry eye product candidate, Prolacria. On October 19, 2006, we received a Wells Notice letter from the staff of the SEC, issued in connection with this investigation. Our Chief Executive Officer and our Executive Vice President, Operations and Communications, also received Wells Notices.

The Wells Notices provide notification of the SEC staff’s determination that it intends to recommend to the SEC that it bring a civil action against us and the two officers regarding possible violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and SEC Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13a-14 thereunder. Under the process established by the SEC, we and the two officers have the opportunity to respond in writing to the Wells Notice before the staff makes any formal recommendation to the SEC regarding what action, if any, should be brought by the SEC. We and the officers receiving these notices provided written submissions to the SEC in response to the Wells Notices during December 2006, and may seek a further meeting with the SEC staff.

We cannot predict with certainty the eventual outcome of this investigation, nor can a reasonable estimate of the costs that might result from the SEC’s investigation be made. Responding to this investigation will result in a diversion of management’s attention and resources and an increase in professional fees. We have various insurance policies related to the risk associated with our business, including directors and officers insurance. However, there is no assurance that our insurance coverage will be sufficient or that our insurance companies will cover the matters claimed. In the event of an adverse outcome, our business as well as our future results of operations, financial position and/or cash flows could be materially affected to the extent that our insurance fails to cover such costs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accompanying discussion and analysis of our financial condition and results of operations are based upon our financial statements and the related disclosures, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, judgments and the policies underlying these estimates on a periodic basis as situations change, and regularly discuss financial events, policies, and issues with members of our audit committee and our independent registered public accounting firm. In addition, recognition of revenue from product co-promotion is affected by certain estimates and judgments made by Allergan on which we rely in recording this revenue. We

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routinely evaluate our estimates and policies regarding revenue recognition, taxes, clinical trial, preclinical/toxicology, manufacturing, research and other service liabilities.

We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates and judgments about matters that are inherently uncertain.

Revenue Recognition

We record all of our revenue from product co-promotion activities and collaborative research agreements in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements.”

We recognize co-promotion revenue based on net sales for Elestat and Restasis, as defined in the co-promotion agreements, and as reported to us by Allergan. We actively promote both Elestat and Restasis through our commercial organization and share in any risk of loss due to returns and other allowances, as determined by Allergan. Accordingly, our co-promotion revenues are based upon Allergan’s revenue recognition policy and other accounting policies over which we have limited or no control and on the underlying terms of our co-promotion agreements. Allergan recognizes revenue from product sales when goods are shipped and title and risk of loss transfers to the customer. The co-promotion agreements provide for gross sales to be reduced by estimates of sales returns, credits and allowances, normal trade and cash discounts, managed care sales rebates and other allocated costs as defined in the agreements, all of which are determined by Allergan and are outside our control. We record a percentage of Allergan’s net sales for both Elestat and Restasis, reported to us by Allergan, as co-promotion revenue. We receive monthly net sales information from Allergan and perform analytical reviews and trend analyses using prescription information that we receive from IMS Health, an independent provider of pharmaceutical data. In addition, we exercise our audit rights under the contractual agreements with Allergan to annually perform an examination of Allergan’s sales records of both Elestat and Restasis. We make no adjustments to the amounts reported to us by Allergan other than reductions in net sales to reflect the incentive programs managed by us. We offer and manage certain incentive programs associated with Elestat, which are utilized by us in addition to those programs managed by Allergan. We reduce revenue by estimating the portion of sales that are subject to these incentive programs based on information reported to us by our third-party administrator of the incentive programs. For fiscal years 2006, 2005 and 2004, the amount of rebates associated with our incentive programs in each year was less than one-half of one percent of our co-promotion revenues. The rebates associated with the programs we manage represent an insignificant amount, as compared to the rebate and discount programs administered by Allergan and as compared to our aggregate co-promotion revenue. Under the co-promotion agreement for Elestat, we are obligated to meet predetermined minimum calendar year net sales target levels. If the annual minimum is not satisfied, we record revenues using a reduced percentage of net sales based upon our level of achievement of predetermined calendar year net sales target levels. Amounts receivable from Allergan in excess of recorded co-promotion revenue are recorded as deferred revenue.

We recognize revenue under our collaborative research and development agreements when we have performed services under such agreements or when we or our collaborative partner have met a contractual milestone triggering a payment to us. We recognize revenue from our research and development service agreements ratably over the estimated service period as related research and development costs are incurred and the services are substantially performed. Upfront non-refundable fees and milestone payments received at the initiation of collaborative agreements for which we have an ongoing research and development commitment are deferred and recognized ratably over the period in which the services are substantially performed. This period, if not defined in the collaborative agreement, is based on estimates by management and the progress towards agreed upon development events as set forth in our collaborative agreements. These estimates are subject to revision as our development efforts progress and we gain knowledge regarding required additional development. Revisions in the commitment period are made in the period that the facts related to the change first become known. If the estimated service period is subsequently modified, the period over which the upfront fee or revenue related to ongoing research and development services is modified on a prospective basis. We are also entitled to receive milestone payments under our collaborative research and development agreements based upon the achievement of agreed upon development events that are substantively at-risk by our collaborative partners or us. This collaborative research revenue is recognized upon the achievement and

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acknowledgement of our collaborative partner of a development event, which is generally at the date payment is received from the collaborative partner or is reasonably assured. Accordingly, our revenue recognized under our collaborative research and development agreements may fluctuate significantly from period to period.

We are currently evaluating the most appropriate revenue recognition policy for AzaSite sales. Since AzaSite is a new product, we may adopt a “pull-through” revenue recognition methodology, recording AzaSite revenue at the time units are dispensed to fill patient prescriptions. If this methodology is used, we would not recognize revenue on sales to wholesalers, but would recognize revenue at the time that a prescription for AzaSite has been filled and dispensed.

Income Taxes

We account for uncertain tax positions in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. We have recorded a valuation allowance against all potential tax assets due to uncertainties in our ability to utilize deferred tax assets, primarily consisting of certain net operating losses carried forward, before they expire. The valuation allowance is based on estimates of taxable income in each of the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable.

Liabilities

We generally enter into contractual agreements with third party vendors to provide clinical, preclinical/toxicology, manufacturing, research and other services in the ordinary course of business. Many of these contracts are subject to milestone-based invoicing and services are completed over an extended period of time. We record liabilities under these contractual commitments when we determine an obligation has been incurred, regardless of the timing of the invoice. We monitor all significant research and development, manufacturing, promotion and marketing and other service activities and the progression of work related to these activities. We estimate the underlying obligation for each activity based upon our estimate of the amount of work performed and compare the estimated obligation against the amount that has been invoiced. Because of the nature of certain contracts and related delay in the contract’s invoicing, the obligation to these vendors may be based upon management’s estimate of the underlying obligation. We record the larger of our estimated obligation or invoiced amounts for completed service. In all cases, actual results may differ from our estimate.

Stock-Based Compensation Expense

As of January 1, 2006, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123(R), which requires us to measure compensation cost for share-based payment awards at fair value and recognize compensation expense over the service period for awards expected to vest. Upon adoption, we implemented the modified prospective method in recognizing stock-based compensation expense in future periods. We have selected the Black-Scholes option-pricing model as the most appropriate fair-value method for our awards and will recognize compensation expense on a straight-line basis over the vesting periods of our awards. The estimation of share-based payment awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Prior to 2007, we used a blended volatility calculation utilizing volatility of peer group companies with similar operations and financial structures in addition to our own historical volatility. In 2007, we began using only our own historical volatility as a basis for determining expected volatility. Significant management judgment is required in determining estimates of future stock price volatility, forfeitures and expected life to be used in the valuation of the options. Actual results, and future changes in estimates, may differ substantially from our current estimates. For stock options granted to non-employees, we have recognized compensation expense in accordance with the requirements of SFAS No. 123 “Accounting for Stock-Based Compensation,” or SFAS No. 123. SFAS No. 123 required that companies recognize compensation expense based on the estimated fair value of options granted to non-employees over their vesting period, which is generally the period during which services are rendered by such non-employees.

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Total stock-based compensation for the three months ended March 31, 2007 and 2006 was allocated as follows (in thousands):

	Three Months Ended March 31,
	2007		2006
Research and development	$	126	$	154
Selling and marketing		115		51
General and administrative		205		155
Total stock-based compensation expense	$	446	$	360

As of March 31, 2007, approximately $4.8 million and $611,000 of total unrecognized compensation cost related to unvested stock options and restricted stock units, respectively, is expected to be recognized over a weighted-average period of 2.8 years and 4.3 years, respectively. We currently estimate total stock-based compensation expense to be approximately $4 million in 2007. This estimate is based on the unvested portion of stock options and restricted stock units outstanding as of March 31, 2007, our current stock price, and an anticipated level of share-based payments granted during 2007, including the hiring of additional employees needed to support the launch of AzaSite in 2007. Should our stock price change significantly from its current level, and/or if our anticipated headcount changes, particularly to support the AzaSite launch, actual stock-based compensation expense could change significantly from this projection. However, the actual amount of stock-based compensation expense recognized in the future will largely depend on levels of share-based payments granted in future periods and changes in our stock price.

Impact of Inflation

Although it is difficult to predict the impact of inflation on our costs and revenues in connection with our products, we do not anticipate that inflation will materially impact our costs of operation or the profitability of our products when marketed.

Impact of Recently Issued Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” or SFAS No. 159. SFAS No. 159 permits companies to elect to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis. Companies electing the fair value option would be required to recognize changes in fair value in earnings. We are currently evaluating the impact, if any, of SFAS No. 159 on our financial statements. If elected, SFAS No. 159 would be effective as of January 1, 2008.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within that fiscal year. We are currently evaluating the impact of adopting this statement.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

We are subject to interest rate risk on our investment portfolio, capital leases, other short-term debt obligations and future borrowings under our term loan facility.

We maintain an investment portfolio consisting of United States government and government agency obligations, money market and mutual fund investments, municipal and corporate notes and bonds and asset or mortgage-backed securities. Our portfolio has a current average maturity of less than 12 months, using the stated maturity or reset maturity dates associated with individual maturities as the basis for the calculation.

Our exposure to market risk for changes in interest rates relates to the increase or decrease in the amount of interest income we can earn on our investment portfolio, changes in the market value of investments due to changes in interest rates, the increase or decrease in realized gains and losses on investments and the amount of interest expense we must pay with respect to various outstanding debt instruments. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We ensure the safety and preservation of invested principal funds by limiting default risk, market risk and reinvestment risk. We reduce default risk by investing in investment grade securities. Our investment portfolio includes only marketable securities and instruments with active secondary or resale markets to help ensure portfolio liquidity and we have implemented guidelines limiting the duration of investments. A hypothetical 100 basis point drop in interest rates along the entire interest rate yield curve would not significantly affect the fair value of our interest sensitive financial instruments. At March 31, 2007, our portfolio of available-for-sale investments consisted of approximately $27.1 million of investments maturing within one year and approximately $14.3 million of investments maturing after one year but within 36 months. In addition, we have $515,000 of our long-term investments that are held in a restricted account that collateralizes a letter of credit with a financial institution. Additionally, we generally have the ability to hold our fixed-income investments to maturity and therefore do not expect that our operating results, financial position or cash flows will be affected by a significant amount due to a sudden change in interest rates.

Our risk associated with fluctuating interest expense is limited to capital leases, other short-term debt obligations and future borrowings under the term loan facility. The interest rate on our long-term debt is fixed on outstanding borrowings from the term loan facility, but future draws on the facility will assume interest based upon current market interest rates at the time of borrow. Assuming other factors are held constant, an increase in interest rates from the fixed rate on our debt generally results in a decrease in the fair value of our long-term debt, and a decrease in interest rates generally results in an increase in the fair value of our long-term debt. However, neither an increase nor a decrease in interest rates will impact the carrying value of the long-term debt. As of March 31, 2007, the fair value of our long-term debt approximates its carrying value of $20.0 million.

Strategic Investment Risk

In addition to our normal investment portfolio, we have a strategic investment in Parion Sciences, Inc. valued at $200,000 as of March 31, 2007. This investment is in the form of unregistered common stock and is subject to higher investment risk than our normal investment portfolio due to the lack of an active resale market for the investment.

Item 4. Controls and Procedures

Our management is responsible for establishing and maintaining an adequate system of internal control over our financial reporting. The design, monitoring and revision of the system of internal accounting controls involves, among other items, management’s judgments with respect to the relative cost and expected benefits of specific control measures. The effectiveness of the control system is supported by the selection, retention and training of qualified personnel and an organizational structure that provides an appropriate division of responsibility and formalized procedures. The system of internal accounting controls is periodically reviewed and modified in response to changing conditions. Internal audit consultants regularly monitor the adequacy and effectiveness of internal accounting controls.

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In addition to the system of internal accounting controls, management maintains corporate policy guidelines that help monitor proper overall business conduct, possible conflicts of interest, compliance with laws and confidentiality of proprietary information. Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during such period that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

On February 15, 2005, the first of five identical purported shareholder class action complaints was filed in the United States District Court for the Middle District of North Carolina against us and certain of our senior officers. Each complaint alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Securities and Exchange Commission Rule 10b-5, and focused on statements that are claimed to be false and misleading regarding a Phase 3 clinical trial of our dry eye product candidate, Prolacria. Each complaint sought unspecified damages on behalf of a purported class of purchasers of our securities during the period from June 2, 2004 through February 8, 2005.

On March 27, 2006, following consolidation of the lawsuits into a single civil action and appointment of lead plaintiffs, the plaintiffs filed a Consolidated Class Action Complaint, or CAC. The CAC asserts claims against us and certain of our present or former senior officers or directors. The CAC asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 based on statements alleged to be false and misleading regarding a Phase 3 clinical trial of Prolacria, and also adds claims under sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The CAC also asserts claims against certain parties that served as underwriters in our securities offerings during the period relevant to the CAC. The CAC seeks unspecified damages on behalf of a purported class of purchasers of our securities during the period from May 10, 2004 through February 8, 2005. In May 2006, the plaintiffs agreed to voluntarily dismiss their claims against the underwriters on the basis that they were time-barred. On June 30, 2006, Inspire and other defendants moved that the court dismiss the CAC on the grounds that it fails to state a claim upon which relief can be granted and does not satisfy the pleading requirements under applicable law. Briefing on that motion is now complete and it is currently pending before the court.

We intend to defend the litigation vigorously. As with any legal proceeding, we cannot predict with certainty the eventual outcome of these pending lawsuits, nor can a reasonable estimate of the amounts of loss, if any, be made.

On August 30, 2005, the SEC notified us that it is conducting a formal, nonpublic investigation which we believe relates to our Phase 3 clinical trial of our dry eye product candidate, Prolacria. On October 19, 2006, we received a Wells Notice letter from the staff of the SEC, issued in connection with this investigation. Our Chief Executive Officer and our Executive Vice President, Operations and Communications, also received Wells Notices.

The Wells Notices provide notification of the SEC staff’s determination that it intends to recommend to the SEC that it bring a civil action against us and the two officers regarding possible violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and SEC Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13a-14 thereunder. Under the process established by the SEC, we and the two officers have the opportunity to respond in writing to the Wells Notice before the staff makes any formal recommendation to the SEC regarding what action, if any, should be brought by the SEC. We and the officers receiving these notices provided written submissions to the SEC in response to the Wells Notices during December 2006, and may seek a further meeting with the SEC staff.

We cannot predict with certainty the eventual outcome of this investigation, nor can a reasonable estimate of the costs that might result from the SEC’s investigation be made.

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Item 1A. Risk Factors.

RISK FACTORS

An investment in the shares of our common stock involves a substantial risk of loss. You should carefully read this entire report and should give particular attention to the following risk factors. You should recognize that other significant risks may arise in the future, which we cannot foresee at this time. Also, the risks that we now foresee might affect us to a greater or different degree than expected. There are a number of important factors that could cause our actual results to differ materially from those indicated by any forward-looking statements in this document. These factors include, without limitation, the risk factors listed below and other factors presented throughout this document and any other documents filed by us with the SEC.

Risks Related to Product Commercialization

Failure to timely and adequately market and commercialize AzaSite will limit our revenues.

The commercial success of AzaSite will largely depend on a number of factors, including:

• The timing and scope of the product’s launch into the United States;

• Acceptance by patients and physicians;

• The effectiveness of our sales and marketing efforts;

• Ability to differentiate AzaSite relative to our competitors’ products;

• Ability to further develop clinical information to support AzaSite;

• A knowledgeable sales force;

• Adequate market penetration;

• Adequate pricing and reimbursement under commercial or governmental plans;

• Successfully contracting for manufacturing capability and distribution services to meet demand;

• Validation of the commercial product manufacturing process;

• The manufacturer’s successful building and sustaining of such manufacturing capability;

• Our ability to enter into managed care and governmental agreements; and

• Any competitor’s ability to successfully commercialize competing therapies.

Based on current manufacturing and commercialization plans, we intend to launch AzaSite in the latter part of the third quarter of 2007. The timing of the launch is dependent upon a number of factors, including validation of the commercial product manufacturing process, hiring and training additional employees, and entering into contracts related to supply chain management and managed care. The implementation of these and other steps related to a product launch will take significant time and resources. We are responsible for all aspects of the commercialization of this product, including manufacturing, distribution, marketing and sales. We are continuing to build the necessary infrastructure to support the product’s launch, but there can be no assurance that we will have the necessary infrastructure in place to support such a launch by the latter part of the third quarter of 2007, if at all. If AzaSite is not successfully commercialized, our revenues will be limited.

We have had limited experience in commercialization of products.

We have established a sales force to market and promote Elestat and Restasis as well as other potential products. Although the members of our sales force have had experience in sales with other companies, prior to 2004 we never had a sales force and we may undergo difficulties maintaining the sales force. We have incurred substantial expenses in establishing and maintaining the sales force, including substantial additional expenses for the training and management of personnel and the infrastructure to enable the sales force to be effective and compliant with the multiple laws and regulations affecting sales and promotion of Elestat and Restasis. We expect to continue to incur substantial expenses in the future.

Based on current manufacturing and commercialization plans, we intend to launch AzaSite during the latter part of the third quarter of 2007. As part of our launch preparation, we intend to expand our sales force to 98 sales representatives who will

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call on eye care professionals, who we currently call on, and select high prescribing pediatricians and primary care physicians. We have never called on pediatricians and primary care physicians. A large number of pharmaceutical companies, including those with competing products, much larger sales forces and financial resources, and those with products for indications that are completely unrelated to those of our products, compete for the time and attention of pediatricians and primary care physicians. Furthermore, if additional products are approved, we will consider substantially expanding our sales force. We may not be able to successfully attract and retain the desired number of qualified sales personnel for the AzaSite launch and commercialization, or for other future needs. The costs of maintaining our sales force may exceed our product revenues.

In addition, we have no prior experience in product pricing, negotiating managed care agreements and government contracts, or managing regulatory-related compliance activities such as pharmacovigilance, all of which are our responsibility as they relate to AzaSite.

Failure to successfully market and co-promote Allergan’s Restasis and Elestat will negatively impact our revenues.

Although we co-promote Restasis in the United States, Allergan is primarily responsible for marketing and commercializing Restasis. Accordingly, our revenues on the net sales of Restasis are largely dependent on the actions and success of Allergan, over whom we have no control.

The manufacture and sale of Restasis is protected under a use patent which expires in August 2009 and a formulation patent which expires in May 2014. If and when we experience competition, including generics, for Restasis, our revenues attributable to Restasis will be significantly impacted. Our agreement with Allergan provides that we have the responsibility for promoting and marketing Elestat in the United States and paying the associated costs. There can be no assurances that revenues associated with Elestat and Restasis will exceed the related selling, promoting and marketing expenses associated with co-promotion activities for these products during the year ending December 31, 2007. Our revenues will be impacted from time to time by the number of formularies upon which these products are listed, the discounts and pricing under such formularies, as well as the estimated and actual amount of rebates. Allergan is responsible for determining the formularies upon which the products are listed and making the appropriate regulatory and other filings. Inclusion on certain formularies may require price concessions through rebate programs that impact the level of co-promotion revenue that we receive on a product. The need to give price concessions can be particularly acute where a greater number of competing products are listed on the same formulary. Presently, there are a large number of competing products in the allergic conjunctivitis area. In 2006, Elestat lost coverage under several state Medicaid plans. While we do not expect the loss of these coverages to significantly impact our portion of the co-promotion revenue due to the large price concessions associated with these particular states, future loss of coverage under additional states or commercial plans may have a negative impact on our co-promotion revenue.

The commercial marketing exclusivity period for Elestat provided under the Hatch-Waxman Act will expire in October 2008, after which time Elestat could face generic or over-the-counter competition if there is no other intellectual property or marketing exclusivity protection covering Elestat. We are aware that several generic pharmaceutical companies have expressed intent to commercialize the ocular form of epinastine after the commercial exclusivity period expires. While we are exploring various possible forms of additional intellectual property coverage to protect the commercialization of Elestat in the United States, there can be no assurance that any form of intellectual property protection covering Elestat will be possible in the United States after the expiration of the commercial exclusivity period under the Hatch-Waxman Act in October 2008. If a generic form of Elestat is introduced into the market, our agreement with Allergan to co-promote Elestat will no longer be in effect, and our revenues attributable to Elestat will cease. Loss of our co-promotion revenue from Elestat will materially impact our results of operations and cash flows.

In January 2007, Alcon launched Pataday®. Both Pataday, that requires administration once-a-day and Patanol®, that requires administration twice-a-day, currently compete with Elestat. In October 2006, Novartis received approval for an over-the-counter version of Zaditor®, and there is a generic version of Zaditor currently

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available. We cannot predict what effect, if any, the introduction of these new products will have on our future co-promotion revenues related to Elestat. However, if these new products gain market acceptance and take market share from Elestat, our revenues from Elestat may be negatively impacted.

Our present revenues depend solely upon and our future revenues will depend, at least in part, upon the acceptance of Elestat and Restasis by eye-care professionals, allergists and patients. Factors that could affect the acceptance of Elestat and Restasis include:

• Satisfaction with existing alternative therapies;

• Perceived efficacy relative to other available therapies;

• Extent and effectiveness of our promotion and marketing efforts;

• Extent and effectiveness of Allergan’s sales and marketing efforts;

• Changes in, or the levels of, third-party reimbursement of product costs;

• Coverage and reimbursement under Medicare Part D, other state government sponsored plans and commercial plans;

• Cost of treatment;

• Marketing and sales activities of competitors;

• Duration of market exclusivity of Elestat and Restasis;

• Pricing and availability of alternative products, including generic or over-the-counter products;

• Shifts in the medical community to new treatment paradigms or standards of care;

• Relative convenience and ease of administration;

• Prevalence and severity of adverse side effects; and

• Regulatory approval in other jurisdictions.

We cannot predict the potential long-term patient acceptance of, or the effects of competition and managed health care on, sales of either product.

If we are unable to contract with third parties for the synthesis of active pharmaceutical ingredients required for preclinical testing, for the manufacture of drug products for clinical trials, or for the large-scale manufacture of any approved products, we may be unable to develop or commercialize our drug products.

The manufacturing of sufficient quantities of new and/or approved product candidates is a time-consuming and complex process. We have no experience or capabilities to conduct the large-scale manufacture of any of our product candidates. In order to successfully commercialize AzaSite and continue to develop our product candidates, we need to contract or otherwise arrange for the necessary manufacturing. There are a limited number of manufacturers that operate under the FDA’s cGMP regulations capable of manufacturing for us or our collaborators. With the exception of (i) AzaSite for which we have contracted with InSite Vision for active pharmaceutical ingredients, or APIs, and for which we are responsible for contracting with a third-party manufacturer to manufacture and supply AzaSite in finished product form, (ii) Santen, for which we are required to supply bulk APIs, and (iii) bilastine for which we will be responsible for contracting with a third-party manufacturer to manufacture and supply bilastine in finished product form, all of our partners are responsible for making their own arrangements for the manufacture of drug products, including arranging for the manufacture of bulk APIs. Our dependence upon third parties for the manufacture of both drug substance and finished drug products that remain unpartnered may adversely affect our ability to develop and deliver such products on a timely and competitive basis. Similarly, our dependence on our partners to arrange for their own supplies of finished drug products may adversely affect our operations and revenues. If we, or our partners, are unable to engage or retain third-party manufacturers on commercially acceptable terms, our products may not be commercialized as planned. Our strategy of relying on third parties for manufacturing capabilities presents the following risks:

• The manufacturing processes for most of our APIs and finished products have not been validated at the scale required for commercial sales;

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• Delays in scale-up to commercial quantities and any change at the site of manufacture could delay clinical trials, regulatory submissions and ultimately the commercialization of our products, which could harm our reputation in the medical and scientific communities;

• Manufacturers of our products are subject to the FDA’s cGMP regulations, and similar foreign standards that apply, and we do not necessarily have full control over compliance with these regulations by third-party manufacturers;

• The FDA may inspect a facility to confirm cGMP compliance and adherence to the specifications submitted to the FDA before an NDA is approved and the facility is subject to ongoing post-approval FDA inspections to ensure continued compliance with cGMP regulations;

• If the manufacturing facility does not maintain cGMP compliance after NDA approval, the FDA has the authority to seize product produced under such conditions and may seek to enjoin further manufacture and distribution, as well as other equitable remedies such as mandatory recall;

• Without satisfactory long-term agreements with manufacturers, we will not be able to develop or commercialize our product candidates as planned or at all;

• We may not have intellectual property rights, or may have to share intellectual property rights, to any improvements in the manufacturing processes or new manufacturing processes for our product candidates; and

• If we are unable to engage or retain an acceptable third-party manufacturer for any of our product candidates, we would either have to develop our own manufacturing capabilities or delay the development of such product candidate.

Reliance on a single party to manufacture and supply either finished product or the bulk active pharmaceutical ingredients for a product or product candidates could adversely affect us.

Under our agreements with Allergan, Allergan is responsible for the manufacture and supply of Elestat, Restasis, and Prolacria, if approved by the FDA. It is our understanding that Allergan relies upon an arrangement with a single third party for the manufacture and supply of APIs for each of Elestat, Restasis, and for Prolacria. Allergan then completes the manufacturing process to yield finished product.

We are responsible for the manufacture of AzaSite pursuant to regulatory requirements. Under our supply agreement with InSite Vision, InSite Vision is responsible for supplying us with azithromycin, the API used in AzaSite. InSite Vision, in turn, relies upon an arrangement with a single third-party for the manufacture and supply of such API. We are responsible for producing the finished product form of AzaSite, which we currently anticipate will be manufactured by a single party. There can be no assurance that such manufacturer will be able to validate the manufacturing process and produce sufficient quantities of finished product in a timely manner to support the commercial launch of AzaSite. In the event we are unable to obtain sufficient quantities of AzaSite in finished product form, the launch of AzaSite may be delayed and our revenues may be negatively impacted.

In the event a third-party manufacturer is unable to supply Allergan and InSite Vision (as the case may be), if such supply is unreasonably delayed, or if Allergan or our finished product contract partner are unable to complete the manufacturing cycle, sales of the applicable product could be adversely impacted, which would result in a reduction in any applicable product revenue. In addition, if Allergan or the third-party manufacturers do not maintain cGMP compliance, the FDA could require corrective actions or take enforcement actions that could affect production and availability of the applicable product, thus adversely affecting sales.

In addition, we have relied upon supply agreements with third parties for the manufacture and supply of the bulk APIs for our product candidates for purposes of preclinical testing and clinical trials. We presently depend upon one vendor as the sole manufacturer of our supply of APIs for Prolacria, denufosol, and epinastine nasal spray. We intend to contract with these vendors, as necessary, for commercial scale manufacturing of our products where we are responsible for such activities. In the case of Prolacria, we expect Allergan to purchase commercial quantities of bulk APIs from a sole manufacturer, including initial launch quantities should the product candidate receive FDA approval. In the case of the Phase 3 oral tablet formulation of bilastine and all other formulations of bilastine, we intend to negotiate a supply agreement pursuant to which FAES will supply us

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with the bulk bilastine as API for our use in manufacturing, developing and commercializing the bilastine compound. However, we can make no assurance that a supply agreement will be completed in a timely manner, if at all, or that the terms and conditions of such agreement will be acceptable. In addition, we believe that FAES intends to rely upon a single third-party manufacturer for the manufacture and supply of API and that FAES has not entered into a final, binding agreement with such a manufacturer. We will have no control over the terms and conditions of such an agreement between FAES and a third-party manufacturer and the terms and conditions of such agreement may not be acceptable to us. We have not identified an alternative source for the supply of bulk bilastine or a third party to manufacture bilastine in finished product form. Identification of an appropriate high quality API supplier for the U.S. market could cause a delay in the filing of a potential NDA for bilastine. We may not be successful in identifying such parties or in entering into acceptable agreements with a party, when they are identified. Delays in any aspect of implementing the manufacturing process could cause significant development delays and increased costs.

In addition, if Allergan, FAES or any third-party manufacturer do not maintain cGMP compliance, the FDA could require corrective actions or take enforcement actions that could affect production and availability of the product thus adversely affecting sales. We presently depend on sole manufacturers of APIs for our product candidates and it would be time consuming and costly to identify and qualify new sources. If our vendors were to terminate our arrangement or fail to meet our supply needs we might be forced to delay our development programs and/or be unable to supply products to the market which could delay or reduce revenues and result in loss of market share.

We may not be able to successfully compete with other biotechnology companies and established pharmaceutical companies.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. There are many companies seeking to develop products for the same indications that we are working on. Our competitors in the United States and elsewhere are numerous and include, among others, major multinational pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions. Competitors in our core therapeutic areas include: Allergan; Alcon, Inc.; Bausch & Lomb; ISTA Pharmaceuticals, Inc.; Lantibio, Inc.; MedPointe Pharmaceuticals; Merck & Co, Inc.; Nascent Pharmaceuticals; Novagali Pharma; Novartis; Otsuka America Pharmaceutical, Inc.; Pfizer, Inc.; Santen Senju Pharmaceutical Co. Ltd.; Sucampo Pharmaceuticals, Inc.; Vistakon Pharmaceuticals (ophthalmic); Gilead Sciences, Inc.; Genaera Corporation; Genentech, Inc.; Novartis; Predix Pharmaceuticals Holdings, Inc.; Vertex Pharmaceuticals Inc. (cystic fibrosis); AstraZeneca; GlaxoSmithKline; MedPointe Pharmaceuticals; Pfizer; Sanofi-Aventis; and Schering-Plough (allergic rhinitis). Most of these competitors have greater resources than us, including greater financial resources, larger research and development staffs and more experienced marketing and manufacturing organizations.

In addition, most of our competitors have greater experience than we do in conducting preclinical and clinical trials and obtaining FDA and other regulatory approvals. Accordingly, our competitors may succeed in obtaining FDA or other regulatory approvals for product candidates more rapidly than we do. Companies that complete clinical trials, obtain required regulatory approvals, and commence commercial sale of their drugs before we do may achieve a significant competitive advantage, including patent and FDA marketing exclusivity rights that would delay our ability to market products. Drugs resulting from our research and development efforts, or from our joint efforts with our collaborative partners, may not compete successfully with competitors’ existing products or products under development.

Acquisitions of competing companies and potential competitors by large pharmaceutical companies or others could enhance financial, marketing and other resources available to such competitors. Academic and government institutions have become increasingly aware of the commercial value of their research findings and are more likely to enter into exclusive licensing agreements with commercial enterprises to market commercial products. Many of our competitors have far greater financial, technical, human and other resources than we do and may be better able to afford larger license fees and milestones attractive to those institutions. Our competitors may also develop technologies and drugs that are safer, more effective, or less costly than any we are developing or which would render our technology and future drugs obsolete and non-competitive. In addition, alternative approaches, such as gene therapy, to treating diseases that we have targeted, such as cystic fibrosis, may make our product candidates obsolete.

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We will rely on third parties to market, distribute and sell some of our products and those third parties may not perform.

We have developed a commercialization organization to co-promote Elestat and Restasis, and we are expanding the organization to market and commercialize AzaSite. We are dependent on Allergan, or other third parties, to perform or assist us in the marketing, distribution or sale of these products. In addition, we may not identify acceptable partners or enter into favorable agreements with them for our other product candidates. We will rely on the services of a third-party distributor to deliver AzaSite to our customers. If third parties do not successfully carry out their contractual duties, meet expected sales goals, or maximize the commercial potential of our products, we may be required to hire or expand our own staff and sales force to compete successfully, which may not be possible. If Allergan or other third parties do not perform, or assist us in performing these functions, or if there is a delay or interruption in the distribution of our products, it could have an adverse effect on product revenue and our overall operations.

If physicians and patients do not accept our product candidates, they will not be commercially successful.

Even if regulatory authorities approve our product candidates, those products may not be commercially successful. Acceptance of and demand for our products will depend largely on the following:

• Acceptance by physicians and patients of our products as safe and effective therapies;

• Reimbursement of drug and treatment costs by government programs and third-party payors;

• Effectiveness of Allergan’s sales and marketing efforts;

• Effectiveness of our sales and marketing efforts;

• Marketing and sales activities of competitors;

• Safety, effectiveness and pricing of alternative products; and

• Prevalence and severity of side effects associated with our products.

In addition, to achieve broad market acceptance of our product candidates, in many cases we will need to develop, alone or with others, convenient methods for administering the products. For example, we intend that Prolacria will be applied from a vial containing a single day’s dosage of non-preserved medication. Patients may prefer to purchase preserved medication for multiple doses. We have not yet established a plan to develop a multi-dose formulation. Although our partner, Santen, is developing a multi-dose formulation for use in its licensed territories, a multi-dose formulation has not been developed by our other partner, Allergan, for use in the remainder of the world. In addition, denufosol for the treatment of cystic fibrosis is administered by a standard nebulizer three times-a-day but patients may prefer a smaller, more portable, hand-held device. Similar challenges may exist in identifying and perfecting convenient methods of administration for our other product candidates.

Failure to timely and adequately market and commercialize our other product candidates will limit our revenues.

Even if clinical trials for our product candidates, including Prolacria, are successful, we cannot predict when, or if, the FDA or other regulatory authorities will approve such product candidates and allow their commercialization. Even if a product candidate is approved, we will need to timely and adequately market and commercialize such product, including the training and possible hiring of an appropriate sales and marketing staff for such product.

Our revenue on net sales of Prolacria, if any, would be largely dependent on the actions and success of Allergan, over whom we have no control. In the event Prolacria is approved by the FDA, we plan to co-promote Prolacria within the United States; however, Allergan is primarily responsible for launching and marketing Prolacria in the United States and other major worldwide pharmaceutical markets, excluding certain Asian markets.

If Prolacria and other product candidates are not successfully commercialized following approval, our revenues may be limited.

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Risks Related to Product Development

If the FDA does not conclude that our product candidates meet statutory requirements for safety and efficacy, we will be unable to obtain regulatory approval for marketing in the United States.

To achieve profitable operations, we must, alone or with others, successfully identify, develop, introduce and market products. We have not received marketing approval for any of our product candidates, except AzaSite, which was in-licensed from InSite Vision. We have one product candidate, Prolacria, for which we have received two approvable letters from the FDA. There is no guarantee that the FDA will approve Prolacria and allow the commercialization of the product in the United States. It may be necessary to undertake additional Phase 3 clinical trials in support of the NDA for Prolacria and there can be no guarantee that any such additional clinical trials would be successful or that the FDA would approve Prolacria even if such additional clinical trials were successful. If additional Phase 3 clinical trials for Prolacria are required by the FDA, we may decide not to conduct those clinical trials, which would result in the inability to obtain FDA approval of the product candidate.

We have licensed bilastine, an oral antihistamine compound for the treatment or prevention of allergic rhinitis, from FAES, for development and commercialization in the United States and Canada. FAES has conducted a thorough QT/QTc clinical trial in the United States of an oral formulation of bilastine to confirm the cardiac safety profile of this product candidate. If this QT/QTc clinical trial is not successful, it is unlikely that we will be able to commercialize bilastine in the United States or Canada. Although FAES previously conducted two large, potentially pivotal Phase 3 seasonal allergic rhinitis clinical trials of an oral tablet formulation of bilastine outside the United States, other than the QT/QTc clinical trial, no other clinical trials have been conducted in the United States. It may be necessary to conduct an additional Phase 3 clinical trial in the United States in support of an NDA filing. There can be no guarantee that the QT/QTc clinical trial or any additional clinical trial will be successful, or that the FDA would approve bilastine even if such clinical trials are successful.

In addition to Prolacria and the oral tablet formulation of bilastine, we have other product candidates in clinical and preclinical development. A substantial amount of work will be required to advance these product candidates through clinical testing and ultimately to commercial approval. We will have to conduct significant additional development activities, non-clinical and clinical tests and obtain regulatory approval before our product candidates can be commercialized. Product candidates that may appear to be promising at early stages of development may not successfully reach the market for a number of reasons. The results of preclinical and clinical testing of our product candidates under development may not necessarily indicate the results that will be obtained from later or more extensive testing. Accordingly, some or all of our preclinical candidates may not advance to clinical development. Additionally, companies in the pharmaceutical and biotechnology industries, including us, have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier clinical trials. Our ongoing clinical trials might be delayed or halted for various reasons, including:

• The measure of efficacy of the drug is not statistically significant compared to placebo;

• Patients experience severe side effects or serious adverse events during treatment;

• Patients die during the clinical trial because their disease is too advanced or because they experience medical problems that may or may not relate to the drug being studied;

• Patients do not enroll in the clinical trials at the rate we expect;

• We decide to modify the drug during testing;

• Clinical investigator conduct or misconduct leads the FDA to stop the clinical trial or to take other action that could delay or impede progress of a clinical trial;

• Our commercial partners, or future commercial partners, delay, amend or change our development plan or strategy;

• We allocate our limited financial and other resources to other clinical and preclinical programs; and

• Weather events, natural disasters, malicious activities or other unforeseen events occur.

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Additionally, the introduction of our products in foreign markets will subject us to foreign regulatory clearances, the receipt of which may be unpredictable, uncertain and may impose substantial additional costs and burdens which we or our partners in such foreign markets may be unwilling or unable to fund. As with the FDA, foreign regulatory authorities must be satisfied that adequate evidence of safety and efficacy of the product has been presented before marketing authorization is granted. The foreign regulatory approval process includes all of the risks associated with obtaining FDA marketing approval. Approval by the FDA does not ensure approval by other regulatory authorities.

Since some of our clinical candidates utilize new or different mechanisms of action and in some cases there may be no regulatory precedents, conducting clinical trials and obtaining regulatory approval may be difficult, expensive and prolonged, which would delay any commercialization of our products.

To complete successful clinical trials, our product candidates must demonstrate safety and provide substantial evidence of efficacy. The FDA generally evaluates efficacy based on the statistical significance of a product candidate meeting predetermined clinical endpoints. The design of clinical trials to establish meaningful endpoints is done in collaboration with the FDA prior to the commencement of clinical trials. We establish these endpoints based on guidance from the FDA, including FDA guidance documents applicable to establishing the efficacy, safety and tolerability measures required for approval of products. However, since some of our product candidates utilize new or different mechanisms of action, the FDA may not have established guidelines for the design of our clinical trials and may take longer than average to consider our product candidates for approval. The FDA could change its view on clinical trial design and establishment of appropriate standards for efficacy, safety and tolerability and require a change in clinical trial design, additional data or even further clinical trials before granting approval of our product candidates. We could encounter delays and increased expenses in our clinical trials if the FDA concludes that the endpoints established for a clinical trial do not adequately predict a clinical benefit.

We have one product candidate for the treatment of dry eye disease, Prolacria, for which we have received two approvable letters from the FDA. The FDA has not published guidelines on the approval of a product for the treatment of dry eye disease. Furthermore, to date, only one prescription product, Restasis, has been approved by the FDA for the treatment of dry eye disease, and such product has a different mechanism of action from Prolacria. It may be necessary to undertake additional Phase 3 clinical trials in support of our NDA for Prolacria and there can be no guarantee that any such additional clinical trials would be successful or that the FDA would approve Prolacria even if such additional clinical trials were successful.

We are developing denufosol tetrasodium as an inhaled product designed to enhance the lung’s innate mucosal hydration and mucociliary clearance mechanisms by mitigating the underlying ion transport defect in the airways of patients with cystic fibrosis. The FDA has not published guidance on the drug approval process associated with such a product candidate. Furthermore, we are not aware of any FDA approved product that mitigates the underlying ion transport defect in the airways of patients with cystic fibrosis. We cannot predict or guarantee the outcome or timing of our Phase 3 program for denufosol for cystic fibrosis. A significant amount of work will be required to advance denufosol through clinical testing, including satisfactory completion of additional clinical trials, toxicology and carcinogenicity studies. We may later decide to change the focus or timing of a Phase 3 program. The Phase 3 clinical trials for denufosol for cystic fibrosis may not be successful or unexpected safety concerns may emerge that would negatively change the risk/benefit profile for this product candidate.

Estimated development costs are difficult to project and may change frequently prior to regulatory approval.

While all new compounds require standard regulated phases of testing, the actual type and scope of testing can vary significantly among different product candidates which may result in significant disparities in total costs required to complete the respective development programs.

The number and type of studies that may be required by the FDA, or other regulatory authorities, for a particular compound are based on the compound’s clinical profile compared to existing therapies for the targeted patient population. Factors that affect the costs of a clinical trial include:

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• The number of patients required to participate in clinical trials to demonstrate statistical significance for a drug’s safety and efficacy and the number and geographical location of clinical trial sites necessary to enroll such patients;

• The time required to enroll the targeted number of patients in clinical trials, which may vary depending on the size and availability of the targeted patient population and the perceived benefit to the clinical trial participants; and

• The number and type of required laboratory tests supporting clinical trials.

Other activities required before submitting an NDA include regulatory preparation for submission, biostatistical analyses, scale-up synthesis, and validation of commercial product. In addition, prior to product launch, production of a certain amount of commercial grade drug product inventory meeting FDA cGMP standards is required, and the manufacturing facility must pass a pre-approval inspection conducted by the FDA to determine whether the product can be consistently manufactured to meet cGMP requirements and to meet specifications submitted to the FDA.

Also, ongoing development programs and associated costs are subject to frequent, significant and unpredictable changes due to a number of factors, including:

• Data collected in preclinical or clinical trials may prompt significant changes, delays or enhancements to an ongoing development program;

• Commercial partners and the underlying contractual agreements may require additional or more involved clinical or preclinical activities;

• The FDA, or other regulatory authorities, may direct the sponsor to change or enhance its ongoing development program based on developments in the testing of similar compounds or related compounds;

• Unexpected regulatory requirements, changes in regulatory policy or review standards, or interim reviews by regulatory agencies may cause delays or changes to development programs; and

• Anticipated manufacturing costs may change significantly due to necessary changes in manufacturing processes, variances from anticipated manufacturing process yields or changes in the cost and/or availability of starting materials, and other costs to ensure the manufacturing facility is in compliance with cGMP requirements and is capable of consistently producing the product candidate in accordance with established specifications submitted to the FDA.

Clinical trials may take longer to complete and cost more than we expect, which would adversely affect our ability to commercialize product candidates and achieve profitability.

Clinical trials are expensive and are often lengthy. They require appropriate identification of optimal treatment regimens and relevant patient population, adequate supplies of drug product, and sufficient patient enrollment. Patient enrollment is a function of many factors, including:

• The size and availability of the relevant patient population;

• The nature of the protocol;

• The proximity of patients to clinical sites;

• The eligibility criteria for the clinical trial; and

• The perceived benefit of participating in a clinical trial.

Delays in patient enrollment can result in increased costs and longer development times. The timing of our Phase 3 program for denufosol for the treatment of cystic fibrosis will be impacted by a number of variables, including clinical development decisions regarding identifying the optimal treatment regimens, patient population, competition for clinical trial participants, approval of other products during our clinical trials, number and length of clinical trials, parallel versus sequential timing of our clinical trials, the exclusion criteria for the clinical trials and use of therapies such as hypertonic saline. Our cystic fibrosis clinical trials will present some unique challenges due to the early-

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intervention approach we are taking with regard to the clinical trials. This approach will require studying mild patients and usually younger patients who do not typically participate in clinical trials since new products are generally focused on the sicker patient population. In addition, due to the age group of these mild patients, many will be in school and will be required to take the medication three times-a-day. Even if we successfully complete clinical trials, we may not be able to submit any required regulatory submissions in a timely manner and we may not receive regulatory approval for the product candidate. In addition, if the FDA or foreign regulatory authorities require additional clinical trials, we could face increased costs and significant development delays.

The timing of the registration process with the FDA for the oral formulation of bilastine for the treatment and prevention of allergic rhinitis may be impacted by the outcome of clinical studies. FAES met with the FDA in 2005 to discuss potential work that might be required for an NDA submission. The FDA advised FAES to perform a thorough QT/QTc clinical trial designed utilizing FDA guidance. We anticipate providing an update during the second quarter of 2007 regarding this clinical trial. The results of the QT/QTc clinical trial could increase development costs, result in significant development delays or result in the cancellation of the program.

From time to time, we conduct clinical trials in different countries around the world and are subject to the risks and uncertainties of doing business internationally. Disruptions in communication and transportation, changes in governmental policies, civil unrest and currency exchange rates may affect the time and costs required to complete clinical trials in other countries.

Changes in regulatory policy or new regulations could also result in delays or rejection of our applications for approval of our product candidates. Product candidates designated as “fast track” products by the FDA may not continue to qualify for expedited review. Even if some of our product candidates receive “fast track” designation, the FDA may not approve them at all or any sooner than other product candidates that do not qualify for expedited review.

If we fail to reach milestones or to make annual minimum payments or otherwise breach our obligations under our license agreements, our licensors may terminate our agreements with them.

We currently have collaboration agreements with several collaborators, including Allergan, Boehringer Ingelheim, FAES, InSite Vision and Santen. If we fail to meet payment obligations, performance milestones relating to the timing of regulatory filings, development and commercial diligence obligations, fail to make milestone payments in accordance with applicable provisions, or fail to pay the minimum annual payments under our respective licenses, our licensors may terminate the applicable license.

It may be necessary in the future for us to obtain additional licenses to avoid infringement of third-party patents. Additionally, we may enter into license arrangements with other third parties as we build our product portfolio. We do not know the terms on which such licenses may be available, if at all.

Risks Related to Governmental Regulation

Failure to comply with all applicable regulations, including those that require us to obtain and maintain governmental approvals for our product candidates, may result in fines and restrictions, including the withdrawal of a product from the market.

Pharmaceutical companies are subject to significant regulation by a number of national, state and local agencies, including the FDA. Failure to comply with applicable regulatory requirements could, among other things, result in fines, suspensions or delays of product manufacture or distribution or both, product recalls, delays in marketing activities and sales, withdrawal of marketing approvals, and civil or criminal sanctions including possible exclusion from eligibility for payment of our products by Medicare, Medicaid, and other third-party payors.

