As filed with the Securities and Exchange Commission on March 30, 2000

Registration No. 333-31174


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM S-1/A
REGISTRATION STATEMENT
Under
The Securities Act of 1933


Inspire Pharmaceuticals, Inc.
(Exact Name of Registrant as Specified in its Charter)


      Delaware                     2834                    04-3209022
   (State or other           (Primary Standard          (I.R.S. Employer
   jurisdiction of              Industrial             Identification No.)
  incorporation or          Classification Code
    organization)                 Number)

                              --------------

      4222 Emperor Boulevard                   Gregory J. Mossinghoff
            Suite 470                          4222 Emperor Boulevard
Durham, North Carolina 27703-8466                    Suite 470
          (919) 941-9777                 Durham, North Carolina 27703-8466
(Address, including zip code, and                  (919) 941-9777
 telephone number, including area       (Name, address, including zip code,
 code, of registrant's principal        and telephone number, including area
        executive office)                   code, of agent for service)

                              --------------

                                 Copies to:
      Diane M. Frenier, Esq.                   Jeffrey E. Cohen, Esq.
   Edward P. Bromley III, Esq.              Carol B. Stubblefield, Esq.
  Smith, Stratton, Wise, Heher &                  Coudert Brothers
             Brennan                        1114 Avenue of the Americas
      600 College Road East                   New York, NY 10036-7703
       Princeton, NJ 08540                         (212) 626-4400
          (609) 924-6000

                              --------------

Approximate date of commencement of proposed sale to the public: As soon as possible after the effective date of this Registration Statement If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_]


CALCULATION OF REGISTRATION FEE

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 Title of each                        Proposed        Proposed
    Class of                          Maximum          Maximum       Amount of
   Securites        Amount to be   Offering Price     Aggregate     Registration
to be Registered     Registered    Per Share(1)   Offering Price(1)    Fee(3)
--------------------------------------------------------------------------------
Common Stock,
 $.001 per share
 (2)...........   6,325,000 shares     $15.00        $94,875,000      $25,047
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended.

(2) Includes 825,000 shares that the underwriters have the option to purchase to cover over-allotments, if any.

(3) Of which registration fee, an aggregate of $21,120 was previously paid on or about February 25, 2000.


The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

+The information in this preliminary prospectus is not complete and may be     +
+changed. We may not sell these securities until the registration statement    +
+filed with the Securities and Exchange Commission is effective. This          +

+preliminary prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any jurisdiction where the +
+offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED MARCH , 2000

PRELIMINARY PROSPECTUS

5,500,000 Shares

[LOGO OF INSPIRE]

Common Stock


This is an initial public offering of 5,500,000 shares of common stock of Inspire Pharmaceuticals, Inc. We are selling all of the shares of common stock offered under this prospectus.

We expect the public offering price for our common stock to be between $13.00 and $15.00 per share. There is currently no public market for our common stock. We have applied to have our common stock approved for listing on the Nasdaq National Market under the symbol "ISPH."

See "Risk Factors" beginning on page 6 to read about risks that you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.


                                                                     Per
                                                                    Share Total
                                                                    ----- -----
Public offering price.............................................. $     $
Underwriting discounts and commissions............................. $     $
Proceeds to Inspire................................................ $     $


We have granted the underwriters a 30-day option to purchase up to an additional 825,000 shares of common stock from us at the initial public offering price less the underwriting discount.

The underwriters are severally underwriting the shares being offered. The underwriters expect to deliver the shares in New York, New York, on , 2000.


Bear, Stearns & Co. Inc.

Deutsche Banc Alex. Brown

U.S. Bancorp Piper Jaffray

The date of this prospectus is , 2000


Inside Front Cover:

The Inspire logo is followed by two diagrams:

Description of the first diagram: The upper portion of the page contains a diagram showing Inspire's product opportunities in the respiratory tract, the eyes and other areas. The diagram is preceded by a caption reading "Our products are based on our proprietary technology targeted at respiratory, eye and other diseases."