After initial regulatory approval, the manufacturing and marketing of drugs, including our products, are subject to continuing FDA and foreign regulatory review, and subsequent discovery of previously unknown problems

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with a product, manufacturing process or facility may result in restrictions, including withdrawal of the product from the market. The FDA is permitted to revisit and change its prior determinations and based on new information it may change its position with regard to the safety or effectiveness of our products. The FDA is authorized to impose post-marketing requirements such as:

• Testing and surveillance to monitor the product and its continued compliance with regulatory requirements;

• Submitting products for inspection and, if any inspection reveals that the product is not in compliance, the prohibition of the sale of all products from the same lot;

• Requiring us or our partners to conduct long-term safety studies after approval;

• Suspending manufacturing;

• Recalling products;

• Withdrawing marketing approval;

• Seizing adulterated, misbranded or otherwise violative products;

• Seeking to enjoin the manufacture or distribution, or both, of an approved product that is found to be adulterated or misbranded; and

• Seeking monetary fines and penalties, including disgorgement of profits, if a court finds that we are in violation of applicable law.

Even before any formal regulatory action, we, or our collaborative partners, could voluntarily decide to cease distribution and sale, or recall, any of our products if concerns about safety or effectiveness develop, if certain cGMP deviations are found, or if economic conditions support such action.

In its regulation of advertising, the FDA may issue correspondence to pharmaceutical companies alleging that its advertising or promotional materials are false, misleading or deceptive. The FDA has the power to impose a wide array of sanctions on companies for such advertising practices and if we were to receive correspondence from the FDA alleging these practices it may be necessary for us to:

• Incur substantial expenses, including fines, penalties, legal fees and costs to conform to the FDA’s limits on such promotion;

• Change our methods of marketing, promoting and selling products;

• Take corrective action, which could include placing advertisements or sending letters to physicians rescinding previous advertisements or promotion; or

• Disrupt the distribution of products and stop sales until we are in compliance with the FDA’s interpretation of applicable laws and regulations.

In addition, in recent years, some alleged violations of FDA requirements regarding off-label promotion of products by manufacturers have been alleged also to violate the federal civil False Claims Act, resulting in substantial monetary settlements. Also, various legislative proposals have been offered in Congress and in some state legislatures that include major changes in the health care system. These proposals have included price or patient reimbursement constraints on medicines and restrictions on access to certain products. We cannot predict the outcome of such initiatives and it is difficult to predict the future impact of the broad and expanding legislative and regulatory requirements affecting us.

Medicare prescription drug coverage legislation and future legislative or regulatory reform of the healthcare system may affect our or our partner’s ability to sell products profitably.

In both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare system that could affect our ability to sell our products profitably. In the United States, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a voluntary outpatient prescription drug benefit under Part D of the Social Security Act. The program, which went into effect January 1, 2006, is administered by the Centers for Medicare & Medicaid Services, or CMS, within the

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Department of Health and Human Services, or HHS. CMS has issued extensive regulations and other subregulatory guidance documents implementing the new benefit. Moreover, the HHS Office of Inspector General has issued regulations and other guidance in connection with the program. Allergan is responsible for the implementation of the Medicare Part D program as it relates to Elestat and Restasis and has contracted with Part D plan sponsors to cover such drugs under the Part D benefit. We will be responsible for contracting with Part D plan sponsors with respect to AzaSite.

The federal government can be expected to continue to issue guidance and regulations regarding the obligations of Part D sponsors and their subcontractors. Participating drug plans may establish drug formularies that exclude coverage of specific drugs, and payment levels for drugs negotiated with Part D drug plans may be lower than reimbursement levels available through private health plans or other payers. Moreover, beneficiary co-insurance requirements could influence which products are recommended by physicians and selected by patients. There is no assurance that any drug that we co-promote or sell will be offered by drug plans participating under the Medicare Part D program that, if covered, the terms of any such coverage, or that covered drugs will be reimbursed at amounts that reflect current or historical levels. Our results of operations could be materially adversely affected by the reimbursement changes emerging in 2007 and in future years from the Medicare prescription drug coverage legislation. To the extent that private insurers or managed care programs follow Medicare coverage and payment developments, the adverse effects of lower Medicare payment may be magnified by private insurers adopting similar lower payment. New federal or state drug payment changes or healthcare reforms in the United States and in foreign countries may be enacted or adopted in the future that could further lower payment for our products.

We are subject to “fraud and abuse” and similar government laws and regulations, and a failure to comply with such laws and regulations, or an investigation into our compliance with such laws and regulations, or a failure to prevail in any litigation related to noncompliance, could harm our business.

Pharmaceutical pricing, sales, and marketing programs and arrangements, and related business practices in the health care industry generally are under increasing scrutiny from federal and state regulatory, investigative, prosecutorial, and administrative entities. These entities include the Department of Justice and its United States Attorneys Offices, the Office of Inspector General of the Department of Health and Human Services, the FDA, the Federal Trade Commission, and various state Attorneys General offices. Many health care laws, including the federal and state anti-kickback laws and statutory and common law false claims laws, have been construed broadly by the courts and permit government entities to exercise considerable discretion. In the event that any of these government entities believed that wrongdoing had occurred, one or more of them could institute civil or criminal proceedings which, if instituted and resolved unfavorably, could subject us to substantial fines, penalties, and injunctive and administrative remedies, including exclusion from government reimbursement programs. We cannot predict whether any investigations would affect our marketing or sales practices. Any such result could have a material adverse impact on our results of operations, cash flows, financial condition, and our business. Such investigations, which also could be instituted as the result of the filing of a qui tam or whistleblower suit by a private relator, could be costly, divert management’s attention from our business, and result in damage to our reputation. We cannot guarantee that measures that we have taken to prevent violations, including our corporate compliance program, will protect us from future violations, lawsuits or investigations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant negative impact on our business, including the imposition of significant fines or other sanctions.

Failure to adequately control compliance with all applicable laws and regulations may adversely affect our business, and we may become subject to investigative or enforcement actions.

There are extensive state, federal and foreign laws and regulations applicable to public pharmaceutical companies engaged in the discovery, development and commercialization of medicinal products. There are laws and regulations that govern areas including financial controls, clinical trials, testing, manufacturing, labeling, safety, packaging, shipping, distribution and promotion of pharmaceuticals, including those governing interactions with prescribers and healthcare professionals in a position to prescribe, recommend, or arrange for the provision of our products. While we have implemented corporate quality, ethics and compliance programs based on current best

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practices, we cannot guarantee against all possible transgressions. Moreover, pharmaceutical manufacturers in recent years have been the targets of extensive whistleblower actions in which the person bringing an action alleges a variety of violations of the civil False Claims Act, in such areas as pricing practices, off-label product promotion, sales and marketing practices, improper relationships with physicians and other healthcare professionals, among others. The potential ramifications are far-reaching if there are areas identified as out of compliance by regulatory agencies including, but not limited to, significant financial penalties, manufacturing and clinical trial consent decrees, commercialization restrictions or other restrictions and litigation. Furthermore, there can be no assurance that we will not be subject to a whistleblower or other investigative or enforcement action at some time in the future.

Risks Associated with Our Business and Industry

We have been named as a defendant in litigation that could result in substantial damages and costs and divert management’s attention and resources.

On February 15, 2005, the first of five identical purported shareholder class action complaints was filed in the United States District Court for the Middle District of North Carolina against us and certain of our senior officers. Each complaint alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Securities and Exchange Commission Rule 10b-5, and focused on statements that are claimed to be false and misleading regarding a Phase 3 clinical trial of our dry eye product candidate, Prolacria. Each complaint sought unspecified damages on behalf of a purported class of purchasers of our securities during the period from June 2, 2004 through February 8, 2005.

On March 27, 2006, following consolidation of the lawsuits into a single civil action and appointment of lead plaintiffs, the plaintiffs filed a Consolidated Class Action Complaint, or CAC. The CAC asserts claims against us and certain of our present or former senior officers or directors. The CAC asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 based on statements alleged to be false and misleading regarding a Phase 3 clinical trial of Prolacria, and also adds claims under sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The CAC also asserts claims against certain parties that served as underwriters in our securities offerings during the period relevant to the CAC. The CAC seeks unspecified damages on behalf of a purported class of purchasers of our securities during the period from May 10, 2004 through February 8, 2005. In May 2006, the plaintiffs agreed to voluntarily dismiss their claims against the underwriters on the basis that they were time-barred. On June 30, 2006, Inspire and other defendants moved that the court dismiss the CAC on the grounds that it fails to state a claim upon which relief can be granted and does not satisfy the pleading requirements under applicable law. Briefing on that motion is now complete and it is currently pending before the court.

We intend to defend the litigation vigorously. No assurance can be made that we will be successful in our defense of the pending claims. If we are not successful in our defense of the claims, we could be forced to, among other ramifications, make significant payments to resolve the claims and such payments could have a material adverse effect on our business, future results of operations, financial position and/or cash flows if not covered by our insurance carriers or if damages exceed the limits of our insurance coverage. Furthermore, regardless of our success in defending against the litigation, the litigation itself has resulted, and may continue to result, in substantial costs, use of resources and diversion of the attention of management and other employees, which could adversely affect our business. We have various insurance policies related to the risk associated with our business, including directors and officers insurance. However, there is no assurance that our insurance coverage will be sufficient or that our insurance companies will cover the matters claimed. In the event of an adverse outcome, our business as well as our future results of operations, financial position and/or cash flows could be materially affected to the extent that our insurance fails to cover such costs.

The investigation by the U.S. Securities and Exchange Commission could have a material adverse effect on our business.

On August 30, 2005, the SEC notified us that it is conducting a formal, nonpublic investigation which we believe relates to our Phase 3 clinical trial of our dry eye product candidate, Prolacria. On October 19, 2006, we

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received a Wells Notice letter from the staff of the SEC, issued in connection with this investigation. Our Chief Executive Officer and our Executive Vice President, Operations and Communications, also received Wells Notices.

The Wells Notices provide notification of the SEC staff’s determination that it intends to recommend to the SEC that it bring a civil action against us and the two officers regarding possible violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and SEC Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13a-14 thereunder. Under the process established by the SEC, we and the two officers have the opportunity to respond in writing to the Wells Notice before the staff makes any formal recommendation to the SEC regarding what action, if any, should be brought by the SEC. We and the officers receiving these notices provided written submissions to the SEC in response to the Wells Notices during December 2006, and may seek a further meeting with the SEC staff.

We are unable to predict the outcome of the investigation and no assurance can be made that the investigation will be concluded favorably. In the event of an adverse outcome, our business, future results of operations, financial position and/or cash flows could be materially affected. Furthermore, regardless of the outcome of the investigation, the investigation itself has resulted, and may continue to result, in substantial uninsured costs, use of resources and diversion of the attention of management and other employees, which could adversely affect our business. We have various insurance policies related to the risk associated with our business, including directors and officers insurance. However, there is no assurance that our insurance coverage will be sufficient or that our insurance companies will cover the matters claimed. In the event of an adverse outcome, our business as well as our future results of operations, financial position and/or cash flows could be materially affected to the extent that our insurance fails to cover such costs.

Our co-promotion revenues are based, in part, upon Allergan’s revenue recognition policy and other accounting policies over which we have limited or no control.

We recognize co-promotion revenue based on Allergan’s net sales for Elestat and Restasis as defined in the co-promotion agreements and as reported to us by Allergan. Accordingly, our co-promotion revenues are based upon Allergan’s revenue recognition policy and other accounting policies over which we have limited or no control and the underlying terms of our co-promotion agreements. Allergan’s filings with the SEC indicate that Allergan maintains disclosure controls and procedures in accordance with applicable laws, which are designed to provide reasonable assurance that the information required to be reported by Allergan in its Exchange Act filings is reported timely and in accordance with applicable laws, rules and regulations. We are not entitled to review Allergan’s disclosure controls and procedures. All of our co-promotion revenues are currently derived from Allergan’s net sales of Elestat and Restasis as reported to us by Allergan. Management has concluded that our internal control over financial reporting was effective as of March 31, 2007, and these internal controls allow us to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; however, we are unable to provide complete assurance that Allergan will not revise reported revenue amounts in the future. If Allergan’s reported revenue amounts were inaccurate, it could have a material impact on our financial statements, including financial statements for previous periods.

Revenues in future periods could vary significantly and may not cover our operating expenses.

We recognize milestone revenue under our collaborative research and development agreements when we have performed services under such agreements or when we or our collaborative partner has met a contractual milestone triggering a payment to us. In the year ended December 31, 2006, we recognized milestone revenue of $1.25 million from Santen associated with the completion of Phase 2 clinical testing of diquafosol tetrasodium in Japan. We or our collaborative partners did not reach any such contractual milestones in 2004 and 2005. There can be no assurances that we or our collaborative partners will reach any additional contractual milestones during 2007 or at any later date.

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Additionally, our revenues may fluctuate from period to period due in part to:

• Fluctuations in future sales of Elestat, Restasis and AzaSite and other future licensed or co-promoted products due to competition, manufacturing difficulties, reimbursement and pricing under commercial or government plans, seasonality, or other factors that affect the sales of a product;

• Deductions from gross sales relating to estimates of sales returns, credits and allowances, normal trade and cash discounts, managed care sales rebates and other allocated costs as defined in our agreements, all of which are determined by Allergan and are outside our control;

• The timing of the commercial launch of AzaSite;

• Deductions from gross sales relating to estimates of sales returns, credits and allowances, normal trade and cash discounts, managed care sales rebates and other allocated costs related to net sales of AzaSite;

• The duration of market exclusivity of Elestat, Restasis and AzaSite;

• The timing of approvals, if any, for other possible future products;

• The progress toward and the achievement of developmental milestones by us or our partners;

• The initiation of new contractual arrangements with other companies;

• The failure or refusal of a collaborative partner to pay royalties or milestone payments;

• The expiration or invalidation of our patents or licensed intellectual property; or

• Fluctuations in foreign currency exchange rates.

If we are not able to obtain sufficient additional funding to meet our expanding capital requirements, we may be forced to reduce or eliminate research programs and product candidate development.

We have used substantial amounts of cash to fund our research and development activities. Our operating expenses were approximately $33.9 million in the three months ended March 31, 2007 as compared to approximately $83.7 million for the year ended December 31, 2006. Our cash, cash equivalents and investments totaled approximately $75.8 million on March 31, 2007 which includes $20.0 million of debt financing we received in December 2006.

We expect that our capital and operating expenditures will continue to exceed our revenue over the next several years as we conduct our research and development activities, clinical trials and commercial activities. Many factors will influence our future capital needs, including:

• The number, breadth and progress of our research and development programs;

• The size and scope of our marketing programs;

• Our ability to attract collaborators for our products and establish and maintain those relationships;

• Achievement of milestones under our existing or future collaborations and licensing agreements;

• Progress by our collaborators with respect to the development of product candidates;

• The level of activities relating to commercialization of our products;

• Competing technological and market developments;

• The timing and terms of any business development activities;

• The timing and amount of debt repayment requirements;

• The costs involved in defending any litigation claims against us;

• The costs involved in responding to SEC investigations;

• The costs involved in enforcing patent claims and other intellectual property rights including costs associated with enhancing market exclusivity for Elestat; and

• The costs and timing of regulatory approvals.

In addition, our capital requirements will depend upon:

• The receipt of revenue from Allergan on net sales of Elestat and Restasis;

• Receipt of revenue from wholesalers and other customers on net sales of AzaSite;

• The ability to generate sufficient sales of AzaSite;

• The receipt or payment of milestone payments under our collaborative agreements;

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• The ability to obtain approval from the FDA for Prolacria;

• Our ability to obtain approval from the FDA for any of our other product candidates; and

• Payments from existing and future collaborators.

In the event that we do not receive timely regulatory approvals, we may need substantial additional funds to fully develop, manufacture, market and sell all of our other potential products and support our co-promotion efforts. We may seek such additional funding through public or private equity offerings and debt financings. Additional financing may not be available when needed. If available, such financing may not be on terms favorable to us or our stockholders. Stockholders’ ownership will be diluted if we raise additional capital by issuing equity securities. If we raise funds through collaborations and licensing arrangements, we may have to give up rights to our technologies or product candidates which are involved in these future collaborations and arrangements or grant licenses on unfavorable terms. If adequate funds are not available, we would have to scale back or terminate research programs and product development and we may not be able to successfully commercialize any product candidate.

If we are unable to make the scheduled principal and interest payments on the term loan facility or maintain minimum liquidity levels or compliance with other debt covenants as defined in the loan and security agreement, we may default on our debt.

In December 2006, we entered into a loan and security agreement for up to $40.0 million. Upon execution of the agreement, we borrowed an initial amount of $20.0 million under the agreement. The loan is secured by substantially all of our assets, except for our intellectual property, but including all accounts, license and royalty fees and other revenues and proceeds arising from our intellectual property. Under the agreement, we are required to maintain a minimum liquidity level based on the balance of the outstanding advances. The agreement may affect our operations in several ways, including the following:

• A portion of our cash flow from operations will be dedicated to the payment of the principal and interest on our indebtedness;

• Our future cash flow may be insufficient to meet our required principal and interest payments;

• We may need to raise additional capital in order to remain in compliance with the loan covenants;

• Our ability to enter into certain transactions may be limited; or

• We may need to delay or reduce planned expenditures or clinical trials as well as other development and commercial activities if our current operations are not sufficient enough to service our debt.

Our ability to borrow additional amounts under this agreement are subject to the satisfaction of any one of a number of conditions related to our progress in developing bilastine or our success in obtaining FDA approval for other product candidates owned by or in-licensed to us. To the extent that none of the conditions are satisfied, we may still borrow from the term loan facility, but only in the amount by which our research and development expenditures on bilastine and/or another in-licensed product candidate exceed the initial advance of $20.0 million.

In addition to the conditions above, we may not be able to borrow additional funds under this agreement if we are not able to maintain various negative and financial covenants. Events of default are not limited to, but include the following:

• Payment default;

• Covenant default;

• A material adverse change in Inspire;

• Breach of our agreements with Allegan;

• Breach of agreement with FAES; or

• Judgments against us over a certain dollar amount.

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In case of an uncured default, the following actions may be taken against us by the lending institutions:

• All outstanding obligations associated with the term loan facility would be immediately due and payable;

• Any future advancement of credit under the term loan facility would cease;

• Any of our balances and deposits held by the lending institutions would be applied to the obligation;

• Balances and accounts at other financial institutions could be “held” or exclusive control be transferred to the lending institutions; and

• All collateral, as defined in the agreement, could be seized and disposed of.

If we continue to incur operating losses for a period longer than anticipated, or in an amount greater than anticipated, we may be unable to continue our operations.

We have experienced significant losses since inception. We incurred net losses of approximately $26.1 for the three months ended March 31, 2007, and approximately $42.1 million for the year ended December 31, 2006. As of March 31, 2007, our accumulated deficit was approximately $271.2 million. We currently expect to incur significant operating losses over the next several years and expect that cumulative losses may increase in the near-term due to expanded research and development efforts, preclinical studies, clinical trials and commercialization efforts. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Such fluctuations will be affected by the following:

• Timing of regulatory approvals and commercial sales of our product candidates and any co-promotion products;

• The level of patient demand for our products and any licensed products;

• Timing of payments to and from licensors and corporate partners;

• Product candidate development activities in order to achieve regulatory approval;

• Timing of investments in new technologies and commercial capability;

• Commercialization activities to support co-promotion efforts; and

• The costs involved in defending any litigation claims against, or government investigations of, us.

To achieve and sustain profitable operations, we must, alone or with others, develop successfully, obtain regulatory approval for, manufacture, introduce, market and sell our products. The time frame necessary to achieve market success is long and uncertain. We may not generate sufficient product revenues to become profitable or to sustain profitability. If the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business.

Our dependence on collaborative relationships may lead to delays in product development, lost revenues and disputes over rights to technology.

Our business strategy depends to some extent upon the formation of research collaborations, licensing and/or marketing arrangements. We currently have collaboration agreements with several collaborators, including Allergan, Boehringer Ingelheim, FAES, InSite Vision and Santen. The termination of any collaboration will result in the loss of any unmet development or commercial milestone payments, may lead to delays in product development and disputes over technology rights, and may reduce our ability to enter into collaborations with other potential partners. In the event we breach an agreement with a collaborator, the collaborator is entitled to terminate our agreement with them in the event we do not cure the breach within a specified period of time, which is typically 60 or 90 days from the notice date. If we do not maintain our current collaborations, or establish additional research and development collaborations or licensing arrangements, it will be difficult to develop and commercialize potential products. Any future collaborations or licensing arrangements may not be on terms favorable to us.

Our current or any future collaborations or licensing arrangements ultimately may not be successful. Under our current strategy, and for the foreseeable future, we do not expect to develop or market products outside North America without a collaborative partner or outside our therapeutic areas of focus. We are currently pursuing the out-licensing of certain rights related to our cystic fibrosis and platelet programs. We may be unsuccessful in out-licensing these programs or we may out-license these programs on terms that are not favorable to us.

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We will continue to depend on collaborators and contractors for the preclinical study and clinical development of therapeutic products and for manufacturing and marketing of potential products. Our agreements with collaborators typically allow them some discretion in electing whether to pursue such activities. If any collaborator were to breach or terminate its agreement with us or otherwise fail to conduct collaborative activities in a timely and successful manner, the preclinical or clinical development or commercialization of product candidates or research programs would be delayed or terminated. Any delay or termination in clinical development or commercialization would delay or eliminate potential product revenues relating to our product candidates.

Disputes may arise in the future over the ownership of rights to any technology developed with collaborators. These and other possible disagreements between us and our collaborators could lead to delays in the collaborative development or commercialization of therapeutic or diagnostic products. Such disagreement could also result in litigation or require arbitration to resolve.

Failure to hire and retain key personnel or to identify, appoint and elect qualified directors, may hinder our product development programs and our business efforts.

We depend on the principal members of management and scientific staff, including Christy L. Shaffer, Ph.D., our President and Chief Executive Officer and a director, and Thomas R. Staab, II, our Chief Financial Officer and Treasurer. If these people leave us, we may have difficulty conducting our operations. We have not entered into agreements with any officers or any other members of our management and scientific staff that bind them to a specific period of employment. We also depend upon the skills and guidance of the independent members of our Board of Directors. We presently have one vacancy on our Board of Directors. There can be no assurance that we can identify, appoint and elect qualified candidates to serve as members of the Board of Directors. Our future success will depend in part on our ability to attract, hire or appoint, and retain additional personnel skilled or experienced in the pharmaceutical industry. There is intense competition for such qualified personnel. We may not be able to attract and retain such personnel.

If our patent protection is inadequate, the development and any possible sales of our product candidates could suffer or competitors could force our products completely out of the market.

Our business and competitive position depends on our ability to continue to develop and protect our products and processes, proprietary methods and technology. Except for patent claims covering new chemical compounds, most of our patents are use patents containing claims covering methods of treating disorders and diseases by administering therapeutic chemical compounds. Use patents, while providing adequate protection for commercial efforts in the United States, may afford a lesser degree of protection in other countries due to their patent laws. Besides our use patents, we have patents and patent applications covering compositions (new chemical compounds), pharmaceutical formulations and processes for large-scale manufacturing. Many of the chemical compounds included in the claims of our use patents and process applications were known in the scientific community prior to our patent applications. None of our composition patents or patent applications covers these previously known chemical compounds, which are in the public domain. As a result, competitors may be able to commercialize products that use the same previously known chemical compounds used by us for the treatment of disorders and diseases not covered by our use patents. Such competitors’ activities may reduce our revenues.

If we must defend a patent suit, or if we choose to initiate a suit to have a third-party patent declared invalid, we may need to make considerable expenditures of money and management time in litigation. We believe that there is significant litigation in the pharmaceutical and biotechnology industry regarding patent and other intellectual property rights. A patent does not provide the patent holder with freedom to operate in a way that infringes the patent rights of others. While we are not aware of any patent that we are infringing, nor have we been accused of infringement by any other party, other companies may have, or may acquire, patent rights, which we might be accused of infringing. A judgment against us in a patent infringement action could cause us to pay monetary damages, require us to obtain licenses, or prevent us from manufacturing or marketing the affected products. In addition, we may need to initiate litigation to enforce our proprietary rights against others. Should we choose to do this, as with the above, we may need

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to make considerable expenditures of money and management time in litigation. Further, we may have to participate in interference proceedings in the United States Patent and Trademark Office, or USPTO, to determine the priority of invention of any of our technologies.

Our ability to develop sufficient patent rights in our pharmaceutical, biopharmaceutical and biotechnology products to support commercialization efforts is uncertain and involves complex legal and factual questions. For instance, the USPTO examiners may not allow our claims in examining our patent applications. If we have to appeal a decision to the USPTO’s Appeals Board for a final determination of patentability, we could incur significant legal fees.

Since we rely upon trade secrets and agreements to protect some of our intellectual property, there is a risk that unauthorized parties may obtain and use information that we regard as proprietary.

We rely upon the laws of trade secrets and non-disclosure agreements and other contractual arrangements to protect our proprietary compounds, methods, processes, formulations and other information for which we are not seeking patent protection. We have taken security measures to protect our proprietary technologies, processes, information systems and data, and we continue to explore ways to further enhance security. However, despite these efforts to protect our proprietary rights, unauthorized parties may obtain and use information that we regard as proprietary. Employees, academic collaborators and consultants with whom we have entered confidentiality and/or non-disclosure agreements may improperly disclose our proprietary information. In addition, competitors may, through a variety of proper means, independently develop substantially the equivalent of our proprietary information and technologies, gain access to our trade secrets, or properly design around any of our patented technologies.

Use of our products may result in product liability claims for which we may not have adequate insurance coverage.

Clinical trials or manufacturing, marketing and sale of our potential products may expose us to liability claims from the use of those products. Product liability claims could result in the imposition of substantial liability on us, a recall of products, or a change in the indications for which they may be used. Although we carry clinical trial liability insurance and product liability insurance, we, or our collaborators, may not maintain sufficient insurance. We do not have the financial resources to self-insure and it is unlikely that we will have these financial resources in the foreseeable future. If we are unable to protect against potential product liability claims adequately, we may find it difficult or impossible to continue to commercialize our products or the product candidates we develop. If claims or losses exceed our liability insurance coverage, we may go out of business.

Insurance coverage is increasingly more costly and difficult to obtain or maintain.

While we currently have insurance for our business, property, directors and officers, and our products, insurance is increasingly more costly and narrower in scope, and we may be required to assume more risk in the future. If we are subject to claims or suffer a loss or damage in excess of our insurance coverage, we will be required to share that risk in excess of our insurance limits. If we are subject to claims or suffer a loss or damage that is outside of our insurance coverage, we may incur significant uninsured costs associated with loss or damage that could have an adverse effect on our operations and financial position. Furthermore, any claims made on our insurance policies may impact our ability to obtain or maintain insurance coverage at reasonable costs or at all.

Our operations involve a risk of injury from hazardous materials, which could be very expensive to us.

Our research and development activities involve the controlled use of hazardous materials and chemicals. We cannot completely eliminate the risk of accidental contamination or injury from these materials. If such an accident were to occur, we could be held liable for any damages that result and any such liability could exceed our resources. In addition, we are subject to laws and regulations governing the use, storage, handling and disposal of these materials and waste products. The costs of compliance with these laws and regulations are substantial.

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Our commercial insurance and umbrella policies include limited coverage designated for pollutant clean-up and removal and limited general liability coverage per occurrence and in the aggregate. The cost of these policies is significant and there can be no assurance that we will be able to maintain these policies or that coverage amounts will be sufficient to insure potential losses.

Risks Related to Our Stock

Our common stock price has been volatile and your investment in our stock may decline in value.

The market price of our common stock has been volatile. These fluctuations create a greater risk of capital losses for our stockholders as compared to less volatile stocks. Factors that have caused volatility and could cause additional volatility in the market price of our common stock include among others:

• Announcements regarding the commercialization of AzaSite;

• Announcements regarding FDA approval of any of our own or in-licensed product candidates;

• Announcements regarding the NDA for Prolacria;

• Announcements made by us concerning results of clinical trials with our product candidates;

• Market acceptance and market share of Elestat, Restasis and AzaSite;

• Duration of market exclusivity of Elestat, Restasis and AzaSite;

• Volatility in other securities including pharmaceutical and biotechnology securities;

• Changes in government regulations;

• Regulatory actions and/or investigations, including our ongoing SEC investigation;

• Changes in the development priorities of our collaborators that result in changes to, or termination of, our agreements with such collaborators;

• Developments concerning proprietary rights including patents by us or our competitors;

• Variations in our operating results;

• FDA approval of other treatments for the same indication as any one of our product candidates;

• Business development activities;

• Litigation;

• Terrorist attacks; and

• Military actions.

Extreme price and volume fluctuations occur in the stock market from time to time that can particularly affect the prices of biotechnology companies. These extreme fluctuations are sometimes unrelated to the actual performance of the affected companies.

Our existing principal stockholders hold a substantial amount of our common stock and may be able to influence significant corporate decisions, which may conflict with the interest of other stockholders.

As of March 31, 2007, our current 5% stockholders and their affiliates beneficially owned approximately 42% of our outstanding common stock. These stockholders, if they act together, may be able to influence the outcome of matters requiring approval of the stockholders, including the election of our directors and other corporate actions such as:

• our merger with or into another company;

• a sale of substantially all of our assets; and

• amendments to our certificate of incorporation.

The decisions of these stockholders may conflict with our interests or those of our other stockholders.

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Future sales of securities may cause our stock price to decline.

Future sales of our common stock by current stockholders into the public market could cause the market price of our stock to fall. As of March 31, 2007, there were 42,399,345 shares of common stock outstanding. Of these outstanding shares of common stock, approximately 21,500,000 shares were sold in public offerings and are freely tradable without restriction under the Securities Act, unless purchased by our affiliates. In addition, we have the ability to issue additional shares of common stock under an active shelf registration statement, which we filed with the SEC on April 16, 2004. On March 9, 2007, we filed with the SEC an additional shelf registration statement on Form S-3. This shelf registration statement has been declared effective and allows us to sell up to $130 million of securities, including common stock, preferred stock, debt securities, depositary shares and securities warrants, from time to time at prices and on terms to be determined at the time of sale. Up to 10,178,571 shares of our common stock are issued or issuable upon exercise of stock options that have been, or stock options, stock appreciation rights, stock awards and restricted stock units that may be, issued pursuant to our Amended and Restated 1995 Stock Plan and our 2005 Equity Compensation Plan. The shares underlying existing stock options and restricted stock units and possible future stock options, stock appreciation rights and stock awards have been registered pursuant to registration statements on Form S-8. The remaining shares of common stock outstanding are not registered under the Securities Act and may be resold in the public market only if registered or if there is an exemption from registration, such as Rule 144.

If some or all of such shares are sold into the public market over a short period of time, the value of all publicly traded shares is likely to decline, as the market may not be able to absorb those shares at then-current market prices. Such sales may make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable, or at all. As of March 31, 2007, our 6 largest stockholders and their affiliates beneficially owned approximately 42% of our outstanding common stock.

Further, we may issue additional shares:

• To employees, directors and consultants;

• In connection with corporate alliances;

• In connection with acquisitions; and

• To raise capital.

Based upon our closing stock price of $5.70 on March 31, 2007, there were outstanding options, which were exercisable and in-the-money, to purchase 967,961 shares of our common stock. This amount combined with the total common stock outstanding at March 31, 2007 is 43,367,306 shares of common stock. As a result of these factors, a substantial number of shares of our common stock could be sold in the public market at any time causing fluctuations or reductions in our stock price.

In April 2007, our Board of Directors approved an Amended and Restated 2005 Equity Compensation Plan, subject to the approval of our stockholders. If approved by our stockholders at our 2007 Annual Meeting on June 8, 2007, the number of shares of our common stock reserved for issuance under any form of stock award under the amended plan will be increased from 3,000,000 shares to 8,000,000 shares.

Our Rights Agreement, the provisions of our Change in Control Severance Benefit Plan and our Change in Control Agreements with management, the anti-takeover provisions in our Restated Certificate of Incorporation and Amended and Restated Bylaws, and our right to issue preferred stock, may discourage a third party from making a take-over offer that could be beneficial to us and our stockholders and may make it difficult for stockholders to replace our Board of Directors and effect a change in our management if they desire to do so.

In October 2002, we entered into a Rights Agreement with Computershare Trust Company. The Rights Agreement could discourage, delay or prevent a person or group from acquiring 15% or more of our common stock. The Rights Agreement provides that if a person acquires 15% or more of our common stock without the approval of our Board of Directors, all other stockholders will have the right to purchase securities from us at a price that is less

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than its fair market value, which would substantially reduce the value of our common stock owned by the acquiring person. As a result, our Board of Directors has significant discretion to approve or disapprove a person’s efforts to acquire 15% or more of our common stock.

Effective as of January 28, 2005, the Compensation Committee of the Board of Directors of Inspire adopted the Company’s Change in Control Severance Benefit Plan, or the CIC Plan, which provides severance benefits to certain employees of the Company as of the date on which a Change in Control occurs. Under the CIC Plan and the Change in Control Agreements discussed below, a Change in Control occurs upon a determination by the Board of Directors or upon certain specified events such as merger and consolidation. The CIC Plan covers any regular full-time or part-time employee, other than employees who are parties to employment agreements or who are parties to any severance plan or agreement with the Company (other than the CIC Plan) that provides for the payment of severance benefits in connection with a Change in Control. Under the CIC Plan, if a Change in Control occurs and a participant’s employment is involuntarily terminated within two years, the participant will be entitled to certain payments and benefits based on the participant’s salary range and years of service with the Company. All executive officers of the Company are parties to individual agreements with the Company regarding a Change in Control and as a result, are not covered by the CIC Plan. Each Change in Control Agreement provides that upon the executive officer’s termination of employment following a Change in Control, unless such termination is for “cause,” because of death or disability or by the executive officer without “good reason,” within 24 months following such Change in Control, the executive officer will be entitled to a lump sum payment equal to a multiple of the sum of (i) the highest annual base salary received by the executive officer in any of the three most recently completed fiscal years prior to the Change in Control and (ii) the higher of the highest annual bonus received by the executive officer in any of the three most recently completed fiscal years preceding the date of the executive officer’s termination, the three most recent completed fiscal years preceding the Change in Control, or the maximum of the bonus opportunity range for the executive officer immediately prior to the date of termination. The multiples used to determine the amount of a lump sum payment range from two to three. The Change in Control Agreements also provide for ongoing benefits, the vesting of outstanding stock options, and gross-up payments. The CIC Plan and the Change in Control Agreements would increase the acquisition costs to a purchasing company that triggers the change in control provisions. As a result, the CIC Plan and the Change in Control Agreements may delay or prevent a change in control.

Our Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions which could delay or prevent a third party from acquiring shares of our common stock or replacing members of our Board of Directors. Our Restated Certificate of Incorporation allows our Board of Directors to issue shares of preferred stock. Our Board of Directors can determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. As a result, our Board of Directors could make it difficult for a third party to acquire a majority of our outstanding voting stock. Since management is appointed by the Board of Directors, any inability to effect a change in the Board of Directors may result in the entrenchment of management.

Our Restated Certificate of Incorporation also provides that the members of the Board will be divided into three classes. Each year the terms of approximately one-third of the directors will expire. Our Amended and Restated Bylaws include director nomination procedures and do not permit our stockholders to call a special meeting of stockholders. Under the Bylaws, only our Chief Executive Officer, President, Chairman of the Board, Vice-Chairman of the Board or a majority of the Board of Directors are able to call special meetings. The staggering of directors’ terms of office, the director nomination procedures and the inability of stockholders to call a special meeting may make it difficult for stockholders to remove or replace the Board of Directors should they desire to do so. The director nomination requirements include a provision that requires stockholders give advance notice to our Secretary of any nominations for director or other business to be brought by stockholders at any stockholders’ meeting. Our directors may be removed from our Board of Directors only for cause. These provisions may delay or prevent changes of control or management, either by third parties or by stockholders seeking to change control or management.

We are also subject to the anti-takeover provisions of section 203 of the Delaware General Corporation Law. Under these provisions, if anyone becomes an “interested stockholder,” we may not enter a “business combination” with that person for three years without special approval, which could discourage a third party from making a take-over offer and could delay or prevent a change of control. For purposes of section 203, “interested stockholder” means,

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generally, someone owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in section 203.

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Item 6. Exhibits

Exhibit No.	Description of Exhibit
3.1	Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2006).
3.2	Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q filed on August 9, 2005).
10.1**	License Agreement by and between Inspire Pharmaceuticals, Inc. and InSite Vision Incorporated, dated as of February 15, 2007.
10.2**	Supply Agreement by and between Inspire Pharmaceuticals, Inc. and InSite Vision Incorporated, dated as of February 15, 2007.
10.3	Trademark License Agreement by and between Inspire Pharmaceuticals, Inc. and InSite Vision Incorporated, dated as of February 15, 2007.
10.4	Side Letter by and between Inspire Pharmaceuticals, Inc., InSite Vision Incorporated and Pfizer Inc., dated as of February 15, 2007.
10.5	Amended and Restated Directors Compensation Policy.
10.6	Form of Nonqualified Stock Option Grant Agreement.
10.7	Form of Director’s Nonqualified Stock Option Grant Agreement.
31.1	Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer & Treasurer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of the President & Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer & Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

** Confidential treatment has been requested with respect to a portion of this Exhibit.

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SIGNATURES

Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Inspire Pharmaceuticals, Inc.
Date: May 10, 2007	By:	/s/ Christy L. Shaffer
		Christy L. Shaffer
		President & Chief Executive Officer
		(principal executive officer)
Date: May 10, 2007	By:	/s/ Thomas R. Staab, II
		Thomas R. Staab, II
		Chief Financial Officer & Treasurer
		(principal financial and chief accounting officer)

61

EXHIBIT INDEX

Exhibit No.	Description of Exhibit
3.1	Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2006).
3.2	Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q filed on August 9, 2005).
10.1**	License Agreement by and between Inspire Pharmaceuticals, Inc. and InSite Vision Incorporated, dated as of February 15, 2007.
10.2**	Supply Agreement by and between Inspire Pharmaceuticals, Inc. and InSite Vision Incorporated, dated as of February 15, 2007.
10.3	Trademark License Agreement by and between Inspire Pharmaceuticals, Inc. and InSite Vision Incorporated, dated as of February 15, 2007.
10.4	Side Letter by and between Inspire Pharmaceuticals, Inc., InSite Vision Incorporated and Pfizer Inc., dated as of February 15, 2007.
10.5	Amended and Restated Directors Compensation Policy.
10.6	Form of Nonqualified Stock Option Grant Agreement.
10.7	Form of Director’s Nonqualified Stock Option Grant Agreement.
31.1	Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer & Treasurer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of the President & Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer & Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

** Confidential treatment has been requested with respect to a portion of this Exhibit.

EX-10.1

Exhibit 10.1

EXECUTION VERSION

[NOTE: CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN MARKED TO INDICATE THAT CONFIDENTIAL INFORMATION HAS BEEN OMITTED. CONFIDENTIALITY HAS BEEN REQUESTED FOR THIS CONFIDENTIAL INFORMATION. THE CONFIDENTIAL PORTIONS HAVE BEEN PROVIDED SEPARATELY TO THE SECURITIES AND EXCHANGE COMMISSION]

LICENSE AGREEMENT

by and between

INSPIRE PHARMACEUTICALS, INC.

and

INSITE VISION INCORPORATED

Dated as of February 15, 2007

TABLE OF CONTENTS

ARTICLE 1 DEFINITIONS		1
ARTICLE 2 LICENSES AND EXCLUSIVITY		12
2.1	Licenses	12
2.2	Sublicenses	13
2.3	InSite Trademarks and Domain Names	14
2.4	Use of Affiliates and Third Party Contractors	15
2.5	Reserved Interests	15
2.6	No Implied Grants	15
2.7	Registration of License	15
2.8	Supply of API	15
2.9	Supply of Finished Product	16
2.10	Option for Option Product License	16
2.11	Inspire Blocking Patent Rights	17
ARTICLE 3 DEVELOPMENT AND COMMERCIALIZATION		17
3.1	Data and Materials Transfer and Right of Reference	17
3.2	Current Product Development	18
3.3	Regulatory Matters; InSite Assistance.	19
3.4	Commercialization	21
3.5	Reports	22
3.6	Adverse Event Reporting	22
3.7	Coordination Committee	23
3.8	Future Development	24
ARTICLE 4 INITIAL PAYMENT AND MILESTONE PAYMENT		25
4.1	Initial Payment	25
4.2	Milestone Payment upon Regulatory Approval	25
4.3	Payment	25
ARTICLE 5 ROYALTIES		26
5.1	Royalty Rates	26
5.2	Royalty Term	26
5.3	Minimum Royalty.	26
5.4	Reports and Payments	28
5.5	Taxes and Withholding	29
5.6	Currency Exchange; Manner and Place of Payment	29
5.7	Maintenance of Records; Audit	29
5.8	Reductions	30
ARTICLE 6 TRADEMARKS		33
6.1	Registrations	33
6.2	Inspire Trademarks	33
ARTICLE 7 REPRESENTATIONS, WARRANTIES AND COVENANTS		33
7.1	Mutual Representations and Warranties	33
7.2	Additional InSite Representations and Warranties	34
7.3	Additional Inspire Representations and Warranties	38
7.4	No Implied Warranties	38
7.5	Certain Additional Covenants.	38

-i-

TABLE OF CONTENTS

(continued)

ARTICLE 8 CONFIDENTIALITY, PUBLICATION AND PUBLIC ANNOUNCEMENTS		41
8.1	Confidentiality	41
8.2	Authorized Disclosure	41
8.3	Scientific Publications	41
8.4	Disclosure of Agreement	42
8.5	Unauthorized Use	43
8.6	Return of Confidential Information	43
ARTICLE 9 INDEMNIFICATION		43
9.1	Inspire	43
9.2	InSite	43
9.3	Indemnification Procedures	43
9.4	Insurance Proceeds	45
9.5	Insurance	45
ARTICLE 10 TERM AND TERMINATION		45
10.1	Term	45
10.2	Voluntary Termination by Inspire	45
10.3	Material Breach	46
10.4	Bankruptcy or Insolvency	46
10.5	Continuing Rights of Sublicensees	46
10.6	Effect of Expiration or Termination of Agreement.	47
10.7	Effect of Partial Termination of Agreement.	48
10.8	Inspire Remedy for Uncured Breach	48
10.9	Rights in Bankruptcy	49
ARTICLE 11 INTELLECTUAL PROPERTY		49
11.1	Prosecution of InSite Licensed Patents	49
11.2	Right to Consult	49
11.3	Abandonment of Prosecution by InSite	50
11.4	Patent Term Extensions	50
11.5	Third Party Infringement	50
11.6	Infringement of Third Party Rights	52
ARTICLE 12 MISCELLANEOUS		53
12.1	Consideration	53
12.2	Assignment	53
12.3	Further Actions	53
12.4	Notices	53
12.5	Amendment	54
12.6	Waiver	54
12.7	Counterparts; Facsimile Signatures	54
12.8	Descriptive Headings	55
12.9	Governing Law; Dispute Resolution	55
12.10	Severability	55
12.11	Entire Agreement of the Parties	55
12.12	Independent Parties	55
12.13	Accrued Rights; Surviving Obligations	55

-ii-

TABLE OF CONTENTS

(continued)

12.14	Certain Remedies	56
12.15	Expenses	56
12.16	No Third Party Beneficiaries	56
12.17	No Strict Construction	56

-iii-

LICENSE AGREEMENT

This LICENSE AGREEMENT (this “Agreement”), dated as of February 15, 2007 (the “Effective Date”), is made by and between Inspire Pharmaceuticals, Inc., a Delaware corporation having its principal office at 4222 Emperor Blvd., Suite 200, Durham, NC 27703 (“Inspire”), and InSite Vision Incorporated, a Delaware corporation having its principal office at 965 Atlantic Ave., Alameda, CA 94501 (“InSite”). Inspire and InSite are each sometimes referred to individually as a “Party” and together as the “Parties.”

RECITALS

WHEREAS, InSite is engaged in the research, development and commercialization of proprietary pharmaceutical products for the treatment of ophthalmic indications and owns certain patents, know-how and regulatory filings relating to certain products;

WHEREAS, Inspire is engaged in the research, development and commercialization of proprietary pharmaceutical products for the treatment of ophthalmic indications; and

WHEREAS, Inspire desires to obtain from InSite, and InSite desires to grant to Inspire, the exclusive rights in the Territory to certain patents, know-how and regulatory filings for the commercialization of Subject Products (each as defined below).

NOW, THEREFORE, in consideration of the foregoing premises and the mutual representations, covenants and agreements contained herein, Inspire and InSite, intending to be legally bound, hereby agree as follows:

ARTICLE 1

DEFINITIONS

When used in this Agreement, whether in the singular or plural, each of the following capitalized terms shall have the meanings set forth in this Article 1.

1.1 “2006 Senior Notes” has the meaning set forth in Section 7.1(e).

1.2 “Acceptable Label” means, for a Subject Product in the United States, FDA-approved labeling for the treatment of bacterial conjunctivitis, where such label: (a) indicates dosing of such Subject Product of not more than two (2) times daily for seven (7) days, (b) permits expiration dating of such Subject Product of no less than eighteen (18) months, and (c) has a comparable side effect profile to ocular antibiotics being marketed as of the Effective Date.

1.3 “Affiliate” means a corporation or non-corporate business entity that, directly or indirectly, controls, is controlled by, or is under common control with the Person specified. An entity will be regarded as in control of another entity if: (a) it owns, directly or indirectly, at least 50% of the voting securities or capital stock of such entity, or has other comparable ownership interest with respect to any entity other than a corporation; or (b) it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the corporation or non-corporate business entity, as applicable, whether through the ownership or control of voting securities, by contract or otherwise.

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1.4 “AzaSite Patent Rights” means, collectively, (a) (i) all Patent Rights related to any Subject Product or its manufacture or use that are Controlled by InSite or an Affiliate of InSite as of the Effective Date, including without limitation all patents and patent applications listed as “AzaSite Patent Rights” in Schedule 1, as may be amended by the Parties from time to time, and (ii) all Patent Rights with priority based on such patents or patent applications or on any application on which the priority of such patents or patent applications is based, (b) all Patent Rights, other than those set forth in the foregoing clause (a), that are Controlled by InSite or an Affiliate of InSite as of the Effective Date or at any time thereafter during the Term and are necessary to make, have made, use, sell, offer for sale or import any Subject Product in the Field in the Territory, and (c) all Patent Rights related to any InSite Developments that are Controlled by InSite or an Affiliate of InSite. Notwithstanding the foregoing, the term “AzaSite Patent Rights” shall not include the Container Patent Rights, the DuraSite Patent Rights, the Columbia Patent Rights or the Pfizer Patent Rights.

1.5 “AzaSite Trademark” means the trademark AzaSite™.

1.6 “Breach Notice” has the meaning set forth in Section 10.3.

1.7 “Breaching Party” has the meaning set forth in Section 10.3.

1.8 “Business Day” means any day, except Saturday and Sunday, on which commercial banking institutions in New York are open for business. Any reference in this Agreement to “day” whether or not capitalized shall refer to a calendar day, not a Business Day.

1.9 “Cardinal” means Cardinal Health PTS, LLC.

1.10 “Cardinal Agreement” means the Manufacturing Services Agreement entered into by InSite and Cardinal on September 12, 2005.

1.11 “Columbia” means Columbia Laboratories, Inc.

1.12 “Columbia Agreement” means the letter agreement entered into by and between InSite and Columbia on February 27, 1992.

1.13 “Columbia Patent Rights” means all Patent Rights licensed to InSite under the Columbia Agreement related to any Subject Product or its manufacture or use, including without limitation all patents listed as “Columbia Patent Rights” in Schedule 1, in each case to the extent Controlled by InSite or an Affiliate of InSite as of the Effective Date and any time thereafter during the Term.

1.14 “Commercially Reasonable Efforts” means, with respect to the efforts of a particular Party to complete specific tasks or obligations under this Agreement, the efforts and resources that would be used, consistent with prevailing pharmaceutical industry standards, by a company of similar size and scope to such Party with respect to a product or potential product at a similar stage in its development or product life and of similar market potential, taking into account efficacy, safety, the anticipated Regulatory Authority approved labeling, the competitiveness of alternative products in the marketplace or under development, the profitability of the product including the royalties payable to Third Party licensors, the patent and other proprietary position

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of the product, the likelihood of Regulatory Approval, the commercial value of the product and other relevant factors. Commercially Reasonable Efforts shall be determined on a country-by-country basis for a particular product or potential product, and it is anticipated that the level of effort will change over time, reflecting changes in the status of the product or potential product and the market involved.

1.15 “Confidential Information” of a Party means all secret, confidential or proprietary information or data, whether provided in written, oral, graphic, video, computer or other form, provided by such Party (the “Disclosing Party”) to the other Party (the “Receiving Party”) pursuant to this Agreement (including information generated by or on behalf of such Party pursuant to this Agreement and disclosed to the other Party), which may include without limitation information relating to the Disclosing Party’s existing or proposed research, development efforts, sales and supply forecasts, financial projections, other sales and marketing information, patent applications, business or products and any other materials that have not been made available by the Disclosing Party to the general public. The terms of this Agreement shall also be deemed Confidential Information of each Party, except to the extent disclosed pursuant to Section 8.4 herein. Notwithstanding the foregoing sentences, the term “Confidential Information” shall not include any information or materials that the Receiving Party can demonstrate:

(a) were already known to the Receiving Party (other than under an obligation of confidentiality), at the time of disclosure by the Disclosing Party to the extent such Receiving Party has documentary evidence to that effect;

(b) were generally available to the public or otherwise part of the public domain at the time of its disclosure to the Receiving Party;

(c) became generally available to the public or otherwise part of the public domain after its disclosure or development, as the case may be, and other than through any act or omission of the Receiving Party in breach of its confidentiality obligations under this Agreement;

(d) were subsequently lawfully disclosed to the Receiving Party by a Third Party who had no obligation to the Disclosing Party not to disclose such information to others;

(e) were independently discovered or developed by or on behalf of the Receiving Party without the use of the Confidential Information belonging to the other Party and the Receiving Party has documentary evidence to that effect; or

(f) is approved for release by the Disclosing Party in writing.

1.16 “Container Patent Rights means, collectively, (a) (i) all patents and patent applications listed as “Container Patent Rights” in Schedule 1, as may be amended by the Parties from time to time, and (ii) all Patent Rights with priority based on such patents or patent applications or on any application on which the priority of such patents or patent applications is based, and (b) all Patent Rights, other than those set forth in the foregoing clause (a), that are Controlled by InSite or an Affiliate of InSite as of the Effective Date or at any time thereafter during the Term and are necessary to make, have made, use, sell, offer for sale or import any Subject Product in the Field in the Territory.

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1.17 “Control,” “Controls,” or “Controlled” means, with respect to specific materials, Know-How or Patent Rights, that the applicable Party owns or has a license under such materials, Know-How or Patent Rights and has the ability to grant to the other Party licenses or sublicenses thereto as contemplated under this Agreement without violating the terms of any agreement or other arrangement with, or the rights of, any Third Party existing as of the date on which such license or sublicense is granted.

1.18 “Coordination Committee” has the meaning set forth in Section 3.7.

1.19 “Course of Action” has the meaning set forth in Section 11.6(a).

1.20 “Current Indication” means bacterial conjunctivitis.

1.21 “Current Product” means the Subject Product with the composition and formulation described in the IND with the number 62,873 or NDA with the number 50-810, as each may be amended, for the Current Indication.

1.22 “[***] Agreement” means the letter agreement entered into by InSite and [***].

1.23 “Disclosing Party” has the meaning set forth in Section 1.15.

1.24 “Domain Names” means the internet domain names set forth in Schedule 1.24, such domain names being owned and registered by InSite.

1.25 “Drug Master File” means a Drug Master File, as defined in the U.S. Federal Food, Drug, and Cosmetic Act, pursuant to 21 C.F.R. § 314.420 as amended, and the regulations promulgated thereunder (or the equivalent thereto as specified in any succeeding legislation), or any foreign equivalent thereto, with respect to the manufacture of any Subject Product or an Inspire Licensed Product.

1.26 “DuraSite Patent Rights” means, collectively, (a) (i) all patents and patent applications listed as “DuraSite Patent Rights” in Schedule 1, as may be amended by the Parties from time to time, and (ii) all Patent Rights with priority based on such patents or patent applications or on any application on which the priority of such patents or patent applications is based, and (b) all Patent Rights, other than those set forth in the foregoing clause (a), that are Controlled by InSite or an Affiliate of InSite as of the Effective Date or at any time thereafter during the Term and are necessary to make, have made, use, sell, offer for sale or import any Subject Product in the Field in the Territory.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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1.27 “FDA” means the United States Food and Drug Administration, or any successor agency thereof.

1.28 “Field” means the treatment, prevention or palliation of any human ocular or ophthalmic disease or condition.

1.29 “First Commercial Sale” means, with regard to a particular Inspire Licensed Product in a country in the Territory, the first commercial sale by Inspire or its Affiliate or sublicensee of such Inspire Licensed Product to a Third Party for end use or consumption in such country after Inspire’s (or its Affiliate’s or sublicensee’s) receipt of Regulatory Approval for such Inspire Licensed Product in such country. Use of Inspire Licensed Products for promotional, sampling or compassionate use purposes that are customary in the prevailing pharmaceutical industry shall not be considered a commercial sale hereunder.

1.30 “Future Development” means any and all Know-How, developments, inventions or discoveries in the Field conceived, reduced to practice, made or developed by or on behalf of InSite or any of its Affiliates (whether or not patentable) during the Term, and any Patent Rights related thereto not otherwise licensed to Inspire under Section 2.1 of this Agreement, in each case that are: (i) Controlled by InSite or its Affiliate, (ii) used by or on behalf of InSite or its Affiliate in the context of a phase I clinical trial, and (iii) necessary or useful to develop, manufacture or commercialize any Subject Product in the Field in the Territory. Notwithstanding the foregoing, the term “Future Development” shall not include any InSite Developments or the Option Product.

1.31 “Future Development Option Notice” has the meaning set forth in Section 3.8.

1.32 “Future Development Option Term” has the meaning set forth in Section 3.8.

1.33 “GAAP” means United States generally accepted accounting principles as interpreted and accepted by the Financial Accounting Standards Board and the Securities and Exchange Commission.

1.34 “Generic Competition” means that one or more Third Parties are marketing, for use in human beings, a Generic Equivalent in a country within the Territory.

1.35 “Generic Equivalent” means a [***].

1.36 “IND” means an Investigational New Drug Application, as defined in the U.S. Federal Food, Drug, and Cosmetic Act, pursuant to 21 C.F.R. § 312.3 as amended, and the regulations promulgated thereunder, or the equivalent thereto as specified in any succeeding legislation.

1.37 “Indemnitee” has the meaning set forth in Section 9.3(a).

1.38 “Indemnitor” has the meaning set forth in Section 9.3(a).

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

5

1.39 “Independent Sublicensee” has the meaning set forth in Section 10.5.

1.40 “Infringement Notice” has the meaning set forth in Section 11.5(a).

1.41 “Initial Payment” has the meaning set forth in Section 4.1.

1.42 “Initial Royalty Period” has the meaning set forth in Section 5.1(a).

1.43 “InSite Developments” means any and all Know-How, developments, inventions or discoveries conceived, reduced to practice, made or developed by or on behalf of InSite or any of its Affiliates (whether or not patentable) at any time from the Effective Date up to and including the Transfer Date, and any Patent Rights related thereto, in each case that are Controlled by InSite or its Affiliate and are necessary or useful to develop, manufacture or commercialize any Subject Product for the Current Indication in the Field in the Territory.

1.44 “InSite Formulation Know-How” means the formulation of polycarbophil, sodium chloride EDTA, disodium and sterile water for irrigation, and any Know-How specifically related thereto, in each case Controlled by InSite or its Affiliate as of the Effective Date.

1.45 “InSite Indemnitees” has the meaning set forth in Section 9.1.

1.46 “InSite Intellectual Property” means, collectively, the InSite Owned Patents, the InSite Know-How, the InSite Formulation Know-How, the InSite Trademarks and the Domain Names.

1.47 “InSite Know-How” means, collectively, (a) all Know-How related to any Subject Product that is Controlled by InSite or any of its Affiliates as of the Effective Date, and (b) all Know-How related to any InSite Developments that is Controlled by InSite or any of its Affiliates at any time from the Effective Date up to and including the Transfer Date. Notwithstanding the foregoing, the term “InSite Know-How” shall not include the InSite Formulation Know-How.

1.48 “InSite License Fee” has the meaning set forth in Section 4.1(b).

1.49 “InSite Licensed Patents” means, collectively, the DuraSite Patent Rights, the Columbia Patent Rights, the AzaSite Patent Rights, the Container Patent Rights and the Pfizer Patent Rights.

1.50 “InSite Owned Patents” means, collectively, the DuraSite Patent Rights, the AzaSite Patent Rights and the Container Patent Rights.

1.51 “InSite Trademarks” means the trademarks set forth in Schedule 1.24, such marks being owned and registered by InSite.

1.52 “Inspire Blocking Patent Rights” means all Patent Rights that are Controlled by Inspire or an Affiliate of Inspire at any time during the Term and are necessary to make, have made, use, sell, offer for sale or import Subject Products in the Field outside the Territory.

1.53 “Inspire Indemnitees” has the meaning set forth in Section 9.2.

6

1.54 “Inspire Improvement” has the meaning set forth in Section 3.8(a).

1.55 “Inspire Licensed Product” means any Subject Product of Inspire or its Affiliate or sublicensee (a) whose manufacture, use, sale, distribution or importation by Inspire would, absent the licenses granted by InSite to Inspire herein, infringe any Valid Claim included in the InSite Licensed Patents, determined on a country-by-country basis, and/or (b) materially uses or incorporates the InSite Know-How or the InSite Formulation Know-How.

1.56 “Inspire Royalties” has the meaning set forth in Section 5.1.

1.57 “Inspire Royalty Term” has the meaning set forth in Section 5.2.

1.58 “Inspire Trademarks” has the meaning set forth in Section 6.2.

1.59 “IP Communication” has the meaning set forth in Section 7.5(h).

1.60 “Know-How” means all non-public information, results and data of any type whatsoever, in any tangible or intangible form whatsoever, whether or not patentable, including databases, practices, methods, techniques, specifications, formulations, formulae, knowledge, skill, experience, data (including pharmacological, medicinal chemistry, biological, chemical, biochemical, toxicological and clinical study data), analytical and quality control data, stability data, studies and procedures, and manufacturing process and development information, results and data (other than such Know-How which is or becomes the subject of a Patent Right).

1.61 “Knowledge” means, with respect to a particular fact or matter, the applicable Party or its Affiliate is actually aware of that fact or matter as of the Effective Date following a reasonable internal review and discussion with such Party’s or Affiliate’s officers and employees who could reasonably be expected to be aware of such fact or matter.

1.62 “Lien” means (a) any interest in property (whether real, personal or mixed and whether tangible or intangible) which secures an obligation owed to, or a claim by, a Person other than the owner of such property, whether such interest is based on the common law, statute or contract, including, without limitation, any such interest arising from a lease, license, mortgage, charge, pledge, hypothecation, security agreement, conditional sale, trust receipt or deposit in trust, or arising from a consignment of bailment given for security purposes (other than a trust receipt or deposit given in the ordinary course of business which does not secure any obligation for borrowed money), (b) any encumbrance upon such property which does not secure such an obligation, (c) any exception to or defect in the title to or ownership interest in such property, including, without limitation, reservations, rights of entry, possibilities of reverter, encroachments, easements, rights of way, restrictive covenants and licenses, and (d) any other claim, charge or commitment. For the avoidance of doubt, “Lien” shall not include any of the Material Agreements or any other license under the InSite Intellectual Property, or other agreements not related to the Subject Products or the InSite Intellectual Property, that InSite enters into in its ordinary course of business after the Effective Date.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

7

1.63 “Losses” has the meaning set forth in Section 9.1.

1.64 “Material Agreements” means, collectively, the Pfizer Agreement, the Columbia Agreement, the Cardinal Agreement and the [***] Agreement.

1.65 “Milestone Payment” has the meaning set forth in Section 4.2.

1.66 “Minimum Royalty” has the meaning set forth in Section 5.3.

1.67 “Minimum Royalty Date” means the first Quarter Start Date that is at least one year (365 days) after the date of the First Commercial Sale of an Inspire Licensed Product in the United States.

1.68 “Minimum Royalty Period” means the one-year period commencing on the Minimum Royalty Date or any yearly anniversary thereof, as applicable.

1.69 “NDA” means a New Drug Application pursuant to 21 U.S.C. § 505(b)(1) or § 505(b)(2) submitted to the FDA or any successor application or procedure required for Regulatory Approval to commence sale of a Subject Product.

1.70 “Net Sales” means the gross amounts invoiced by Inspire, any of its Affiliates or any of its sublicensees for sales of Inspire Licensed Products to Third Parties, less the total of the following deductions to the extent customary in the prevailing pharmaceutical industry and actually allowed or incurred in connection with such sales:

(a) trade, cash and quantity discounts;

(b) excise, sales and other consumption taxes and custom duties to the extent included in the invoice price;

(c) freight, handling, insurance and other transportation or distribution charges and fees to the extent included in the invoice price;

(d) amounts repaid, credited or accrued by reason of returns, rejections, defects or recalls or because of chargebacks, allowances, adjustments, retroactive price reductions, refunds or billing errors;

(e) payments and rebates related to the sale of such Inspire Licensed Products accrued, paid or deducted pursuant to agreements (including, but not limited to, managed care agreements) with Third Parties or governmental regulations;

(f) any amounts actually written off or specifically identified as uncollectible, in accordance with GAAP consistently applied; and

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

8

(g) any other similar and customary deductions taken in accordance with GAAP consistently applied.

Use of Inspire Licensed Products for promotional, sampling or compassionate use purposes shall not be considered in determining Net Sales. In the case of any sale of an Inspire Licensed Product between Inspire and its Affiliates or sublicensees for resale, Net Sales shall be calculated as above only on the first arm’s length sale thereafter to a Third Party.

1.71 “New Indication” means any indication for any Subject Product other than for bacterial conjunctivitis.

1.72 “Non-Breaching Party” has the meaning set forth in Section 10.3.

1.73 “Option Notice” has the meaning set forth in Section 2.10.

1.74 “Option Product” means the topical anti-infective product for human ophthalmic indications, as formulated with the InSite Formulation Know-How and described in the IND with the number 76,074, as such IND may be amended, containing only the following active ingredients in addition to other ingredients as described in such IND: (a) the chemical compound known as azithromycin or any salts, esters or hydrates thereof, and (b) the chemical compound known as dexamethasone or any salts, esters or hydrates thereof.

1.75 “Option Product Phase I Clinical Trial” means a clinical trial, having the study number C-06-502-001, to determine the safety of the Option Product (as formulated with the InSite Formulation Know-How and described in the IND with the number 76,074, as such IND may be amended) in humans, as more fully described in 21 C.F.R. § 312.21(a).

1.76 “Option Term” has the meaning set forth in Section 2.10.

1.77 “Patent Rights” means the rights and interests in and to all issued patents and pending patent applications, including without limitation, all provisional applications, substitutions, continuations, continuations-in-part, divisions, and renewals, all letters patent granted thereon, and all patents-of-addition, reissues, reexaminations and extensions or restorations by existing or future extension or restoration mechanisms (including regulatory extensions), and all supplementary protection certificates, together with any foreign counterparts thereof anywhere in the Territory.

1.78 “Person” or “person” means any individual, firm, corporation, partnership, limited liability company, trust, unincorporated organization or other entity or a government agency or political subdivision thereto, and shall include any successor (by merger or otherwise) of such Person.

1.79 “Pfizer” means Pfizer Inc.

1.80 “Pfizer Agreement” means the Exclusive License Agreement entered into by InSite and Pfizer on February 15, 2007, relating to the Pfizer Patent Rights, as in effect from time to time.

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1.81 “Pfizer Patent Rights” means all Patent Rights licensed to InSite under the Pfizer Agreement related to any Subject Product or its manufacture or use, including without limitation all patents and patent applications listed as “Pfizer Patent Rights” in Schedule 1, in each case to the extent Controlled by InSite or an Affiliate of InSite as of the Effective Date and any time thereafter during the Term.

1.82 “Prosecution” or “Prosecute” means the preparation, filing, prosecution, issuance and maintenance (including, without limitation, interference, opposition and similar third party proceedings before the relevant patent office) of any patent applications or patents.

1.83 “PTO” means the United States Patent and Trademark Office.

1.84 “Publishing Party” has the meaning set forth in Section 8.3.

1.85 “Quarter Start Date” means January 1, April 1, July 1, and October 1 of any applicable year.

1.86 “Receiving Party” has the meaning set forth in Section 1.15.

1.87 “Redemption Amount” has the meaning set forth in Section 4.1(a).

1.88 “Regulatory Approval” means the issuance by the applicable Regulatory Authority of an action letter indicating that an NDA or foreign equivalent, as applicable, is approved. For avoidance of doubt, Regulatory Approval does not mean that the Regulatory Authority issues an action letter indicating that an NDA or foreign equivalent is approvable.

1.89 “Regulatory Authority” means any national (e.g., the FDA), state, provincial or local regulatory agency, department, bureau, commission, council or other governmental entity involved in or responsible for regulation of medicinal products intended for human use in any country.

1.90 “Regulatory Dossier” means the technical, medical and scientific registrations, authorizations and approvals (including, without limitation, approvals of NDAs or foreign equivalents, supplements and amendments, pre- and post- approvals, pricing and third party reimbursement approvals, and labeling approvals) of any Regulatory Authority necessary for the development (including the conduct of clinical trials), manufacture, distribution, marketing, promotion, offer for sale, use, import, reimbursement, export or sale of a Subject Product in the Field in a regulatory jurisdiction in the Territory, together with all related correspondence to or from any Regulatory Authority and all documents referenced in the complete regulatory chronology for each NDA or foreign equivalent, including the IND, NDA and supplemental new drug applications (sNDAs), or foreign equivalents in the Territory.

1.91 “Reserved Interests” has the meaning set forth in Section 2.5.

1.92 “Reviewing Party” has the meaning set forth in Section 8.3.

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1.93 “[***]” means [***].

1.94 “[***] Agreement” means the Commercial Supply/Purchase Agreement entered into by InSite and [***] on April 1, 2005.

1.95 “Scientific Publication” has the meaning set forth in Section 8.3.

1.96 “SEC” has the meaning set forth in Section 8.2.

1.97 “Security Agreement” has the meaning set forth in Section 7.1(e).

1.98 “Senior Secured Notes” has the meaning set forth in Section 7.1(e).

1.99 “Serious Adverse Drug Experience” means any of an “adverse drug experience,” a “life-threatening adverse drug experience,” a “serious adverse drug experience,” or an “unexpected adverse drug experience,” as those terms are defined at either 21 C.F.R. § 312.32 or 21 C.F.R. § 314.80 or relevant foreign regulation within the Territory.

1.100 “Subject Product” means any topical anti-infective product for human ocular or ophthalmic indications, in any dosage strength or size, for any mode of ocular or ophthalmic administration, containing as the sole active ingredient the chemical compound known as azithromycin or any salts, esters or hydrates thereof.

1.101 “Term” has the meaning set forth in Section 10.1.

1.102 “Territory” means the United States and Canada and their respective territories and possessions.

1.103 “Third Party(ies)” means any Person other than InSite, Inspire and their respective Affiliates.

1.104 “Third Party Claim” has the meaning set forth in Section 9.1.

1.105 “Third Party Manufacturers” means Third Parties who have been engaged by InSite to perform services or supply facilities or goods (including, without limitation, any Subject Product) in connection with the manufacture, testing or packaging of any Subject Product by InSite.

1.106 “Title 11” has the meaning set forth in Section 10.9.

1.107 “Transfer Date” has the meaning set forth in Section 3.3(a).

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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1.108 “Valid Claim” means a claim of an issued and unexpired patent, or a claim of a pending patent application, within the InSite Licensed Patents, which claim has not been held invalid, unpatentable or unenforceable by a court or other government agency of competent jurisdiction from which no appeal can be further taken, and has not been held or admitted to be invalid, unpatentable or unenforceable through abandonment, re-examination or disclaimer, opposition procedure, nullity suit or otherwise, which claim, but for the licenses granted herein, would be infringed by the manufacture, sale or importation of an Inspire Licensed Product; provided, however, that if a claim of a pending patent application shall not have issued within three (3) years after the filing date from which such claim takes priority, such claim shall not constitute a Valid Claim for the purposes of this Agreement unless and until such claim shall issue in a patent.

1.109 “Wind-Down Period” has the meaning set forth in Section 10.6(c).

1.110 “Withholding Taxes” has the meaning set forth in Section 5.5.

ARTICLE 2

LICENSES AND EXCLUSIVITY

2.1 Licenses.

(a) Subject to the terms and conditions of this Agreement, InSite hereby grants to Inspire a royalty-bearing, exclusive (even as to InSite and its Affiliates, except as provided in Section 2.1(d)) right and license, with the right to grant sublicenses, under the AzaSite Patent Rights and the InSite Know-How: (i) to develop, have developed, make, have made, use, have used, market, have marketed, commercialize, have commercialized, offer for sale, sell, have sold, import and have imported Subject Products in the Field in the Territory, and (ii) to develop, have developed, make, have made, use and have used Subject Products anywhere in the world for the purpose of marketing, commercialization or sale of Subject Products in the Field in the Territory.

(b) Subject to the terms and conditions of this Agreement, InSite hereby grants to Inspire a royalty-bearing, non-exclusive right and license, with the right to grant sublicenses, under the DuraSite Patent Rights, the Container Patent Rights, the Columbia Patent Rights and the InSite Formulation Know-How: (i) to develop, have developed, make, have made, use, have used, market, have marketed, commercialize, have commercialized, offer for sale, sell, have sold, import and have imported Subject Products in the Field in the Territory, and (ii) to develop, have developed, make, have made, use and have used Subject Products anywhere in the world for the purpose of marketing, commercialization or sale of Subject Products in the Field in the Territory. Notwithstanding the non-exclusive nature of the foregoing grant (but subject to Section 2.1(d)), InSite hereby expressly covenants that it shall not, and shall cause its Affiliates and licensees not to, directly or indirectly: (x) practice the DuraSite Patent Rights, the Container Patent Rights or the Columbia Patent Rights or use the InSite Formulation Know-How (1) to develop, have developed, make, have made, use, have used, market,

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have marketed, commercialize, have commercialized, offer for sale, sell, have sold, import or have imported any Subject Products in the Field in the Territory, or (2) to develop, have developed, make, have made, use or have used any Subject Products anywhere in the world for the purpose of marketing, commercialization or sale of any Subject Products in the Field in the Territory; or (y) grant to any Third Party any right or license under the DuraSite Patent Rights, the Container Patent Rights, the Columbia Patent Rights or the InSite Formulation Know-How to conduct any of the activities set forth in the foregoing clause (x).

(c) Subject to the terms and conditions of this Agreement, InSite hereby grants to Inspire a royalty-bearing, exclusive (even as to InSite and its Affiliates, except as provided in Section 2.1(d)) right and sublicense, with the right to grant further sublicenses, under the Pfizer Patent Rights, in each case to the extent not greater than the rights and licenses granted to InSite under the Pfizer Agreement: (i) to develop, have developed, make, have made, use, have used, market, have marketed, commercialize, have commercialized, offer for sale, sell, have sold, import and have imported Subject Products in the Field in the Territory, and (ii) to develop, have developed, make, have made, use and have used Subject Products anywhere in the world for the purpose of marketing, commercialization or sale of Subject Products in the Field in the Territory.

(d) For the avoidance of doubt, (i) the licenses and rights granted to Inspire under this Agreement shall not include a right to offer for sale, sell or have sold Subject Products, and Inspire expressly covenants that it shall not sell any Subject Products, in the Territory in circumstances in which Inspire knows or reasonably should know such Subject Products will be distributed or sold outside the Territory, (ii) InSite shall retain the rights under the InSite Intellectual Property and Pfizer Patent Rights to develop, have developed, make, have made, use and have used Subject Products in the Field in the Territory solely for the purposes of distribution, sale or other commercial pursuit of Subject Products outside the Territory, (iii) InSite shall be permitted to carry out and perform its tasks and responsibilities under this Agreement, (iv) InSite shall retain the exclusive rights to develop, have developed, make, have made, use, have used, market, have marketed, commercialize, have commercialized, offer for sale, sell, have sold, import and have imported Subject Products outside the Field and/or outside the Territory, and (v) InSite retains all rights to pursue any of its Reserved Interests.

(e) With respect to each Subject Product, on a country-by-country basis, upon the expiration of the Inspire Royalty Term applicable to such Subject Product in a specific country, the rights and licenses granted to Inspire under paragraphs (a), (b) and (c) above shall become fully paid up, royalty-free, perpetual and irrevocable with regards to such Subject Product in such country.

(f) To the extent required by and in conformance with any applicable laws, Inspire shall mark Inspire Licensed Products with the numbers of the applicable InSite Licensed Patents.

2.2 Sublicenses. All sublicenses granted hereunder must be in writing and must contain provisions that are not inconsistent with the terms and conditions of this Agreement.

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2.3 InSite Trademarks and Domain Names.

(a) The Parties are entering into a trademark license agreement contemporaneously with this Agreement under which InSite is granting to Inspire rights and licenses to use the InSite Trademarks and the Domain Names in connection with the marketing, commercialization and sale of Subject Products in the Field in the Territory (the “Trademark License Agreement”).

(b) If Inspire and InSite enter into a definitive license agreement with respect to the Option Product pursuant to the terms of Section 2.10 (or otherwise mutually agree to enter into such an agreement despite Inspire’s failure to exercise its option under Section 2.10 or the Parties’ failure to come to an agreement within the time period for negotiation set forth therein), or if InSite makes any public announcement that it is no longer pursuing development of the Option Product, then:

(i) within ten (10) days after the execution of such agreement or the making of such announcement, as applicable, InSite shall assign to Inspire all of InSite’s right, title, and interest in and to the AzaSite Trademark in the Territory, including without limitation in the registration therefor, together with the good will of the business associated therewith and which is symbolized thereby, and shall execute the AzaSite Trademark Assignment Agreement attached hereto as Schedule 2.3(b) to give effect to such assignment in the United States and a comparable agreement to give effect to such assignment in Canada. InSite agrees promptly to execute and deliver such further and other documents and to perform such actions as may be necessary to give effect to the foregoing assignment. From and after the effective date of such assignment, the term “InSite Trademarks” shall not include the AzaSite Trademark for any purpose under this Agreement; and

(ii) effective upon the execution of such agreement or the making of such public announcement, as applicable, InSite hereby transfers and assigns to Inspire all of InSite’s right, title and interest in and to the Domain Names. InSite acknowledges and agrees that Inspire is not assuming any liabilities, obligations or indebtedness of InSite related to the Domain Names accrued by InSite prior to the effectiveness of such transfer, whether arising as a result of the transactions contemplated by this Agreement or otherwise related to InSite’s business in any manner, all of which will remain solely InSite’s responsibility. Inspire shall be solely responsible for any liabilities related to the use of the Domain Names accrued by Inspire. InSite agrees promptly to execute and deliver such further and other documents and to perform such actions as may be necessary to give effect to the foregoing assignment and transfer.

(c) In addition, if Inspire and InSite enter into a definitive license agreement with respect to the Option Product pursuant to the terms of Section 2.10 (or otherwise mutually agree to enter into such an agreement despite Inspire’s failure to exercise its option under Section 2.10 or the Parties’ failure to come to an agreement within the time period for negotiation set forth therein), then InSite shall assign to Inspire all of InSite’s right, title, and interest in and to the trademark AzaSite Plus^TM in the Territory, including

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without limitation in the registration therefor, together with the good will of the business associated therewith and which is symbolized thereby. In such event, the Parties shall include the trademark AzaSite Plus^TM as a trademark assigned under the AzaSite Trademark Assignment Agreement (for the United States) and the comparable assignment agreement (for Canada) that are executed pursuant to paragraph (b) above in order to give effect to such assignment.

2.4 Use of Affiliates and Third Party Contractors. The licenses granted under Section 2.1 include the right of Inspire to engage its Affiliates and Third Party contractors in exercising such rights and in carrying out its activities and obligations under this Agreement, provided that (i) all such agreements with Third Party contractors must be in writing and must contain provisions that are not inconsistent with the terms and conditions of this Agreement and (ii) Inspire remains responsible for the compliance with this Agreement by such Affiliates or Third Party contractors.

2.5 Reserved Interests. Notwithstanding anything to the contrary herein, Inspire acknowledges and agrees that this Agreement shall not restrict or limit InSite or its Affiliates, at any time, with respect to (i) any activity, licensing or otherwise, related to any product other than the Subject Products (other than the Option Product as provided under Section 2.10 or any Future Development as provided in Section 3.8); or (ii) any activity, licensing or otherwise, related to the Option Product other than as expressly provided under Section 2.10 or related to any Future Development other than as expressly provided under Section 3.8. Inspire also acknowledges and agrees that any such activities described in clauses (i) and (ii) above, as well as all rights and interests not expressly granted to Inspire are reserved by InSite (the “Reserved Interests”).

2.6 No Implied Grants. Except as expressly licensed hereunder, neither Party grants any rights to the other Party under this Agreement, by implication or estoppel, under any of its intellectual property rights.

2.7 Registration of License. Notwithstanding anything to the contrary in Article 8, Inspire, at its expense, may register the licenses granted under this Agreement in any country of the Territory. Upon request by Inspire, InSite agrees promptly to execute any “short form” licenses consistent with the terms and conditions of this Agreement submitted to it by Inspire reasonably necessary to effect the foregoing registration in such country.

2.8 Supply of API. The Parties are entering into a supply agreement contemporaneously with this Agreement under which InSite will supply bulk azithromycin [***] (as API), obtained from [***] under the [***] Agreement, to Inspire for Inspire’s use in manufacturing and commercializing Subject Products in final form.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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2.9 Supply of Finished Product. Upon Inspire’s election within ninety (90) days after Regulatory Approval of the Current Product in the United States, InSite promptly will modify the Cardinal Agreement so that the Cardinal Agreement would only be for the purpose of commercialization outside the Territory and assist Inspire in executing a new agreement with Cardinal with identical terms to the current Cardinal Agreement, except with respect to commercialization inside the Territory, in order to transition to Inspire all rights with respect to manufacture of Subject Products in finished form for commercialization inside the Territory. During the period commencing on the First Commercial Sale of any Subject Product in the United States and continuing until the first (1^st) anniversary of such date, Inspire shall, at no cost to Inspire, be permitted to use, or have used for Inspire’s benefit, the equipment owned or controlled by InSite and used by Cardinal with respect to Subject Products in connection with the Cardinal Agreement. If, after the expiration of such one (1) year period, Inspire elects to continue to use or have used such equipment, Inspire shall be permitted to do so at a reasonable market rate that the Parties shall negotiate in good faith.

2.10 Option for Option Product License. During the period commencing on the Effective Date and continuing until the date that is the later of (a) [***], and (b) [***] days after the date on which InSite provides to Inspire data from the completed Option Product Phase I Clinical Trial [***] (the “Option Term”), Inspire will have the exclusive option, but not the obligation, to enter into a license agreement with InSite for the Option Product upon terms and conditions to be separately discussed and negotiated by the Parties. At the request of Inspire, InSite promptly shall afford Inspire a reasonable opportunity to review the scientific and clinical information relevant to the Option Product that are available to InSite (including during negotiations between the Parties as provided below). Inspire may exercise its option under this Section 2.10 by providing written notice (the “Option Notice”) to InSite on or before the expiration of the Option Term. If Inspire timely provides the Option Notice, the Parties shall negotiate in good faith and exclusively, using their respective best efforts, for a period of up to [***] days from the date of the Option Notice to enter into a definitive license agreement with respect to the Option Product prior to the expiration of such [***] day negotiating period; provided, however, that (x) if at the end of such [***] day negotiation period the Parties are actively negotiating the terms of such agreement, then such negotiation period may be extended, if mutually agreed to so extend by the Parties at such time, to a mutually acceptable time by the Parties in writing, and (y) if at the end of such [***] day negotiation period the FDA has not yet granted Regulatory Approval of the Current Product, then such negotiation period shall be extended until [***] days after the date on which the FDA grants such Regulatory Approval. If Inspire does not exercise its option under this Section 2.10 on or before the expiration of the Option Term, or if the Parties cannot come to an agreement despite such efforts after such [***] day period (or any extension thereof in accordance with this provision), then InSite shall be free to pursue any and all other opportunities with respect to the Option Product with no further obligations to Inspire. InSite represents, warrants and covenants that neither it nor its Affiliates have granted prior to the Effective Date, nor will grant during the Term, to any Third Party any license, option, first refusal, or other right or interest in or to any Patent Rights, Know-How, trademarks or internet domain names related to the Option Product that is inconsistent with this Agreement, including without limitation this Section 2.10.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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2.11 Inspire Blocking Patent Rights. If and when Inspire first files or Controls any Inspire Blocking Patent Rights outside the Territory, Inspire shall notify InSite within a reasonable time after such filing. Upon InSite’s election in writing within [***] days of such notice, the Parties shall negotiate in good faith for a period of up to [***] days from the date of such election to determine a commercially reasonable royalty rate to apply to InSite’s practice under any Inspire Blocking Patent Rights in the Field outside the Territory, together with such other terms as are reasonable and customary to effectuate the license granted below, including without limitation reporting and payment obligations and audit rights (collectively, the “Additional Terms”). Effective upon the Parties’ agreement in writing to the Additional Terms: (i) the Additional Terms shall be incorporated by reference into this Agreement as if set forth in full herein, and (ii) subject to the Additional Terms and the terms and conditions of this Agreement, Inspire hereby grants to InSite a royalty-bearing, non-exclusive right and license, without any right to grant sublicenses, under the Inspire Blocking Patent Rights to make, have made, use, sell, offer to sell and import Subject Products in the Field outside the Territory. Notwithstanding anything to the contrary in this Agreement, InSite acknowledges and agrees that this Section 2.11 shall not affect, restrict or limit: (i) any right of Inspire or its Affiliates or sublicensees under this Agreement with respect to any Subject Products, including without limitation the rights and licenses granted to Inspire in Section 2.1, or (ii) any obligation of or restriction upon InSite or its Affiliates under this Agreement with respect to Subject Products, including without limitation the exclusive nature of the grants in Section 2.1.

ARTICLE 3

DEVELOPMENT AND COMMERCIALIZATION

3.1 Data and Materials Transfer and Right of Reference.

(a) In furtherance of the licenses granted by InSite to Inspire under this Agreement and the activities contemplated by this Article 3, InSite shall, or shall cause its Affiliates or Third Party contractors to, transfer promptly (but in all events within thirty (30) days following the Effective Date) to Inspire (i) an instance of any physical embodiments, to the extent necessary or useful and available, of the InSite Know-How and the InSite Formulation Know-How, and (ii) a copy of the entire Regulatory Dossier for any Subject Products for the Territory in existence as of the Effective Date. Without limiting the foregoing, InSite shall provide to Inspire copies of all final audited study reports, prepared in accordance with applicable FDA guidelines, for all studies relating to the Current Product, including without limitation those listed on Schedule 3.1(a).

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(b) InSite shall make reasonably available to Inspire at no cost to Inspire during the period commencing on the Effective Date and continuing until the expiration of the twelve (12) month period following Regulatory Approval of the Current Product by the FDA, for up to [***] man hours, InSite’s key employees (including but not limited to key manufacturing and development personnel) for purposes of reasonable consulting with Inspire regarding the development, testing and manufacturing of the Current Product, and to enable Inspire to use the InSite Know-How and InSite Formulation Know-How in connection with the Current Product. Any support beyond such will be subject to InSite’s agreement at reasonable market rates.

(c) InSite, to the extent it has the right to do so, hereby grants to Inspire a “Right of Reference or Use” as that term is defined in 21 C.F.R. § 314.3(b), and any foreign equivalents, to any and all regulatory filings, data and information relating to the Current Product, or to any other Subject Products developed, manufactured or commercialized by Inspire, in the Field in the Territory, including without limitation that related to pharmacology, toxicology, preclinical testing, clinical testing, chemistry, manufacturing and controls data, batch records, trials and studies, safety and efficacy, manufacturing information, analytical and quality control, including without limitation the data and information listed on Schedule 3.1(c), and agrees to sign, and cause its Affiliates to sign, any instruments reasonably requested by Inspire in order to effect such grant. In addition, InSite will use commercially reasonable efforts to obtain, on Inspire’s behalf, a writing from applicable Drug Master File holders for the Current Product granting Inspire the right to reference such Drug Master Files. In the event that InSite is not able to obtain any such writing, InSite promptly shall establish alternative arrangements reasonably acceptable to Inspire whereby Inspire’s access to supply of the Current Product in commercially reasonable amounts for launch and marketing thereof is not impaired by the lack of such writing. In addition, upon Inspire’s request, InSite shall provide reasonable assistance to Inspire in any efforts by Inspire to obtain a writing from applicable Drug Master File holders for any other Subjects Products developed, manufactured or commercialized by Inspire granting Inspire the right to reference such Drug Master Files.

3.2 Current Product Development. InSite will be responsible for, and will bear all costs and expenses associated with, obtaining Regulatory Approval for the Current Product in each country in the Territory. InSite will not be responsible for any other development or Regulatory Approval for any other product or indication except as otherwise agreed to under the terms of Section 3.8. Subject to and without limiting the foregoing, InSite shall, using its Commercially Reasonable Efforts:

(a) Progress NDA number 50-810 for the Current Product to Regulatory Approval of the Current Product by the FDA, including without limitation conducting all clinical trials required for the Current Product, as deemed necessary by the FDA in order to grant Regulatory Approval of the Current Product;

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(b) Address any material concerns (i.e., without resolution of which, Regulatory Approval of the Current Product cannot be obtained) raised by the FDA with regard to the Current Product, whether in an action letter indicating that the NDA for the Current Product is approvable or otherwise;

(c) Prepare and file an application for Regulatory Approval in Canada for the Current Product and progress such application to Regulatory Approval of the Current Product by the applicable Regulatory Authority in Canada, including without limitation conducting all clinical trials required for the Current Product, as deemed necessary by such Regulatory Authority in order to grant Regulatory Approval of the Current Product in Canada;

(d) Address any material concerns (i.e., without resolution of which, Regulatory Approval of the Current Product cannot be obtained) raised by the applicable Regulatory Authority in Canada with regard to the Current Product;

(e) Prior to Regulatory Approval of the Current Product in each country in the Territory, keep Inspire fully and promptly informed of: (i) the preparation of all documents submitted to Regulatory Authorities and the filing of all submissions relating to Regulatory Approval of any Subject Product in the Territory; and (ii) all regulatory actions, communications and meetings with any Regulatory Authority with respect to any Subject Product in the Territory; including in each case, without limitation, with respect to labeling matters. InSite shall collaborate in good faith with Inspire in connection with all of the foregoing, and Inspire shall be permitted to attend any meeting described in clause (ii) of the preceding sentence upon Inspire’s request; and

(f) Facilitate discussions between InSite’s Third Party Manufacturers and Inspire in order to assist Inspire in obtaining its requirements of pre-clinical, clinical and commercial supplies of the Current Product.

3.3 Regulatory Matters; InSite Assistance.

(a) Within twenty-five (25) days after Regulatory Approval of the Current Product in any country of the Territory, InSite shall:

(i) submit to the FDA or equivalent foreign Regulatory Authority to transfer to Inspire ownership of, and Inspire shall own in Inspire’s name, the entire Regulatory Dossier for the Current Product (and, to the extent in existence at the time of such transfer, any other Subject Products) in such country, including without limitation NDA number 50-810 and IND number 62,873 or any foreign equivalents thereto (as applicable) in the Territory, all at no additional charge to Inspire. InSite shall execute and deliver to the applicable Regulatory Authority such documents as are required to notify such Regulatory Authority of the transfer of such NDA and IND, or foreign equivalents thereto, to Inspire. In addition,

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InSite promptly shall execute any and all other instruments, forms of assignment or other documents and take such further actions as Inspire may reasonably request in order to give effect to or evidence the foregoing assignments. The date on which all such assignments have been given effect in both the United States and Canada shall be deemed the “Transfer Date” under this Agreement; and

(ii) use commercially reasonable efforts to obtain, on Inspire’s behalf, a writing from [***] granting Inspire the right to reference the Drug Master File held by [***] for the Current Product. In the event that InSite is not able to obtain such writing, InSite promptly shall establish alternative arrangements reasonably acceptable to Inspire whereby Inspire’s access to supply of the Current Product in commercially reasonable amounts for launch and marketing thereof is not impaired by the lack of such writing.

(b) InSite shall retain the right to use any and all information in the Regulatory Dossier assigned to Inspire as described above, and the right of reference to all such regulatory documents, solely for purposes relating to InSite’s exercise of rights retained by it under Section 2.1(d) or otherwise not granted to Inspire under this Agreement.

(c) From and after the transfer of the Regulatory Dossier in any country in the Territory as provided above in paragraph (a) above:

(i) Inspire shall have exclusive control over, and authority and responsibility for, the regulatory strategies relating to the further development and commercialization of Subject Products in such country in the Field, including, without limitation: (A) the preparation of all documents submitted to Regulatory Authorities and the filing of all submissions relating to Regulatory Approval of Subject Products in such country; and (B) all regulatory actions, communications and meetings with any Regulatory Authority with respect to Subject Products in such country. Upon the request of Inspire, InSite shall provide to Inspire on a timely basis such information in its possession relating to Subject Products as may be required for the foregoing regulatory activities, and otherwise provide reasonable assistance to Inspire, at Inspire’s expense, in complying with all regulatory obligations in such country relating to Subject Products, including without limitation, safety updates, amendments, annual reports, pharmacovigilance filings, investigator notifications, manufacturing facility inspections and certifications and product approvals.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(ii) Inspire shall be responsible for interfacing, corresponding and meeting with all Regulatory Authorities in such country with respect to Subject Products in the Field. Except as required by applicable law or as permitted under paragraph (b) above, InSite shall not communicate directly with any Regulatory Authority in such country relating to Subject Products in the Field without the prior written consent of Inspire. In furtherance thereof, InSite shall refer all Regulatory Authority communications relating to Subject Products in the Field in such country to Inspire.

(iii) InSite shall cooperate with Inspire, at Inspire’s expense, to provide all reasonable assistance and take all actions reasonably requested by Inspire that are necessary to comply with any law applicable to Subject Products, including, but not limited to, reporting of adverse drug experience reports (and Serious Adverse Drug Experiences) to Regulatory Authorities in such country.

(iv) Inspire shall make available to InSite on a reasonable basis any documents in the Regulatory Dossier, and amendments thereto, for the Subject Products in such country that InSite is required by applicable law to reference in connection with seeking Regulatory Approval of Subject Products outside the Territory, provided that InSite requests such access in writing and identifies such applicable law in such request. In addition, Inspire shall consider in good faith any other reasonable request by InSite for access to information in the Regulatory Dossier for the Subject Products in such country.

3.4 Commercialization.

(a) Except as otherwise set forth in this Agreement, Inspire shall be solely responsible for commercialization of Inspire Licensed Products in the Field in the Territory, including without limitation with respect to:

(i) sales and marketing;

(ii) advertising, marketing and promotional materials;

(iii) sales representatives and sales force matters;

(iv) distribution;

(v) regulatory compliance and communications and regulatory fees (e.g., adverse event reporting programs, establishment and product fees under the Prescription Drug User Fee Act), in each case to the extent such responsibilities or fees arise following Regulatory Approval of the Current Product and transfer of the Regulatory Dossier for the Current Product in the applicable country of the Territory as provided above in Section 3.3(a); and

(vi) product inquiries and complaints.

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(b) Inspire shall use Commercially Reasonable Efforts to commercialize an Inspire Licensed Product in the Field in the Territory, promptly after (i) Regulatory Approval for such Inspire Licensed Product in the Territory has been obtained, (ii) such other approvals (including without limitation reimbursement approvals) as are necessary for the marketing of such Inspire Licensed Product in the Territory have been obtained, and (iii) the transitions as provided under Sections 2.9 (provided Inspire has made the election set forth therein) and 3.3(a) (as applicable) have been given effect (collectively, “Launch Approval”).

(c) Without limiting the foregoing, Inspire agrees that it shall effect a First Commercial Sale of the Current Product in the United States no later than [***] calendar days after Launch Approval for the Current Product is obtained in the United States; provided, however, that such obligation shall be suspended during any period in which [***].

(d) Inspire shall not include in promotional kits any Subject Products intended for sale without InSite’s consent, such consent not to be unreasonably withheld; provided, however, that the foregoing limitation shall not affect or restrict any sampling practices of Inspire.

3.5 Reports. Every twelve (12) months following the Effective Date, Inspire shall provide InSite a written report summarizing the efforts and accomplishments of Inspire, its Affiliates and its sublicensees during the preceding twelve (12) month period in commercializing Inspire Licensed Products.

3.6 Adverse Event Reporting.

(a) Each Party shall, and shall require its respective Affiliates to:

(i) to the extent permissible under time constraints and reporting requirements, provide to the other Party in advance of initial or periodic submission to Regulatory Authorities any and all adverse event reports and Serious Adverse Drug Experience reports from clinical trials and commercial experiences with respect to Subject Products or any Inspire Licensed Products;

(ii) provide such adverse event reports and Serious Adverse Drug Experience reports to the other Party contemporaneously with the provision of such reports to the applicable Regulatory Authority; and

(iii) adhere to all requirements of applicable laws, rules and regulations that relate to the reporting and investigation of adverse events and Serious Adverse Drug Experiences and keep the other Party informed of such events.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(b) If a Party contracts with a Third Party for research to be performed by such Third Party on any Subject Products or any of the Inspire Licensed Products, that Party shall require such Third Party to report to the contracting Party the information set forth above.