Description of the second diagram (located under the first diagram): A bar chart setting forth information regarding the products in development as follows:

Inspire Product Development Chart

                                                          Clinical Trials
                                                     --------------------------
Products                                 Preclinical Phase I Phase II Phase III
-------------------------------------------------------------------------------
INS365 Respiratory for Chronic            XXXXXXXXX
 Bronchitis                                          XXXXXXX  OOO
INS37217 Respiratory for Cystic Fibro-    XXXOOOOOO
 sis                                                 OOO
INS316 Diagnostic Aid for Lung Disease    XXXXXXXXX  XXXXXXX  XXXOO     OO
INS365 Ophthalmic for Dry Eye             XXXXXXXXX  XXXXXXX  XXXOO
INS37217 Ophthalmic for Retinal Detach-   XXXOOOOOO
 ment                                                OOOOOOO  OOO

XXX Current Development as of February 25, 2000 OOO Expected Stage of Development in 2000

The expected stage of development in 2000 is based on our current plans for development and depends on a variety of factors. None of our products have been approved for marketing by any regulatory authority. See "Risk Factors."


PROSPECTUS SUMMARY

You should read the following summary together with the more detailed information regarding our company and our common stock being sold in this offering and our financial statements and the notes to our financial statements appearing elsewhere in this prospectus before making an investment decision. You should also consider the information discussed in "Risk Factors."

We discover and develop new drugs to treat diseases characterized by deficiencies in the body's innate defense mechanisms of mucosal hydration and mucociliary clearance. These mechanisms are the natural way that the body defends its mucosal surfaces against dust, pollutants, bacteria and viruses. Mucosal hydration involves the moistening of the body's mucosal surfaces, and mucociliary clearance involves a blanket-like movement of fluid and particles from the lungs and sinuses. Our lead products target respiratory and ophthalmic diseases with inadequate current treatments and which represent large therapeutic market opportunities. We currently have three product candidates in advanced clinical development, and we have entered into development and commercialization alliances with Genentech, Inc., Kissei Pharmaceutical Co., Ltd. and Santen Pharmaceutical Co., Ltd. Our products are based on our proprietary technology relating to P2Y receptors. A receptor is a protein in a cell membrane that, when stimulated by a compound, leads to a biological response. We are also exploring other target diseases where we believe P2Y receptors play important biological roles.

Our Products

INS365 Respiratory for Chronic Bronchitis: We are developing INS365 Respiratory in an inhaled form for the treatment of chronic bronchitis and expect this product to enter Phase IIa clinical trials later this year. In Phase I clinical trials, INS365 Respiratory was well tolerated and significantly enhanced the clearance of retained fluid and mucus in the airways. Chronic bronchitis, which affects approximately 31 million patients in the major international pharmaceutical markets, is a serious and potentially life-threatening lung condition characterized by airway inflammation and obstruction and a mucus-producing cough. The current drugs for chronic bronchitis, which generally solely relieve symptoms but do not cure the disease, generated approximately $1.3 billion of annual sales in 1996, and sales of these products have been estimated to reach approximately $2 billion in 2001. Currently, there is no FDA approved pharmaceutical agent that effectively clears the retained mucous secretions which contribute to lung infections in patients with chronic bronchitis. We expect that our product will address this need and may therefore reduce the use of antibiotics, steroids and bronchodilators, and may reduce the frequency and length of flare-ups of the illness and related hospitalizations.

In December 1999, we entered into a comprehensive strategic alliance with Genentech to develop treatments for respiratory disorders, including chronic bronchitis and cystic fibrosis, worldwide outside of Japan. Upon signing, we received $15 million comprised of license fees and an equity investment. We may receive future payments based on the attainment of development milestones, which could total up to an additional $63 million, as well as royalties on net sales of licensed products. We have also retained joint development and commercialization rights for cystic fibrosis in the United States. In September 1998, we entered into an agreement with Kissei for INS365 Respiratory in Japan. We received an upfront payment of $4.5 million, which included an equity investment. In addition, if milestones are met, we could receive additional payments of up to $13 million, as well as royalties on net sales of licensed products.