3.7 Coordination Committee.

(a) Within thirty (30) days after the Effective Date, the Parties will establish a committee to (i) discuss further development efforts related to Subject Products in the Field in the Territory following Regulatory Approval of the Current Product in each country in the Territory, (ii) manage and facilitate in an orderly manner the transition as provided above in Section 2.9 and the transition of the Regulatory Dossier in each country of the Territory as provided above in Section 3.3(a), (iii) manage and facilitate InSite’s access to the Regulatory Dossier in the United States, after the assignment thereof pursuant to Section 3.3(a), as reasonably necessary to facilitate InSite’s obtaining Regulatory Approval for the Current Product in Canada, and (iv) manage and facilitate (A) in connection with the launch of Subject Products by Inspire, Inspire’s access to Subject Products manufactured by Cardinal and (B) Inspire’s access to bottle molds and trade dress used by InSite in connection with Subject Products (the “Coordination Committee”). The Coordination Committee will be comprised of equal numbers of representatives of each Party, with each Party appointing two (2) representatives as members of the Coordination Committee. The Coordination Committee may change its size from time to time by mutual consent of its members. Each Party may replace its Coordination Committee representatives at any time upon written notice to the other Party.

(b) The Coordination Committee will meet in person (or by having certain representatives of the Parties participate by telephone where necessary) no less frequently than once every six (6) months, unless otherwise agreed by the Parties. The members of the Coordination Committee may also convene or be consulted from time to time by means of telecommunications, videoconferences, electronic mail or correspondence, as deemed necessary or appropriate. Meetings of the Coordination Committee that are held in person will alternate between the offices of the Parties, or such other place as the Parties may agree. The first meeting of the Coordination Committee will take place at the offices of one of the Parties within ninety (90) days after the Effective Date.

(c) The Coordination Committee will strive to reach consensus on any determinations with respect to further development efforts related to Subject Products in the Field in the Territory following Regulatory Approval of the Current Product in each country in the Territory; provided, however, that Inspire shall have final decision-making authority with respect to the development of Subject Products in the Field in the Territory.

(d) The Coordination Committee will have only such purposes as are specifically stated in this Agreement, and will have no power to amend or interpret this Agreement or waive a Party’s rights or obligations under this Agreement.

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3.8 Future Development.

(a) Subsequent to the Transfer Date, Inspire has exclusive control with respect to any further development of any Subject Product, including without limitation any New Indication, in the Field in the Territory (each such improvement an “Inspire Improvement”). Inspire may, at its discretion, pursue any such Inspire Improvement independently or through the Coordination Committee. Any such Inspire Improvement will be deemed a Subject Product under this Agreement and, if and to the extent such Inspire Improvement also constitutes an Inspire Licensed Product, such Inspire Improvement will be subject to Inspire Royalties payable under Article 5. No additional milestone payments will be due for any such Inspire Improvement under any circumstances. If Inspire, at its discretion, requests InSite’s assistance in developing any Inspire Improvement and InSite, at its discretion, agrees to provide such assistance, Inspire shall reimburse InSite for any such development efforts in the manner agreed by the Parties.

(b) InSite promptly shall provide Inspire written notice of any Future Development together with the data from a completed phase I clinical trial (to determine the safety of such Future Development in humans as more fully described in 21 C.F.R. §312.21(a)) in a form suitable for submission to the FDA or equivalent Regulatory Authority (“Future Development Option Notice”). During the period of [***] days following the date of the Future Development Option Notice (“Future Development Option Term”), Inspire will have the exclusive option, but not the obligation, to enter into a license agreement with InSite for the Future Development described in the Future Development Option Notice for commercialization within the Territory upon terms and conditions to be separately discussed and negotiated by the Parties. At the request of Inspire, InSite shall promptly afford Inspire a reasonable opportunity to review the scientific and clinical information relevant to such Future Development that are available to InSite (including during negotiations between the Parties as provided below). Inspire may exercise its option under this Section 3.8 by providing written notice (the “Future Development Option Exercise Notice”) to InSite on or before the expiration of the Future Development Option Term. If Inspire timely provides the Future Development Option Exercise Notice, the Parties shall negotiate in good faith and exclusively, using their respective best efforts, for a period of up to [***] days from the date of the Future Development Option Exercise Notice to enter into a definitive license agreement with respect to the applicable Future Development prior to the expiration of such [***] day negotiating period; provided, however, that if at the end of such [***] day negotiation period the Parties are actively negotiating the terms of such agreement, then such negotiation period may be extended, if mutually agreed to so extend by the Parties at such time, to a mutually acceptable time by the Parties in writing. If Inspire does not exercise its option under this Section 3.8 on or before the expiration of the applicable Future Development Option Term, or if the Parties cannot come to an agreement despite such efforts after such [***] day period (or

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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such extension as mutually agreed by the Parties in accordance with this provision), then InSite shall have no further obligation to negotiate with Inspire with respect to such Future Development. InSite represents, warrants and covenants that neither it nor its Affiliates have granted prior to the Effective Date, nor will grant during the Term, to any Third Party any license, option, first refusal, or other right or interest in or to any Patent Rights, Know-How, trademarks or internet domain names related to any Future Development that is inconsistent with this Agreement, including without limitation this Section 3.8. Notwithstanding anything to the contrary in this Agreement, InSite acknowledges and agrees that this Section 3.8 shall not affect, restrict or limit: (i) any right of Inspire or its Affiliates or sublicensees under this Agreement with respect to any Subject Products or InSite Developments, including without limitation the rights and licenses granted to Inspire in Section 2.1, or (ii) any obligation of or restriction upon InSite or its Affiliates under this Agreement with respect to Subject Products or InSite Developments, including without limitation the exclusive nature of the grants in Section 2.1.

ARTICLE 4

INITIAL PAYMENT AND MILESTONE PAYMENT

4.1 Initial Payment. On the Effective Date, Inspire shall pay InSite Thirteen Million U.S. Dollars ($13,000,000) (the “Initial Payment”) as follows:

(a) Seven Million Three Hundred Fifty-Two Thousand Six Hundred Sixty-Five Dollars and Sixty-Two Cents ($7,352,665.62) to The Bank of New York, N.A. to redeem the Senior Secured Notes (the “Redemption Amount”) on behalf of InSite and in the manner set forth in Section 4.3; and

(b) Five Million Six Hundred Forty-Seven Thousand Three Hundred Thirty-Four Dollars and Thirty-Eight Cents ($5,647,334.38) to InSite in the manner set forth in Section 4.3 (the “InSite License Fee”).

The Parties acknowledge and agree that this Agreement shall become effective on the Effective Date immediately upon receipt of the Redemption Amount by The Bank of New York, N.A. as specified in the foregoing clause (a). InSite agrees that Inspire’s payment of the foregoing amounts in the manner specified shall constitute full and complete satisfaction of Inspire’s payment obligations under this Section 4.1.

4.2 Milestone Payment upon Regulatory Approval. Within fifteen (15) calendar days following receipt by InSite of Regulatory Approval in the United States of any Subject Product with an Acceptable Label, Inspire shall pay InSite Nineteen Million U.S. Dollars ($19,000,000) (the “Milestone Payment”) in the manner set forth in Section 4.3. For purposes of clarification, the Milestone Payment shall be made only once and upon the first occurrence of the indicated event, regardless of the number of Subject Products or occurrences of Regulatory Approval for Subject Products.

4.3 Payment. The Initial Payment and the Milestone Payment shall each be non-refundable and shall be made by Inspire in U.S. Dollars by wire transfer in immediately available funds.

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Inspire shall transfer the Redemption Amount to the Bank of New York, N.A., as Collateral Agent for the holders of the Senior Secured Notes, by wire transfer to the credit of such bank account as is designated in Schedule 4.3. The InSite License Fee and the Milestone Payment shall be paid to InSite by wire transfer to the credit of such bank account of InSite as is designated in Schedule 5.5.

ARTICLE 5

ROYALTIES

5.1 Royalty Rates. Inspire shall pay to InSite the following non-refundable royalties in accordance with this Article 5 (“Inspire Royalties”) based on the cumulative volume of Net Sales of Inspire Licensed Products in the Territory:

(a) For Net Sales of Inspire Licensed Products occurring during the period commencing on the Effective Date and continuing until the second (2nd) anniversary of the First Commercial Sale of an Inspire Licensed Product in the United States (such period, the “Initial Royalty Period”), twenty percent (20%) of such Net Sales; and

(b) For Net Sales of Inspire Licensed Products occurring after the expiration of the Initial Royalty Period, twenty-five percent (25%) of such Net Sales.

The obligation to pay Inspire Royalties under this Article 5 shall be imposed only once (i) with respect to any sale of the same unit of any Inspire Licensed Product, and (ii) with respect to a single unit of any Inspire Licensed Product.

5.2 Royalty Term. The Inspire Royalties set forth in Section 5.1 shall be payable as to each particular Inspire Licensed Product sold in a particular country, on an Inspire Licensed Product-by-Inspire Licensed Product basis and a country-by-country basis, for the longer of: (a) eleven (11) years following the First Commercial Sale by Inspire, any of its Affiliates or any of its sublicensees of such Inspire Licensed Product in a particular country of sale, or (b) for so long as there exists in the particular country of sale a Valid Claim within the InSite Licensed Patents covering such Inspire Licensed Product (such period, the “Inspire Royalty Term” as to the particular Inspire Licensed Product sold in the particular country); provided, however, that the applicable royalty rate under Section 5.1 shall be reduced by [***] in any country for any period during which the manufacture, sale or importation of such Inspire Licensed Product in such country is not covered by any Valid Claim within the InSite Licensed Patents. For the avoidance of doubt, Inspire shall have no obligation to pay any Inspire Royalties for a particular Inspire Licensed Product in a particular country under Section 5.1 above upon the expiration of the Inspire Royalty Term applicable to such Inspire Licensed Product in such country.

5.3 Minimum Royalty.

(a) For each of five (5) one-year Minimum Royalty Periods, which Minimum Royalty Periods shall commence on the Minimum Royalty Date and run consecutively for five (5) years

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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thereafter, Inspire shall pay to InSite the annual minimum royalty payment for the applicable year as specified in Schedule 5.3(a) (each a “Minimum Royalty”), subject to any applicable reductions or offsets permitted under this Agreement. On the date that is forty-five (45) days after the end of a particular Minimum Royalty Period, Inspire shall determine the total amounts of Inspire Royalties accrued and payable for such Minimum Royalty Period under Section 5.1. If such total amount of Inspire Royalties accrued is less than the Minimum Royalty amount owed for such Minimum Royalty Period as set forth in Schedule 5.3(a), then, in addition to the payment of Inspire Royalties that Inspire made for the calendar quarter that just ended at the end of such Minimum Royalty Period, Inspire shall also pay InSite an amount equal to the difference between the Minimum Royalty amount owed and such total amount of Inspire Royalties accrued for such Minimum Royalty Period.

(b) Promptly after completion of a particular calendar year in which a Minimum Royalty Period ended, Inspire may conduct and complete an internal financial audit with respect to the total amounts of Inspire Royalties accrued and payable under Section 5.1 for such Minimum Royalty Period. If such audit (combined with the applicable portions of an audit performed for the prior calendar year) shows that the total amount of Inspire Royalties actually owed and paid to InSite, under Section 5.1, for such Minimum Royalty Period is different from the amount used in Section 5.3(a) above in calculating the amount (if any) that must be paid to InSite to meet the Minimum Royalty amount owed for such Minimum Royalty Period, then Inspire may provide to InSite written notice of such difference, and the consequential difference (if any) in the amount of the payment (if any) that Inspire should have made under Section 5.3(a) above for such Minimum Royalty Period in order to meet the Minimum Royalty amount owed for such Minimum Royalty Period (such difference, the “Reconciliation Amount”). If such audit demonstrates that there is a Reconciliation Amount that must be paid by one Party to the other, in order to make the payment made under Section 5.3(a) for the applicable Minimum Royalty Period accurate, then the applicable Party shall pay to the other Party such Reconciliation Amount shown to be owing by the audit, within thirty (30) days of Inspire providing such written notice to InSite.

(c) Notwithstanding anything to the contrary in this Agreement:

(i) Inspire’s obligation to pay Minimum Royalties under this Section 5.3 shall be suspended during any period in which (A) [***], or (B) Inspire is unable, despite use of Commercially Reasonable Efforts, [***];

(ii) Inspire shall have no further obligation to pay Minimum Royalties under this Section 5.3 as of the date on which:

(A) there no longer exists any [***];

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(B) sales of a Generic Equivalent, as to any Inspire Licensed Product, during any calendar quarter, are equal to or greater than either [***], expressed in local currency; or

(C) InSite has not cured a material failure to perform any of its obligations under this Agreement within [***] days of receiving notice thereof from Inspire;

(iii) If Inspire’s obligation to pay Minimum Royalties under this Section 5.3 is suspended pursuant to subsection (i) above during any particular Minimum Royalty Period(s), then the Minimum Royalty amount owed for such Minimum Royalty Period(s) shall be based on a pro-rated amount (using a straight-line pro ration based on the number of days in such Minimum Royalty Period(s) during which Inspire’s obligation to pay Minimum Royalties were not suspended) of the required Minimum Royalties owed for such Minimum Royalty Period(s) under Schedule 5.3(a); and

(iv) If Inspire’s obligation to pay Minimum Royalties under this Section 5.3 expires pursuant to subsection (ii) above, or if this Agreement expires or is terminated, during any particular Minimum Royalty Period, then the Minimum Royalty amount owed for such Minimum Royalty Period shall be based on a pro-rated amount (using a straight-line pro ration based on the number of days in such Minimum Royalty Period through the date of such expiration or applicable notice of termination) of the required Minimum Royalties owed for such Minimum Royalty Period under Schedule 5.3(a).

(d) During any suspension and after any expiration of Inspire’s obligation to pay Minimum Royalties under this Section 5.3, other than as a result of expiration or termination of this Agreement, Inspire shall continue to be obligated to use Commercially Reasonable Efforts to commercialize Inspire Licensed Products in the Field in the Territory pursuant to Section 3.4.

5.4 Reports and Payments. Inspire shall deliver to InSite, within twenty-five (25) days after the end of each calendar quarter, a report setting forth for such calendar quarter the following information for each Inspire Licensed Product: (i) Net Sales of such Inspire Licensed Product by Inspire, any of its Affiliates or any of its sublicensees on a country-by-country basis; (ii) the Inspire Royalties due to InSite in respect of such Net Sales; and (iii) the exchange rates used in calculating any of the foregoing. The total Inspire Royalties due in respect of Net Sales of Inspire Licensed Products during such calendar quarter shall be remitted at the time such report is made.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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5.5 Taxes and Withholding. Any payments made by Inspire to InSite under this Agreement may be reduced by the amount required to be paid or withheld pursuant to any applicable law, including, but not limited to, United States federal, state or local tax law (“Withholding Taxes”). Any such Withholding Taxes required by law to be paid or withheld shall be an expense of, and borne solely by, InSite. Inspire shall pay all applicable Withholding Taxes from payments payable hereunder to the appropriate government authority on behalf of InSite, as required by applicable law. Inspire shall submit to InSite reasonable proof of payment of the Withholding Taxes, together with an accounting of the calculations of such taxes, within thirty (30) days after such Withholding Taxes are remitted to the proper authority. The Parties will cooperate reasonably in completing and filing documents required under the provisions of any applicable tax laws or under any other applicable law in connection with the making of any required tax payment or withholding payment, or in connection with any claim to a refund of or credit for any such payment.

5.6 Currency Exchange; Manner and Place of Payment. All payments hereunder shall be payable in U.S. Dollars. Inspire Royalties shall be calculated based on Net Sales in each country’s currency in which Net Sales have occurred, and shall be converted (as applicable) to U.S. Dollars as follows. With respect to each calendar quarter, whenever conversion of payments from any foreign currency shall be required, such conversion shall be made using the same exchange rate Inspire uses to record such sales. All payments shall be made by wire transfer to the credit of such bank account of InSite as is designated in Schedule 5.5 or as may otherwise be designated at least ten (10) Business Days in advance by InSite in writing to Inspire.

5.7 Maintenance of Records; Audit. For a period of two (2) years from the end of the calendar quarter in which the particular sale occurred, Inspire shall maintain, and shall require its Affiliates and sublicensees to maintain, complete and accurate books and records in connection with the sale of Inspire Licensed Products hereunder, as necessary to allow the accurate calculation consistent with GAAP of the Inspire Royalties due to InSite, including any records required to calculate any royalty adjustments hereunder. Once per calendar year, InSite shall have the right to engage an independent accounting firm reasonably acceptable to Inspire, which shall have the right to examine in confidence the relevant records of Inspire as may be reasonably necessary to determine or verify the amount of royalty payments due hereunder. Such examination shall be conducted, and Inspire shall make its records available, during normal business hours, after at least fifteen (15) Business Days prior written notice to Inspire, and shall take place at the facility(ies) where such records are maintained. Each such examination shall be limited to pertinent books and records for any year ending not more than twenty-four (24) months prior to the date of request; provided, however, that InSite shall not be permitted to audit the same period of time more than once. Before permitting such independent accounting firm to have access to such books and records, Inspire may require such independent accounting firm and its personnel involved in such audit to sign a confidentiality agreement (in form and substance reasonably acceptable to Inspire) as to any confidential information which is to be provided to such accounting firm, or to which such accounting firm will have access, while conducting the audit under this paragraph. The independent accounting firm will prepare and provide to each Party a written report stating whether the royalty reports submitted and royalties paid are correct or incorrect and the details concerning any discrepancies. Such accounting firm may not reveal to InSite any information learned in the course of such audit other than the

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amount of any such discrepancies. InSite agrees to hold in strict confidence all information disclosed to it, except to the extent necessary for InSite to enforce its rights under this Agreement or to the extent disclosure is required by law. In the event there was an underpayment by Inspire of amounts owed under this Agreement, Inspire shall promptly (but in no event later than thirty (30) days after Inspire’s receipt of the independent auditor’s report so correctly concluding) make payment to InSite of any shortfall. In the event that there was an overpayment by Inspire hereunder, InSite shall promptly (but in no event later than thirty (30) days after InSite’s receipt of the independent auditor’s report so correctly concluding) refund to Inspire or credit to future royalties, at Inspire’s election, the excess amount. InSite shall bear the full cost of such audit unless such audit discloses an underreporting by Inspire of more than ten percent (10%) of the aggregate amount of royalties in any twelve (12) month period, in which case, Inspire shall bear the full cost of such audit. Upon the expiration of twenty four (24) months following the end of any Inspire fiscal year, the calculation of royalties payable with respect to such year will be binding and conclusive upon InSite except with respect to any audit then underway, and except for fraud or misrepresentation, Inspire and its Affiliates will be released from any liability or accountability with respect to royalties for such fiscal year. In addition, Inspire shall maintain and permit Pfizer to audit books and records in connection with sales of Inspire Licensed Products in the same manner and to the same extent that InSite is required to maintain and permit audits of InSite’s books and records with respect to such sales under Section 4(c) of the Pfizer Agreement.

5.8 Reductions.

(a) [***] Third Party Patent Rights, Know-How or other technology rights in any country in the Territory are necessary for the development of, having developed, making of, having made, using of, having used, marketing of, having marketed, commercializing of, having commercialized, offering for sale of, sale of, having sold, importing of or having imported a particular Inspire Licensed Product in the Field and if Inspire then enters into a written license agreement with any such Third Party, Inspire may:

(i) reduce the Inspire Royalties and Minimum Royalties payable with respect to such Inspire Licensed Product in such country pursuant to this Article 5 by [***] of the sum of the royalties paid to all Third Parties by Inspire pursuant to all such Third Party licenses combined; provided, however, that in no event shall the Inspire Royalties or Minimum Royalties payable by Inspire to InSite hereunder be reduced by more than [***] as a result of application of this Section 5.8(a)(i); and

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(ii) offset [***] of any license issue fees (including but not limited to any initial or upfront fees) and milestone payments paid to all Third Parties by Inspire pursuant to all such Third Party licenses against any Inspire Royalties or Minimum Royalties due under this Agreement. Offsets for such payments to Third Parties may be applied in any single calendar quarter or several calendar quarters until the application of such payments in their entirety; provided, however, that in no event shall the aggregate of offsets under this Section 5.8(a)(ii) exceed in any particular calendar quarter [***] of the sum of any Inspire Royalties or Minimum Royalties due hereunder in such quarter.

(b) [***] to obtain rights in any country in the Territory from any Third Party, other than the situation described in paragraph (a) above, for Patent Rights, Know-How or other technology to develop, have developed, make, have made, use, have used, market, have marketed, commercialize, have commercialized, offer for sale, sell, have sold, import or have imported a particular Inspire Licensed Product in the Field, then Inspire may notify InSite of its intent to enter into, and may enter into, a license with any such Third Party at its discretion. Within thirty (30) days of receipt of such notice, InSite shall notify Inspire of its concurrence or lack of concurrence to such Third Party license (which concurrence shall not be unreasonably withheld, conditioned or delayed). If InSite so notifies Inspire of its lack of concurrence, the following royalty reductions shall not apply. Any lack of notice shall not be deemed as concurrence. If InSite has notified Inspire of its concurrence to such Third Party license, and if Inspire then enters into a written license agreement with such Third Party, Inspire may:

(i) reduce the Inspire Royalties and Minimum Royalties payable with respect to such Inspire Licensed Product in such country pursuant to this Article 5 by [***] of the sum of the royalties paid to all Third Parties by Inspire pursuant to all such Third Party licenses combined; provided, however, that in no event shall the Inspire Royalties or Minimum Royalties payable by Inspire to InSite hereunder be reduced by more than [***] as a result of application of this Section 5.8(b)(i); and

(ii) offset [***] of any license issue fees (including but not limited to any initial or upfront fees) and milestone payments paid to all Third Parties by Inspire pursuant to all such Third Party licenses against any Inspire Royalties or Minimum Royalties due under this Agreement. Offsets for such payments to Third Parties may be applied in any single calendar quarter or several calendar quarters until the application of such payments in their entirety; provided, however, that in no event shall the aggregate of offsets under this Section 5.8(b)(ii) exceed in any particular calendar [***] of the sum of any Inspire Royalties or Minimum Royalties due hereunder in such quarter.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(c) The Inspire Royalties payable by Inspire with respect to any Inspire Licensed Product in any country in the Territory pursuant to this Article 5 shall be reduced by the following percentages effective during and after the calendar quarter when Generic Competition occurs at the following sales levels with respect to such Inspire Licensed Product in such country. Where the sales of a Generic Equivalent, as to such Inspire Licensed Product, during a calendar quarter are equal to or greater than either [***] of total sales of such Inspire Licensed Product sold in such country, expressed in units, or (v) [***] of the total sales of such Inspire Licensed Product sold in such country, expressed in local currency, the Inspire Royalties with respect to such Inspire Licensed Product shall be reduced, subject to Section 5.8(d), by [***] of the amounts otherwise owed in such country. Where the sales of a Generic Equivalent, as to such Inspire Licensed Product, during a calendar quarter are equal to or greater than either (w) [***] of total sales of such Inspire Licensed Product sold in such country, expressed in units, or (x) [***] of the total sales of such Inspire Licensed Product sold in such country, expressed in local currency, the Inspire Royalties with respect to such Inspire Licensed Product shall be reduced, subject to Section 5.8(d), by [***] of the amounts otherwise owed in such country. Where the sales of a Generic Equivalent, as to such Inspire Licensed Product, during a calendar quarter are equal to or greater than either (y) [***] of total sales of such Inspire Licensed Product sold in such country, expressed in units, or (z) [***] of the total sales of such Inspire Licensed Product sold in such country, expressed in local currency, the Inspire Royalties with respect to such Inspire Licensed Product shall be reduced to an amount that is equal to [***] of applicable Net Sales of such Inspire Licensed Product. If such Generic Competition ceases to exist at such sales levels, then, beginning with the first calendar quarter after such Generic Competition does not exist at such sales levels, the reduction of Inspire Royalties with respect to such Inspire Licensed Product in this Section 5.8(c) shall be reduced to the reduction applicable to such lower sales levels, if any, in such country until such time as Generic Competition may again exist at such sales levels with respect to such Inspire Licensed Product in such country.

(d) Notwithstanding the provisions of Sections [***] permitting Inspire to reduce Inspire Royalties under certain circumstances, in no event shall Inspire Royalties payable by Inspire to InSite pursuant to this Article 5 with respect to a particular Inspire Licensed Product in a particular country of the Territory in any single calendar quarter be reduced, as a result of the application of such provisions, to an amount that is below [***] of applicable Net Sales of such Inspire Licensed Product in such country in such quarter. Subject to the foregoing, Inspire shall be permitted to apply any reduction or offset to which it is entitled under Section 5.8(a) or Section 5.8(b) in any single calendar quarter or several calendar quarters until the application of such amounts in their entirety. For the avoidance of doubt, this Section 5.8(d) shall not limit the application of any other reduction or offset to which Inspire is or may be entitled under this Agreement, and shall not preclude Inspire’s exercise of any other applicable rights or remedies from time to time.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(e) In the event that Inspire becomes a direct licensee of Pfizer under the Pfizer Patent Rights, Inspire shall be entitled to offset, against any Inspire Royalties or Minimum Royalties due under this Agreement, any payment made by Inspire to Pfizer in connection with such license.

ARTICLE 6

TRADEMARKS

6.1 Registrations. InSite shall, at InSite’s expense, use its commercially reasonable efforts to secure and thereafter to maintain registrations for all of the InSite Trademarks in each jurisdiction in the Territory. Inspire agrees to provide reasonable cooperation in connection with InSite’s preparation and filing of any applications, renewals or other documentation necessary or useful to protect InSite’s intellectual property rights in the InSite Trademarks and Domain Names.

6.2 Inspire Trademarks. Subject to Section 3.2 of the Trademark License Agreement, Inspire shall own any trademarks created by or on behalf of Inspire that Inspire elects, in its sole discretion, to use in connection with the Inspire Licensed Products (the “Inspire Trademarks”). InSite acknowledges that the Inspire Trademarks and any domain names incorporating such trademarks will be selected by Inspire and will be registered in Inspire’s or its Affiliate’s name and will be the sole property of Inspire, and InSite agrees that it will not have, assert or acquire any right, title or interest therein or thereto or any good will associated therewith, except as provided in Section 3.2 of the Trademark License Agreement. Subject to Section 3.2 of the Trademark License Agreement, any trade names, brand names, slogans, logos, designs, trade dress, copyrights and good will used on or in connection with the Inspire Licensed Products may be selected by Inspire in its sole discretion and shall be the sole and exclusive property of Inspire. Neither InSite nor its Affiliates shall have the right or license to use the Inspire Trademarks at any time before, during, or after the Term of this Agreement; provided, however, that InSite shall be permitted to mention the Inspire Trademarks to the extent necessary in making any permitted disclosures under Article 8.

ARTICLE 7

REPRESENTATIONS, WARRANTIES AND COVENANTS

7.1 Mutual Representations and Warranties. Each Party hereby represents and warrants to the other Party as of the Effective Date that:

(a) such Party is a corporation or entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has full corporate power and authority to execute and deliver this Agreement and the Trademark License Agreement and to carry out the provisions hereof and thereof;

(b) such Party is duly authorized, by all requisite corporate action, to execute and deliver this Agreement and the Trademark License Agreement and to carry out the provisions hereof and thereof, and the Person executing this Agreement and the Trademark License Agreement on behalf of such Party is duly authorized to do so by all requisite corporate action;

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(c) no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority is required on the part of such Party in connection with the valid execution, delivery and performance of this Agreement and the Trademark License Agreement, except where the failure to obtain any of the foregoing could not, individually or in the aggregate, reasonably be expected to materially adversely affect such Party’s ability to consummate the transactions contemplated herein or therein or perform its obligations hereunder or thereunder;

(d) this Agreement and the Trademark License Agreement are legal and valid obligations binding upon such Party and enforceable in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and similar laws; and

(e) the execution, delivery and performance by it of this Agreement and the Trademark License Agreement and its compliance with the terms and provisions of this Agreement and the Trademark License Agreement does not and will not (i) conflict with or result in a violation or breach of any of the terms, conditions or provisions of its certificate or articles of incorporation or by-laws (or other comparable corporate charter documents); (ii) conflict with or result in a violation or breach of any term or provision of any law or order applicable to it; or (iii) (A) conflict with or result in a violation or breach of, (B) constitute (with or without notice or lapse of time or both) a default under, (C) require it to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, or (D) result in the creation or imposition of any Lien upon it or any of the InSite Intellectual Property under, any contract, instrument or license to which it is a party or by which any of its assets and properties is bound; except, in the case of (i), (ii) and (iii) above, which could not, individually or in the aggregate, reasonably be expected to materially adversely affect its ability to consummate the transactions contemplated herein or perform its obligations hereunder, and except, in the case of (iii)(A), (B) and (D) above, with respect to (x) that certain Amended and Restated Security Agreement, dated as of December 30, 2005, by and between InSite and The Bank of New York (the “Security Agreement”) and (y) the 2003 Senior Notes, the 2005 Senior Notes (each as defined in the Security Agreement), as amended on December 22, 2006, and those senior secured promissory notes issued by InSite on January 11, 2006, as amended on December 22, 2006 (the “2006 Senior Notes,” and together with the 2003 Senior Notes and the amended 2005 Senior Notes, the “Senior Secured Notes”).

7.2 Additional InSite Representations and Warranties. InSite additionally represents and warrants to Inspire as of the Effective Date that:

(a) InSite has the full right, power and authority to grant, and is not prohibited by the terms of any agreement to which it is a party from granting, the licenses granted to Inspire under Article 2 hereof and under Article 2 of the Trademark License Agreement. InSite has not previously granted any rights inconsistent with the rights and licenses granted to Inspire under this Agreement or the Trademark License Agreement;

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(b) InSite is the exclusive owner of all right, title and interest in the InSite Owned Patents as set forth in Schedule 1, except with respect to the Container Patent Rights which are jointly owned with R.P. Scherer Technologies, Inc. Schedule 1 contains a complete and accurate description of all Patent Rights owned by, or otherwise Controlled by, InSite or any of its Affiliates as of the Effective Date that are necessary or useful to develop, manufacture or commercialize Subject Products in the Field in the Territory. InSite’s rights and interests in the InSite Owned Patents are through assignment, without reservation, from the designated inventors; except that it is expressly acknowledged that InSite derives no rights from Patrick Poisson, a co-inventor named in the Container Patent Rights, and that R.P. Scherer Technologies, Inc., not InSite, is the assignee of Patrick Poisson;

(c) all InSite Intellectual Property is, and immediately after the Effective Date will be, free and clear of all Liens other than the Liens imposed under the terms of the Security Agreement and the Senior Secured Notes, which Liens shall be automatically released upon full payment of the Redemption Amount by Inspire on behalf of InSite in the manner set forth in Section 4.3. InSite has obtained the assignment or exclusive licenses of all material interests and all material rights from its employees and independent contractors and any other Third Party contractors with respect to the InSite Know-How and the InSite Formulation Know-How. InSite has taken reasonable security measures to protect the secrecy, confidentiality and value as of the Effective Date of the InSite Know-How and the InSite Formulation Know-How that it regards as material and in need of confidential treatment;

(d) the patent applications included in the InSite Owned Patents have been duly filed;

(e) there are no actions, claims, demands, suits, citations, summons, subpoenas, inquiries or investigations of any nature, civil, criminal, regulatory or otherwise, in law or in equity, or arbitral proceedings or any proceedings by or before any governmental authority (including any Regulatory Authority), pending or, to InSite’s Knowledge, threatened against, relating to or affecting InSite or the Current Product or any of the InSite Intellectual Property (with the exception of normal Prosecution at the United States Patent and Trademark Office and equivalent foreign patent offices or customary actions with the relevant Regulatory Authorities) which (A) could reasonably be expected to result in the issuance of an order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement and the Trademark License Agreement or otherwise result in a diminution of the benefits contemplated by this Agreement or the Trademark License Agreement to Inspire; or (B) if determined adversely to it, could reasonably be expected to result in any injunction or other equitable relief against it that would interfere in any material respect with its ability to perform its duties and obligations under this Agreement and the Trademark License Agreement;

(f) to InSite’s Knowledge, neither the manufacture, use or sale of the Current Product nor the use of the InSite Know-How, the InSite Formulation Know-How or the InSite Trademarks by Inspire as contemplated by this Agreement and the Trademark License Agreement will infringe upon any Third Party’s patents or will constitute a

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misappropriation of a Third Party’s trade secrets or other intellectual property rights existing as of the Effective Date; neither InSite nor its Affiliates and, to InSite’s Knowledge, its Third Party contractors, have received any notice in writing, or otherwise have Knowledge of any facts, which have, or reasonably should have, led InSite to believe that the manufacture, use or sale of the Current Product or the use of the InSite Know-How, the InSite Formulation Know-How or the InSite Trademarks by Inspire as contemplated by this Agreement and the Trademark License Agreement will infringe any rights of a Third Party existing as of the Effective Date;

(g) to InSite’s Knowledge, there is no Third Party using or infringing any of the InSite Owned Patents or InSite Trademarks or misappropriating or using InSite Know-How or InSite Formulation Know-How in derogation of the rights granted to Inspire in this Agreement and the Trademark License Agreement;

(h) the development, testing, manufacture, labeling, storage and distribution of the Current Product have been conducted by InSite and its Affiliates and, to InSite’s Knowledge, its Third Party contractors, in compliance in all material respects with all applicable laws, rules and regulations, including with respect to investigational use, good clinical practices, good laboratory practices, good manufacturing practices, record keeping, security and filing of reports; neither InSite nor its Affiliates, and to InSite’s Knowledge, its Third Party contractors, have received any notice in writing, or otherwise have knowledge of any facts, which have, or reasonably should have, led InSite to believe that any of the regulatory submissions relating to the Current Product are not currently in good standing with the FDA;

(i) InSite has provided to Inspire all material information, available to InSite or its Affiliates, with respect to the safety and/or efficacy of the Current Product, including without limitation, all material information related to clinical and non-clinical studies, and, to InSite’s Knowledge, there is no issue that would prevent InSite from obtaining Regulatory Approval in each country in the Territory for the Current Product and there are no material adverse effects that would preclude Inspire or Inspire’s Affiliates from exercising any rights granted hereunder or prohibiting the transactions contemplated by this Agreement and the Trademark License Agreement;

(j) InSite is the exclusive owner of all right, title and interest in the InSite Trademarks. The InSite Trademarks and registrations thereof are in full force and effect and will be maintained by InSite in the Territory during the Term in the ordinary course. There is no action, suit or proceeding pending or, to InSite’s Knowledge, that has been threatened in writing by any Third Party which, if adversely determined, would have a material adverse effect upon the ability of Inspire to use the InSite Trademarks in connection with the Subject Products in the Territory under the terms of this Agreement or the Trademark License Agreement;

(k) the Domain Names are duly registered, the registrations thereof are in full force and effect and will be maintained by InSite during the Term in the ordinary course, and all applicable fees have been paid. InSite is the exclusive registrant of the Domain Names and has the unencumbered right to transfer the Domain Names to Inspire. The

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Domain Names are, and immediately after the Effective Date will be, free and clear of all Liens. There is no action, suit or proceeding pending or, to InSite’s Knowledge, that has been threatened in writing by any Third Party which, if adversely determined, would have a material adverse effect upon the ability of Inspire to use the Domain Names in connection with the Subject Products in the Territory under the terms of this Agreement or the Trademark License Agreement;

(l) each of the Material Agreements is a legal and valid obligation binding upon InSite and, as applicable, Pfizer, Columbia, Cardinal or [***], is in full force and effect, and is enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and similar laws. Neither InSite nor, to the Knowledge of InSite, Pfizer, Columbia, Cardinal or [***] is in default or breach of any of its respective obligations under any of the Material Agreements. Neither InSite nor, to the Knowledge of InSite, Pfizer, Columbia, Cardinal or [***] has waived any rights or defaults or breaches under any of the Material Agreements that would adversely affect the ability of Inspire or Inspire’s Affiliates to exercise any rights granted under this Agreement or that would prohibit the transactions contemplated by this Agreement. To InSite’s Knowledge, no event has occurred which, after the giving of notice or the lapse of time or both, would constitute a default or breach under any of the Material Agreements by InSite, Pfizer, Columbia, Cardinal or [***]. True, correct and complete copies of the Material Agreements, including all amendments thereto, have been provided by InSite to Inspire. InSite has not received any notice orally or in writing that any of the Material Agreements has been, will be, or is threatened to be, terminated (in whole or in part) or that InSite is in default or breach of its obligations under any of the Material Agreements. InSite has no intention of terminating any of the Material Agreements (in whole or in part) and is not aware of any events, circumstances or grounds upon which any of the Material Agreements may be terminated (in whole or in part) by a party thereto for default or breach;

(m) a true, correct and complete copy of the [***]Agreement, including all amendments thereto, has been provided by InSite to Inspire. [***] has no right, title or interest in, to or under the InSite Intellectual Property except as expressly set forth in such agreement; and

(n) all written statements and other writings furnished by InSite pursuant hereto or in connection with this Agreement or the Trademark License Agreement or the transactions contemplated hereby or thereby, are complete and accurate in all material respects to the best of InSite’s Knowledge. No representation or warranty by InSite in this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary in order to make any statement contained herein not misleading. There is no fact, event or condition known to InSite that materially adversely affects the Current Product that has not been set forth in this Agreement or disclosed by InSite to Inspire in writing.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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7.3 Additional Inspire Representations and Warranties. Inspire additionally represents and warrants to InSite as of the Effective Date that there is no action, claim, demand, suit, proceeding, arbitration, grievance, citation, summons, subpoena, inquiry or investigation of any nature, civil, criminal, regulatory or otherwise, in law or in equity, pending or, to Inspire’s Knowledge, relating to or threatened against Inspire in connection with or relating to the transactions contemplated by this Agreement.

7.4 No Implied Warranties. Except as expressly set forth in this Agreement, neither Party makes any representation or warranty, express or implied, with respect to the subject matter hereof or the transactions contemplated hereby.

7.5 Certain Additional Covenants.

(a) Each Party shall comply in all material respects with all laws, rules and regulations applicable to its performance under this Agreement and the Trademark License Agreement. Without limiting the foregoing, Inspire shall conduct its marketing and sales activities under this Agreement in compliance with applicable laws, rules and regulations and prevailing pharmaceutical industry standards. Inspire shall use Commercially Reasonable Efforts to maintain an adequate sales force to market and sell the Inspired Licensed Products as contemplated by this Agreement.

(b) InSite shall not grant to any Third Party any rights inconsistent with the rights and licenses granted to Inspire under this Agreement and the Trademark License Agreement.

(c) InSite shall promptly notify Inspire in writing upon becoming aware:

(i) of any actual or threatened claim, judgment or settlement against or owed by InSite with respect to any of the InSite Intellectual Property, or of any threatened claims or litigation seeking to invalidate the InSite Licensed Patents;

(ii) of any actual or threatened investigation, inquiry, action or proceeding by any Regulatory Authority or other government agency with respect to any Subject Product;

(iii) of any actual or threatened action, suit or proceeding by any Third Party which, if adversely determined, would have a material adverse effect upon the ability of Inspire to use the InSite Intellectual Property as licensed hereunder or under the Trademark License Agreement in connection with the Subject Products in the Field in the Territory; or

(iv) that the manufacture, use or sale of any Subject Product or the use of the InSite Know-How, the InSite Formulation Know-How or InSite Trademarks may infringe any Patent Rights or other intellectual property rights of a Third Party.

(d) InSite will promptly disclose to Inspire all InSite Developments that arise, if any. Information provided by InSite to Inspire with respect to such InSite Developments will be in reasonable detail but in no circumstance less than would be sufficient to permit an understanding of the nature of the InSite Developments by a practitioner reasonably skilled in the relevant technical or scientific area.

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(e) Except in connection with an assignment or transfer of this Agreement as permitted under Section 12.2, InSite shall not sell, assign or transfer any of the Material Agreements without Inspire’s prior written consent (such consent not to be unreasonably withheld). InSite shall deploy and conduct itself under each of the Material Agreements in a manner that will enable Inspire to perform its obligations and exercise its rights with regard to Subject Products and Inspire Licensed Products under this Agreement. In this regard, and without limiting the foregoing, InSite shall:

(i) comply in all material respects with and perform all of its duties and obligations under each of the Material Agreements;

(ii) not intentionally take or fail to take any action within InSite’s reasonable control under any of the Material Agreements that could have a materially adverse effect on Inspire’s rights under this Agreement, including but not limited to any action or inaction that would empower Pfizer, Columbia, Cardinal or [***] to terminate any of the Material Agreements or otherwise limit or reduce InSite’s rights thereunder in any material respect;

(iii) enforce the material provisions of each of the Material Agreements against Pfizer, Columbia, Cardinal, or [***], as applicable, if failure to do so could have a materially adverse effect on Inspire’s rights with respect to Subject Products or Inspire Licensed Products under this Agreement; and

(iv) not modify, amend or terminate any of the Material Agreements without the prior written consent of Inspire.

(f) InSite shall promptly (but no later than within five (5) Business Days) notify Inspire in writing of any actual or threatened (or InSite’s receipt of notice of any actual or threatened) default (including failure to pay royalties when due, if applicable), breach, suspension of compliance or performance, or termination (in whole or in part) under or of any of the Material Agreements. InSite shall promptly (but no later than within five (5) Business Days) notify Inspire in writing of the actual or threatened commencement of (or receipt of notice of the actual or threatened commencement of) any dispute, claim, suit, litigation or arbitration proceeding related to any of the Material Agreements, including without limitation those disputes, claims, suits, litigations or arbitration proceedings alleging a Third Party’s infringement or misappropriation of any of the Patent Rights licensed or sublicensed under the Pfizer Agreement or the Columbia Agreement. Each such notification shall contain a summary of the event described therein. At the request of Inspire, InSite shall promptly provide to Inspire full particulars, of which it is aware, in writing of the applicable matter. InSite shall keep Inspire reasonably informed as to the status and proposed resolution of each such matter.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(g) In the event that InSite receives notice of any default (including failure to pay royalties when due) or breach under any of the Material Agreements and has not cured such breach or default within ten (10) days of receiving such notice, Inspire shall be entitled, but not obligated, to undertake payment or performance of the applicable underlying obligation on behalf of InSite as necessary to cure such default or breach and to offset, against amounts payable to InSite under this Agreement, any reasonable costs and expenses incurred by Inspire in the course thereof.

(h) InSite shall notify Inspire in writing promptly after receipt by InSite of any notice from Pfizer or Columbia relating to the status, validity, or change thereto, of any of the Patent Rights licensed or sublicensed under the Pfizer Agreement or the Columbia Agreement (including maintenance, filings, extensions, abandonments, surrenders, patent office proceedings, Third Party interference or other challenges to, or Third Party potential infringement or misappropriation of such Patent Rights) (each, an “IP Communication”). InSite shall inform Inspire of the receipt and substance of each IP Communication and if in writing shall furnish Inspire with a copy of such IP Communication. InSite shall promptly inform Inspire in writing if InSite receives, or becomes aware of, any certification filed under the U.S. “Drug Price Competition and Patent Term Restoration Act of 1984” claiming that any patent licensed or sublicensed under the Pfizer Agreement or the Columbia Agreement is invalid or that infringement thereof will not arise from the manufacture, use, import, offer for sale or sale of any product by a Third Party.

(i) InSite shall be responsible for and comply in all material respects with and materially perform all of its duties and obligations under the [***] Agreement and under any other agreement by or through which any Third Party has any right, title or interest in or to any of the InSite Intellectual Property.

(j) InSite shall not create, incur, or allow any Lien on any of the InSite Intellectual Property, unless the Person that is to hold such Lien shall have first entered into a mutually acceptable non-disturbance agreement with Inspire providing to the effect that, in the event such Person exercises its rights with respect to the InSite Intellectual Property under such Lien, such Person agrees to recognize the existence and validity of, and Inspire’s rights with respect to the InSite Intellectual Property under, this Agreement or any agreement supplementary hereto.

(k) Inspire and its Affiliates shall not directly or indirectly challenge or induce any Third Party to challenge the validity or enforceability of the Pfizer Patent Rights, or any patent claim(s) therein, or initiate or participate in any re-examination or other proceeding related to the validity, enforceability or patentability of any claim of the Pfizer Patent Rights before any tribunal or patent office. This section shall not prohibit Inspire and its Affiliates from responding to a subpoena, process, or discovery requests in any litigation or administrative proceeding provided that Inspire gives prompt notice to Pfizer of the receipt of said subpoena, process or discovery requests.

(l) The Parties acknowledge the provisions of Section 4(b) of the Pfizer Agreement regarding estimated monthly net sales and the Parties agree to cooperate reasonably to

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facilitate compliance with such provisions. The Parties further acknowledge that to the extent Inspire delivers information regarding such estimated monthly net sales to InSite for further delivery by InSite to Pfizer then such further delivery shall not constitute a breach of Section 8.1 of this Agreement, provided that InSite shall advise Pfizer that such disclosure is Confidential Information under the Pfizer Agreement and subject to the obligations of non-disclosure and non-use in Section 11(a) of the Pfizer Agreement.

ARTICLE 8

CONFIDENTIALITY, PUBLICATION AND PUBLIC ANNOUNCEMENTS

8.1 Confidentiality. The Parties agree that during the Term, and for a period of five (5) years after this Agreement expires or terminates, a Party receiving Confidential Information of the other Party shall (i) maintain in confidence such Confidential Information to the same extent such Party maintains its own proprietary information of similar kind and value (but at a minimum each Party shall use commercially reasonable efforts to maintain Confidential Information in confidence); (ii) not disclose such Confidential Information to any Third Party without prior written consent of the Disclosing Party, except for disclosures to its sublicensees and commercial partners for Subject Products who agree to be bound by obligations of non-disclosure and non-use at least as stringent as those contained in this Article 8; and (iii) not use such Confidential Information for any purpose except those purposes permitted by this Agreement. InSite acknowledges that notwithstanding any other provision of this Agreement, it shall be an uncurable material breach of this Agreement if InSite breaches this Section 8.1 with respect to any Confidential Information of Inspire regarding actual or projected financial, sales or supply information or forecasts, including without limitation disclosing such Confidential Information or any portion thereof to investors, analysts or any other Third Party or providing opinions or financial projections to any Third Party based on such Confidential Information. InSite shall in no event be restricted from providing its own financial projections, so long as Inspire’s confidential projections are not disclosed and InSite’s projections are not in any way attributed to Inspire by InSite. For the avoidance of doubt, any financial information of Inspire that is made generally available to the public by Inspire shall not be considered Confidential Information of Inspire.

8.2 Authorized Disclosure. Notwithstanding any other provision of this Agreement, the Receiving Party may disclose Confidential Information of the Disclosing Party to a Third Party: (i) to the extent and to the Persons as required by an applicable law, rule, regulation, legal process or court order, or an applicable disclosure requirement of any Regulatory Authority, the U.S. Securities and Exchange Commission (“SEC”), the Nasdaq market or any other securities exchange or market; or (ii) to the extent necessary to exercise the rights granted to or retained by the Receiving Party under this Agreement in filing or prosecuting patent applications, prosecuting or defending litigation or otherwise establishing rights or enforcing obligations under this Agreement; provided, however, that the Receiving Party shall provide prior notice of such intended disclosure to the Disclosing Party if possible under the circumstances and shall disclose only such Confidential Information of the Disclosing Party as is reasonably required to be disclosed.

8.3 Scientific Publications. Subject to existing obligations of each Party to any Third Party and excluding any publications currently being pursued, each as described in Schedule 8.3, prior

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to making any formal scientific publication relating to any Inspire Licensed Product or Subject Product in the Field (a “Scientific Publication”), each Party (the “Publishing Party”) agrees to provide the other Party (the “Reviewing Party”) the opportunity to review: (a) any proposed Scientific Publication comprising a formal scientific paper for publication in any peer reviewed journal at least thirty (30) days prior to its intended publication, and (b) any proposed Scientific Publication comprising a formal scientific abstract or poster at least ten (10) days prior to its intended publication. The Reviewing Party shall have the right (i) to request in good faith a delay in the Scientific Publication in order to protect patentable information; and (ii) to require the Publishing Party to remove from the Scientific Publication the Reviewing Party’s Confidential Information. If the Reviewing Party requests a delay pursuant to clause (i) of the preceding sentence, the Publishing Party shall delay the Scientific Publication for a period of sixty (60) days from such request to enable patent applications to be filed protecting each Party’s rights in such information. Upon the expiration of the applicable period specified above in this Section 8.3, the Publishing Party shall be free to proceed with the Scientific Publication as transmitted to the Reviewing Party, except to the extent that the Reviewing Party has exercised its rights under clause (i) or (ii) of the second preceding sentence.

8.4 Disclosure of Agreement. The Parties agree that the material terms of this Agreement shall be considered Confidential Information of both Parties, subject to the special authorized disclosure provisions set forth below in this Section 8.4 (in lieu of the authorized disclosure provisions set forth in Section 8.2, to the extent of any conflict) and without limiting the generality of the definition of Confidential Information set forth in Section 1.15. The Parties will mutually agree the text of a press release announcing the execution of this Agreement. Thereafter, if either Party desires to make a public announcement concerning the terms of this Agreement, such Party shall give reasonable prior advance notice of the proposed text of such announcement to the other Party for its prior review and approval, such approval not to be unreasonably withheld. A Party shall not be required to seek the permission of the other Party to repeat or disclose any information as to the terms of this Agreement that has already been publicly disclosed by such Party in accordance with the foregoing or by the other Party, or any similar or comparable information. Either Party may disclose the terms of this Agreement to such Party’s existing investors, lenders, directors and professional advisors and to potential investors, lenders, acquirors or merger partners and their professional advisors who are bound by written or professional obligations of non-disclosure and non-use that are at least as stringent as those contained in this Article 8 or are customary for such purpose. InSite also may disclose this Agreement to Pfizer as required under Section 2(c) of the Pfizer Agreement, provided that InSite shall advise Pfizer that such disclosure is Confidential Information under the Pfizer Agreement and subject to the obligations of non-disclosure and non-use in Section 11(a) of the Pfizer Agreement. Inspire also may disclose the relevant terms of this Agreement to potential sublicensees who agree to be bound by obligations of non-disclosure and non-use at least as stringent as those contained in this Article 8. Each Party acknowledges that the other Party may be obligated to file a copy of this Agreement with the SEC with its next quarterly report on Form 10-Q, annual report on Form 10-K or current report on Form 8-K or with any registration statement filed with the SEC pursuant to the Securities Act of 1933, as amended, and each Party shall be entitled to make such filings, provided, however, that the filing Party requests (to the extent legally permitted) confidential treatment of the terms hereof for which confidential treatment is customarily sought, to the extent such confidential treatment is reasonably available to such Party under the circumstances then prevailing. In the event of any such filing, the filing

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Party will provide the other Party with a copy of the Agreement marked to show provisions for which the filing Party intends to seek confidential treatment and shall reasonably consider the other Party’s timely comments thereon.

8.5 Unauthorized Use. If either Party becomes aware or has knowledge of any unauthorized use or disclosure of the other Party’s Confidential Information, it shall promptly notify the other Party of such unauthorized use or disclosure.

8.6 Return of Confidential Information. Upon termination of this Agreement, the Receiving Party shall promptly return all of the Disclosing Party’s Confidential Information, including all reproductions and copies thereof in any medium (except that the Receiving Party may retain one copy for its legal files) except as otherwise reasonably necessary to exercise the Receiving Party’s surviving rights under this Agreement.

ARTICLE 9

INDEMNIFICATION

9.1 Inspire. Inspire shall indemnify, defend and hold harmless InSite and its Affiliates and their respective directors, officers, employees and agents (the “InSite Indemnitees”) from and against any and all losses, costs, damages, liabilities fees or expenses (including reasonable attorney’s fees and expenses) (“Losses”) incurred in connection with or arising out of any Third Party claim, suit, action or proceeding (a “Third Party Claim”) against any InSite Indemnitees to the extent resulting from (i) the breach by Inspire of any of its representations, warranties, covenants or obligations under this Agreement or the Trademark License Agreement, (ii) any gross negligence or willful misconduct of Inspire in the exercise of any rights granted by InSite or the performance of any of Inspire’s obligations under this Agreement or the Trademark License Agreement, or (iii) the development, manufacture, sale or use of any Subject Product by Inspire or its Affiliates and sublicensees.

9.2 InSite. InSite shall indemnify, defend and hold harmless Inspire and its Affiliates and their respective directors, officers, employees and agents (the “Inspire Indemnitees”) from and against any and all Losses incurred in connection with or arising out of any Third Party Claim against any Inspire Indemnitees to the extent resulting from (i) the breach by InSite of any of its representations, warranties, covenants or obligations under this Agreement or the Trademark License Agreement, (ii) any gross negligence or willful misconduct of InSite in the exercise of any of its rights or the performance of any of its obligations under this Agreement or the Trademark License Agreement, (iii) the development or manufacture of any Subject Product by InSite or its Affiliates, or (iv) the sale or use of any Subject Product by InSite or its Affiliates.

9.3 Indemnification Procedures.

(a) In the case of a Third Party Claim made by any Person who is not a Party to this Agreement (or an Affiliate thereof) as to which a Party (the “Indemnitor”) may be obligated to provide indemnification pursuant to this Agreement, such Party seeking indemnification hereunder (the “Indemnitee”) will notify the Indemnitor in writing of the Third Party Claim (and specifying in reasonable detail the factual basis for the Third Party Claim and, to the extent known, the amount of the Third Party Claim) reasonably

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promptly after becoming aware of such Third Party Claim; provided, however, that failure to give such notification will not affect the indemnification provided hereunder except to the extent the Indemnitor shall have been actually prejudiced as a result of such failure.

(b) If a Third Party Claim is made against an Indemnitee and the Indemnitor acknowledges in writing its obligation to indemnify the Indemnitee therefor, the Indemnitor will be entitled, within one hundred twenty (120) days after receipt of written notice from the Indemnitee of the commencement or assertion of any such Third Party Claim, to assume the defense thereof (at the expense of the Indemnitor) with counsel selected by the Indemnitor and reasonably satisfactory to the Indemnitee, for so long as the Indemnitor is conducting a good faith and diligent defense. Should the Indemnitor so elect to assume the defense of a Third Party Claim, the Indemnitor will not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, however, that if under applicable standards of professional conduct a conflict of interest exists between the Indemnitor and the Indemnitee in respect of such claim, such Indemnitee shall have the right to employ separate counsel (which shall be reasonably satisfactory to the Indemnitor) to represent such Indemnitee with respect to the matters as to which a conflict of interest exists and in that event the reasonable fees and expenses of such separate counsel shall be paid by such Indemnitor; provided, further, that the Indemnitor shall only be responsible for the reasonable fees and expenses of one separate counsel for such Indemnitee. If the Indemnitor assumes the defense of any Third Party Claim, the Indemnitee shall have the right to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the Indemnitor. If the Indemnitor assumes the defense of any Third Party Claim, the Indemnitor will promptly supply to the Indemnitee copies of all correspondence and documents relating to or in connection with such Third Party Claim and keep the Indemnitee informed of developments relating to or in connection with such Third Party Claim, as may be reasonably requested by the Indemnitee (including, without limitation, providing to the Indemnitee on reasonable request updates and summaries as to the status thereof). If the Indemnitor chooses to defend a Third Party Claim, all Indemnitees shall reasonably cooperate with the Indemnitor in the defense thereof (such cooperation to be at the expense, including reasonable legal fees and expenses, of the Indemnitor). If the Indemnitor does not elect to assume control of the defense of any Third Party Claim within the one hundred twenty (120) day period set forth above, or if such good faith and diligent defense is not being or ceases to be conducted by the Indemnitor, the Indemnitee shall have the right, at the expense of the Indemnitor, after three (3) Business Days notice to the Indemnitor of its intent to do so, to undertake the defense of the Third Party Claim for the account of the Indemnitor (with counsel selected by the Indemnitee), and to compromise or settle such Third Party Claim, exercising reasonable business judgment; provided, however, that the Indemnitee shall not compromise or settle such Third Party Claim without the Indemnitor’s prior written consent (which consent shall not be unreasonably withheld) if such compromise or settlement would result in an admission or liability or loss of right by the Indemnitor or payment by the Indemnitor. The Indemnitor agrees to reasonably cooperate with the Indemnitee in such defense, at the Indemnitor’s expense, including being joined as a necessary party.

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(c) If the Indemnitor acknowledges in writing its obligation to indemnify the Indemnitee for a Third Party Claim, the Indemnitee will agree to any settlement, compromise or discharge of such Third Party Claim that the Indemnitor may recommend that by its terms obligates the Indemnitor to pay the full amount of Losses (whether through settlement or otherwise) in connection with such Third Party Claim and unconditionally and irrevocably releases the Indemnitee completely from all liability in connection with such Third Party Claim; provided, however, that, without the Indemnitee’s prior written consent, the Indemnitor shall not consent to any settlement, compromise or discharge (including the consent to entry of any judgment), and the Indemnitee may refuse in good faith to agree to any such settlement, compromise or discharge, that provides for injunctive or other non-monetary relief affecting the Indemnitee. If the Indemnitor acknowledges in writing its obligation to indemnify the Indemnitee for a Third Party Claim, the Indemnitee shall not (unless required by law) admit any liability with respect to, or settle, compromise or discharge, such Third Party Claim without the Indemnitor’s prior written consent (which consent shall not be unreasonably withheld).

9.4 Insurance Proceeds. Any indemnification hereunder shall be made net of any insurance proceeds recovered by the Indemnitee (it being understood that an Indemnitee may simultaneously pursue an insurance claim and a claim for indemnification hereunder); provided, however, that if, following the payment to the Indemnitee of any amount under this Article 9, such Indemnitee recovers any insurance proceeds in respect of the claim for which such indemnification payment was made, the Indemnitee shall promptly pay an amount equal to the amount of such proceeds (but not exceeding the amount of such indemnification payment) to the indemnifying Party.

9.5 Insurance. Each Party agrees to obtain and maintain commercial general liability insurance, including clinical trials and products liability insurance, with reputable and financially secure insurance carriers, in such amounts and subject to such deductibles as are reasonable and customary in the pharmaceutical industry for companies of comparable size and activities. Each Party shall maintain such insurance for so long as Subject Products in the Territory continue to be developed, manufactured or sold and thereafter for so long as is necessary to cover any and all Third Party Claims which may arise from the development, manufacture or sale of Subject Products in the Territory. Upon reasonable request by a Party, the other Party shall produce evidence that such insurance policies are valid, kept up to date and in full force and effect.

ARTICLE 10

TERM AND TERMINATION

10.1 Term. Except as set forth in Section 12.13, unless earlier terminated by mutual agreement of the Parties in writing or pursuant to the provisions of this Article 10, this Agreement will become effective as of the Effective Date and continue in full force and effect until the expiration of the Inspire Royalty Term with respect to all Inspire Licensed Products throughout the Territory (the “Term”).

10.2 Voluntary Termination by Inspire. Notwithstanding any other provision herein, Inspire may terminate this Agreement in its entirety or on a country-by-country basis for its convenience

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at any time after the earlier of (i) the Regulatory Approval of the Current Product in the United States or (ii) April 27, 2008, subject to the following. If Inspire so terminates prior to the First Commercial Sale of an Inspire Licensed Product, Inspire shall provide InSite no less than ninety (90) days advance written notice of such intent to terminate. If Inspire so terminates after such First Commercial Sale, Inspire shall provide InSite no less than one hundred eighty (180) days advance written notice of such intent to terminate. During such one hundred eighty (180) day notice period (if applicable), Inspire’s obligations under this Agreement shall continue, subject to all terms and conditions of this Agreement.

10.3 Material Breach. Upon a material breach of this Agreement by a particular Party (in such capacity, the “Breaching Party”), the other Party (in such capacity, the “Non-Breaching Party”) may provide written notice (a “Breach Notice”) to the Breaching Party specifying the material breach. If the Breaching Party fails to cure such material breach during the [***] day period following the date on which the Breach Notice is provided (or, if applicable, such longer period, but not to exceed [***] days, as would be reasonably necessary for a diligent party to cure such material breach, provided the Breaching Party has commenced and continues its diligent efforts to cure during the initial [***] day period following the date on which the Breach Notice is provided) (such failure, an “Uncured Breach”), then the Non-Breaching Party may terminate this Agreement on a country-by-country basis with respect to the particular country that was at issue in the Uncured Breach. Notwithstanding the foregoing, the cure period for any failure by Inspire to make the Milestone Payment or to make royalty payments due hereunder shall be [***] days; provided, however, that the failure by Inspire to make any such payment shall not be considered a breach to the extent that such payment is the subject of a good faith dispute by Inspire.

10.4 Bankruptcy or Insolvency. Either Party may, subject to the provisions set forth herein, terminate this Agreement by giving the other Party written termination notice if, at any time, the other Party shall: (a) file in any court pursuant to any statute a petition for bankruptcy or insolvency, or for reorganization in bankruptcy, or for an arrangement or for the appointment of a receiver, trustee or administrator of such Party or of its assets; (b) be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within sixty (60) days after the filing thereof; (c) propose or be a party to any dissolution; or (d) make an assignment for the benefit of its creditors.

10.5 Continuing Rights of Sublicensees. Upon any termination of any license rights granted to Inspire under this Agreement, each sublicense previously granted by Inspire or any of its Affiliates under such license rights to any Person that is not an Affiliate of Inspire (each, an “Independent Sublicensee”) shall remain in effect and shall become a direct license or sublicense, as the case may be, of such rights by InSite to such Independent Sublicensee, subject to (i) the Independent Sublicensee agreeing in writing to assume Inspire’s terms, conditions and obligations to InSite under this Agreement as they pertain to the sublicensed rights, and (ii) Inspire remaining liable for any liability to the Independent Sublicensee incurred by Inspire prior to such termination.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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10.6 Effect of Expiration or Termination of Agreement.

(a) Expiration or termination of this Agreement in its entirety pursuant to this Article 10 shall not (i) relieve a Party hereto of any obligation accruing to such Party prior to such termination, or (ii) result in the waiver of any right or remedy by a Party hereto accruing to such Party prior to such termination. Without limiting the foregoing, upon expiration or termination of this Agreement in its entirety pursuant to this Article 10, Inspire shall pay InSite all outstanding accrued payments under this Agreement in the manner required by this Agreement.

(b) Upon termination of this Agreement in its entirety by Inspire pursuant to Section 10.2 or by InSite pursuant to Sections 10.3 or 10.4: (i) all licenses granted to Inspire by InSite under this Agreement will terminate, and all rights therein will revert to InSite; and (ii) Inspire promptly shall assign and surrender to InSite (A) the Regulatory Dossier in the Territory for all Subject Products and (B) all Third Party agreements that relate solely to the Subject Products and are necessary for the development, manufacture or commercialization of Subject Products in the Territory, provided that Inspire has the right to assign such agreements. Inspire promptly shall cease, and cause its Affiliates and sublicensees (subject to Section 10.5) promptly to cease, any sale of any Subject Product in the Territory. In addition, Inspire promptly shall execute any and all other instruments, forms of assignment or other documents and take such further actions as InSite may reasonably request in order to give effect to or evidence the foregoing assignments.

(c) Upon termination of this Agreement in its entirety by Inspire pursuant to Sections 10.3 or 10.4, Inspire shall have a period of [***] months to continue to sell any Inspire Licensed Products in its or its Affiliate’s or sublicensee’s inventory (the “Wind-Down Period”), subject to the payment of royalties and other terms of this Agreement. After the Wind-Down Period, (i) all licenses granted to Inspire by InSite under this Agreement will terminate, and all rights therein will revert to InSite; and (ii) Inspire promptly shall assign and surrender to InSite (A) the Regulatory Dossier in the Territory for all Subject Products and (B) all Third Party agreements that relate solely to the Subject Products and are necessary for the development, manufacture or commercialization of Subject Products in the Territory, provided that Inspire has the right to assign such agreements. After the Wind-Down Period, Inspire shall promptly cease, and cause its Affiliates and sublicensees (subject to Section 10.5) promptly to cease, any sale of any Subject Product in the Territory. In addition, Inspire promptly shall execute any and all other instruments, forms of assignment or other documents and take such further actions as InSite may reasonably request in order to give effect to or evidence the foregoing assignments.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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10.7 Effect of Partial Termination of Agreement.

(a) Termination of this Agreement with respect to a particular country pursuant to this Article 10 shall not (i) relieve a Party hereto of any obligation accruing to such Party prior to such termination, (ii) result in the waiver of any right or remedy by a Party hereto accruing to such Party prior to such termination, or (iii) result in the termination or modification of any rights or obligations of a Party under the Agreement not involved in such termination.

(b) Upon termination of this Agreement with respect to a particular country by Inspire pursuant to Section 10.2 or by InSite pursuant to Section 10.3: (i) the licenses granted to Inspire by InSite under this Agreement solely with respect to such country will terminate, and all such rights will revert to InSite; and (ii) Inspire promptly shall assign and surrender to InSite (A) the Regulatory Dossier in such country for all Subject Products and (B) all Third Party agreements that relate solely to the Subject Products in such country and are necessary for the development, manufacture or commercialization of Subject Products in such country, provided that Inspire has the right to assign such agreements. Inspire promptly shall cease, and cause its Affiliates and sublicensees (subject to Section 10.5) promptly to cease, any sale of any Subject Product in such country. In addition, Inspire promptly shall execute any and all other instruments, forms of assignment or other documents and take such further actions as InSite may reasonably request in order to give effect to or evidence the foregoing assignments.

(c) Upon termination of this Agreement with respect to a particular country by Inspire pursuant to Section 10.3, Inspire shall have a period of twelve (12) months to continue to sell Inspire Licensed Products in such country, subject to the payment of royalties and other terms of this Agreement. After such period, (i) the licenses granted to Inspire by InSite under this Agreement solely with respect to such country will terminate, and all such rights will revert to InSite; and (ii) Inspire promptly shall assign and surrender to InSite (A) the Regulatory Dossier in such country for all Subject Products and (B) all Third Party agreements that relate solely to the Subject Products in such country and are necessary for the development, manufacture or commercialization of Subject Products in such country, provided that Inspire has the right to assign such agreements. After such period, Inspire shall promptly cease, and cause its Affiliates and sublicensees (subject to Section 10.5) promptly to cease, any sale of any Subject Product in such country. In addition, Inspire promptly shall execute any and all other instruments, forms of assignment or other documents and take such further actions as InSite may reasonably request in order to give effect to or evidence the foregoing assignments.

10.8 Inspire Remedy for Uncured Breach. In the event of an Uncured Breach by InSite, the Inspire Royalties with respect to all Inspire Licensed Products immediately shall be reduced by [***] of the amounts otherwise owed by Inspire under this Agreement until such time as InSite

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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has cured such Uncured Breach. For the avoidance of doubt, only one such reduction shall be in effect at any particular time during the Term. For the further avoidance of doubt, such reduction shall be cumulative with, and shall not limit the application of, any other reduction or offset to which Inspire is or may be entitled under this Agreement. In addition, the enumeration of the remedy set forth in this Section 10.8 is not intended to be to the exclusion of other applicable remedies, and it shall not preclude Inspire’s exercise of any other applicable rights or remedies under the Agreement or that may now or hereafter exist at law or in equity.

10.9 Rights in Bankruptcy. All rights and licenses granted under or pursuant to this Agreement by InSite to Inspire are, for all purposes of Section 365(n) of Title 11 of the U.S. Code (“Title 11”), licenses of rights to intellectual property as defined in Title 11. InSite agrees during the Term of this Agreement to maintain and preserve any current copies of all such intellectual property that are in existence and in its possession as of the commencement of a case under Title 11 by or against InSite. If a case is commenced by or against InSite under Title 11, then, unless and until this Agreement is rejected as provided in Title 11, InSite (in any capacity, including debtor-in-possession) and its successors and assigns (including, without limitation, a Title 11 Trustee) shall, as Inspire may elect in a written request, immediately upon such request (a)(i) perform all of the obligations provided in this Agreement to be performed by InSite, or (ii) provide to Inspire copies of all such intellectual property (including all embodiments thereof) held by InSite and such successors and assigns as of the commencement of a case under Title 11 by or against InSite and from time to time thereafter, and (b) not interfere with the rights of Inspire as provided in this Agreement, or any agreement supplementary hereto, to such intellectual property (including all such embodiments thereof), including any right of Inspire to obtain such intellectual property (or such embodiment) from any other entity.

ARTICLE 11

INTELLECTUAL PROPERTY

11.1 Prosecution of InSite Licensed Patents. InSite shall have the obligation to diligently Prosecute the InSite Owned Patents, and, if and to the extent InSite is permitted to do so under the Pfizer Agreement, to diligently Prosecute the Pfizer Patent Rights (the Pfizer Patent Rights with respect to which InSite has such rights, if any, the “Pfizer Prosecution Patents”), in the Territory at no cost to Inspire. InSite and Inspire shall reasonably consult and cooperate with each other regarding the Prosecution of the AzaSite Patent Rights and the Pfizer Prosecution Patents with regard to matters affecting Subject Products.

11.2 Right to Consult. During the Term, InSite shall copy Inspire, or have Inspire copied, on all substantive documents relating to the AzaSite Patent Rights and the Pfizer Prosecution Patents received from or to be filed in any patent office in the Territory, within fifteen (15) days of receipt from the patent office and at least fifteen (15) days prior to filing with the patent office, respectively, including without limitation copies of each patent application, official action, response to official action, declaration, information disclosure statement, request for terminal disclaimer, request for patent term extension, and request for reexamination. Inspire may comment on the Prosecution of the AzaSite Patent Rights and the Pfizer Prosecution Patents with regard to matters affecting Subject Products and provide such comments to InSite’s patent counsel, and InSite shall cause its patent counsel to consider in good faith such comments from Inspire.

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11.3 Abandonment of Prosecution by InSite. InSite shall notify Inspire in the event it for any reason elects to abandon the Prosecution of a particular patent application or maintenance of an issued patent within the AzaSite Patent Rights or the Pfizer Prosecution Patents in the Territory (other than in favor of a continuing application based on such parent application). Such notification shall specify the application to be abandoned or patent that will not longer be maintained by InSite and shall be given within a reasonable period (i.e., with sufficient time for Inspire to take action as may be necessary or desired) prior to the date on which such patent application(s) or patent(s) will lapse or go abandoned. With respect to any such patent application(s) or patent(s) that relate to Subject Products, Inspire shall then have the option with respect to the AzaSite Patent Rights, exercisable upon written notification to InSite, and InSite shall not interfere with any rights Inspire may have with respect to the Pfizer Prosecution Patents, to assume full responsibility, at Inspire’s discretion and at Inspire’s cost and expense, for Prosecution of the affected patent application(s) or maintenance of any of the affected patent(s) in such country or countries in the Territory; provided, however, that Inspire may offset any such costs and expenses against the Milestone Payment or Inspire Royalties or Minimum Royalties due to InSite.

11.4 Patent Term Extensions. Inspire shall have the right to request that InSite file all applications and take actions necessary to obtain patent extension pursuant to 35 U.S.C. § 156 or similar foreign statutes for the AzaSite Patent Rights in the Territory (to the extent affecting Subject Products), which extensions shall be owned by InSite. If InSite declines to pursue such patent extensions, then Inspire shall have the right (at Inspire’s cost and expense) on behalf of InSite to file all such applications and take all such actions necessary to obtain such patent extensions. InSite agrees to sign such further document and take such further actions (at Inspire’s cost and expense) as may be requested by Inspire in this regard. Inspire may offset any costs and expenses incurred by it under this Section 11.4 against the Milestone Payment or Inspire Royalties or Minimum Royalties due to InSite.

11.5 Third Party Infringement.

(a) Suits for Infringement of the InSite Licensed Patents or InSite Trademarks. If InSite or Inspire becomes aware of infringement of any patent included in the InSite Licensed Patents by a Third Party in the Territory, or any material instance of an actual or potential infringement of, or unfair competition by a Third Party affecting, any InSite Trademark used in connection with Inspire Licensed Products in the Territory, such Party shall promptly notify the other Party in writing to that effect and provide a summary of the relevant facts and circumstances known to such Party relating to such infringement (“Infringement Notice”). Promptly after receipt of an Infringement Notice, the Parties shall discuss in good faith the infringement or unfair competition and appropriate actions that could be taken to cause it to cease. Upon Inspire’s request, InSite shall submit to Pfizer a writing approved by Inspire evidencing any infringement of the Pfizer Patent Rights and shall request that Pfizer assert the Pfizer Patent Rights to restrain such infringement. InSite shall keep Inspire informed with respect to any such proceeding as may be instituted by Pfizer. InSite shall have the right, but not be obligated, at its sole

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discretion, on its own behalf, to institute, prosecute and control any action or proceeding to restrain infringement of any InSite Owned Patents or to abate infringement or unfair competition with respect to any InSite Trademarks. In addition, if and to the extent InSite is permitted to do so under the Pfizer Agreement, InSite shall, upon Inspire’s request, institute and diligently prosecute an action or proceeding to restrain infringement of any Pfizer Patent Rights. Inspire shall provide all reasonable cooperation required to prosecute such litigation. InSite shall have sole control of any such suit and all negotiations for its settlement or compromise; provided, however, that (i) InSite shall keep Inspire informed and consult with Inspire with respect to any such proceeding and (ii) InSite shall not settle or compromise any such suit or enter into any agreement or consent order for the settlement or compromise thereof without the prior written consent of Inspire, which consent shall not be unreasonably withheld.

(b) Step-in Right for Inspire. If, prior to the expiration of three (3) months from said Infringement Notice, (i) (A) InSite has not obtained a discontinuance of an alleged infringement of the InSite Owned Patents or an alleged infringement or unfair competition with respect to any InSite Trademarks by a Third Party or brought an infringement action or proceeding or otherwise taken appropriate action to abate such infringement or unfair competition, or (B) if InSite shall notify Inspire at any time prior thereto of its intention not to bring suit against an alleged infringer and (ii) such infringement or unfair competition is not de minimis and is adverse to an Inspire Licensed Product in the Field in the Territory, then Inspire shall have the right, but not be obligated, to institute, prosecute and control any action or proceeding to restrain such infringement or unfair competition. In addition, if InSite is permitted to institute and prosecute an action or proceeding to restrain infringement of any Pfizer Patent Rights, and InSite does not diligently do so within ten (10) days of Inspire’s request therefor, then Inspire shall, subject to any rights of Pfizer with respect to the Pfizer Patent Rights, have the right, but not be obligated, to institute, prosecute and control any action or proceeding to restrain such infringement. InSite agrees to be joined as a party plaintiff if necessary to prosecute any such action or proceeding and shall provide all reasonable cooperation, including any necessary use of its name, required to prosecute any such litigation. InSite shall have the right to join any such action, using counsel of its own choosing and at its own expense. Inspire shall have sole control of any such suit and all negotiations for its settlement or compromise; provided, however, that (i) Inspire shall keep InSite informed and consult with InSite with respect to any such proceeding and (ii) Inspire shall not settle or compromise any such suit or enter into any agreement or consent order for the settlement or compromise thereof without the prior written consent of InSite, which consent shall not be unreasonably withheld.

(c) Costs and Recoveries from Infringement Action. Each Party shall assume and pay all of its own out-of-pocket costs incurred in connection with any litigation or proceedings described in this Section 11.5 including, without limitation, the fees and expenses of that Party’s counsel. Any recovery obtained by any Party as a result of any proceeding described in this Section 11.5, by settlement or otherwise, shall be applied in the following order of priority: (i) first, to reimburse each Party for all litigation costs in connection with such proceeding paid by that Party and not otherwise recovered (on a pro rata basis based on each Party’s respective litigation costs, to the extent the recovery was less than all such litigation costs); and (ii) second, the remainder of the recovery shall be shared equally.

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(d) Declaratory Actions and Counterclaims Against Inspire or InSite. In the event that an action alleging invalidity or non-infringement of any of the InSite Owned Patents shall be brought against InSite or Inspire, InSite, at its sole discretion, shall have the right, but not be obligated, within thirty (30) days after the commencement of such action, to take or regain control of the action at its own expense. If InSite shall determine not to exercise this right, Inspire may take over or remain as lead counsel for the action at Inspire’s sole discretion. Any recovery obtained from such litigation, proceeding or settlement shall be shared in accordance with Section 11.5(c).

11.6 Infringement of Third Party Rights.

(a) Infringement Claims. With respect to any and all claims instituted by Third Parties for patent infringement involving the manufacture, use, offer for sale or sale of an Inspire Licensed Product in the Field in the Territory during the Term, Inspire shall promptly notify InSite of such claim and the Parties shall discuss in good faith such infringement and determine the best course of action. If the Parties cannot agree on the best course of action after such good faith discussions and Inspire in good faith believes that the claim is significant and adverse to the manufacture, use, offer for sale or sale of an Inspire Licensed Product in the Field in the Territory during the Term, then Inspire may proceed with what it deems to be the best course of action in its good faith judgment under the terms of this provision (either this course of action or the agreed upon course of action will be referred to herein as “Course of Action”). Except for any such claims for which InSite is obligated to indemnify Inspire under Section 9.2, Inspire shall have the right, but not be obligated, at its sole discretion, on its own behalf, to pursue any Course of Action. InSite agrees to be joined as a party if necessary to pursue any Course of Action and shall provide all reasonable cooperation, including any necessary use of its name, required for such Course of Action. Inspire shall have sole control of any such Course of Action, including without limitation any associated settlement or compromise; provided, however, that (i) Inspire shall keep InSite informed and consult with InSite with respect to any such Course of Action and (ii) Inspire shall not settle or compromise any such action or proceeding or enter into any agreement or consent order for the settlement or compromise thereof without the prior written consent of InSite, which consent shall not be unreasonably withheld.

(b) Step-in Right for InSite. If, prior to the expiration of three (3) months from said claim being brought, or such sooner period as may be necessary to appropriately respond to said claim, Inspire has not elected to pursue any Course of Action, or if Inspire shall notify InSite at any time prior thereto of its intention not to pursue any Course of Action, then InSite shall have the right, but not be obligated, to defend and control such action or proceeding. Inspire shall provide all reasonable cooperation required to defend such claim, including any necessary use of its name. InSite shall have sole control of any such defense and all negotiations for its settlement or compromise; provided, however, that (i) InSite shall keep Inspire informed and consult with Inspire with respect to any such Course of Action and (ii) InSite shall not settle or compromise any such suit or enter into any agreement or consent order for the settlement or compromise thereof without the prior written consent of Inspire, which consent shall not be unreasonably withheld.

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(c) Costs and Expenses from Defending an Infringement Action. Inspire may offset its out-of-pocket costs, losses and expenses incurred in connection with any Course of Action described in this Section 11.6, including without limitation, the fees and expenses of counsel, against any Inspire Royalties or Minimum Royalties or the Milestone Payment due under this Agreement. Offsets for such costs and expenses may be applied in any calendar quarter or several calendar quarters until the application of such costs and expenses in their entirety.

ARTICLE 12

MISCELLANEOUS

12.1 Consideration. The Parties acknowledge that each of the licenses and rights granted by InSite in Article 2 and each of the provisions of this Agreement for efforts or assistance by InSite and access to InSite Intellectual Property and Pfizer Patent Rights, individually and collectively, constitute good, valuable, and sufficient consideration for each and all of the fees and payments called for hereunder and for each and all of the other obligations of Inspire and its Affiliates and sublicensees; and the Parties further acknowledge that the individual and collective rights under and access to InSite Licensed Patents, InSite Trademarks, InSite Know-How, and InSite Formulation Know-How renders the way in which those fees and payments hereunder are determined, and their duration, appropriate and desirable as a matter of convenience.

12.2 Assignment. This Agreement may not be assigned or otherwise transferred (in whole or in part, whether voluntarily, by operation of law or otherwise) by either Party without the prior written consent of the other Party (which consent shall not be unreasonably withheld); provided, however, that such consent shall not be required in connection with (a) assignment or transfer to an Affiliate of the Party; (b) a merger, consolidation or reorganization of the Party, (c) a sale or transfer of all or substantially all of the voting stock, or all or substantially all of the assets, of the Party, or (d) a sale or transfer by the Party of all or substantially all of the assets of the Party with respect to its program related to Subject Products. Notwithstanding the foregoing, any such assignment or transfer to an Affiliate shall not relieve the assigning Party of its responsibilities for performance of its obligations under this Agreement. The rights and obligations of the Parties under this Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Parties. Any attempted assignment not in accordance with this Agreement shall be void.

12.3 Further Actions. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

12.4 Notices. Notices to InSite shall be addressed to:

InSite Vision Incorporated

965 Atlantic Avenue

Alameda, California 94501

Attention: Chief Executive Officer

Facsimile No.: 510-865-5700

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With a copy to:	O’Melveny & Myers LLP
	2765 Sand Hill Road
	Menlo Park, California 94025
	Attention: Tim Curry, Esq.
	Facsimile No.: 650-473-2601
Notices to Inspire shall be addressed to:
	Inspire Pharmaceuticals, Inc.
	4222 Emperor Boulevard, Suite 200
	Durham, North Carolina 27703
	Attention: General Counsel
	Facsimile No.: 919-941-9797
With a copy to:	Smith, Anderson, Blount,
	Dorsett, Mitchell & Jernigan, L.L.P.
	2500 Wachovia Capitol Center
	Raleigh, North Carolina 27601
	Attention: Christopher Capel
	Facsimile No.: 919-821-6800

Either Party may change the address to which notices shall be sent by giving notice to the other Party in the manner herein provided. Any notice required or provided for by the terms of this Agreement shall be in writing and shall be (i) sent via a reputable overnight courier service, or (ii) sent by facsimile transmission, in each case properly addressed in accordance with the paragraphs above. The effective date of any notice shall be the actual date of receipt by the Party receiving the same.

12.5 Amendment. No amendment, modification or supplement of any provision of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized representative of each Party.

12.6 Waiver. No provision of this Agreement shall be waived by any act, omission or knowledge of a Party or its agents or employees except by an instrument in writing expressly waiving such provision and signed by a duly authorized officer of the waiving Party.

12.7 Counterparts; Facsimile Signatures. This Agreement may be executed in counterparts and such counterparts taken together shall constitute one and the same agreement. This Agreement may be executed by facsimile signatures, which signatures shall have the same force and effect as original signatures.

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12.8 Descriptive Headings. The descriptive headings of this Agreement are for convenience only, and shall be of no force or effect in construing or interpreting any of the provisions of this Agreement.

12.9 Governing Law; Dispute Resolution. This Agreement shall be governed and construed in accordance with the laws of the State of New York, without giving effect to any choice of law provisions thereof. Prior to bringing a legal action against the other Party, such dispute shall be separately negotiated by the Parties hereto in good faith and all reasonable efforts undertaken to settle amicably such matters before resorting to further legal recourse, as follows: upon the occurrence of a dispute between the Parties, including, without limitation, any breach of this Agreement or any obligation relating thereto, or any dispute with respect to whether a product is an Inspire Licensed Product, the matter shall be referred first to the officers of InSite and Inspire having responsibility for the subject matter of the dispute, or their designees. The officers, or their designees, as the case may be, shall negotiate in good faith to resolve such dispute in a mutually satisfactory manner for up to thirty (30) days. If such efforts do not result in mutually satisfactory resolution of the dispute, the matter shall be referred to the chief executive officers of InSite and Inspire, or their designees. The chief executive officers, or their designees, as the case may be, shall negotiate in good faith to resolve such dispute in a mutually satisfactory manner for up to thirty additional (30) days, or such longer period of time to which the chief executive officers may agree.

12.10 Severability. If any provision hereof should be held invalid, illegal or unenforceable in any respect in any jurisdiction, the Parties hereto shall use reasonable efforts to substitute, by mutual written consent, valid provisions for such invalid, illegal or unenforceable provisions which valid provisions in their economic effect are sufficiently similar to the invalid, illegal or unenforceable provisions that it can be reasonably assumed that the Parties would have entered into this Agreement with such valid provisions. In case such valid provisions cannot be agreed upon, the invalid, illegal or unenforceable provisions of this Agreement shall not affect the validity of this Agreement as a whole, unless the invalid, illegal or unenforceable provisions are of such essential importance to this Agreement that it is to be reasonably assumed that the Parties would not have entered into this Agreement without the invalid, illegal or unenforceable provisions.

12.11 Entire Agreement of the Parties. This Agreement hereby, together with the Trademark License Agreement and the Schedules and Exhibits hereto and thereto, constitutes and contains the complete, final and exclusive understanding and agreement of the Parties and cancels and supersedes any and all prior negotiations, correspondence, understandings and agreements whether oral or written, between the Parties respecting the subject matter hereof and thereof.

12.12 Independent Parties. The relationship between the Parties created by this Agreement is one of independent contractors and is not a joint venture, partnership or any similar arrangement. Neither Party shall have the power or authority to bind or obligate the other except as expressly set forth in this Agreement.

12.13 Accrued Rights; Surviving Obligations. Unless explicitly provided otherwise in this Agreement, termination, relinquishment or expiration of this Agreement for any reason shall be without prejudice to any rights that shall have accrued to the benefit to any Party prior to such

55

termination, relinquishment or expiration, including damages arising from any breach hereunder. Such termination, relinquishment or expiration shall not relieve any Party from obligations which are expressly indicated to survive termination or expiration of the Agreement. Without limiting the foregoing, the obligations and rights set forth in Sections 2.1(e), 5.7, 6.2, 10.5, 10.6, and Articles 1 (to the extent required to enforce other surviving rights or obligations), 8, 9 and 12 hereof shall survive the termination or expiration of this Agreement.

12.14 Certain Remedies. Each Party acknowledges and agrees that the other Party would be irreparably damaged if any of the provisions of this Agreement (other than provisions involving the payment of money) are not performed by a Party in accordance with their specific terms, and that any breach of, or failure to perform or comply with, this Agreement by a Party could not be adequately compensated in all cases by monetary damages alone. Accordingly, in addition to any other right or remedy to which a Party may be entitled at law or in equity, it shall be entitled to enforce any provision of this Agreement (other than provisions involving the payment of money) by a decree of specific performance and to temporary, preliminary and permanent injunctive relief to prevent breaches or threatened breaches of any of the provisions of this Agreement, without posting any bond or other undertaking.

12.15 Expenses. Unless otherwise provided herein, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party that shall have incurred the same and the other Party shall have no liability relating thereto.

12.16 No Third Party Beneficiaries. No person or entity other than the Parties hereto and their respective Affiliates, successors and permitted assigns shall be deemed an intended beneficiary hereunder or have any right to enforce any obligation of this Agreement.

12.17 No Strict Construction. This Agreement has been prepared jointly and shall not be strictly construed against either Party.

[Signature Page Immediately Follows]

56

IN WITNESS WHEREOF, duly authorized representatives of the Parties have duly executed this Agreement as of the Effective Date.

INSITE VISION INCORPORATED
By:	/s/ S. Kumar Chandrasekaran
Name:	S. Kumar Chandrasekaran
Title:	CEO
INSPIRE PHARMACEUTICALS, INC.
By:	/s/ Christy L. Shaffer
Name:	Christy L. Shaffer
Title:	President & CEO

SIGNATURE PAGE TO LICENSE AGREEMENT

57

Schedule 1

InSite Licensed Patents

DuraSite Patent Rights:

[***]

AzaSite Patent Rights:

U.S. Patent Nos. 6,239,113; 6,569,443, 7056,893

[***]

Columbia Patent Rights:

[***]

Container Patent Rights:

[***]

Pfizer Patent Rights:

U.S. Patent No. 6,861,411

[***]

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Schedule 1.24

InSite Trademarks

Trademarks

U.S.:

DuraSite

DuraSite^® US Trademark Number: 1769077

AzaSite

AzaSite™ US Trademark Application Number: 78/426,374

Canada:

DuraSite

DuraSite^® Canadian Registration Number 432299

AzaSite

AzaSite™ Canadian Trademark Application Number 1325128

Domain Name

www.AzaSite.com

Schedule 2.3(b)

AzaSite Trademark Assignment Agreement

(See attached document)

ASSIGNMENT OF TRADEMARKS

This ASSIGNMENT OF TRADEMARKS (this “Assignment”) is dated and made as of                     , 2007, by and between InSite Vision Incorporated, a Delaware corporation (“Assignor”), and Inspire Pharmaceuticals, Inc., a Delaware corporation (“Assignee”).

RECITAL

Assignee and Assignor are parties to a License Agreement dated as of February 15, 2007. In accordance therewith, Assignor desires to transfer and assign to Assignee, and Assignee desires to accept the transfer and assignment of, all of Assignor’s right, title and interest in, to and under Assignor’s registered and unregistered trademarks with respect to AzaSite [AzaSite Plus to be added as applicable] in the United States of America, and the territories and possessions thereof, and all registrations and registration applications associated therewith, including without limitation any and all of the foregoing listed on Schedule A annexed hereto and incorporated herein by reference (all of the foregoing being referred to herein as the “Marks”).

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor does hereby irrevocably and unconditionally transfer and assign to Assignee, and Assignee does hereby accept such transfer and assignment, all of Assignor’s right, title and interest in, to, and under (i) the Marks, together with the goodwill associated therewith and which is symbolized thereby, and any and all renewals and extensions thereof that may hereafter be secured, now or hereafter in effect, and (ii) all claims and causes of action for damages and other relief by Assignor by reason of all past and future infringements, dilutions, and other violations of any and all rights under such Marks along with Assignor’s right to sue under such claims and to collect and enjoy damages, benefits, and other remedies resulting therefrom, all the foregoing to be held and enjoyed by Assignee, its successors and assigns from and after the date hereof as fully and entirely as the same would have been held and enjoyed by Assignor had this Assignment not been made.

Assignor agrees to assist Assignee by executing such other instruments and taking such other actions as requested by Assignee to vest sole and exclusive ownership of the Marks in Assignee’s name and to otherwise give full effect to the rights granted to Assignee hereunder.

Assignor hereby authorizes and requests the Director of the U.S. Patent and Trademark Office, and the similar authorities in all trademark, intellectual property, or other offices where any of the registration applications included in the Marks have been or may be filed, to issue any registrations arising from said applications to Assignee for its sole use and advantage; and for the use and advantage of its legal representatives and assigns, to the full end of the term, and any extensions thereof, for which such registrations may be granted, as fully and entirely as the same would have been held by Assignor had this Assignment not been made.

Assignor hereby authorizes Assignee to file this Assignment and any other documents relating thereto with the U.S. Patent and Trademark Office and the trademark, intellectual property, or other offices where any registrations or registration applications for Marks have been or may be filed or issued for purposes of having the Assignment recorded therein and to place sole and exclusive right, title, and interest in and to such Marks in the name of Assignee.

This Assignment is effective as of                     , 2007.

Except to the extent that federal law preempts state law with respect to the matters covered hereby, this Assignment shall be governed and construed in accordance with the laws of the State of New York, without giving effect to any choice of law provisions thereof.

IN WITNESS WHEREOF, each party has caused its duly authorized officer to execute this Assignment as of the date set forth below.

InSite Vision Incorporated

By:

Name:

Title:

Inspire Pharmaceuticals, Inc.

By:

Name:

Title:

SCHEDULE A

AzaSite

AzaSite™ US Trademark Application Number: 78/426,374

[AzaSite Plus to be added as applicable.]

Schedule 3.1(a)

Final Audited Study Reports

[***]

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Schedule 3.1(c)

Data and Information Related to AzaSite

All data supplied in NDA-50-810 and Amendments to 50-810 which has been supplied to Inspire

Schedule 4.3

Wire Transfer Instructions for Redemption Amount

Bank:	[***]
ABA #:	[***]
Credit Account #:	[***]
Acct Name:	[***]
Reference:	[***]
Attn:	[***]

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Schedule 5.3(a)

Minimum Royalties

Minimum Royalty Period	Required Minimum Royalty for Period (US$)
First Minimum Royalty Period:	[***]
Second Minimum Royalty Period:	[***]
Third Minimum Royalty Period:	[***]
Fourth Minimum Royalty Period:	[***]
Fifth Minimum Royalty Period:	[***]

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Schedule 5.5

Wire Transfer Instructions

Bank:	[***]
ABA #:	[***]
Credit Account #:	[***]
Acct Name:	[***]
Attn:	[***]

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Schedule 8.3

Scientific Publications

Abstracts and Articles:

1. Ocular Bioavailability and Systemic Levels of an Ophthalmic Formulation of Azithromycin, ISV-401. E.C. Si, L.M. Bowman, S.D. Roy. Invest Ophthalmol Vis Sci. 2003. E—Abstract 1461. Presented at: The Association for Research in Vision and Ophthalmology, Monday, May 5, 2003.

2. A Randomized Trial Assessing Microbial Eradication and Clinical Efficacy of 1% Azithromycin Ophthalmic Solution vs. Tobramycin in Pediatric and Adult Subjects with Bacterial Conjunctivitis. M. B. Abelson, E. E. Protzko, A. M. Shapiro, AzaSite Clinical Study Group. Invest Ophthalmol Vis Sci. 2006. E—Abstract 3589. Presented at: The Association for Research in Vision and Ophthalmology, Wednesday, May 3, 2006.

3. A Randomized Trial Assessing Safety and Tolerability of 1% Azithromycin Ophthalmic Solution vs. Tobramycin in Pediatric and Adult Subjects with Bacterial Conjunctivitis. E. E. Protzko, M.B. Abelson, A.M. Shapiro, AzaSite Clinical Study Group. Invest Ophthalmol Vis Sci. 2006. E—Abstract 4958 Presented at: The Association for Research in Vision and Ophthalmology, Thursday, May 4, 2006.

4. Safety and Tolerability of Azithromycin 1% Eye Drops as Anti-infective Therapy for Bacterial Conjunctivitis. W. Heller, M.B. Abelson, A.M. Shapiro, The AzaSite Clinical Study Group. Presented at: The Annual Meeting of the American Academy of Ophthalmology, November 11-14, 2006.

5. Efficacy of Azithromycin 1% Eye Drops vs. Vehicle as First-Line Therapy for Bacterial Conjunctivitis. M.B. Abelson, A.M. Shapiro, W. Heller, The AzaSite Clinical Study Group. Presented at: The Annual Meeting of the American Academy of Ophthalmology, November 11-14, 2006.