INS365 Ophthalmic for Dry Eye Disease: We are developing INS365 Ophthalmic as an eye drop for dry eye disease, and are currently conducting Phase IIb clinical trials. In preclinical studies conducted by us and our corporate partner, Santen, INS365 Ophthalmic was well tolerated and produced a statistically significant increase in tear secretion. In early clinical testing, the product was well tolerated in healthy subjects and patients with dry eye disease. We estimate, based on an extrapolation from United States data, that moderate to severe cases of dry eye affect approximately nine million people in the major international pharmaceutical markets. Dry eye disease is the general term for a condition in which abnormalities in the eye's tear film--a mixture of salt, water and proteins that coat and protect the surface of the eye--lead to red, irritated and dry eyes. These abnormalities are typically characterized by a decrease in tear production, an increase in tear

1

evaporation or an improper mixture of the eye's tear film components. If left untreated, dry eye disease can result in severe corneal damage and visual impairment. Treatments in these markets consist primarily of artificial tear replacement therapy, such as eye drops that are made to be similar to natural tears. There are currently no FDA approved pharmacological treatments for dry eye disease. We expect that by promoting natural mucosal hydration and proper lubrication of the eye, our product will be the first drug that works by stimulating the P2Y\\2\\ receptor to treat the symptoms of dry eye disease, restore a natural corneal tear film and help prevent long-term corneal damage.

In December 1998, we entered into an agreement with Santen for INS365 Ophthalmic for the treatment of dry eye disease in Japan and Asia, under which we received an up-front equity investment of $1.5 million and we could receive development milestone payments of up to $4.75 million, as well as royalties on net sales of licensed products.

INS316 Diagnostic Adjunct for Lung Disease: We are developing INS316 Diagnostic in an inhaled form to assist in diagnostic tests and we expect this product to enter Phase III clinical trials in 2000. INS316 Diagnostic is designed to assist a patient in producing a specimen containing adequate material from the lower part of the lung. Specimens of such material are frequently used for diagnosing lung cancer and lung infections. In a trial in patients at risk of developing lung cancer, INS316 Diagnostic significantly enhanced the production of an adequate specimen of such material when compared with placebo. Many patients have difficulty producing adequate specimens spontaneously, and there are no FDA approved agents to enhance the production of a specimen. To obtain deep-lung specimens, physicians sometimes use a costly and invasive bronchoscopy or non-approved inhaled agents that are generally ineffective and can cause irritation. We expect our product to be the first approved agent to address the need to enhance the production of an adequate deep-lung specimen, which may facilitate the diagnosis of lung cancer or lung infection.

Other Products: In addition to our clinical-stage products, we have several preclinical products, two of which we expect to enter clinical trials later this year: INS37217 Respiratory to treat cystic fibrosis, a life-threatening hereditary respiratory disease, and INS37217 Ophthalmic to treat retinal detachment, an ophthalmic disorder that can lead to serious visual impairment.

Our Technology

We have focused our discovery efforts on our P2Y receptor technology. The P2Y receptor family plays an important role in a number of biological processes and we are currently studying a number of P2Y receptor subtypes for potential targets that can be used to treat diseases. We have initially focused on a subtype of the P2Y receptor family, the P2Y\\2\\ receptor, which coordinates mucosal hydration and mucociliary clearance, the body's natural mechanisms for cleansing and protecting mucosal surfaces. We believe our P2Y\\2\\ receptor agonists, which are compounds that stimulate the P2Y\\2\\ receptor, can regulate these processes and represent a novel pharmacological approach to the treatment of diseases characterized by deficiencies in these mechanisms. Importantly, we are developing our lead product candidates in forms applied directly to the mucosal surfaces, such as inhaled aerosols or eye drops where they are rapidly metabolized. This minimizes the potential for systemic side effects.