6. DuraSite as a Drug Delivery Platform. M.H. Friedlaender, L. Bowman, E. Si Presented at: The Annual Meeting of the Association for Ocular Pharmacology and Therapeutics 8^th Scientific Meeting, February 9-11, 2007.

7. Frequent Dosing with Topical 1% Azithromycin is Effective in Reducing Azithromycin-Resistant Pseudomonas aeruginosa Colony Counts in a NZW Rabbit Model. K.A. Yates, E.G. Romanowski, R.P. Kowalski, F.S. Mah, Y.J. Gordon. Accepted at: The Association for Research in Vision and Ophthalmology 2007.

8. Development of a Commercial Eye Drop Formulation of Azithromycin. L.M. Bowman, E. Si, J. Pang, M. Friedlaender Accepted at: The Association for Research in Vision and Ophthalmology 2007.

9. Phase 3 Safety Comparisons for 1.0% Azithromycin in a Polymeric Mucoadhesive Eyedrop vs. 0.3% Tobramycin Eyedrops for Bacterial Conjunctivitis. Protzko E., Bowman L., Shapiro A., Abelson M.B. and AzaSite Study Group. Invest Ophthalmol Vis Sci. in press.

10. “Study results promising: Antibiotic product treats bacterial conjunctivitis effectively” Ophthalmology Times, Nov 2002: Advanstar Communications. Article Link.

11. Groves N, Abelson MB “Antibiotic combats acute bacterial conjunctivitis” Ophthalmology Times April 2003: Advanstar Communications. Article Link.

12. “Patent covers all azalide use for ocular infections” Ophthalmology Times, May 2003: Advanstar Communications. Article Link

13. Abelson M.B. Chapin M., Plumer A. “Ophthalmic drugs: What’s in the pipeline?” Ophthalmology Times, May 2005: Advanstar Communications. Article Link

14. Lines L., Abelson M.B. “The Ophthalmic Pharmaceutical Pipeline Expands” Ophthalmology Times, Jul 2006: Advanstar Communications. Article Link

15. Guttman C. “Long-acting azithromycin safe, effective in treating bacterial conjunctivitis.” Ophthalmology Times, Jul 2006: M.B. Abelson (editor) Advanstar Communications. Article Link

70

16. Donnenfeld E. “Azithromycin with DuraSite offers stability, increased corneal contact.” Ocular Surgery News, November 2006: vol. 24 issue 22. Slack Incorporated.

17. Abelson M.B. “Pearls from ARVO—allergies, AMD and therapeutics” Eye World August 2006: Lisa Lines (Editor). ASCRS Ophthalmic Services Corp. Article Link.

18. Realini T. “New Topical Broad Spectrum Antibiotic on the Horizon: Phase 3 Trial of Azithromycin Yields Promising Results.” Eye World, February 2007: Vol. 12;2:20-21 A. Shapiro and W.H. Heller (editors) : ASCRS Ophthalmic Services Corp. Current Issue Main Page

Submitted Chapters and Manuscripts:

19. Donnenfeld E., Friedlaender M.H. “Azithromycin in Ophthalmology: A New Therapy” in Clinical Applications of Antibiotics and Antiinflammatory Drugs in Ophthalmology A. Garg, E. Donnenfeld, J. Shepard, M. Friedlaender (Editors). M/S Jaypee Brothers Medical Publisher Pvt. Ltd, New Delhi, Publishers. 2007

20. Friedlaender M.H., Protzko E. 1% Azithromycin in DuraSite: Clinical Development of Topical Azalide Anti-Infective for Ocular Surface Therapy. Clinical Ophthalmology. 2007.

21. A Randomized Trial Assessing the Clinical Efficacy and Microbial Eradication of 1% Azithromycin Ophthalmic Solution vs. Tobramycin in Adult and Pediatric Subjects with Bacterial Conjunctivitis Abelson M.B., Bowman L., Shapiro A., Protzko E. and AzaSite Study Group. Clinical Ophthalmology

Manuscripts in Progress

22. Abelson M.B., Bowman L., Shapiro A., Heller W.H. and AzaSite Study Group “Efficacy and Safety of Topical 1% Azithromycin in DuraSite vs. Vehicle for Bacterial Conjunctivitis”

EX-10.2

EXHIBIT 10.2

EXECUTION VERSION

[NOTE: CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN MARKED TO INDICATE THAT CONFIDENTIAL INFORMATION HAS BEEN OMITTED. CONFIDENTIALITY HAS BEEN REQUESTED FOR THIS CONFIDENTIAL INFORMATION. THE CONFIDENTIAL PORTIONS HAVE BEEN PROVIDED SEPARATELY TO THE SECURITIES AND EXCHANGE COMMISSION]

SUPPLY AGREEMENT FOR ACTIVE PHARMACEUTICAL INGREDIENT

by and between

INSPIRE PHARMACEUTICALS, INC.

and

INSITE VISION INCORPORATED

Dated as of February 15, 2007

TABLE OF CONTENTS

		Page
ARTICLE 1	DEFINITIONS	1
ARTICLE 2	MANUFACTURE AND SUPPLY OF API	6
ARTICLE 3	ORDERS AND FORECASTING; EIGHTEEN MONTH SUPPLY; DELIVERY	6
ARTICLE 4	PASSING OF TITLE AND RISK OF LOSS IN API	9
ARTICLE 5	PRICE OF API	9
ARTICLE 6	INVOICE AND PAYMENT	10
ARTICLE 7	CAPACITY	11
ARTICLE 8	COMPLAINTS AND PRODUCT RECALL	11
ARTICLE 9	REJECTION AND REPLACEMENT OF DEFECTIVE API	12
ARTICLE 10	QUALITY ASSURANCE; REGULATORY COMPLIANCE; AUDITS AND INSPECTION; PRODUCT LICENSE; MANUFACTURING LICENSE; DOCUMENTATION AND REPORTS	14
ARTICLE 11	CONFIDENTIALITY	15
ARTICLE 12	FORCE MAJEURE EVENT	17
ARTICLE 13	REPRESENTATIONS AND WARRANTIES	17
ARTICLE 14	LIABILITY AND INDEMNIFICATION	19
ARTICLE 15	INSURANCE	21
ARTICLE 16	TERM; TERMINATION; REMEDIES	22
ARTICLE 17	MISCELLANEOUS	25

SCHEDULES
SCHEDULE 1	SPECIFICATIONS
SCHEDULE 2	PRICE

SUPPLY AGREEMENT

This SUPPLY AGREEMENT (this “Agreement”) is made and entered into as of the 15th day of February, 2007 (the “Effective Date”) by and between INSPIRE PHARMACEUTICALS, INC., a Delaware corporation having its principal office at 4222 Emperor Boulevard, Suite 200, Durham, North Carolina 27703 (the “Purchaser”), and InSite Vision Incorporated, a Delaware corporation having its principal office at 965 Atlantic Avenue, Alameda, California 94501 (the “Supplier”). The Purchaser and the Supplier are sometimes referred to herein individually as a “Party” and collectively as “Parties.”

RECITALS

WHEREAS, [***] is engaged in the business of manufacturing and supplying the active pharmaceutical ingredient azithromycin [***];

WHEREAS, the Supplier purchases azithromycin [***] from [***] pursuant to that certain Commercial Supply/Purchase Agreement dated April 1, 2005 by and between the Supplier and [***] (the “[***] Agreement”); and

WHEREAS, the Purchaser desires to purchase azithromycin [***] manufactured by [***] from the Supplier.

NOW, THEREFORE, in consideration of the foregoing recitals, mutual covenants, agreements, representations and warranties contained herein, the Parties hereby agree as follows:

ARTICLE 1

DEFINITIONS

In this Agreement:

1.1 “Affiliate” means a corporation or non-corporate business entity that, directly or indirectly, controls, is controlled by, or is under common control with the Person specified. An entity will be regarded as in control of another entity if: (i) it owns, directly or indirectly, at least 50% of the voting securities or capital stock of such entity, or has other comparable ownership interest with respect to any entity other than a corporation; or (ii) it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the corporation or non-corporate business entity, as applicable, whether through the ownership or control of voting securities, by contract or otherwise.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

1

1.2 “Agreement” means this Supply Agreement together with all of its schedules (the “Schedules”).

1.3 “API” means the active pharmaceutical ingredient azithromycin [***] as described in the relevant Specifications for use by the Purchaser and/or Purchaser’s Nominated Contract Manufacturer in the manufacture of Product pursuant to the License Agreement.

1.4 “Applicable Laws” means all Legal Requirements applicable to the Manufacture of API, including not only in the country of Manufacture but also (i) where API is to be supplied to another country, the Legal Requirements in such country applicable to the Manufacture and sale of Product in such country and (ii) the Legal Requirement of the United States, including the Regulatory Acts, applicable to the Manufacture and sale of Product in the United States.

1.5 “Business Day” means any day, except Saturday and Sunday, on which commercial banking institutions in New York are open for business. Any reference in this Agreement to “day” whether or not capitalized shall refer to a calendar day, not a Business Day.

1.6 “Certificate of Analysis” means a certificate provided by a representative of [***] authenticating the pharmaceutical analysis of each batch of API supplied under this Agreement.

1.7 “Commercially Reasonable Efforts” means, with respect to the efforts of a particular Party to complete specific tasks or obligations under this Agreement, the efforts and resources that would be used, consistent with prevailing pharmaceutical industry standards, by a company of similar size and scope to such Party taking into account efficacy, safety and other relevant factors. Commercially Reasonable Efforts shall be determined on a country-by-country basis. With respect to the efforts of the Supplier to compel [***] to undertake any action as required under this Agreement, the Supplier’s rights and obligations under the [***] Agreement shall be considered in the determination of what efforts constitute Commercially Reasonable Efforts.

1.8 “Confidential Information” of a Party means all secret, confidential or proprietary information or data, whether provided in written, oral, graphic, video, computer or other form, provided by such Party (the “Disclosing Party”) to the other Party (the “Receiving Party”) pursuant to this Agreement (including information generated by or on behalf of such Party pursuant to this Agreement and disclosed to the other Party), which may include without limitation information relating to the Disclosing Party’s existing or proposed research, development efforts, patent applications, business or products and any other materials that have not been made available by the Disclosing Party to the general public. The terms of this Agreement shall also be deemed Confidential Information of each Party, except to the extent

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

2

disclosed pursuant to Section 11.3 herein. Notwithstanding the foregoing sentences, the term “Confidential Information” shall not include any information or materials that the Receiving Party can demonstrate:

(a) were already known to the Receiving Party (other than under an obligation of confidentiality), at the time of disclosure by the Disclosing Party to the extent such Receiving Party has documentary evidence to that effect;

(b) were generally available to the public or otherwise part of the public domain at the time of its disclosure to the Receiving Party;

(c) became generally available to the public or otherwise part of the public domain after its disclosure or development, as the case may be, and other than through any act or omission of the Receiving Party in breach of its confidentiality obligations under this Agreement;

(d) were subsequently lawfully disclosed to the Receiving Party by a Third Party who had no obligation to the Disclosing Party not to disclose such information to others;

(e) were independently discovered or developed by or on behalf of the Receiving Party without the use of the Confidential Information belonging to the other Party and the Receiving Party has documentary evidence to that effect; or

(f) is approved for release by the Disclosing Party in writing.

1.9 “Consent” means any consent, authorization, permit, certificate, license or approval of, exemption by, or filing with, any Regulator or other Person.

1.10 “Current Good Manufacturing Practices” or “cGMPs” shall mean the then-current version of ICH-Q7A Good Manufacturing Practice Guidance For Active Pharmaceutical Ingredients and the then-current principles detailed in the U.S. Current Good Manufacturing Practices, 21 CFR Parts 210 and 211.

1.11 “Delivery” means in each case the delivery of API in accordance with the requirements of Section 4.1.

1.12 “Disclosing Party” has the meaning set forth in Section 1.8.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

3

1.13 “DMF” means in relation to API the Drug Master File containing all the information on the production and control of API.

1.14 “Effective Date” has the meaning set forth in the first (1^st) paragraph hereof.

1.15 “Eighteen Month Supply” means the quantity of API forecasted in the applicable Forecast Schedule.

1.16 “FDA” means the United States Food and Drug Administration, or any successor agency thereof.

1.17 “Firm Order” or “Firm Orders” has the meaning set forth in Section 3.3.

1.18 “Force Majeure Event” has the meaning set forth in Section 12.1.

1.19 “Forecast Schedule” has the meaning set forth in Section 3.2.

1.20 “Good Condition” means that API supplied is the right product, made in accordance with the registered process, has in no way deteriorated or broken down, is not damaged or contaminated upon Delivery, is in the right container, is correctly labelled and properly sealed in its container, accords with the relevant Specifications and is capable of any agreed standard of performance.

1.21 “Indemnitee” has the meaning set forth in Section 14.3(a).

1.22 “Indemnitor” has the meaning set forth in Section 14.3(a).

1.23 “Independent Laboratory” means such laboratory as shall be mutually agreed in writing between the Parties for the purpose of Article 9.

1.24 “Initial Term” has the meaning set forth in Section 16.1.

1.25 “Knowledge” means, with respect to a particular fact or matter, the applicable Party or its Affiliate is actually aware of that fact or matter as of the Effective Date following a reasonably comprehensive internal investigation among such Party’s or Affiliate’s officers and employees who could reasonably be expected to be aware of such fact or matter.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

4

1.26 “Legal Requirements” shall mean any and all applicable local, municipal, provincial, federal and international laws, statutes, ordinances, rules, regulations or operating procedures now or hereafter enacted or promulgated by any Regulator, including the Regulatory Acts.

1.27 “License Agreement” shall mean that certain License Agreement by and between the Purchaser and the Supplier dated as of February 15, 2007.

1.28 “Loss” or “Losses” has the meaning set forth in Section 14.1.

1.29 “Manufacture” or “Manufacturing” means the planning, purchasing, manufacture, processing, compounding, storage, filling, packaging, waste disposal, labelling, leafleting, testing, quality assurance, sample retention, stability testing, release, dispatch and supply of API.

1.30 “Manufacturing License” means all licenses necessary for or required in connection with the Manufacture of API at the Manufacturing Site.

1.31 “Manufacturing Site” means the manufacturing facility of [***] at [***].

1.32 “Material Safety Data Sheet” means the material safety data sheet provided by a representative of [***] with respect to each batch of API supplied under this Agreement.

1.33 “Other Purchaser Default” has the meaning set forth in Section 16.6.

1.34 “Other Supplier Default” has the meaning set forth in Section 16.3.

1.35 “Party” or “Parties” has the meaning set forth in the first (1^st) paragraph hereof.

1.36 “Person” or “person” means any individual, firm, corporation, partnership, limited liability company, trust, unincorporated organization or other entity or a government agency or political subdivision thereto, and shall include any successor (by merger or otherwise) of such Person.

1.37 “Price” means the price of API calculated pursuant to Article 5.

1.38 “Product” means the finished pharmaceutical products Manufactured by Purchaser pursuant to the License Agreement that contain API as an active ingredient.

1.39 “Purchaser” has the meaning set forth in the first (1^st) paragraph hereof.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

5

1.40 “Purchaser Indemnitee” has the meaning set forth in Section 14.1.

1.41 “Purchaser Material Default” has the meaning set forth in Section 16.5.

1.42 “Purchaser’s Nominated Contract Manufacturer” means Cardinal Health PTS, LLC and such other Third Party manufacturer reasonably acceptable to Supplier as may be confirmed by the Purchaser to the Supplier in writing from time to time as being appointed by the Purchaser to manufacture Product on behalf of the Purchaser and to whom supplies of API shall be Delivered for this purpose pursuant to this Agreement.

1.43 “Receiving Party” has the meaning set forth in Section 1.8.

1.44 “Regulator” means any relevant nation or government, any state, province, or other political subdivision thereof or any entity with legal authority to exercise executive, legislative, judicial, regulatory or administrative functions or pertaining to government which regulates any aspect of the Manufacture of API or active pharmaceutical ingredient in general and/or the sale or marketing of any Product, including any division of the FDA (as applicable) and any other applicable counterpart agency that administers the Regulatory Acts of any jurisdiction.

1.45 “Regulatory Acts” means all Applicable Laws and regulations that govern the approval, manufacture, sale or licensing of pharmaceutical products, or ingredients for inclusion therein, including, without limitation, the United States Federal Food, Drug and Cosmetic Act, as amended and the rules and regulations promulgated thereunder.

1.46 “Renewal Term” has the meaning set forth in Section 16.1.

1.47 “[***]” has the meaning set forth in the first (1^st) recital hereof.

1.48 “[***] Agreement” has the meaning set forth in the second (2^nd) recital hereof.

1.49 “[***] Confidential Information” means Confidential Information (as defined in the [***] Agreement) of [***] received by the Supplier pursuant to the [***] Agreement.

1.50 “Schedules” has the meaning set forth in Section 1.2.

1.51 “SEC” has the meaning set forth in Section 11.2.

1.52 “Seed Stock” has the meaning set forth in Section 3.1.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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1.53 “Specifications” means the specifications for API as identified in Schedule 1.

1.54 “Supplier” has the meaning set forth in the first (1^st) paragraph hereof.

1.55 “Supplier Indemnitee” has the meaning set forth in Section 14.2.

1.56 “Supplier Material Default” has the meaning set forth in Section 16.2.

1.57 “Term” has the meaning set forth in Section 16.1.

1.58 “Third Party(ies)” means any Person other than the Supplier, the Purchaser and their respective Affiliates.

1.59 “Third Party Claim” means any Third Party claim, demand, suit, action or proceeding.

ARTICLE 2

MANUFACTURE AND SUPPLY OF API

2.1 Manufacture and Supply. In accordance with the terms of this Agreement, the Supplier shall sell to the Purchaser those requirements for API Manufactured by [***] as forecasted and ordered from time to time by the Purchaser in accordance with Article 3, and shall supply such quantities of API to the Purchaser and/or Purchaser’s Nominated Contract Manufacturer (as applicable) for use in the Manufacture of Product.

2.2 Compliance with Specifications; Quality Standards. All API supplied hereunder shall comply with the warranty set forth in Section 13.2(c).

2.3 [***] Agreement. The Supplier shall comply with all material terms and conditions set forth in the [***] Agreement.

ARTICLE 3

ORDERS AND FORECASTING; EIGHTEEN MONTH SUPPLY; DELIVERY

3.1 Seed Stock. The Supplier shall Deliver to Purchaser and/or Purchaser’s Nominated Contract Manufacturer [***] (the “Seed Stock”). The Seed Stock shall be Delivered as follows: (a) [***] in the aggregate of API on the date hereof; and (b) sufficient quantities of API so that the Seed Stock equals [***] in the aggregate of API on [***]. Title and risk of loss for the Seed Stock shall transfer to Purchaser in accordance with Section 4.2. Purchaser shall pay for the Seed Stock as follows: (y) notwithstanding Section 6.1, [***]upon shipment of the Seed Stock in accordance with Section 6.1.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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3.2 Quarterly Forecast. The Purchaser and/or Purchaser’s Nominated Contract Manufacturer (as applicable) shall provide the Supplier with a rolling forecast schedule of demand showing their estimated requirements for API for the following [***] months (“Forecast Schedule”). The Forecast Schedule shall be updated [***] and shall contain, in addition to quantity of API required, the requested delivery date. The first such Forecast Schedule shall be provided to the Supplier on the date hereof and thereafter by the first (1^st) day of each [***]. All forecasts and orders under this Agreement shall be in multiples of the minimum order quantity of [***].

3.3 Eighteen Month Supply. The Supplier shall build up at the Purchaser’s or Purchaser’s Nominated Contract Manufacture’s (as applicable) location the Eighteen Month Supply of API in accordance with the following schedule: (a) [***] in the aggregate of API on the date hereof; (b) [***] in the aggregate of API on June 30, 2007; (c) [***] in the aggregate of API on December 31, 2007; and (d) the Eighteen Month Supply shall be fully Delivered on June 30, 2008. The Seed Stock shall be part of the Eighteen Month Supply and shall be included in determining the quantity of the Eighteen Month Supply at all times. At all times after June 30, 2008 during the term of this Agreement, the Supplier shall ensure that API is Delivered to Purchaser or Purchaser’s Nominated Contract Manufacturer in amounts sufficient to maintain, in the aggregate, the Eighteen Month Supply. Notwithstanding the preceding sentence, Purchaser acknowledges and agrees that the Supplier shall not be in breach of such obligation to maintain the Eighteen Month Supply if: (y) the quantity of API in inventory at the Purchaser’s or Purchaser’s Nominated Contract Manufacturer’s (as applicable) location, in the aggregate, falls below the Eighteen Month Supply while awaiting Delivery of API from [***] on orders already placed by the Supplier for the benefit of the Purchaser; or (z) the amount of API required for the Eighteen Month Supply increases as a result of the Purchaser’s Forecast Schedule and the Supplier is using its Commercially Reasonable Efforts to expedite Delivery of such increased amount in accordance with the Supplier’s then-current ordering processes with [***] so long as (i) Delivery occurs no later than seven (7) months from the date of such Forecast Schedule and (ii) the Supplier satisfies such increase from the Supplier’s own inventory of API by allocating its existing stock among the Purchaser and such other Third Parties to whom the Supplier supplies API on a pro rata basis. If the Supplier allocates API to the Purchaser from the Supplier’s own inventory, the Parties will discuss in good faith how such allocation will be documented and applied toward the Supplier’s obligations under this Section 3.3. The Purchaser shall be responsible for all storage, insurance and other costs required to maintain the Eighteen Month Supply; provided, however, the Supplier shall reimburse the Purchaser for one-third (1/3) of all such reasonable and documented costs within thirty (30) days of invoice thereof by the Purchaser.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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3.4 Firm Orders. Upon submittal of each Forecast Schedule, the quantities of API required for the Supplier to meet its obligations under Section 3.3 above will be regarded by the Parties as a binding irrevocable commitment (each a “Firm Order”) by the Purchaser to buy from the Supplier, and by the Supplier to supply (or cause to be supplied) to the Purchaser and/or Purchaser’s Nominated Contract Manufacturer (as appropriate).

3.5 Confirmation of Firm Orders. The Supplier shall respond to each Firm Order received from the Purchaser within thirty (30) days of receipt. The response shall include confirmation of the delivery dates and quantity as set out in the Firm Order. In the event that discussion is required regarding the timing of production and Delivery, then the relevant planning personnel from both Parties will agree and confirm any amendments to the Firm Order within ten (10) days of receipt by the Supplier of the original Firm Order.

3.6 Changes to Firm Orders. The Supplier shall satisfy the Purchaser’s requirements pertaining to each Firm Order and, subject to the Supplier’s rights under the [***] Agreement, shall use Commercially Reasonable Efforts to satisfy any changes in quantity, Delivery phasing or dates requested by the Purchaser in respect of such a Firm Order. In the event that the Supplier becomes aware that any Firm Order will not be satisfied, then the Supplier shall inform the Purchaser as soon as reasonably practicable and in any event within ten (10) Business Days. This shall be without prejudice to the Purchaser’s rights under this Agreement in respect of failure to meet Firm Orders.

3.7 Shipment. Each lot of API shall be shipped in reinforced cardboard boxes bagged in foil laminate pouches that meet U.S. Department of Transportation requirements per 49 CFR 171 and 178, as applicable, and each container will be clearly labelled with the weight, name, lot number, and expiration date. The Purchaser or Purchaser’s Nominated Contract Manufacturer (as appropriate) shall be provided with each Delivery the commercial invoice bearing the applicable order number relating to such Delivery and any other agreed Delivery documentation. At the Purchaser’s request, the Supplier shall provide the Purchaser with reasonable access to any applicable supporting data in the Supplier’s possession, available to the Supplier or that the Supplier is able to obtain using Commercially Reasonable Efforts.

3.8 Delivery. Delivery shall take place within the period from two days prior to two days after the delivery date contained in the Firm Order. If API is incorrectly delivered according to the Firm Order, the Supplier shall be held responsible for any reasonable and documented additional expense incurred in Delivering it to the correct point specified in the Firm Order.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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3.9 Incomplete Delivery. The Purchaser or, if relevant, Purchaser’s Nominated Contract Manufacturer shall notify the Supplier as soon as reasonably practicable if there is an incomplete delivery according to the terms of this Agreement. If the Supplier is notified by telephone or in person, then such notification shall be confirmed in writing. The Supplier shall then be obligated to rectify the incomplete delivery within sixty (60) days, running from the first date the Supplier receives such notification, provided this shall be without prejudice to any other rights or obligations under this Agreement. In addition, the Supplier shall rectify the incomplete delivery from the Supplier’s own inventory of API by allocating its existing stock among the Purchaser and such other Third Parties to whom the Supplier supplies API on a pro rata basis. If the Supplier allocates API to the Purchaser from the Supplier’s own inventory, the Parties will discuss in good faith how such allocation will be documented and applied toward the Supplier’s obligations under Section 3.3.

3.10 Certificate of Analysis; Material Safety Data Sheet. At the time of Delivery to the Purchaser or Purchaser’s Nominated Contract Manufacturer, the Purchaser shall be provided one (1) completed copy of the Certificate of Analysis and Material Safety Data Sheet relating to each batch of API Delivered.

3.11 Discontinuation. The Supplier shall notify the Purchaser in writing no less than twelve (12) months prior to such time as [***] may discontinue the manufacture of the API. The Purchaser shall have the right to purchase up to 150 additional kilograms of API on or prior to the effective date of such discontinuance.

3.12 Failure to Supply. If for any reason (including without limitation as a result of negligence, fault or omission of the Supplier or a Force Majeure Event) API is not able to be supplied to the Purchaser or the Eighteen Month Supply is not maintained at the amount required under Section 3.3 (or the Supplier anticipates that API will not be supplied to the Purchaser in accordance with any order placed in accordance with Article 3 or the Eighteen Month Supply will not be maintained at the amount required under Section 3.3), the Supplier shall, as soon as it becomes aware of the fact, give written notice to the Purchaser of the reasons for the shortfall. If the Supplier is in breach of its obligations under Section 3.3 and cannot for any reason whatsoever meet any such shortfall from allocation of Supplier’s existing stock, then the Purchaser may, without prejudice to its other rights and remedies pursuant to the Agreement or available at law, select and qualify a new supplier to manufacture and supply API to the Purchaser, and the reasonable and documented costs of such qualification shall be borne by the

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Supplier. In the event the Purchaser selects and qualifies a new supplier pursuant to the preceding sentence, at the Supplier’s written request: (a) the Purchaser and the Supplier shall use Commercially Reasonable Efforts to agree to a mutually acceptable arrangement where the Purchaser supplies the Supplier some portion of the API received by the Purchaser from such new supplier; or (b) the Purchaser will use Commercially Reasonable Efforts to assist the Supplier to obtain the right to order API directly from such new supplier.

3.13 Secondary Supplier. At any time while this Agreement is in effect, the Purchaser may select and qualify a secondary supplier (at the Purchaser’s sole expense) to manufacture and supply API to the Purchaser.

3.14 Regular Meetings. In order to promote efficient and effective supply chain planning, the appropriate personnel from the Parties’ respective manufacturing organizations will meet on a regular basis (and in any event no less than once each year) during the term of this Agreement to discuss, consider and implement such measures as they consider appropriate to manage the demand and supply aspects of this Agreement and review performance.

ARTICLE 4

PASSING OF TITLE AND RISK OF LOSS IN API

4.1 Shipment; Transport. API shall be Delivered to the Purchaser or Purchaser’s Nominated Contract Manufacturer (as specified in the Firm Order) FCA (Incoterms 2000 edition, published by the International Chamber of Commerce, ICC Publication 560) the location specified in the Firm Order, except with regard to title and risk of loss, which is described below in Section 4.2.

4.2 Title; Risk of Loss. Title and risk of loss in API shall remain with the Supplier until receipt by the Purchaser or Purchaser’s Nominated Contract Manufacturer (as the case may be), at which point title and risk of loss shall pass to the Purchaser or Purchaser’s Nominated Contract Manufacturer (as the case may be).

4.3 No Acceptance. Neither payment by nor passing of title or risk in API to the Purchaser or Purchaser’s Nominated Contract Manufacturer (as the case may be) shall be deemed to constitute acceptance of API.

ARTICLE 5

PRICE OF API

5.1 Price. The Price payable by the Purchaser for API shall be calculated in accordance with Schedule 2. The Price and any other amounts payable pursuant to this Agreement shall be as stated and exclude the cost of Delivery, insurance and packing costs and applicable taxes and duties which shall be paid by the Purchaser.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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5.2 Annual Review. The Supplier will keep accurate books and accounts of record in connection with its purchase of API from [***] in sufficient detail to permit accurate determination of all figures necessary for verification of payment obligations set forth in this Article 5. The Parties shall meet annually during the term of this Agreement (unless otherwise mutually agreed in writing) to review the Price payable by the Purchaser. Prior to such meeting, the Supplier shall (subject to the Supplier’s confidentiality obligations to [***] (which the Supplier shall use Commercially Reasonable Efforts to compel [***] to waive)) provide the Purchaser with the details of the pricing at which the Supplier purchases API from [***].

ARTICLE 6

INVOICE AND PAYMENT

6.1 Invoices. Upon shipment of API, the Supplier shall invoice the Purchaser for the relevant quantity of API contained in such shipment. Each invoice issued by the Supplier hereunder shall specify:

(a) The Price in respect of API shipped;

(b) The quantity of API shipped and the corresponding Firm Order; and

(c) Any other amounts reimbursable to the Supplier pursuant to this Agreement.

6.2 Payment. Payment to the account identified by the Supplier in writing and shall be made in either Euros or United States Dollars in the Purchaser’s discretion. If a conversion in currency is required, the amount of payment shall be determined by converting the price in Schedule 2 to United States Dollars according to the exchange rate listed in the Wall Street Journal on the date of payment. Payments shall be made within thirty (30) days from the date of Supplier’s invoice to the account identified by the Supplier in writing.

6.3 Taxes.

(a) The Purchaser shall pay and otherwise be responsible for all applicable sales, goods and services and transfer taxes in connection with any payment made to the Supplier pursuant to this Agreement.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(b) Any income or other tax that one Party hereunder is required to withhold and pay on behalf of the other Party hereunder with respect to amounts payable under this Agreement shall be deducted from and offset against said amounts prior to payment to the other Party; provided, however, that in regard to any tax so deducted, the Party making the withholding shall give or cause to be given to the other Party such assistance as may reasonably be necessary to enable that other Party to claim exemption therefrom or credit therefor, and in each case shall furnish the Party on whose behalf amounts were withheld proper evidence of the taxes paid on its behalf. Each Party shall comply with reasonable requests of the other Party to take any proper actions that may minimize any withholding obligation.

ARTICLE 7

CAPACITY

The Supplier shall use Commercially Reasonable Efforts to ensure that sufficient manufacturing capacity to meet the Purchaser’s and/or Purchaser’s Nominated Contract Manufacturer’s (as the case may be) requirements for API as shown in the Forecast Schedule is available at all times in accordance Section 3.3. The Purchaser and the Supplier shall regularly review and discuss the Manufacturing capacity available at the Manufacturing Site in relation to the Forecast Schedule. In the event of a breakdown or fault in production which impacts the manufacturing capacity required hereunder or otherwise impacts the Manufacture of API for the Purchaser, the Supplier shall notify the Purchaser as soon as reasonably practicable and shall use Commercially Reasonable Efforts to ensure a return to production as soon as possible.

ARTICLE 8

COMPLAINTS AND PRODUCT RECALL

8.1 Complaints and Product Recall. The Purchaser shall be solely responsible in accordance with Applicable Laws and regulations for the reporting to Regulators in the territories in which the Purchaser is permitted to Manufacture and distribute Products pursuant to the License Agreement of any complaints and product recalls relating to Product which arise for any reason.

8.2 Manufacturing Events. The Supplier shall use Commercially Reasonable Efforts to advise, and shall use Commercially Reasonable Efforts to compel [***] to advise, the Purchaser of any occurrence or information which arises out of the Manufacturing activities that has or could reasonably be expected to have adverse regulatory compliance and/or reporting consequences concerning API and/or Product within forty-eight (48) hours of becoming aware of such information, and, subject to the Supplier’s confidentiality obligations to [***] (which the

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Supplier shall use Commercially Reasonable Efforts to compel [***] to waive), promptly furnish copies of any related information or reports to the Purchaser. In addition to the foregoing, the Supplier shall use Commercially Reasonable Efforts to notify, and shall use Commercially Reasonable Efforts to compel [***] to notify, the Purchaser of any problem related to the Manufacture of API under this Agreement within forty-eight (48) hours of becoming aware of such problem, including:

(a) where any API or its labelling may have been mistaken for or applied to another product; or

(b) where any API may be affected by bacteriological or other contamination, significant chemical, physical or other change or deterioration or stability failures; or

(c) where any API is the subject of a complaint by a Third Party or customer in circumstances where this may impact API Manufactured for the Purchaser under this Agreement; or

(d) where any API may not comply with the Specifications therefor.

8.3 Recall Strategy. If any of the circumstances described in Section 8.2 arise, at the Purchaser’s written request, the Supplier shall use Commercially Reasonable Efforts to take, and shall use Commercially Reasonable Efforts to compel [***] to take, all such acts as the Purchaser may reasonably direct in writing. If the Purchaser or any Regulator deems that a Product recall is required, the recall strategy shall be developed in good faith by the Parties and the Supplier shall use Commercially Reasonable Efforts to follow, and shall use Commercially Reasonable Efforts to compel [***] to follow, timing requirements. The reasonable and documented costs of any such action agreed upon by the Parties as a result of the circumstances described in Section 8.2, or of any such recall under this Section 8.3, shall be borne by the Supplier only in the event and to the extent the need for the action is the result of a failure on the part of the Supplier to comply with its obligations under this Agreement, and if not the result of a failure of the Supplier shall be borne by the Purchaser.

8.4 Complaint Investigations. Upon notification from the Purchaser that it has received a complaint in respect of the Product which the Purchaser reasonably believes is due to API, upon the Purchaser’s written request, the Supplier shall use Commercially Reasonable Effort to follow, and shall use Commercially Reasonable Efforts to compel [***] to conduct, all such necessary internal investigations as may be reasonably necessary to determine the validity of such complaint. The findings of any such investigations shall be reported in writing to the Purchaser

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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within five (5) Business Days of completion of the investigation, provided that the Purchaser shall be kept informed periodically as the investigation progresses. The Purchaser shall thereafter respond to the complainant and provide a written copy of such response to the Supplier and the Supplier shall thereupon use Commercially Reasonable Efforts to carry out, and shall use Commercially Reasonable Efforts to compel [***] to carry out, any actions which the Purchaser may reasonably require in connection therewith. The reasonable and documented costs of any such investigation or other action which the Purchaser requires to be undertaken pursuant to this Section 8.4 shall be borne by the Supplier in the event and to the extent that the need for such action is the result of a failure on the part of the Supplier to comply with its obligations under this Agreement, and if not the result of a failure of the Supplier shall be borne by the Purchaser.

ARTICLE 9

REJECTION AND REPLACEMENT OF DEFECTIVE API

9.1 Testing. Upon receipt of each Delivery under this Agreement, the Purchaser or Purchaser’s Nominated Contract Manufacturer (as applicable) shall carry out testing and/or control for such Delivery and shall report any adverse findings to the Supplier pursuant to Section 9.3. API delivered to the Purchaser or Purchaser’s Nominated Contract Manufacturer will be deemed accepted by the relevant recipient if it fails to carry out such testing obligations pursuant to this Section 9.1 or if no notification is made to the Supplier pursuant to Section 9.3 within the time period set out in Section 9.2, provided that notwithstanding acceptance of API pursuant to this Section 9.1 the Supplier shall remain liable to the Purchaser under the terms of this Agreement for any defect or failure of API to comply with the terms of this Agreement.

9.2 Nonconformance. The Purchaser or Purchaser’s Nominated Contract Manufacturer (as applicable) shall have the right exercisable within thirty (30) days after Delivery to reject API or any part thereof contained in such Delivery if, having carried out the relevant testing as prescribed in Section 9.1, or it becomes aware that any such API does not conform in quality or quantity or is otherwise defective with respect to the Specifications and all other terms of this Agreement or the specific Firm Order or if API is not in Good Condition.

9.3 Rejection. In the event of any rejection of API pursuant to Section 9.2:

(a) The Purchaser shall notify the Supplier in writing;

(b) The payment obligation in relation to any such delivery shall be suspended forthwith pending resolution of the dispute in accordance with this Section;

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(c) The Parties shall immediately use their respective Commercially Reasonable Efforts to agree whether or not the delivery in question complies with the Specifications; and

(d) The Supplier shall be entitled at all reasonable times to inspect and/or analyze the delivery in question.

9.4 Independent Laboratory. The Parties shall use all Commercially Reasonable Efforts to resolve any dispute that may arise pursuant to this Section but if the Parties fail to agree within thirty (30) days of notification to the Supplier pursuant to Section 9.3, whether any delivery of API supplied to the Purchaser hereunder is defective or may be rejected for any other reason set out in Section 9.2, the dispute shall be determined by the Independent Laboratory and the decision of the Independent Laboratory shall be final and binding on the Parties. The Independent Laboratory shall act as an expert and not as an arbitrator and (unless the Independent Laboratory otherwise determines) its fees shall be borne by the party against whom the Independent Laboratory’s decision is given.

9.5 API Agreed or Determined to be Nonconforming. If the Supplier agrees or the Independent Laboratory finds that any delivery of API is defective or may otherwise be rejected in accordance with Section 9.2, without prejudice to any other rights under this Agreement that the Purchaser may have against the Supplier:

(a) The Supplier shall promptly collect at its own expense any rejected API from the Purchaser; and

(b) The Supplier shall, in addition, promptly reimburse the Purchaser in respect of any reasonable and documented out-of-pocket costs (including without limitation freight, clearance, duty and storage) incurred by the Purchaser in respect of the defective delivery, and replace the API with new API that strictly complies with the Specifications and all other requirements of the Agreement.

9.6 API Determined to be Conforming. If a Delivery of API is found by the Independent Laboratory to comply with the requirements of Section 9.2, the Purchaser shall pay for such Delivery in accordance with the payment provisions contained in this Agreement.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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ARTICLE 10

QUALITY ASSURANCE; REGULATORY COMPLIANCE; AUDITS AND

INSPECTION; PRODUCT LICENSE; MANUFACTURING LICENSE;

DOCUMENTATION AND REPORTS

10.1 Quality Assurance. The Supplier shall use Commercially Reasonable Efforts to provide, and shall use Commercially Reasonable Efforts to compel [***] to provide, to the Purchaser such documentation and information as may be reasonably necessary for the Purchaser to evaluate and assess on an ongoing basis the quality assurance testing, cGMPs, manufacturing processes, and manufacturing controls relating to the API. Without limiting the foregoing, the Supplier shall use Commercially Reasonable Efforts to compel [***] to comply with the quality requirements set forth in the [***] Agreement and use Commercially Reasonable Efforts to procure the right for the Purchaser to have the same access and information with respect to such requirements as the Supplier has under the [***] Agreement.

10.2 Regulatory Compliance. The Supplier shall use Commercially Reasonable Efforts to provide, and shall use Commercially Reasonable Efforts to compel [***] to provide, to the Purchaser such documentation and information as may be reasonably necessary for the Purchaser to comply on an ongoing basis with the Purchaser’s regulatory obligations with respect to the API and the Product. Without limiting the foregoing, the Supplier shall use Commercially Reasonable Efforts to compel [***] to comply with the regulatory compliance requirements set forth in the [***] Agreement and use Commercially Reasonable Efforts to procure the right for the Purchaser to have the same access and information with respect to such requirements as the Supplier has under the [***] Agreement.

10.3 Audits and Inspection. The Supplier shall use Commercially Reasonable Efforts to procure the right for the Purchaser to have the same audit and inspection rights of [***] as the Supplier has with respect to [***] pursuant to the [***] Agreement. If the Supplier is unable to procure such rights, the Purchaser may direct the Supplier to carry out such audits and inspection to which the Supplier is entitled under the [***] Agreement on the Purchaser’s behalf and the Supplier, subject to the Supplier’s confidentiality obligations to [***] (which the Supplier shall use Commercially Reasonable Efforts to compel [***] to waive), shall report in writing its findings within ten (10) Business Days of completing the audit or inspection; the Purchaser will notify the Supplier in writing of any adverse observations within ninety (90) calendar days of the Purchaser’s receipt of the Supplier’s report and the Supplier will use Commercially Reasonable Efforts to address with [***] such observations to the reasonable satisfaction of the Purchaser, including resolving a dispute with [***] by appeal to a Third Party in accordance with the [***] Agreement.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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10.4 Product License. The Purchaser shall be responsible for the registration of the Products with all relevant Regulators in the jurisdictions in which the Purchaser may distribute Products pursuant to the License Agreement, and the Supplier shall provide such assistance (at the Purchaser’s expense) as the Purchaser may reasonably request in connection therewith insofar as such assistance relates to the Manufacture of API and/or performance of this Agreement by the Supplier for supply by the Supplier to the Purchaser or Purchaser’s Nominated Contact Manufacturer (as applicable).

10.5 Manufacturing Licenses. The Supplier shall use Commercially Reasonable Efforts to compel [***] to obtain and maintain in full force and effect for the duration of this Agreement the Manufacturing License and all necessary permits, licenses, approvals and authorizations required under Applicable Laws to enable [***] to Manufacture and supply API to the Supplier.

10.6 Documentation and Reports. The Supplier shall use Commercially Reasonable Efforts to compel [***] to:

(a) complete and maintain (and ensure that any authorized subcontractors complete and maintain) the documentation relating to the Manufacture of each batch of API in accordance with cGMPs and retain such documentation for a minimum period of six (6) years after release of API;

(b) notify the Supplier, who will then notify Purchaser, of any batch failures, process deviations and any out-of-specification results which arise under Manufacture of Product as provided for in this Agreement;

(c) complete and maintain all records and reporting requirements relating to controlled drugs as may be applicable; and

(d) complete and lodge with the appropriate authorities where required all documentation relating to the export of API where Delivery involves export from the country of Manufacture.

ARTICLE 11

CONFIDENTIALITY

11.1 Confidentiality. The Parties agree that during the Term, and for a period of five (5) years after this Agreement expires or terminates, a Party receiving Confidential Information of the other Party shall (a) maintain in confidence such Confidential Information to the same extent

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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such Party maintains its own proprietary information of similar kind and value (but at a minimum each Party shall use Commercially Reasonable Efforts to maintain Confidential Information in confidence); (b) not disclose such Confidential Information to any Third Party without prior written consent of the Disclosing Party, except for disclosures to its sublicensees and commercial partners for Products who agree to be bound by obligations of non-disclosure and non-use at least as stringent as those contained in this Article 11; and (c) not use such Confidential Information for any purpose except those purposes permitted by this Agreement. Notwithstanding the foregoing, the Purchaser’s confidentiality obligations with respect to [***] Confidential Information received by the Purchaser in connection with the Parties’ performance of this Agreement shall continue until three (3) years after the termination or expiration of the [***] Agreement; provided, in no event shall such confidentiality obligations extend past the later of (y) five (5) years after this Agreement expires or terminates, or (z) April 1, 2022.

11.2 Authorized Disclosure. Notwithstanding any other provision of this Agreement, the Receiving Party may disclose Confidential Information of the Disclosing Party to a Third Party: (a) to the extent and to the Persons as required by any Applicable Law, legal process or court order, or an applicable disclosure requirement of any Regulator, the U.S. Securities and Exchange Commission (“SEC”), the Nasdaq market or any other securities exchange or market; or (b) to the extent necessary to exercise the rights granted to or retained by the Receiving Party under this Agreement or otherwise establishing rights or enforcing obligations under this Agreement; provided, however, that the Receiving Party shall provide prior notice of such intended disclosure to the Disclosing Party if possible under the circumstances and shall disclose only such Confidential Information of the Disclosing Party as is reasonably required to be disclosed.

11.3 Disclosure of Agreement. The Parties agree that the material terms of this Agreement shall be considered Confidential Information of both Parties, subject to the special authorized disclosure provisions set forth below in this Section 11.3 (in lieu of the authorized disclosure provisions set forth in Section 11.2, to the extent of any conflict) and without limiting the generality of the definition of Confidential Information set forth in Section 1.8. The Parties will mutually agree the text of a press release announcing the execution of this Agreement. Thereafter, if either Party desires to make a public announcement concerning the terms of this Agreement, such Party shall give reasonable prior advance notice of the proposed text of such announcement to the other Party for its prior review and approval, such approval not to be unreasonably withheld. A Party shall not be required to seek the permission of the other Party to repeat or disclose any information as to the terms of this Agreement that has already been publicly disclosed by such Party in accordance with the foregoing or by the other Party, or any

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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similar or comparable information. Either Party may disclose the terms of this Agreement to such Party’s existing investors, lenders, directors and professional advisors and to potential investors, lenders, acquirors or merger partners and their professional advisors who are bound by written or professional obligations of non-disclosure and non-use that are at least as stringent as those contained in this Article 11 or are customary for such purpose. Each Party acknowledges that the other Party may be obligated to file a copy of this Agreement with the SEC with its next quarterly report on Form 10-Q, annual report on Form 10-K or current report on Form 8-K or with any registration statement filed with the SEC pursuant to the Securities Act of 1933, as amended, and each Party shall be entitled to make such filings, provided, however, that the filing Party requests (to the extent legally permitted) confidential treatment of the terms hereof for which confidential treatment is customarily sought, to the extent such confidential treatment is reasonably available to such Party under the circumstances then prevailing. In the event of any such filing, the filing Party will provide the other Party with a copy of the Agreement marked to show provisions for which the filing Party intends to seek confidential treatment and shall reasonably consider the other Party’s timely comments thereon.

11.4 Unauthorized Use. If either Party becomes aware or has Knowledge of any unauthorized use or disclosure of the other Party’s Confidential Information, it shall promptly notify the other Party of such unauthorized use or disclosure.

11.5 Return of Confidential Information. Upon termination of this Agreement, the Receiving Party shall promptly return all of the Disclosing Party’s Confidential Information, including all reproductions and copies thereof in any medium (except that the Receiving Party may retain one copy for its legal files) except as otherwise reasonably necessary to exercise the Receiving Party’s surviving rights under this Agreement.

ARTICLE 12

FORCE MAJEURE EVENT

12.1 General. Neither Party shall be liable to the other on account of any failure to perform or on account of any delay in performance of any obligation under this Agreement (excluding payment obligations), if and to the extent that such failure or delay shall be due to a cause beyond the control of the relevant Party and which, by the exercise of its Commercially Reasonable Efforts of diligence and care, such Party could not reasonably have been expected to avoid (a “Force Majeure Event”). For the evidence of doubt, any failure to Deliver API pursuant to a Firm Order due to an order, injunction or any other action by a Regulator shall not constitute a Force Majeure Event. The Party experiencing the delay and seeking relief under this Section

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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shall promptly notify the other Party of the delay and use Commercially Reasonable Efforts to overcome such delay. The Party affected shall promptly notify in writing the non-affected Party of the specific causes beyond the control of the affected Party and the probable duration of the delay, and that Party shall be excused from the performance of such obligation to the extent such performance is necessarily prevented, hindered or delayed thereby during the continuance of any such happening or event. This Agreement, insofar as it relates to such obligation, shall be deemed suspended so long as and to the extent that such cause delays the performance of any Force Majeure Event obligation.

12.2 Termination; Transition. If as a result of the conditions referred to in Section 12.1, the Supplier is unable to fully perform its obligations for a period of ninety (90) days, the Purchaser shall have the right to terminate this Agreement upon thirty (30) days prior notice to the Supplier. In the event the Purchaser terminates this Agreement as provided in this Section 12.2, the Supplier agrees to use Commercially Reasonable Efforts to assist the Purchaser to transfer the Manufacture of the Products to any other facility or facilities selected by the Purchaser, in its sole discretion.

ARTICLE 13

REPRESENTATIONS AND WARRANTIES

13.1 Mutual Representations and Warranties. Each Party hereby represents and warrants to the other Party as of the Effective Date that:

(a) such Party is a corporation or entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has full corporate power and authority to execute and deliver this Agreement and to carry out the provisions hereof;

(b) such Party is duly authorized, by all requisite corporate action, to execute and deliver this Agreement and to carry out the provisions hereof, and the Person executing this Agreement on behalf of such Party is duly authorized to do so by all requisite corporate action;

(c) except as set forth in the License Agreement, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority is required on the part of such Party in connection with the valid execution, delivery and performance of this Agreement, except where the failure to obtain any of the foregoing could not, individually or in the

aggregate, reasonably be expected to materially adversely affect such Party’s ability to consummate the transactions contemplated herein or perform its obligations hereunder;

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(d) this Agreement is a legal and valid obligation binding upon such Party and enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and similar laws; and

(e) the execution, delivery and performance by it of this Agreement and its compliance with the terms and provisions of this Agreement does not and will not, except as set forth in the License Agreement, (i) conflict with or result in a violation or breach of any of the terms, conditions or provisions of its certificate or articles of incorporation or by-laws (or other comparable corporate charter documents); (ii) conflict with or result in a violation or breach of any term or provision of any law or order applicable to it; or (iii) (A) conflict with or result in a violation or breach of, (B) constitute (with or without notice or lapse of time or both) a default under, (C) require it to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, any contract, instrument or license to which it is a party or by which any of its assets and properties is bound; except, in the case of (i), (ii) and (iii) above, which could not, individually or in the aggregate, reasonably be expected to materially adversely affect its ability to consummate the transactions contemplated herein or perform its obligations hereunder.

13.2 Additional Supplier Representations and Warranties. The Supplier represents and warrants that:

(a) To fulfil its obligations under this Agreement, the Supplier has allocated and will allocate resources sufficient to perform its obligations under this Agreement.

(b) The Supplier will convey to Purchaser the same title that the Supplier receives from [***] to the API supplied hereunder.

(c) The Manufacture, generation, processing, distribution, transport, treatment, storage, disposal and other handling of any API until delivery to a carrier or freight forwarder shall (i) be in accordance with and conform to the Specifications and cGMPs, (ii) be in accordance with and conform to any applicable standards specified by the United States Pharmacopeia and Pharmacopeia Forum and the European Pharmacopeia and Pharmacopeial Forum, and (iii) otherwise conform to any provisions of the

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Regulatory Acts or any Applicable Laws not reflected in cGMPs. The API will strictly comply with the Specifications, shall be free from defects in materials and workmanship and shall not be adulterated or misbranded within the meaning of applicable Regulatory Acts or the United States Federal Food, Drug, and Cosmetic Act. At the time of Delivery, the API shall be in Good Condition. THE REPRESENTATIONS AND WARRANTIES PROVIDED IN THIS AGREEMENT DO NOT APPLY TO PRODUCTS TO THE EXTENT THAT, AFTER SHIPMENT, OCCURRENCES AFFECTING OR ALTERING THE PRODUCTS AFTER THEY ARE DELIVERED TO THE CARRIER, OR ACTIONS TAKEN OR FAILED TO BE TAKEN AFTER THE PRODUCTS WERE SHIPPED, THE PRODUCTS FAIL TO CONFORM TO SPECIFICATIONS. EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 13, THE SUPPLIER DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

ARTICLE 14

LIABILITY AND INDEMNIFICATION

14.1 Indemnity by the Supplier. Subject to Section 14.4 below, the Supplier hereby agrees to indemnify, defend and hold harmless the Purchaser and each Purchaser Affiliate who receives a Product subject to indemnity hereunder and their respective directors, officers, employees and agents (each a “Purchaser Indemnitee”) from and against all losses, damages, costs, penalties, liabilities (including strict liabilities), judgements, amounts paid in settlement, fines and expenses (including court costs and reasonable fees of attorneys and other professionals) (“Losses”) arising from a Third Party Claim (a) for bodily injury, death and property damage caused by: (i) defects inherent in the API at the time of delivery by [***] to Supplier; (ii) defective API information (including any materials or samples thereof) submitted by [***] to the Supplier; or (iii) the negligence or wilful misconduct or wrongdoing of the Supplier or (b) arising with respect to any breach or non-performance of any of the Supplier’s covenants, obligations, representations or warranties under this Agreement. The foregoing indemnification obligations shall not apply in each case to the extent any particular Loss is a direct result of (i) the negligence or intentional misconduct of a Purchaser Indemnitee, or (ii) any matter for which the Purchaser is obligated to indemnify the Supplier pursuant to Section 14.2 herein. Nothing in this Section 14.1 or Section 14.2 below shall be construed to limit, and these provisions shall be in addition to, any indemnification provision, in any other agreement between the Parties.

14.2 Indemnity by the Purchaser. Subject to Section 14.4 below, the Purchaser shall indemnify, defend and hold the Supplier and Supplier Affiliates an d their respective directors,

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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officers, employees and agents (each a “Supplier Indemnitee”) harmless from and against all Losses arising from any Third Party Claim (a) for bodily injury, death or property damage caused by: (i) the distribution or marketing of Products by the Purchaser; or (ii) the negligence or wilful misconduct or wrongdoing of the Purchaser, or (b) arising with respect to any breach or non-performance of any of the Purchaser’s covenants, obligations, representations or warranties under this Agreement. The foregoing indemnification obligations shall not apply in each case to the extent any particular Loss is a direct result of the negligence or intentional misconduct of the Supplier Indemnitee, or (ii) any matter for which the Supplier is obligated to indemnify the Purchaser pursuant to Section 14.1 above. Nothing in this Section 14.2 or Section 14.1 above shall be construed to limit, and these provisions shall be in addition to, any indemnification provision in and any other agreement between the Parties.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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14.3 Procedures.

(a) In the case of a Third Party Claim made by any Person who is not a Party to this Agreement (or an Affiliate thereof) as to which a Party (the “Indemnitor”) may be obligated to provide indemnification pursuant to this Agreement, such Party seeking indemnification hereunder (the “Indemnitee”) will notify the Indemnitor in writing of the Third Party Claim (and specifying in reasonable detail the factual basis for the Third Party Claim and, to the extent known, the amount of the Third Party Claim) reasonably promptly after becoming aware of such Third Party Claim; provided, however, that failure to give such notification will not affect the indemnification provided hereunder except to the extent the Indemnitor shall have been actually prejudiced as a result of such failure.

(b) If a Third Party Claim is made against the Indemnitee and the Indemnitor acknowledges in writing its obligation to indemnify the Indemnitee therefor, the Indemnitor will be entitled, within one hundred twenty (120) days after receipt of written notice from the Indemnitee of the commencement or assertion of any such Third Party Claim, to assume the defense thereof (at the expense of the Indemnitor) with counsel selected by the Indemnitor and reasonably satisfactory to the Indemnitee, for so long as the Indemnitor is conducting a good faith and diligent defense. Should the Indemnitor so elect to assume the defense of a Third Party Claim, the Indemnitor will not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, however, that if under applicable standards of professional conduct a conflict of interest exists between the Indemnitor and the Indemnitee in respect of such claim, such Indemnitee shall have the right to employ separate counsel (which shall be reasonably satisfactory to the Indemnitor) to represent such Indemnitee with respect to the matters as to which a conflict of interest exists and in that event the reasonable fees and expenses of such separate counsel shall be paid by such Indemnitor; provided, further, that the Indemnitor shall only be responsible for the reasonable fees and expenses of one separate counsel for such Indemnitee. If the Indemnitor assumes the defense of any Third Party Claim, the Indemnitee shall have the right to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the Indemnitor. If the Indemnitor assumes the defense of any Third Party Claim, the Indemnitor will promptly supply to the Indemnitee copies of all correspondence and documents relating to or in connection with such Third Party Claim and keep the Indemnitee informed of developments relating to or in connection with such Third Party Claim, as may be reasonably requested by the

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Indemnitee (including, without limitation, providing to the Indemnitee on reasonable request updates and summaries as to the status thereof). If the Indemnitor chooses to defend a Third Party Claim, all Indemnitees shall reasonably cooperate with the Indemnitor in the defense thereof (such cooperation to be at the expense, including reasonable legal fees and expenses, of the Indemnitor). If the Indemnitor does not elect to assume control of the defense of any Third Party Claim within the one hundred twenty (120) day period set forth above, or if such good faith and diligent defense is not being or ceases to be conducted by the Indemnitor, the Indemnitee shall have the right, at the expense of the Indemnitor, after three (3) Business Days notice to the Indemnitor of its intent to do so, to undertake the defense of the Third Party Claim for the account of the Indemnitor (with counsel selected by the Indemnitee), and to compromise or settle such Third Party Claim, exercising reasonable business judgment; provided, however, that the Indemnitee shall not compromise or settle such Third Party Claim without the Indemnitor’s prior written consent (which consent shall not be unreasonably withheld) if such compromise or settlement would result in an admission or liability or loss of right by the Indemnitor or payment by the Indemnitor. The Indemnitor agrees to reasonably cooperate with the Indemnitee in such defense, at the Indemnitor’s expense, including being joined as a necessary party.

(c) If the Indemnitor acknowledges in writing its obligation to indemnify the Indemnitee for a Third Party Claim, the Indemnitee will agree to any settlement, compromise or discharge of such Third Party Claim that the Indemnitor may recommend that by its terms obligates the Indemnitor to pay the full amount of Losses (whether through settlement or otherwise) in connection with such Third Party Claim and unconditionally and irrevocably releases the Indemnitee completely from all liability in connection with such Third Party Claim; provided, however, that, without the Indemnitee’s prior written consent, the Indemnitor shall not consent to any settlement, compromise or discharge (including the consent to entry of any judgment), and the Indemnitee may refuse in good faith to agree to any such settlement, compromise or discharge, that provides for injunctive or other non-monetary relief affecting the Indemnitee. If the Indemnitor acknowledges in writing its obligation to indemnify the Indemnitee for a Third Party Claim, the Indemnitee shall not (unless required by law) admit any liability with respect to, or settle, compromise or discharge, such Third Party Claim without the Indemnitor’s prior written consent (which consent shall not be unreasonably withheld).

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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14.4 Limitations. Notwithstanding any provision of this Agreement to the contrary, in no event shall either Party be liable to the other, or have any obligation to indemnify any Purchaser Indemnitee or Supplier Indemnitee, as the case may be, for any consequential or indirect damages or Losses including any loss of profits suffered by the Purchaser or the Supplier, however caused and on any theory of liability, regardless of any failure of essential purpose of any remedy available under this Agreement. The foregoing limitation on liability shall not be applicable to consequential or indirect damages or Losses, including without limitation, lost profits incurred by the Indemnitee as a direct result of any failure by the Indemnitor to perform its obligations under this Agreement that the Indemnitee can demonstrate is due to wilful misconduct or gross negligence by the Indemnitor or any of its employees.

ARTICLE 15

INSURANCE

Each Party shall at all times maintain in full force and effect, with financially sound and reputable carriers reasonably satisfactory to the other Party, product liability, property, and fidelity insurance in such amounts and with such scope of coverage as are adequate to cover such Party’s obligations under this Agreement and as are appropriate companies of like size, taking into account the nature of API to be manufactured hereunder.

ARTICLE 16

TERM; TERMINATION; REMEDIES

16.1 General.

(a) This Agreement shall commence on the Effective Date and will continue until December 31, 2012 (the “Initial Term”). Unless terminated pursuant to Sections 12.2, 16.1(b), 16.1(c), 16.1(d), 16.4 or 16.7, this Agreement shall automatically renew for successive terms of three (3) years (each, a “Renewal Term”). The period from the Effective Date until the termination of the Agreement is the “Term”.

(b) The Purchaser may terminate this Agreement by delivery of a one hundred eighty (180) days advance, written notice.

(c) The Supplier may terminate this Agreement by delivery of a one hundred eighty (180) days advance, written notice.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(d) Either Party may terminate this Agreement or any Firm Orders by delivery of written notice following expiration or termination of the License Agreement or the [***] Agreement.

16.2 Manufacturing Site. The Purchaser may terminate this Agreement on thirty (30) days written notice if [***] changes the Manufacturing Site at which API is Manufactured or the process used in the Manufacture of API. Any such termination pursuant to this Section 16.2 shall not be deemed to be due to a breach by the Supplier.

16.3 Supplier Material Default. “Supplier Material Default” shall mean the occurrence of any of the events listed below, regardless of whether the occurrence is voluntary or involuntary; provided, however, that none of the following occurrences shall constitute a “Supplier Material Default” to the extent such occurrence is a direct result of a breach by the Purchaser of a representation, warranty or covenant hereunder, any failure by the Purchaser to comply with Applicable Laws to the extent they pertain to the Products or the Regulatory Acts, a Purchaser Material Default, the Supplier’s compliance with an order of a Regulator directed to the Supplier specifically regarding its compliance with cGMPs, the Regulatory Acts, or Applicable Laws, or a Force Majeure Event:

(a) an assignment or attempted assignment of this Agreement or the rights or obligations arising hereunder by the Supplier, in violation of this Agreement;

(b) insolvency or general failure of the Supplier to pay its debts as they become due; entrance of the Supplier into receivership or any arrangement with creditors generally; filing of a voluntary or involuntary petition or other action or proceeding for bankruptcy or reorganization or dissolution or winding-up of the Supplier; a general assignment for the benefit of the Supplier’s creditors; or a foreclosure or sale of a material part of the Supplier’s assets by or for the benefit of any creditor or governmental agency; or

(c) a material breach or failure by the Supplier with respect to any material obligation or covenant under this Agreement, including a failure to Deliver API pursuant to a Firm Order or a failure to maintain the Eighteen Month Supply at the amount required under Section 3.3, that is not remedied by the Supplier within thirty (30) days after receiving notice thereof or, if such breach or failure is susceptible of cure but cannot be reasonably cured within thirty (30) days, unless the Supplier in good faith promptly commences pursuing such cure and diligently and continually does so but is delayed in completion by factors beyond its control after the use of Commercially Reasonable Efforts (but in no event to exceed ninety (90) days from the date of the Purchaser’s notice).

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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16.4 Other Supplier Default. “Other Supplier Default” shall mean the breach or failure by the Supplier with respect to any obligation, covenant, representation, warranty or condition under this Agreement that is not remedied by the Supplier within thirty (30) days after receiving written notice thereof from the Purchaser, other than a Supplier Material Default, or if such breach or failure is susceptible of cure but cannot be reasonably cured within thirty (30) days, unless the Supplier in good faith promptly commences pursuing such cure and diligently and continually does so but in no event to exceed sixty (60) days from the date of the Purchaser’s notice. Notwithstanding the foregoing, none of the foregoing occurrences shall constitute an Other Supplier Default to the extent such occurrence is a direct result of (a) a breach by the Purchaser of a representation, warranty or covenant hereunder, (b) any failure by the Purchaser to comply with the Applicable Laws or Regulatory Acts or to perform any of its obligations under this Agreement, (c) the Supplier’s compliance with the Specifications or an order of a Regulator directed to the Supplier specifically regarding its compliance with cGMPs, the Regulatory Acts, or Applicable Laws, or (d) a Force Majeure Event.

16.5 Effect of Supplier Default.

(a) The Supplier Material Default. Upon the occurrence of a Supplier Material Default, the Purchaser shall have the right to (i) terminate this Agreement, in whole or in part, immediately or at such other date specified under this Agreement, or (ii) terminate any Firm Order issued under this Agreement, in which case the Purchaser shall bear no liability with respect to the terminated Firm Order, including, without limitation, any expenses incurred by the Supplier in connection with such terminated Firm Order. In either event, the Purchaser shall also be entitled to seek all other remedies available under law or in equity.

(b) Other Supplier Default. Upon the occurrence of an Other Supplier Default, the Purchaser shall have no right to terminate this Agreement, but the Purchaser shall have the right to seek all other remedies available under law.

16.6 Purchaser Material Default. A “Purchaser Material Default” shall occur upon the Purchaser’s failure to pay an amount specified in this Agreement due to the Supplier under this Agreement within fifteen (15) Business Days after receiving written notice thereof from the Supplier (such notice to be accompanied by copies of invoices, shipping manifests and other relevant documentation supporting the Supplier’s claim for payment), other than the portion of

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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any payment hereunder that is the subject of a pending good faith dispute identified by the Purchaser in a written notice delivered to the Supplier following receipt of an invoice and before such payment is due to the Supplier.

16.7 Other Purchaser Default. “Other Purchaser Default” shall mean the breach or failure by the Purchaser with respect to any obligation, covenant, representation, warranty or condition under this Agreement, other than a Purchaser Material Default, that is not remedied by the Purchaser within thirty (30) days after receiving written notice thereof from the Supplier, or if such breach or failure is susceptible of cure but cannot be reasonably cured within thirty (30) days, unless the Purchaser in good faith promptly commences pursuing such cure and diligently and continually does so, but in no event to exceed sixty (60) days from the date of the Supplier’s notice.

16.8 Effect of a Purchaser Default.

(a) Purchaser Material Default. Upon the occurrence of a Purchaser Material Default, the Supplier shall have the right to terminate this Agreement immediately or at such other date specified under this Agreement and to seek all other remedies available under law or in equity.

(b) Other Purchaser Default. Upon the occurrence of an Other Purchaser Default, the Supplier shall have no right to terminate this Agreement, but the Supplier shall have all rights to pursue all other remedies available under law.

16.9 Eighteen Month Supply. If the Eighteen Month Supply is not at the time of termination the quantity required under Section 3.3, at the Purchaser’s written request, the Supplier shall Deliver at the time of termination API that strictly complies with the Specifications and all other requirements of this Agreement to the Purchaser to the extent necessary to satisfy such deficiency in the Eighteen Month Supply.

16.10 Remedies. Except as expressly set forth in this Agreement, none of the remedies set forth in this Agreement are intended to be exclusive, and each Party shall have available to it all remedies available under law or in equity. The Parties specifically acknowledge and agree that the Purchaser will have available the remedy of specific performance under this Agreement upon a Supplier Material Default.

16.11 Injunctive Relief. In the event that either the Supplier or the Purchaser breaches or threatens to breach any provision of Article 11 of this Agreement, the Parties agree that

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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irreparable harm to the other Party should be presumed and the damage to such Party would probably be very difficult to ascertain and would be inadequate. Accordingly, in the event of such circumstances, each of the Supplier and the Purchaser agree that, in addition to any other right and remedies available at law or in equity, the other Party shall have the right to obtain injunctive relief from any court of competent jurisdiction.

ARTICLE 17

MISCELLANEOUS

17.1 Standard Forms. In all communications, the Purchaser and the Supplier may employ their standard forms (including terms and conditions in purchase orders and purchase order acknowledgements), but nothing in those forms shall be construed to modify or amend the terms and conditions of this Agreement, and, in the case of any conflict herewith, the terms and conditions of this Agreement shall control.

17.2 Notices.

Notices to the Purchaser shall be addressed to:
	Inspire Pharmaceuticals, Inc.
	4222 Emperor Boulevard, Suite 200
	Durham, North Carolina 27703
	Attention: General Counsel
	Facsimile No.: 919-941-9797
With a copy to:	Smith, Anderson, Blount,
	Dorsett, Mitchell & Jernigan, L.L.P.
	2500 Wachovia Capitol Center
	Raleigh, North Carolina 27601
	Attention: Christopher Capel
	Facsimile No.: 919-821-6800
Notices to the Supplier shall be addressed to:
	InSite Vision Incorporated
	965 Atlantic Avenue
	Alameda, California 94501
	Attention: Chief Executive Officer
	Facsimile No.: 510-865-5700

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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With a copy to:	O’Melveny & Myers LLP
	2765 Sand Hill Road
	Menlo Park, California 94025
	Attention: Tim Curry, Esq.
	Facsimile No.: 650-473-2601

Either Party may change the address to which notices shall be sent by giving notice to the other Party in the manner herein provided. Any notice required or provided for by the terms of this Agreement shall be in writing and shall be (i) sent via a reputable overnight courier service, or (ii) sent by facsimile transmission, in each case properly addressed in accordance with the paragraphs above. The effective date of any notice shall be the actual date of receipt by the Party receiving the same.

17.3 Independent Contractors. The relationship between the Parties created by this Agreement is one of independent contractors and is not a joint venture, partnership or any similar arrangement. Neither Party shall have the power or authority to bind or obligate the other except as expressly set forth in this Agreement.

17.4 Certain Remedies. Each Party acknowledges and agrees that the other Party may be irreparably damaged if any of the provisions of this Agreement (other than provisions involving the payment of money) are not performed by a Party in accordance with their specific terms, and that any breach of, or failure to perform or comply with, this Agreement by a Party may not be adequately compensated in all cases by monetary damages alone. Accordingly, in addition to any other right or remedy to which a Party may be entitled at law or in equity, it may be entitled to enforce any provision of this Agreement (other than provisions involving the payment of money) by a decree of specific performance and to temporary, preliminary and permanent injunctive relief to prevent breaches or threatened breaches of any of the provisions of this Agreement, without posting any bond or other undertaking.

17.5 Expenses. Unless otherwise provided herein, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party that shall have incurred the same and the other Party shall have no liability relating thereto.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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17.6 No Third Party Beneficiaries. No person or entity other than the Parties hereto and their respective Affiliates, successors and permitted assigns shall be deemed an intended beneficiary hereunder or have any right to enforce any obligation of this Agreement.

17.7 Entire Understanding. This Agreement, together with the Schedules and Exhibits hereto, constitutes and contains the complete, final and exclusive understanding and agreement of the Parties and cancels and supersedes any and all prior negotiations, correspondence, understandings and agreements whether oral or written, between the Parties respecting the subject matter hereof and thereof.

17.8 Unintentional Omissions. The Parties acknowledge that they have expended substantial effort in preparing this Agreement and attempting to describe, in the Schedules hereto, as thoroughly and precisely as possible, Specifications and other information. However, despite these efforts, the Parties acknowledge the possibility of involuntary or inadvertent omissions from the Schedules. The Parties will agree in writing to the changes to be made to the Schedules to add these inadvertent or involuntary omissions and any such written agreement executed by the Parties shall serve as an amendment to this Agreement.

17.9 Transferability; Binding Effect. This Agreement may not be assigned or otherwise transferred (in whole or in part, whether voluntarily, by operation of law or otherwise) by either Party without the prior written consent of the other Party (which consent shall not be unreasonably withheld); provided, however, that such consent shall not be required in connection with (a) assignment or transfer to an Affiliate of the Party; (b) a merger, consolidation or reorganization of the Party, (c) a sale or transfer of all or substantially all of the voting stock, or all or substantially all of the assets, of the Party, or (d) a sale or transfer by the Party of all or substantially all of the assets of the Party with respect to its program related to Products. Notwithstanding the foregoing, any such assignment or transfer to an Affiliate shall not relieve the assigning Party of its responsibilities for performance of its obligations under this Agreement. The rights and obligations of the Parties under this Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Parties. Any attempted assignment not in accordance with this Agreement shall be void.

17.10 Further Actions. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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17.11 Amendment. No amendment, modification or supplement of any provision of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized officer of each Party.

17.12 Severability. If any provision hereof should be held invalid, illegal or unenforceable in any respect in any jurisdiction, the Parties hereto shall use reasonable efforts to substitute, by mutual written consent, valid provisions for such invalid, illegal or unenforceable provisions which valid provisions in their economic effect are sufficiently similar to the invalid, illegal or unenforceable provisions that it can be reasonably assumed that the Parties would have entered into this Agreement with such valid provisions. In case such valid provisions cannot be agreed upon, the invalid, illegal or unenforceable provisions of this Agreement shall not affect the validity of this Agreement as a whole, unless the invalid, illegal or unenforceable provisions are of such essential importance to this Agreement that it is to be reasonably assumed that the Parties would not have entered into this Agreement without the invalid, illegal or unenforceable provisions.

17.13 Waiver. No provision of this Agreement shall be waived by any act or omission of a Party or its agents or employees except by an instrument in writing expressly waiving such provision and signed by a duly authorized officer of the waiving Party.

17.14 Survival. Articles 11, 13, 14, 16 and 17 and any other provision which by its terms specifically shall so state, together with any obligation to make accrued but unpaid payments due hereunder, shall survive the termination or expiration of this Agreement until the last-to-expire of the longest statute of limitations governing any claims relating to the performance of this Agreement.

17.15 No Strict Construction. This Agreement has been prepared jointly and shall not be strictly construed against either Party.

17.16 Descriptive Headings; Schedules; Interpretation.

(a) The descriptive headings of this Agreement are for convenience only, and shall be of no force or effect in construing or interpreting any of the provisions of this Agreement.

(b) All Schedules delivered pursuant to this Agreement shall be deemed part of this Agreement and incorporated herein by reference, as if fully set forth herein. All provisions contained in any Schedule delivered by or on behalf of the Parties hereto, or in connection with the transactions contemplated hereby, are an integral part of this Agreement.

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(c) Words denoting the singular include the plural and vice versa; words denoting one gender include all genders.

(d) References to the word “including” or “includes” are to be construed as “including without limitation” and “includes without limitation”.

17.17 Counterparts; Facsimile Signatures. This Agreement may be executed in counterparts and such counterparts taken together shall constitute one and the same agreement. This Agreement may be executed by facsimile signatures, which signatures shall have the same force and effect as original signatures.

17.18 Time of the Essence. Time shall be of the essence in relation to the performance of any and all of each Party’s obligations pursuant to this Agreement.

17.19 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York, without giving effect to any choice of law provisions thereof. Prior to bringing a legal action against the other Party, such dispute shall be separately negotiated by the Parties hereto in good faith and all reasonable efforts undertaken to settle amicably such matters before resorting to further legal recourse, as follows: upon the occurrence of a dispute between the Parties, including, without limitation, any breach of this Agreement or any obligation relating thereto, the matter shall be referred first to the officers of the Supplier and the Purchaser having responsibility for the subject matter of the dispute, or their designees. The officers, or their designees, as the case may be, shall negotiate in good faith to resolve such dispute in a mutually satisfactory manner for up to thirty (30) days. If such efforts do not result in mutually satisfactory resolution of the dispute, the matter shall be referred to the chief executive officers of the Supplier and the Purchaser, or their designees. The chief executive officers, or their designees, as the case may be, shall negotiate in good faith to resolve such dispute in a mutually satisfactory manner for up to thirty (30) additional days, or such longer period of time to which the chief executive officers may agree. Notwithstanding the foregoing, nothing in this Section 17.19 shall prevent a Party from seeking injunctive relief pursuant to Section 17.4.

[Signature Page Immediately Follows]

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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IN WITNESS WHEREOF, duly authorized representatives of the Parties duly executed this Agreement as of the Effective Date.

INSPIRE PHARMACEUTICALS, INC.
By:	/s/ Christy L. Shaffer
Name:	Christy L. Shaffer
Title:	President & CEO
INSITE VISION INCORPORATED
By:	/s/ S. Kumar Chandrasekaran
Name:	S. Kumar Chandrasekaran
Title:	CEO

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Schedule 1

Specifications

TEST	METHOD	SPECIFICATION
1. [***]	[***]	[***]
2. [***]	[***]	[***]
3. [***]	[***]	[***]
4. [***]	[***]	[***]
5. [***]	[***]	[***]
6. [***]	[***]	[***]
7. [***]	[***]	[***]
8. [***]	[***]	[***]
9. [***]	[***]	[***]
10. [***]	[***]	[***]

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Schedule 2

Price

The price shall be the [***] the [***] Agreement (for the calendar year 2007 such cost is [***] of API) plus [***].

*Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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EX-10.3

EXHIBIT 10.3

TRADEMARK LICENSE AGREEMENT

This TRADEMARK LICENSE AGREEMENT (this “Agreement”), dated as of February 15, 2007 (the “Effective Date”), is made by and between Inspire Pharmaceuticals, Inc., a Delaware corporation having its principal office at 4222 Emperor Blvd., Suite 200, Durham, NC 27703 (“Inspire”), and InSite Vision Incorporated, a Delaware corporation having its principal office at 965 Atlantic Ave., Alameda, CA 94501 (“InSite”). Inspire and InSite are each sometimes referred to individually as a “Party” and together as the “Parties.”

RECITALS

WHEREAS, InSite and Inspire are entering into a license agreement (the “License Agreement”) contemporaneously with this Agreement, under which InSite is granting to Inspire the exclusive rights in the Territory to certain patents, know-how and regulatory filings for the commercialization of Subject Products;

WHEREAS, InSite owns and has the right to grant a license to the InSite Trademarks and the Domain Names described on Schedule 1 attached hereto; and

WHEREAS, Inspire desires to obtain from InSite, and InSite desires to grant to Inspire, rights and licenses to use the InSite Trademarks and the Domain Names in connection with the marketing, commercialization and sale of Subject Products in the Territory under the License Agreement.

NOW, THEREFORE, in consideration of the foregoing premises, the rights and benefits that they will each receive in connection with the License Agreement, and the mutual representations, covenants and agreements contained herein, Inspire and InSite, intending to be legally bound, hereby agree as follows:

ARTICLE 1

DEFINITIONS

1.1 Incorporated Definitions. Capitalized terms that are used in this Agreement but are not otherwise defined in this Agreement will have the respective meaning ascribed to such terms in the License Agreement.

1.2 Additional Definitions. When used in this Agreement, whether in the singular or plural, each of the following capitalized terms shall have the meanings set forth in this Section 1.2.

(a) “AzaSite Trademark” means the trademark AzaSite™.

(b) “Domain Names” means the internet domain names set forth in Schedule 1, such domain names being owned and registered by InSite.

(c) “Independent Sublicensee” has the meaning set forth in Section 4.4.

(d) “InSite Trademarks” means the trademarks set forth in Schedule 1, such marks being owned and registered by InSite. From and after the effective date of the assignment of the AzaSite Trademark by InSite to Inspire pursuant to Section 2.3(b) of

the License Agreement, the term “InSite Trademarks” shall not include the AzaSite Trademark for any purpose under this Agreement.

(e) “Term” has the meaning set forth in Section 4.1.

ARTICLE 2

LICENSES AND EXCLUSIVITY

2.1 Licenses.

(a) Subject to the terms and conditions of this Agreement, InSite hereby grants to Inspire a royalty-free, exclusive (even as to InSite and its Affiliates) right and license, with the right to grant sublicenses, to use the AzaSite Trademark and the Domain Names in connection with the marketing, commercialization and sale of Subject Products in the Field in the Territory under the License Agreement. In connection with such license, InSite agrees immediately to cease any and all use of the Domain Names and to execute and deliver such further and other documents and to perform such actions as may be necessary to enable Inspire to access and use the Domain Names under such license.

(b) Subject to the terms and conditions of this Agreement, InSite hereby grants to Inspire a royalty-free, non-exclusive right and license, with the right to grant sublicenses, to use the InSite Trademarks (other than the AzaSite Trademark) in connection with the marketing, commercialization and sale of Subject Products in the Field in the Territory under the License Agreement. Notwithstanding the non-exclusive nature of the foregoing grant, InSite hereby expressly covenants that it shall not, and shall cause its Affiliates and licensees not to, directly or indirectly: (x) use the InSite Trademarks in connection with the marketing, commercialization or sale of Subject Products in the Field in the Territory; or (y) grant to any Third Party any right or license under the InSite Trademarks to conduct any of the activities set forth in the foregoing clause (x).

2.2 Sublicenses. Inspire may sublicense the rights granted under Section 2.1 only to sublicensees who will use the InSite Trademarks and the Domain Names in connection with the marketing, commercialization and sale of Subject Products in the Field in the Territory under the License Agreement. All sublicenses granted hereunder must be in writing and must contain provisions that are not inconsistent with the terms and conditions of this Agreement. All sublicenses shall include quality control standards at least as protective as those referenced under Section 3.1.

2.3 Use of Affiliates and Third Party Contractors. The licenses granted under Section 2.1 include the right of Inspire to engage its Affiliates and Third Party contractors in exercising such rights and in carrying out its activities and obligations under this Agreement, provided that (i) all such agreements with Third Party contractors must be in writing and must contain provisions that are not inconsistent with the terms and conditions of this Agreement and (ii) Inspire remains responsible for the compliance with this Agreement by such Affiliates or Third Party contractors.

2.4 No Implied Grants. Except as expressly licensed hereunder, neither Party grants any rights to the other Party under this Agreement, by implication or estoppel, under any of its intellectual property rights.

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2.5 Registration of License. Notwithstanding anything to the contrary in Section 5.1, Inspire, at its expense, may register the licenses granted under this Agreement in any country of the Territory. Upon request by Inspire, InSite agrees promptly to execute any “short form” licenses consistent with the terms and conditions of this Agreement submitted to it by Inspire reasonably necessary to effect the foregoing registration in such country.

2.6 Notice. In connection with the use of the InSite Trademarks, Licensee will mark the first prominent use of the InSite Trademark with the appropriate trademark symbol (“TM” or “®”, as set forth in Schedule 1 or as otherwise reasonably instructed by InSite in writing) and will include the following legend in connection with such use: “[InSite Trademark] is the trademark of InSite Vision Incorporated and is being used by permission.”

ARTICLE 3

QUALITY CONTROL AND RELATED MATTERS

3.1 Quality Control and Standards. Inspire shall adhere to such reasonable quality control standards that InSite may from time to time promulgate and communicate to Inspire in writing with respect to the InSite Trademarks, and shall comply materially with all federal, state and local laws and regulations governing the use of the InSite Trademarks in connection with the provision of Inspire Licensed Products. In order to confirm that Inspire’s use of the InSite Trademarks complies with this Section 3.1, InSite shall have the right upon written notice to require that Inspire submit to InSite a reasonable number of representative samples of any Inspire Licensed Products or related materials bearing the InSite Trademarks.

3.2 Protection of the InSite Trademarks. Inspire hereby acknowledges InSite’s rights in the InSite Trademarks and shall not at any time do or authorize to be done any action that would prejudice the validity or registration of the InSite Trademarks or the good will associated therewith, including filing for, using or authorizing the use of any trademark (i) likely to cause consumer confusion with respect to the InSite Trademarks or (ii) containing “SITE” as a part. It is understood that neither Inspire nor any of its Affiliates shall acquire or claim any independent right, title or interest in or to the InSite Trademarks by virtue of Inspire’s use of the InSite Trademarks as provided in this Agreement, it being the intention of the Parties that all use of the InSite Trademarks by Inspire, and all goodwill associated therewith, shall at all times inure to the exclusive benefit of InSite.

ARTICLE 4

TERM AND TERMINATION

4.1 Term. Except as set forth in Section 5.13, unless earlier terminated by mutual agreement of the Parties in writing or pursuant to the provisions of this Article 4, this Agreement will become effective as of the Effective Date and continue in full force and effect until the expiration or termination of the License Agreement in its entirety (the “Term”).

4.2 Bankruptcy or Insolvency. Either Party may, subject to the provisions set forth herein, terminate this Agreement by giving the other Party written termination notice if, at any time, the other Party shall: (a) file in any court pursuant to any statute a petition for bankruptcy or insolvency, or for reorganization in bankruptcy, or for an arrangement or for the appointment of

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a receiver, trustee or administrator of such Party or of its assets; (b) be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within sixty (60) days after the filing thereof; (c) propose or be a party to any dissolution; or (d) make an assignment for the benefit of its creditors.

4.3 Termination of License Agreement. If either Party terminates the License Agreement in its entirety pursuant to Section 10.2 or 10.3 thereof, then either such terminating Party or the other Party may terminate this Agreement in its entirety concurrently with such termination by providing written notice thereof to the other Party. If either Party terminates the License Agreement with respect to a particular country pursuant to Section 10.2 or 10.3 thereof, then either such terminating Party or the other Party may terminate this Agreement, solely with respect to such country, concurrently with such termination by providing written notice thereof to the other Party.

4.4 Continuing Rights of Sublicensees. Upon any termination of any license rights granted to Inspire under this Agreement, each sublicense previously granted by Inspire or any of its Affiliates under such license rights to any Person that is not an Affiliate of Inspire (each, an “Independent Sublicensee”) shall remain in effect and shall become a direct license or sublicense, as the case may be, of such rights by InSite to such Independent Sublicensee, subject to (i) the Independent Sublicensee agreeing in writing to assume Inspire’s terms, conditions and obligations to InSite under this Agreement as they pertain to the sublicensed rights, and (ii) Inspire remaining liable for any liability to the Independent Sublicensee incurred by Inspire prior to such termination.

4.5 Effect of Expiration or Termination.

(a) Expiration or termination of this Agreement in its entirety pursuant to this Article 4 shall not (i) relieve a Party hereto of any obligation accruing to such Party prior to such termination, or (ii) result in the waiver of any right or remedy by a Party hereto accruing to such Party prior to such termination. Upon termination of this Agreement in its entirety, all licenses granted to Inspire by InSite under this Agreement will terminate, and all rights therein will revert to InSite. Inspire promptly shall cease, and cause its Affiliates and sublicensees (subject to Section 4.4) promptly to cease, any use of any InSite Trademarks and Domain Names in the Territory.

(b) Termination of this Agreement with respect to a particular country pursuant to this Article 4 shall not (i) relieve a Party hereto of any obligation accruing to such Party prior to such termination, (ii) result in the waiver of any right or remedy by a Party hereto accruing to such Party prior to such termination, or (iii) result in the termination or modification of any rights or obligations of a Party under the Agreement not involved in such termination. Upon termination of this Agreement with respect to a particular country, the licenses granted to Inspire by InSite under this Agreement solely with respect to such country will terminate, and all such rights will revert to InSite. Inspire promptly shall cease, and cause its Affiliates and sublicensees (subject to Section 4.4) promptly to cease, any use of any InSite Trademarks in such country.

(c) Notwithstanding anything to the contrary in this Agreement, the licenses granted to Inspire by InSite under this Agreement shall continue during any period in which

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Inspire continues to have the right to sell Inspire Licensed Products under Sections 10.6(c) or 10.7(c) of the License Agreement solely in connection with Inspire’s exercise of its rights as set forth in the License Agreement during such period.

ARTICLE 5

MISCELLANEOUS

5.1 Confidentiality. All secret, confidential or proprietary information or data, whether provided in written, oral, graphic, video, computer or other form, provided by a Party to the other Party in connection with the activities contemplated by this Agreement is and will be deemed under the License Agreement to be Confidential Information of the Party providing such information or data, subject to the limitations set forth in Section 1.15 thereof, and will be held in accordance with and subject to the terms of Article 8 thereof. The terms of this Agreement shall also be deemed Confidential Information of each Party under the License Agreement, except to the extent disclosed pursuant to Section 8.4 thereof.

5.2 Assignment. This Agreement may not be assigned or otherwise transferred (in whole or in part, whether voluntarily, by operation of law or otherwise) by either Party without the prior written consent of the other Party (which consent shall not be unreasonably withheld); provided, however, that such consent shall not be required for assignment or transfer of this Agreement in connection with an assignment or transfer of the License Agreement as permitted under Section 12.2 thereof. Notwithstanding the foregoing, any such assignment or transfer to an Affiliate shall not relieve the assigning Party of its responsibilities for performance of its obligations under this Agreement. The rights and obligations of the Parties under this Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Parties. Any attempted assignment not in accordance with this Agreement shall be void.

5.3 Further Actions. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

5.4 Notices. All notices under this Agreement by one Party to the other Party shall be given in accordance with Section 12.4 of the License Agreement.

5.5 Amendment. No amendment, modification or supplement of any provision of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized representative of each Party.

5.6 Waiver. No provision of this Agreement shall be waived by any act, omission or knowledge of a Party or its agents or employees except by an instrument in writing expressly waiving such provision and signed by a duly authorized officer of the waiving Party.

5.7 Counterparts; Facsimile Signatures. This Agreement may be executed in counterparts and such counterparts taken together shall constitute one and the same agreement. This Agreement may be executed by facsimile signatures, which signatures shall have the same force and effect as original signatures.

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5.8 Descriptive Headings. The descriptive headings of this Agreement are for convenience only, and shall be of no force or effect in construing or interpreting any of the provisions of this Agreement.

5.9 Governing Law; Dispute Resolution. This Agreement shall be governed and construed in accordance with the laws of the State of New York, without giving effect to any choice of law provisions thereof. Prior to bringing any legal action against the other Party, the Parties shall comply with the dispute resolution procedures required under Section 12.9 of the License Agreement with respect to such dispute.

5.10 Severability. If any provision hereof should be held invalid, illegal or unenforceable in any respect in any jurisdiction, the Parties hereto shall use reasonable efforts to substitute, by mutual written consent, valid provisions for such invalid, illegal or unenforceable provisions which valid provisions in their economic effect are sufficiently similar to the invalid, illegal or unenforceable provisions that it can be reasonably assumed that the Parties would have entered into this Agreement with such valid provisions. In case such valid provisions cannot be agreed upon, the invalid, illegal or unenforceable provisions of this Agreement shall not affect the validity of this Agreement as a whole, unless the invalid, illegal or unenforceable provisions are of such essential importance to this Agreement that it is to be reasonably assumed that the Parties would not have entered into this Agreement without the invalid, illegal or unenforceable provisions.

5.11 Entire Agreement of the Parties. This Agreement hereby, together with the License Agreement and the Schedules and Exhibits hereto and thereto, constitutes and contains the complete, final and exclusive understanding and agreement of the Parties and cancels and supersedes any and all prior negotiations, correspondence, understandings and agreements whether oral or written, between the Parties respecting the subject matter hereof.

5.12 Independent Parties. The relationship between the Parties created by this Agreement is one of independent contractors and is not a joint venture, partnership or any similar arrangement. Neither Party shall have the power or authority to bind or obligate the other except as expressly set forth in this Agreement.

5.13 Accrued Rights; Surviving Obligations. Unless explicitly provided otherwise in this Agreement, termination, relinquishment or expiration of this Agreement for any reason shall be without prejudice to any rights that shall have accrued to the benefit to any Party prior to such termination, relinquishment or expiration, including damages arising from any breach hereunder. Such termination, relinquishment or expiration shall not relieve any Party from obligations which are expressly indicated to survive termination or expiration of the Agreement, including, without limitation, those obligations set forth in Sections 4.4 and 4.5 and Article 1 (to the extent required to enforce other surviving rights and/or obligations) and Article 5 hereof.

5.14 Injunctive Relief. Inspire acknowledges and agrees that InSite would be irreparably damaged if any of the provisions of this Agreement are not performed by Inspire in accordance with their specific terms, and that any breach of, threatened breach of, or failure to perform or comply with, this Agreement by Inspire could not be adequately compensated in all cases by monetary damages alone. Accordingly, in addition to any other right or remedy to which InSite

6

may be entitled at law or in equity, InSite shall be entitled to temporary, preliminary and permanent injunctive relief to prevent breaches or threatened breaches of any of the provisions of this Agreement, without posting any bond or other undertaking.

5.15 Expenses. Unless otherwise provided herein, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party that shall have incurred the same and the other Party shall have no liability relating thereto.

5.16 No Third Party Beneficiaries. No person or entity other than the Parties hereto and their respective Affiliates, successors and permitted assigns shall be deemed an intended beneficiary hereunder or have any right to enforce any obligation of this Agreement.

5.17 No Strict Construction. This Agreement has been prepared jointly and shall not be strictly construed against either Party.

[Signature Page Immediately Follows]

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IN WITNESS WHEREOF, duly authorized representatives of the Parties have duly executed this Agreement as of the Effective Date.

INSITE VISION INCORPORATED
By:	/s/ S. Kumar Chandrasekaran
Name:	S. Kumar Chandrasekaran
Title:	CEO
INSPIRE PHARMACEUTICALS, INC.
By:	/s/ Christy L. Shaffer
Name:	Christy L. Shaffer
Title:	President & CEO

SIGNATURE PAGE TO TRADEMARK LICENSE AGREEMENT

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Schedule 1

InSite Trademarks

Trademarks

U.S.:

DuraSite

DuraSite^® US Trademark Number: 1769077

AzaSite

AzaSite™ US Trademark Application Number: 78/426,374

Canada:

DuraSite

DuraSite^® Canadian Registration Number 432299

AzaSite

AzaSite™ Canadian Trademark Application Number 1325128

Domain Name

www.AzaSite.com

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EX-10.4

EXHIBIT 10.4

February 15, 2007

Pfizer Inc.

235 East 42nd Street

New York, NY 10017-5755

Attention:	Edmund P. Harrigan
	Senior Vice President, World-Wide Business Development

Re: Exclusive License Agreement

Dear Mr. Harrigan:

As you are aware, pursuant to the Exclusive License Agreement dated February 15, 2007 (“Pfizer Agreement”), Pfizer Inc. and Pfizer Products, Inc. (collectively, “Pfizer”) have licensed to InSite Vision Incorporated (“Licensor”) certain rights owned by Pfizer. Licensor proposes to enter into an agreement (the “Licensee Agreement”) with Inspire Pharmaceuticals, Inc. (“Licensee”) pursuant to which Licensor would grant to Licensee among other things a sublicense under the rights and licenses granted to Licensor under the Pfizer Agreement.

1. No Default. Pfizer confirms that, as of the date of this letter agreement (the “Letter Agreement”), the Pfizer Agreement remains in full force and effect and Pfizer has not given any notice to Licensor of any default by Licensor under the Pfizer Agreement.

2. Consent to Sublicense. Pfizer hereby gives its consent, pursuant to Section 2(b) of the Pfizer Agreement, to Licensor granting sublicenses to Licensee pursuant to the Licensee Agreement under the rights and licenses granted to Licensor under the Pfizer Agreement. Licensor and Licensee agree to promptly notify Pfizer as to the date the Licensee Agreement becomes effective (the “Effective Date”).

3. Effective Date. Paragraphs 4 - 10 of this Letter Agreement shall become effective as of the Effective Date, and except as otherwise expressly provided the provisions of this Letter Agreement shall be effective from the date of first written above.

4. Licensor Default. Under Pfizer Agreement. Pfizer agrees to provide Licensee with notice of any breach or default by Licensor under the Pfizer Agreement at the same time it notifies Licensor of such breach or default. Such notice to Licensee shall be given in accordance with Paragraph 9 below. Licensee will be provided, in all respects, the opportunity to cure on behalf of Licensor any breach or default by Licensor under the Pfizer Agreement within the sixty (60) day cure period (or ten (10) day cure period, with respect to breach or default of a payment obligation) as set forth in Section 13 of the Pfizer Agreement, and Pfizer shall accept any such cure by Licensee on Licensor’s behalf.

5. Patents. If and to the extent Licensor is permitted to prosecute any patent application or maintain any patent within the Licensed Patents (as defined in the Pfizer Agreement) in the United States or Canada (such countries collectively being referred to herein as the “Territory”), and Licensor does not exercise such right within ten (10) days of the date such right arises under the Pfizer Agreement, Licensee may, upon written notice to Pfizer, assume full responsibility, at Licensee’s discretion, cost and expense, for prosecution of such application or maintenance of such patent in such country. If and to the extent Licensor is permitted to initiate legal proceedings against an infringer of any of the Licensed Patents in any country in the Territory pursuant to Section 8(a) or 8(c) of the Pfizer Agreement, and Licensor does not exercise such right within ten (10) days of the date such right arises under the Pfizer Agreement, Licensee may, upon notice to Pfizer, initiate and carry on such legal proceedings pursuant to the terms of Sections 8(a), 8(c), 8(d) and 8(e) thereof.

6. Continuation of Licensee’s Sublicense Rights Upon Termination of the Pfizer Agreement. Subject to the licenses granted to Licensor in the Pfizer Agreement, Pfizer agrees to grant to Licensee all rights and licenses granted to Licensor under the Pfizer Agreement on the same terms and conditions that such rights and licenses were granted to Licensor under the Pfizer Agreement, to the extent such terms and conditions arise from or apply to the grant of rights and licenses from Licensor to Licensee under the Licensee Agreement with respect to the Territory, including all payment and termination provisions of the Pfizer Agreement (collectively, the “Stand-By License”); provided, however, that Pfizer will grant such rights and licenses only after the Pfizer Agreement first terminates or otherwise ceases to be in effect for any reason, whether or not in connection with any laws governing an insolvency, reorganization, bankruptcy, liquidation or winding up of Licensor as applicable (the effective time of such termination or other cessation, the “Effective Time”). Accordingly, as of the Effective Time, the Stand-By License shall become effective and Licensee may exercise the rights granted by Pfizer in this Paragraph 6 notwithstanding any failure by Licensee to cure Licensor’s breach or default pursuant to Paragraph 4 above without the need for further action by Pfizer or Licensee, and Licensee shall be subject to all of the terms and conditions of the Pfizer Agreement to the extent such terms and conditions arise from or apply to the grant of rights and licenses from Licensor to Licensee under the Licensee Agreement with respect to the Territory. Nothing in this Letter Agreement shall affect, modify or diminish in any way, any of Pfizer’s rights or remedies relating to breaches of the Pfizer Agreement by Licensor; provided, however, that if Licensee pays Pfizer any overdue amounts owed to Pfizer by Licensor under the Pfizer Agreement, Licensee shall be subrogated to any claim that Pfizer has against Licensor for such amounts.

7. Payments and Obligations Following Effective Time. For clarity and without limiting Paragraph 6 above, from and after the Effective Time, all payments to Pfizer under Section 3 of the Pfizer Agreement shall be an obligation of and payable by Licensee to Pfizer and calculated based on amounts that would have been payable by Licensor under the Pfizer Agreement had it stayed in effect.

8. Bankruptcy. All rights and licenses granted under or pursuant to this Letter Agreement and all the other agreements referred to herein (including, without limitation, the Licensee Agreement) are, and shall otherwise be deemed to be, for purposes of Section

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365(n) of the U.S. Bankruptcy Code, 11 U.S.C. section 101 through 1330 et seq., licenses of rights to “intellectual property” as defined under Section 101 of the U.S. Bankruptcy Code.

9. Notices. Any notices required hereunder shall be sent by registered or certified mail or by an equivalent service capable of verification at the address stated below or such other address as to which the parties may provide in the future.

If to Pfizer:	Pfizer Inc. and Pfizer Products Inc.
	235 East 42nd Street
	New York, New York 10017-5755
	Attention: General Counsel
	Fax: 212-309-0564
If to Licensee:	Inspire Pharmaceuticals, Inc.
	4222 Emperor Boulevard, Suite 200
	Durham, North Carolina 27703
	Attention: General Counsel
	Facsimile No.: 919-941-9797
With a copy to:	Smith, Anderson, Blount,
	Dorsett, Mitchell & Jernigan, L.L.P.
	2500 Wachovia Capitol Center
	Raleigh, North Carolina 27601
	Attention: Christopher Capel
	Facsimile No.: 919-821-6800

10. Miscellaneous.

a. Sublicenses. Upon termination of any license rights granted to Licensee under the Stand-By License, each of Licensee’s permitted sublicenses thereunder shall remain in effect and become a direct license of such rights by Pfizer to the sublicensee thereunder, provided that such sublicensee agrees in writing to be bound by the terms of the Stand-By License as if it were a party thereto.

b. Counterparts. This Letter Agreement may be executed in any number of counterparts each of which shall be original and all originals of which shall be deemed a single instrument.

c. Full Understanding. This Letter Agreement, the Licensee Agreement and the Pfizer Agreement represent the full understanding among the parties with respect to the subject matter hereof.

d. Modification/Waiver. No modification or waiver of this Letter Agreement shall be effective except in a written document signed by the party against whom such waiver or modification is to be enforced.

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e. No Assignment. This Letter Agreement may not be assigned without the prior written consent of each party hereto except to an affiliate of the assigning party or to any successor in interest in connection with the sale or transfer of substantially all or the entire business and assets of the assigning party related to the subject matter hereof, provided that such affiliate or successor in interest agrees in writing to be bound by the terms of this Letter Agreement as if it were a party hereto, or in connection with a permitted assignment by Licensor or Pfizer of the Pfizer Agreement as provided in Article 16 of the Pfizer Agreement.

f. Independent Contractors. This Letter Agreement shall not constitute any party as the joint venturer, legal representative or agent of any other party hereto and no party hereto shall have the right or authority to assume or create any obligation on the part of any other party hereto.

g. Confidentiality. All trade secrets or other proprietary information regarding a party’s technology, products, business or objectives, including without limitation the terms of this Letter Agreement, the Licensee Agreement and any sublicense agreement permitted hereunder and any information provided or made available pursuant to the reporting, audit or other provisions of the Pfizer Agreement, provided by a party to another party hereto in connection with the activities contemplated by this Letter Agreement, the Pfizer Agreement or the Licensee Agreement shall be deemed the confidential information of the party originally providing such information, subject the limitations set forth in Section 1(c) of the Pfizer Agreement (“Confidential Information”). Each party agrees to treat the Confidential Information of the other parties hereto in accordance with all terms and conditions set forth in Section 11(a) of the Pfizer Agreement as if such terms and conditions were set forth in full in this Letter Agreement.

h. Publicity. Licensee shall be permitted to publicly announce (1) the execution of the Pfizer Agreement in an announcement comparable to the announcement agreed by Pfizer and Licensor in Section 11(b) of the Pfizer Agreement and (2) the execution of this Letter Agreement.

Remainder of Page Intentionally Left Blank

4

Please sign and return a copy of this Letter Agreement to us to acknowledge our mutual agreement on this matter. Both Licensee and Licensor wish to thank you, again, for all of your assistance.

Inspire Pharmaceuticals, Inc.
By:	/s/ Christy L. Shaffer
Name:	Christy L. Shaffer, Ph.D.
Title:	President & CEO
AGREED AND ACKNOWLEDGED:
Pfizer Inc.
By:	/s/ Edmund P. Harrigan
Name:	Edmund P. Harrigan
Title:	Senior Vice President
Pfizer Products, Inc.
By:	/s/ Brian C. Zielinski
Name:	Brian C. Zielinski
Title:	Vice President, attorney-in-fact
ACKNOWLEDGED:
InSite Vision Incorporated
By:	/s/ S. Kumar Chandrasekaran
Name:	S. Kumar Chandrasekaran
Title:	CEO

EX-10.5

EXHIBIT 10.5

INSPIRE PHARMACEUTICALS, INC.

AMENDED AND RESTATED

DIRECTOR COMPENSATION POLICY

Amended and Restated: March 29, 2007 Page 1 of 4

All non-employee members (each, a “Director” and, collectively, the “Directors”) of the Inspire Pharmaceuticals, Inc. (the “Company”) Board of Directors (the “Board”) shall receive the following compensation pursuant to this Amended and Restated Director Compensation Policy (this “Policy”):

A. Cash Compensation.

1. Each Director shall receive $30,000 annually to cover general availability and participation in meetings and conference calls of the Board;

2. Each Audit Committee member shall receive $10,000 annually to cover general availability and participation in Audit Committee conference calls and meetings;

3. Each Corporate Governance Committee member shall receive $10,000 annually to cover general availability and participation in Corporate Governance Committee conference calls and meetings;

4. Each Compensation Committee member shall receive $10,000 to cover general availability and participation in Compensation Committee conference calls and meetings;

5. The Chairman of the Board shall receive an additional $30,000 annually. The Chairman of each committee identified above shall receive an additional $10,000 annually; and

6. Each Director shall receive $3,500 per day, plus reasonable out-of-pocket travel expenses, to cover preparation for, attendance at and participation in the meetings, seminars and other events comprising the Company’s “Science Day”, including any follow-up discussions relating to the issues discussed at the Science Day (it being understood that such compensation shall be paid only to those Directors that attend a Science Day and that the events constituting a Science Day may take place over a period of time covering up to 48 hours).

INSPIRE AMENDED AND RESTATED DIRECTOR COMPENSATION POLICY PAGE 2 OF 4

B. Stock Option Grants.

1. A stock option grant in the amount of 50,000 shares will be granted to each Director upon initial election to the Board, which stock option will vest over three years commencing on the date of grant as follows: 20,000 shares in year one (1/4^th of such 20,000 shares per quarter), 15,000 shares in year two (1/4^th of such 15,000 shares per quarter) and 15,000 shares in year three (1/4^th of such 15,000 shares per quarter); provided, however, that all vesting will cease if the Director resigns from the Board or otherwise ceases to serve as Director, unless the Board determines that the circumstances warrant continuation of vesting;

2. A stock option grant in the amount of 30,000 shares shall be granted to each Director at the time of each annual meeting of the Board of Directors, which stock option will vest over the one year period commencing on the date of grant (1/4^th of such 30,000 shares per quarter); provided, however, that all vesting will cease if the Director resigns from the Board or otherwise ceases to serve as Director, unless the Board determines that the circumstances warrant continuation of vesting; and

3. A stock option grant in the amount of 10,000 shares shall be granted to the Chairman of the Board at the time of the annual meeting of the Board of Directors, which stock option grant will vest over the one year period commencing on the date of grant (1/4^th of such 10,000 shares per quarter); provided, however, that all vesting will cease if such person resigns from the position of Chairman of the Board, unless the Board determines that the circumstances warrant continuation of vesting.

C. Vacancies. In the event that a Director is appointed to fill a vacancy on the Board, any Committee of the Board, or as Chairman of the Board, the Board will determine the amount of cash compensation and stock option grants appropriate to provide such Director with comparable compensation for the period such Director will so serve for the remainder of the term.

D. Payment/Grant Procedure. All cash compensation payments made pursuant to this Policy shall be paid quarterly in arrears as soon as practicable, but not later than 10 days, after the last day of such quarter.

All stock options awarded pursuant to this Policy (other than options granted pursuant to Paragraph C and, in certain circumstances options granted pursuant to Paragraph B.1) shall be granted on the date of the annual meeting of the Board of Directors, and the exercise price for each share available under such option will be equal to the fair market value of the common stock of the Company, par value of $.001 per share (the “Common Stock”), on the date of such grant. All stock options awarded pursuant to Paragraphs B.1 and C of this Policy shall be granted on the date of such appointment, and the exercise price for each share available under such option will be equal to the fair market value of the Common Stock, on the date of such grant.

E. Effective Date. All cash compensation provisions of this Policy and any stock option grant pursuant to Paragraph B.1 shall be effective as of April 1, 2007. The Stock option grant provisions of Sections B.2 and B.3 of this Policy shall be effective for Directors

INSPIRE AMENDED AND RESTATED DIRECTOR COMPENSATION POLICY PAGE 3 OF 4

elected or serving as of the annual meeting of stockholders to be held in, or after, 2007, or appointed to a Committee or as Chairman of the Board at the annual meeting of the Board of Directors to be held in, or after, 2007.

F. Change of Control Provisions. Notwithstanding the foregoing, all options granted under this Policy shall vest immediately if: (i) there is a Change of Control (as hereinafter defined); and (ii) the optionee will cease to serve as a Director of the Company as a result of such Change of Control.

(a) For purposes of this Policy, a “Change of Control” means the determination (which may be made effective as of a particular date) by the Board, made by a majority vote that a Change of Control has occurred, or is about to occur. Such a change shall not include, however, a restructuring, reorganization, merger or other change in capitalization in which the Persons (as defined below) who own an interest in the Company on the date hereof (the “Current Owners”) (or any individual or entity which receives from a Current Owner an interest in the Company through will or the laws of descent and distribution or otherwise) maintain more than a fifty percent (50%) interest in the resultant entity. Regardless of the vote of the Board or whether or not the Board votes, a Change of Control will be deemed to have occurred as of the first day any one (1) or more of the following subsections shall have been satisfied:

(b) Any Person (other than the Person in control of the Company as of the date of this Agreement, or other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, or a company owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), becomes the beneficial owner, directly or indirectly, of securities of the Company representing more than thirty-five percent (35%) of the combined voting power of the Company’s then outstanding securities; or

(c) The stockholders of the Company approve:

(i) A plan of complete liquidation of the Company;

(ii) An agreement for the sale or disposition of all or substantially all of the Company’s assets; or

(iii) A merger, consolidation or reorganization of the Company with or involving any other company, other than a merger, consolidation or reorganization that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger, consolidation or reorganization.

(d) However, in no event shall a Change of Control be deemed to have occurred, with respect to the optionee, if the optionee is part of a purchasing group which consummates the Change of Control transaction. The optionee shall be deemed “part of the purchasing group” for purposes of the preceding sentence if the optionee is an equity participant or has agreed to become an equity participant in the purchasing company or group (except for (i) passive

INSPIRE AMENDED AND RESTATED DIRECTOR COMPENSATION POLICY PAGE 4 OF 4

ownership of less than five percent (5%) of the voting securities of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise deemed not to be significant, as determined prior to the Change of Control by a majority of the continuing non-employee Directors).

(e) For purposes of this Paragraph F, “Person(s)” shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”), as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (A) the Company or any of its subsidiaries; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries; (C) an underwriter temporarily holding securities pursuant to an offering of such securities; (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company; or (E) an entity or entities which are eligible to file and have filed a Schedule 13G under Rule 13d-l(b) of the Exchange Act, which Schedule indicates beneficial ownership of fifteen percent (15%) or more of the outstanding shares of common stock of the Company or the combined voting power of the Company’s then outstanding securities.

EX-10.6

EXHIBIT 10.6

INSPIRE PHARMACEUTICALS, INC.

1995 STOCK PLAN

NONQUALIFIED STOCK OPTION

Inspire Pharmaceuticals, Inc. (the “Company”) has granted to you a Nonqualified Stock Option (the “Option”) under the Inspire Pharmaceuticals, Inc. 1995 Stock Plan, as amended (the “Plan”). The terms of the Option are set forth in the Nonqualified Stock Option Grant Agreement provided to you (the “Agreement”). The following provides a summary of the key terms of the Option; however, you should read the entire Agreement, along with the terms of the Plan, to fully understand the Option.

SUMMARY OF NONQUALIFIED OPTION GRANT

Option Number:

Grantee:

Date of Grant:

Vesting Schedule:

Exercise Price Per Share:

Total Number of Options Granted:

Term/Expiration Date:

INSPIRE PHARMACEUTICALS, INC.

1995 STOCK PLAN

NONQUALIFIED STOCK OPTION GRANT AGREEMENT

This NONQUALIFIED STOCK OPTION GRANT AGREEMENT (the “Agreement”), dated as of (the “Date of Grant”), is delivered by Inspire Pharmaceuticals, Inc. (the “Company”) to (the “Grantee”).

RECITALS

A. The Inspire Pharmaceuticals, Inc. 1995 Stock Plan, as amended (the “Plan”) provides for the grant of options to purchase shares of common stock of the Company. The Company has decided to make a stock option grant as an inducement for the Grantee to promote the best interests of the Company and its stockholders.

B. The Board of Directors of the Company (the “Board”) has delegated its authority to administer the Plan to the Compensation Committee (the “Committee”).

NOW, THEREFORE, the parties to this Agreement, intending to be legally bound hereby, agree as follows:

1. Grant of Option. Subject to the terms and conditions set forth in this Agreement and in the Plan, the Company hereby grants to the Grantee a Nonqualified Stock Option (the “Option”) to purchase shares of common stock of the Company (“Shares”) at an exercise price of per Share (the “Exercise Price”). The Option shall become exercisable according to Paragraph 2 below.

2. Exercisability of Option. The Option shall become exercisable in the manner provided below, if the Grantee is employed by, or providing service to, the Employer (as defined below) on the applicable date. For this purpose, the term “Shares” refers to the number of shares underlying that portion of the Option that vests in the manner described under Vest Type and Full Vest Date. The term “Vest Type” describes how the Option covering those shares will vest before the Full Vest Date. For example, if Vest Type is “monthly”, that Option will vest with respect to those shares on a pro rata basis on each monthly anniversary of the Grantee’s date of hire. The term “Full Vest Date” is the date on which that portion of the Option covering all of the corresponding shares set forth in the “Shares” column will be fully vested.

Shares Vest Type Full Vest Date

The number of Shares noted on the first line will fully vest on the corresponding “Full Vest Date.” The number of Shares noted in each subsequent line will vest in equal monthly installments, beginning one month after the Full Vest Date shown in the previous line and ending on the Full Vest Date shown in the corresponding line.

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The exercisability of the Option is cumulative, but shall not exceed one hundred percent (100%) of the Shares subject to the Option. If the foregoing schedule would produce fractional Shares, the number of Shares for which the Option becomes exercisable shall be rounded down to the nearest whole Share. If the Grantee dies while employed by, or providing service to, the Employer, all of the unexercised outstanding Shares of the Option shall become immediately exercisable.

3. Term of Option.

(a) The Option shall have a term of five (5) years from the Date of Grant and shall terminate at the expiration of that period, unless it is terminated at an earlier date pursuant to the provisions of this Agreement or the Plan.

(b) Unless otherwise determined by the Committee (as provided in Sections 6(b) and (c) of the Plan), the Option shall automatically terminate upon the happening of the first of the following events:

(i) The expiration of the ninety (90) day period after the Grantee ceases to be employed by, or provide service to, the Employer (as defined below), if the termination is for any reason other than Disability (as defined below), death or Misconduct (as defined below).

(ii) The expiration of the one (1) year period after the Grantee ceases to be employed by, or provide service to, the Employer on account of the Grantee’s Disability.

(iii) The expiration of the one (1) year period after the Grantee ceases to be employed by, or provide service to, the Employer, if the Grantee dies (x) while employed by, or providing service to, the Employer or (y) within ninety (90) days after the Grantee ceases to be so employed or provide such services on account of a termination described in subparagraph (i) above.

(iv) The expiration of the thirty (30) day period after the date on which the Grantee ceases to be employed by, or provide service to, the Employer on account of a termination by the Employer for Misconduct. In addition, notwithstanding the prior provisions of this Paragraph 3, if the Employer determines that the Grantee has engaged in conduct that constitutes Misconduct at any time while the Grantee is employed by, or providing service to, the Employer or after the Grantee’s termination of employment or service, the Option shall terminate as of the thirtieth (30^th) day after the date on which such Misconduct first occurred.

(v) For purposes of this Agreement:

(1) The term “Employer” shall mean the Company and its parent and subsidiary corporations or other entities, as determined by the Committee.

(2) “Employed by, or provide service to, the Employer” shall mean employment or service as an Employee, Key Advisor (as defined below) or member of the Board of Directors (so that, for purposes of exercising Options, a Grantee shall not be considered to

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have terminated employment or service until the Grantee ceases to be an Employee, Key Advisor or member of the Board of Directors). “Key Advisor” means consultants and advisors who perform services for the Company or any of its parents or subsidiaries.

(3) “Disability” shall mean a Grantee’s becoming disabled within the meaning of the Employer’s long-term disability plan applicable to the Grantee, as determined in the sole discretion of the Committee.

(4) “Misconduct” means (i) willful and continued failure by the Grantee to substantially perform the Grantee’s duties with the Employer (other than any such failure resulting from the Grantee’s incapacity due to physical or mental illness) or (ii) the willful engaging by the Grantee in conduct which is demonstrably injurious to the Employer, monetarily or otherwise. For purposes of this definition, no act, or failure to act, on the Grantee’s part shall be deemed “willful” unless done, or omitted to be done, by the Grantee not in good faith or without reasonable belief that the Grantee’s act, or failure to act, was in the best interest of the Employer.

Notwithstanding the foregoing, in no event may the Option be exercised after the date that is immediately before the fifth (5^th) anniversary of the Date of Grant. Any portion of the Option that is not exercisable at the time the Grantee ceases to be employed by, or provide service to, the Employer shall immediately terminate.

4. Exercise Procedures.

(a) Subject to the provisions of Paragraphs 2 and 3 above, the Grantee may exercise part or all of the exercisable Option by giving the Company written notice of intent to exercise in the manner provided in this Agreement, specifying the number of Shares as to which the Option is to be exercised. At such time as the Committee shall determine, the Grantee shall pay the Exercise Price (i) in cash, (ii) by payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board or (iii) by such other method as the Company may approve. The Company may impose from time to time such limitations as it deems appropriate on the use of Shares of the Company to exercise the Option.

(b) The obligation of the Company to deliver Shares upon exercise of the Option shall be subject to all applicable laws, rules, and regulations and such approvals by governmental agencies as may be deemed appropriate by the Company, including such actions as Company counsel shall deem necessary or appropriate to comply with relevant securities laws and regulations. The Company may require that the Grantee (or other person permitted to exercise the Option) represent that the Grantee is purchasing Shares for the Grantee’s own account and not with a view to or for sale in connection with any distribution of the Shares, or such other representation as the Company deems appropriate.

(c) All obligations of the Company under this Agreement shall be subject to the rights of the Company as set forth in the Plan to withhold amounts required to be withheld for any taxes, if applicable. Subject to Committee approval, the Grantee may elect to satisfy any tax withholding obligation of the Employer with respect to the Option by having Shares withheld up

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to an amount that does not exceed the minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities.

5. Change in Control.

(a) “Change in Control” means the determination (which may be made effective as of a particular date) by the Board, made by a majority vote that a Change in Control has occurred, or is about to occur. Such a change shall not include, however, a restructuring, reorganization, merger or other change in capitalization in which the Persons (as defined below) who own an interest in the Company on the date hereof (the “Current Owners”) (or any individual or entity which receives from a Current Owner an interest in the Company through will or the laws of descent and distribution or otherwise) maintain more than a fifty percent (50%) interest in the resultant entity. Regardless of the vote of the Board or whether or not the Board votes, a Change in Control will be deemed to have occurred as of the first day any one (1) or more of the following subsections shall have been satisfied:

(b) Any Person (other than the Person in control of the Company as of the date of this Agreement, or other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, or a company owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), becomes the beneficial owner, directly or indirectly, of securities of the Company representing more than thirty-five percent (35%) of the combined voting power of the Company’s then outstanding securities; or

(c) The stockholders of the Company approve:

(i) A plan of complete liquidation of the Company;

(ii) An agreement for the sale or disposition of all or substantially all of the Company’s assets; or

(iii) A merger, consolidation or reorganization of the Company with or involving any other company, other than a merger, consolidation or reorganization that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger, consolidation or reorganization.

(d) However, in no event shall a Change in Control be deemed to have occurred, with respect to the Grantee, if the Grantee is part of a purchasing group which consummates the Change in Control transaction. The Grantee shall be deemed “part of the purchasing group” for purposes of the preceding sentence if the Grantee is an equity participant or has agreed to become an equity participant in the purchasing company or group (except for (i) passive ownership of less than five percent (5%) of the voting securities of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise deemed not to be significant, as determined prior to the Change in Control by a majority of the continuing non-employee directors).

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(e) For purposes of this Paragraph 5 the term “Person(s)” shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”), as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (A) the Company or any of its subsidiaries; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries; (C) an underwriter temporarily holding securities pursuant to an offering of such securities; (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company; or (E) an entity or entities which are eligible to file and have filed a Schedule 13G under Rule 13d-l(b) of the Exchange Act, which Schedule indicates beneficial ownership of fifteen percent (15%) or more of the outstanding shares of common stock of the Company or the combined voting power of the Company’s then outstanding securities.

6. Consequences of a Change in Control.

(a) Notice and Acceleration. Upon a Change in Control, unless the Company determines otherwise, if the Option is outstanding (including, for purposes of this Paragraph 6, any portion of the Option that is outstanding), (i) the Company shall provide the Grantee written notice of such Change in Control and (ii) the outstanding Option shall automatically accelerate and become fully exercisable.

(b) Assumption of Grants. Upon a Change in Control where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), the Grantee shall have the right to elect within thirty (30) days of receiving the notice described in subparagraph (a) immediately above one (1) of the following methods of treating the outstanding Option: (i) the outstanding Option shall be assumed by, or replaced with comparable options by, the surviving corporation (or a parent or subsidiary of the surviving corporation; or (ii) the Grantee may surrender the outstanding Option in exchange for a payment by the Company, in cash or Company Stock (as elected by the Grantee) in an amount equal to the amount by which the then Fair Market Value (as defined below) of the shares of Company Stock underlying the Option exceeds the Exercise Price of the Grantee’s unexercised Option.

(c) For purposes of this Paragraph 6, “Fair Market Value” per Share shall be determined as follows: (i) if the principal trading market for the Shares is a national securities exchange or the Nasdaq National Market, the last reported sale price thereof on the relevant date or (if there were no trades on that date) the latest preceding date upon which a sale was reported, or (ii) if the Shares are not principally traded on such exchange or market, the mean between the last reported “bid” and “asked” prices of the Shares on the relevant date, as reported on Nasdaq or, if not so reported, as reported by the National Daily Quotation Bureau, Inc. or as reported in a customary financial reporting service, as applicable and as the Company determines. If the Shares are not publicly traded or, if publicly traded, is not subject to reported transactions or “bid” or “asked” quotations as set forth above, the Fair Market Value per Share shall be as determined by the Company.

7. Restrictions on Exercise. Except as the Company may otherwise permit pursuant to the Plan, only the Grantee may exercise the Option during the Grantee’s lifetime and, after the Grantee’s death, the Option shall be exercisable (subject to the limitations specified in the Plan)

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solely by the legal representatives of the Grantee, by the person who acquires the right to exercise the Option by will or by the laws of descent and distribution or by a former spouse of the Grantee who obtained the Option pursuant to a domestic relations order, to the extent that the Option is exercisable pursuant to this Agreement.

8. Grant Subject to Plan Provisions. This grant is made pursuant to the Plan, the terms of which are incorporated herein by reference, and in all respects shall be interpreted in accordance with the Plan. The grant and exercise of the Option are subject to interpretations, regulations and determinations concerning the Plan established from time to time by the Committee in accordance with the provisions of the Plan, including, but not limited to, provisions pertaining to: (i) rights and obligations with respect to withholding taxes, (ii) the registration, qualification or listing of the Shares, (iii) changes in capitalization of the Company and (iv) other requirements of applicable law. The Committee shall have the authority to interpret and construe the Option pursuant to the terms of the Plan, and its decisions shall be conclusive as to any questions arising hereunder.

9. Certain Capital Changes. In the event that the Committee, in its discretion, determines that any stock dividend, split-up, combination or reclassification of shares, recapitalization or other similar capital change affects the Shares such that adjustment is required in order to preserve the benefits or potential benefits of the Option, the maximum aggregate number and kind of shares or securities of the Company subject to the Option, and the Exercise Price of the Option, shall be appropriately adjusted by the Committee (whose determination shall be conclusive) so that the proportionate number of Shares or other securities subject to the Option and the proportionate interest of the Grantee shall be maintained as before the occurrence of such event.

10. No Employment or Other Rights. The grant of the Option shall not confer upon the Grantee any right to be retained by or in the employ or service of the Employer and shall not interfere in any way with the right of the Employer to terminate the Grantee’s employment or service at any time. The right of the Employer to terminate at will the Grantee’s employment or service at any time for any reason is specifically reserved.

11. No Shareholder Rights. Neither the Grantee, nor any person entitled to exercise the Grantee’s rights in the event of the Grantee’s death or otherwise, shall have any of the rights and privileges of a shareholder with respect to the Shares subject to the Option, until certificates for Shares have been issued upon the exercise of the Option.

12. Assignment and Transfers. Except as provided below, only the Grantee may exercise rights under the Option during the Grantee’s lifetime. The Grantee may not transfer those rights except: (i) by will or by the laws of descent and distribution, (ii) pursuant to a domestic relations order or (iii) as otherwise permitted by the Company. When the Grantee dies, the personal representative or other person entitled to succeed to the rights of the Grantee may exercise such rights. The Committee shall have the right to require evidence to its satisfaction of the rights of any person or persons seeking to exercise the Option hereunder, e.g., an authenticated copy of the Grantee’s will or a domestic relations order. This Agreement may be assigned by the Company without the Grantee’s consent.

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13. Applicable Law. The validity, construction, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

14. Notice. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of the Compensation Committee at 4222 Emperor Boulevard, Suite 200, Durham, North Carolina, 27703-8466, and any notice to the Grantee shall be addressed to such Grantee at the current address shown on the payroll of the Employer, or to such other address as the Grantee may designate to the Employer in writing. Any notice shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.

****

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IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Agreement, and the Grantee has executed this Agreement, effective as of the Date of Grant.

INSPIRE PHARMACEUTICALS, INC.
By:
Name:	Joseph M. Spagnardi
Title:	Senior Vice President, General Counsel & Secretary

I hereby accept the Option described in this Agreement, and I agree to be bound by the terms of the Plan and this Agreement. I hereby further agree that all the decisions and determinations of the Committee shall be final and binding.

Grantee:

Date:

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EX-10.7

EXHIBIT 10.7

INSPIRE PHARMACEUTICALS, INC.

1995 STOCK PLAN

DIRECTOR’S NONQUALIFIED STOCK OPTION

Inspire Pharmaceuticals, Inc. (the “Company”) has granted to you a Nonqualified Stock Option (the “Option”) under the Inspire Pharmaceuticals, Inc. 1995 Stock Plan, as amended (the “Plan”). The terms of the Option are set forth in the Director’s Nonqualified Stock Option Grant Agreement provided to you (the “Agreement”). The following provides a summary of the key terms of the Option; however, you should read the entire Agreement, along with the terms of the Plan, to fully understand the Option.

SUMMARY OF DIRECTOR’S NONQUALIFIED STOCK OPTION

Option Number:

Grantee:

Date of Grant:

Vesting Schedule:

Exercise Price Per Share:

Total Number of Options Granted:

Term/Expiration Date:

INSPIRE PHARMACEUTICALS, INC.

1995 STOCK PLAN

DIRECTOR’S NONQUALIFIED STOCK OPTION GRANT AGREEMENT

This DIRECTOR’S NONQUALIFIED STOCK OPTION GRANT AGREEMENT (the “Agreement”), dated as of (the “Date of Grant”), is delivered by Inspire Pharmaceuticals, Inc. (the “Company”) to (the “Grantee”).

RECITALS

A. The Inspire Pharmaceuticals, Inc. 1995 Stock Plan, as amended (the “Plan”) provides for the grant of options to purchase shares of common stock of the Company to non-employee members of the Board of Directors of the Company (the “Board”). The Company has decided to make a stock option grant as an inducement for the Grantee to promote the best interests of the Company and its stockholders.

B. The Board has delegated its authority to administer the Plan to the Compensation Committee (the “Committee”).

NOW, THEREFORE, the parties to this Agreement, intending to be legally bound hereby, agree as follows:

1. Grant of Option. Subject to the terms and conditions set forth in this Agreement and in the Plan, the Company hereby grants to the Grantee a Nonqualified Stock Option (the “Option”) to purchase shares of common stock of the Company (“Shares”) at an exercise price of per Share (the “Exercise Price”). The Option shall become exercisable according to Paragraph 2 below. This Option has been granted to the Grantee because the Grantee was elected as a member of the Board as of the Date of Grant (referred to below as the “Board Position”).

2. Exercisability of Option. The Option shall become exercisable in the manner provided below, if the Grantee is serving in the Board Position on the applicable date. For this purpose, the term “Shares” refers to the number of shares underlying that portion of the Option that vests in the manner described under Vest Type and Full Vest Date. The term “Vest Type” describes how the Option covering those shares will vest before the Full Vest Date. For example, if Vest Type is “monthly”, that Option will vest with respect to those shares on a pro rata basis on each monthly anniversary of the Date of Grant. The term “Full Vest Date” is the date on which that portion of the Option covering all of the corresponding shares set forth in the “Shares” column will be fully vested.

Shares Vest Type Full Vest Date

The number of Shares noted on the first line will vest in equal monthly installments, beginning one month after the date of grant and will fully vest on the corresponding “Full Vest Date.” The

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number of Shares noted in each subsequent line will vest in equal monthly installments, beginning one month after the Full Vest Date shown in the previous line and ending on the Full Vest Date shown in the corresponding line.

The exercisability of the Option is cumulative, but shall not exceed one hundred percent (100%) of the Shares subject to the Option. If the foregoing schedule would produce fractional Shares, the number of Shares for which the Option becomes exercisable shall be rounded down to the nearest whole Share. Notwithstanding the foregoing, the Option shall cease to vest if and when the Grantee ceases to serve in the Board Position (unless the Committee otherwise determines that circumstances warrant continuation of vesting). If the Grantee dies while serving in the Board Position, all of the unexercised outstanding Shares of the Option shall become immediately exercisable.

3. Term of Option.

(a) The Option shall have a term of seven (7) years from the Date of Grant (the “Exercise Period”) and shall terminate at the expiration of that period, unless it is terminated at an earlier date pursuant to the provisions of this Agreement or the Plan.

(b) If the Grantee ceases to serve in the Board Position after any portion of the Option becomes exercisable but before the end of the Exercise Period, the Exercise Period shall be shortened as follows:

(i) The Exercise Period shall end immediately upon the date of the Grantee’s breach of any agreement, covenant or representation by and between the Grantee and the Company, including, but not limited to, any promise or warrant made as consideration for this Agreement or the terms of any severance agreement;

(ii) The Exercise Period shall end immediately upon the date of the Grantee’s illegal or improper conduct that injures or impairs the reputation, goodwill, or business of the Company, involves the misappropriation of funds of the Company, or the misuse of data, information or documents acquired in connection with the Grantee’s service as a director, consultant, employee or any other capacity to the Company, or violates any other directive or policy promulgated by the Company; and

(iii) The Exercise Period shall end immediately upon the effective date of the (x) termination of the Grantee’s consulting or director relationship with the Company in violation of an agreement to remain in service with the Company; (y) involuntary termination of the Grantee’s consulting or director relationship with the Company for reasons which may include, without limitation, any illegal or improper conduct that injures or impairs the reputation, goodwill, or business of the Company, involves the misappropriation of funds of the Company, or the misuse of data, information or documents acquired in connection with service for the Company, or violates any other directive or policy promulgated by the Company; or (z) voluntary termination of his or her consulting or director relationship with the Company in anticipation of involuntary termination.

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(c) Notwithstanding the foregoing, in no event may the Option be exercised after the date that is immediately before the seventh (7^th) anniversary of the Date of Grant. Any portion of the Option that is not exercisable at the time the Grantee ceases to serve as a member of the Board shall immediately terminate.

4. Exercise Procedures.

(a) Subject to the provisions of Paragraphs 2 and 3 above, the Grantee may exercise part or all of the exercisable Option by giving the Company written notice of intent to exercise in the manner provided in this Agreement, specifying the number of Shares as to which the Option is to be exercised. At such time as the Committee shall determine, the Grantee shall pay the Exercise Price (i) in cash, (ii) by payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board or (iii) by such other method as the Company may approve. The Company may impose from time to time such limitations as it deems appropriate on the use of Shares of the Company to exercise the Option.

(b) The obligation of the Company to deliver Shares upon exercise of the Option shall be subject to all applicable laws, rules, and regulations and such approvals by governmental agencies as may be deemed appropriate by the Company, including such actions as Company counsel shall deem necessary or appropriate to comply with relevant securities laws and regulations. The Company may require that the Grantee (or other person exercising the Option) represent that the Grantee is purchasing Shares for the Grantee’s own account and not with a view to or for sale in connection with any distribution of the Shares, or such other representation as the Company deems appropriate.

(c) All obligations of the Company under this Agreement shall be subject to the rights of the Company as set forth in the Plan to withhold amounts required to be withheld for any taxes, if applicable. Subject to Committee approval, the Grantee may elect to satisfy any tax withholding obligation of the Company with respect to the Option by having Shares withheld up to an amount that does not exceed the minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities.

(d) It shall be a condition of exercise hereunder that:

(i) The Company may, in its discretion, require that in the opinion of counsel for the Company the proposed purchase of Shares shall be exempt from registration under the Securities Act of 1933, as amended;

(ii) The Grantee shall have made such undertakings and agreements with the Company as the Company may reasonably require, and that such other steps, if any, as counsel for the Company shall deem necessary to comply with any law, rule or regulation applicable to the issue of such shares by the Company shall have been taken by the Company or the Grantee, or both;

(iii) The certificates representing the Shares purchased under the Option may contain such legends as counsel for the Company shall deem necessary to comply with the applicable law, rule or regulation;

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(iv) The Grantee shall execute and deliver to the Company a counterpart of any applicable stockholders agreement, investor rights agreement or similar agreement among the Company and some or all of its stockholders, and any amendment thereto or restatement or replacement thereof, pursuant to which the Grantee shall be subject to all provisions therein applicable to holders of Shares; and

(v) The Grantee shall, if the Company so requests, provide payment of all state and federal taxes imposed upon the exercise of the Option and the issue of the shares covered hereby.

5. Change in Control.

(a) Notwithstanding anything herein (or in the Plan) to the contrary, the Option shall vest and become immediately exercisable if: (a) there is a Change in Control (as defined below); and (b) the Grantee will cease to serve as a director of the Company as a result of such Change in Control.

(b) For purposes of this Paragraph 5, “Change in Control” means the determination (which may be made effective as of a particular date) by the Board, made by a majority vote that a Change in Control has occurred, or is about to occur. Such a change shall not include, however, a restructuring, reorganization, merger or other change in capitalization in which the Persons (as defined below) who own an interest in the Company on the date hereof (the “Current Owners”) (or any individual or entity which receives from a Current Owner an interest in the Company through will or the laws of descent and distribution or otherwise) maintain more than a fifty percent (50%) interest in the resultant entity. Regardless of the vote of the Board or whether or not the Board votes, a Change in Control will be deemed to have occurred as of the first day any one (1) or more of the following subsections shall have been satisfied:

(c) Any Person (other than the Person in control of the Company as of the date of this Agreement, or other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, or a company owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), becomes the beneficial owner, directly or indirectly, of securities of the Company representing more than thirty-five percent (35%) of the combined voting power of the Company’s then outstanding securities; or

(i) The stockholders of the Company approve:

(1) A plan of complete liquidation of the Company;

(2) An agreement for the sale or disposition of all or substantially all of the Company’s assets; or

(3) A merger, consolidation or reorganization of the Company with or involving any other company, other than a merger, consolidation or reorganization that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the combined voting power of the voting

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securities of the Company (or such surviving entity) outstanding immediately after such merger, consolidation or reorganization.

(d) However, in no event shall a Change in Control be deemed to have occurred, with respect to the Grantee, if the Grantee is part of a purchasing group which consummates the Change in Control transaction. The Grantee shall be deemed “part of the purchasing group” for purposes of the preceding sentence if the Grantee is an equity participant or has agreed to become an equity participant in the purchasing company or group (except for (i) passive ownership of less than five percent (5%) of the voting securities of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise deemed not to be significant, as determined prior to the Change in Control by a majority of the continuing non-employee directors).

(e) For purposes of this Paragraph 5 the term “Person(s)” shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”), as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (A) the Company or any of its subsidiaries; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries; (C) an underwriter temporarily holding securities pursuant to an offering of such securities; (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company; or (E) an entity or entities which are eligible to file and have filed a Schedule 13G under Rule 13d-l(b) of the Exchange Act, which Schedule indicates beneficial ownership of fifteen percent (15%) or more of the outstanding shares of common stock of the Company or the combined voting power of the Company’s then outstanding securities.

6. Restrictions on Exercise. Except as the Committee may otherwise permit pursuant to the Plan or as provided in Paragraph 10 below, only the Grantee may exercise the Option during the Grantee’s lifetime and, after the Grantee’s death, the Option shall be exercisable (subject to the limitations specified in the Plan) solely by the legal representatives of the Grantee, by the person who acquires the right to exercise the Option by will or by the laws of descent and distribution or by a former spouse of the Grantee who obtained the Option pursuant to a domestic relations order, to the extent that the Option is exercisable pursuant to this Agreement.

7. Grant Subject to Plan Provisions. This grant is made pursuant to the Plan, the terms of which are incorporated herein by reference, and in all respects shall be interpreted in accordance with the Plan. The grant and exercise of the Option are subject to interpretations, regulations and determinations concerning the Plan established from time to time by the Committee in accordance with the provisions of the Plan, including, but not limited to, provisions pertaining to: (i) rights and obligations with respect to withholding taxes, (ii) the registration, qualification or listing of the Shares, (iii) changes in capitalization of the Company, and (iv) other requirements of applicable law. The Committee shall have the authority to interpret and construe the Option pursuant to the terms of the Plan, and its decisions shall be conclusive as to any questions arising hereunder.

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8. No Rights to Continued Directorship. The grant of the Option shall not confer upon the Grantee any right to continue to serve as a member of the Board, in any office of the Board, or any committee of the Board,

9. No Shareholder Rights. Neither the Grantee, nor any person entitled to exercise the Grantee’s rights in the event of the Grantee’s death or otherwise, shall have any of the rights and privileges of a shareholder with respect to the Shares subject to the Option, until certificates for Shares have been issued upon the exercise of the Option.

10. Assignment and Transfers.

(a) Except as provided below, only the Grantee may exercise rights under the Option during the Grantee’s lifetime. The Grantee may not transfer those rights except: (i) by will or by the laws of descent and distribution, (ii) pursuant to a domestic relations order or (iii) as otherwise permitted by the Company. When the Grantee dies, the personal representative or other person entitled to succeed to the rights of the Grantee may exercise such rights. The Committee shall have the right to require evidence to its satisfaction of the rights of any person or persons seeking to exercise the Option hereunder, e.g., an authenticated copy of the Grantee’s will or a domestic relations order. This Agreement may be assigned by the Company without the Grantee’s consent.

(b) The Grantee may make a lifetime transfer of the Option only to the Grantee’s child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Grantee’s household (other than a tenant or employee), a trust in which these persons have more than fifty percent (50%) of the beneficial interest, a foundation in which these persons (or the Grantee) control the management of assets, and any other entity in which these persons (or the Grantee) own more than fifty percent (50%) of the voting interest.

(c) No consideration may be given for any transfer of the Option by the Grantee.

(d) In no event shall the Option be exercisable by any person to a greater extent than the Option could have been exercised by the Grantee immediately prior to his death or the effective date of his resignation from the Board due to “Disability”, as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (as applicable).

(e) Transfers may be made only to the extent that they do not violate any rules and conditions imposed by the Committee.

(f) Any transferee described above shall be treated as the Grantee for purposes of all other provisions of this Agreement and the terms of the Plan.

11. Certain Capital Changes. In the event that the Committee, in its discretion, determines that any stock dividend, split-up, combination or reclassification of shares, recapitalization or other similar capital change affects the Shares such that adjustment is required in order to preserve the benefits or potential benefits of the Option, the maximum aggregate number and kind of shares or securities of the Company subject to the Option, and the Exercise Price of the

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Option, shall be appropriately adjusted by the Committee (whose determination shall be conclusive) so that the proportionate number of Shares or other securities subject to the Option and the proportionate interest of the Grantee shall be maintained as before the occurrence of such event.

12. Certain Corporate Transactions. Notwithstanding anything in the Plan to the contrary, in the event of a consolidation or merger of the Company with another corporation, or the sale or exchange of all or substantially all of the assets of the Company, or a reorganization or liquidation of the Company, the Grantee shall be entitled to receive upon exercise and payment in accordance with the terms of the Option, the same shares, securities or property as he or she would have been entitled to receive upon the occurrence of such event if he or she had been, immediately prior to such event, the owner of the number of Shares. In lieu of the foregoing, however, the Committee may upon written notice to the Grantee provide that, unless theretofore exercised, the Option shall expire as of the earlier of the end of the Exercise Period or the date specified in such notice which may not be less than twenty (20) days after the date of such notice.

13. Applicable Law. The validity, construction, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

14. Notice. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of the Compensation Committee at 4222 Emperor Boulevard, Suite 200, Durham, North Carolina, 27703-8466, and any notice to the Grantee shall be addressed to such Grantee at the current address shown on the payroll of the Company, or to such other address as the Grantee may designate to the Company in writing. Any notice shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.

****

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IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Agreement, and the Grantee has executed this Agreement, effective as of the Date of Grant.

INSPIRE PHARMACEUTICALS, INC.
By:
Name:	Joseph M. Spagnardi
Title:	Senior Vice President,
	General Counsel & Secretary

I hereby accept the Option described in this Agreement, and I agree to be bound by the terms of the Plan and this Agreement. I hereby further agree that all the decisions and determinations of the Committee shall be final and binding.

Grantee:

Date:

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EX-31.1

Exhibit 31.1

INSPIRE PHARMACEUTICALS, INC.

CERTIFICATIONS

I, Christy L. Shaffer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Inspire Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2007	/s/ Christy L. Shaffer
	Christy L. Shaffer
	President & Chief Executive Officer
	(principal executive officer)

EX-31.2

Exhibit 31.2

INSPIRE PHARMACEUTICALS, INC.

CERTIFICATIONS

I, Thomas R. Staab, II, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Inspire Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2007	/s/ Thomas R. Staab, II
	Thomas R. Staab, II
	Chief Financial Officer & Treasurer
	(principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Inspire Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2007, as filed with the Securities and Exchange Commission (the “Report”), I, Christy L. Shaffer, President & Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 10, 2007	/s/ Christy L. Shaffer
	Christy L. Shaffer
	President & Chief Executive Officer (principal executive officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Inspire Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2007, as filed with the Securities and Exchange Commission (the “Report”), I, Thomas R. Staab, II, Chief Financial Officer & Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 10, 2007	/s/ Thomas R. Staab, II
	Thomas R. Staab, II
	Chief Financial Officer & Treasurer (principal financial officer)