Our Strategy

Our objective is to become a leading biopharmaceutical company focused on developing novel treatments primarily for diseases involving impaired mucosal hydration or inadequate mucociliary clearance. The principal elements of our strategy include:

. Agressively advance our lead products;

. Establish collaborative relationships with market leaders while selectively retaining marketing rights;

. Use our proprietary technology platform relating to P2Y receptors to develop novel products; and

. Protect and enhance our technology leadership position.

Inspire was incorporated in Delaware in October 1993. Our principal office is located at 4222 Emperor Boulevard, Suite 470, Durham, North Carolina, and our telephone number is (919) 941-9777.

2

THE OFFERING

Common stock to be offered by Inspire............... 5,500,000 shares
Common stock to be outstanding after this offering.. 24,314,069 shares
Use of proceeds..................................... We plan to use the net
                                                     proceeds from this
                                                     offering for clinical
                                                     development, product
                                                     commercialization,
                                                     discovery research,
                                                     preclinical activities,
                                                     working capital, general
                                                     corporate purposes and
                                                     possible future
                                                     acquisitions
Proposed Nasdaq National Market symbol.............. ISPH

The share amounts in this table are based on shares outstanding as of March 24, 2000. This table excludes:

. 1,906,241 shares of our common stock that are reserved for the exercise of options granted to executive officers, employees and consultants under our stock plan with a weighted average exercise price of $4.18 per share;

. 265,397 shares of our common stock that are reserved for the exercise of outstanding warrants with a weighted average exercise price of $7.72 per share;

. the sale of up to $2,000,000 of our common stock, at a per share price determined using the 20-day trailing average close price of common stock as quoted on an established stock exchange, to Genentech upon the occurrence of certain milestone events, and up to 50,793 shares of common stock to Genentech upon exercise of warrants to be issued upon the occurrence of certain milestone events with a weighted average exercise price of $7.88 per share; and

. 208,170 shares of our preferred stock that are reserved for the exercise of outstanding warrants for preferred stock that will convert into warrants to purchase 118,954 shares of our common stock at the time of the closing of this offering with a weighted average exercise price of $2.10 per share.

The information in this prospectus is based on the following assumptions:

. 15,469,104 shares of our common stock will be issued upon the automatic conversion of the outstanding shares of our Series A, B, C, D and E preferred stock at the time of the closing of this offering;

. a 1-for-1.75 reverse-split in our common stock will take effect just before the closing of this offering;

. 740,880 shares of common stock will be issued upon the automatic conversion of the outstanding shares of our Series G preferred stock owned by Genentech at the time of the closing of this offering, assuming the accrual of dividends through April 30, 2000, and a conversion ratio based on an initial public offering price of $14.00 per share; provided, however, the actual number of shares of common stock issued to Genentech will be the number obtained by dividing the aggregate Series G preferred stock purchase price of $10,000,000, plus accrued dividends, by the initial public offering price of our common stock in this offering;

. the milestone events which trigger the sale to Genentech of up to $2,000,000 of our common stock and warrants for up to 50,793 shares of common stock do not occur; and

. the underwriters do not exercise the over-allotment option to purchase up to 825,000 shares.

3

SUMMARY FINANCIAL DATA

The following table presents summary financial and operating data for our company. The data presented in this table are derived from "Selected Financial Data," and the financial statements and notes elsewhere in this prospectus. You should read those sections for a further explanation of the financial data summarized here. You should also read "Management's Discussion and Analysis of Financial Condition and Results of Operations," on page 22 which describes a number of factors which have affected our financial results.

                                           Year Ended December 31,
                                   -------------------------------------------
                                    1995     1996     1997     1998     1999
                                   -------  -------  -------  -------  -------
                                       (in thousands, except per share
                                                  amounts)
Statement of Operations Data:
Revenue........................... $   --   $   --   $   --   $ 3,600  $   600
                                   -------  -------  -------  -------  -------
Operating Expenses:
  Research and development
   (excludes $0, $0, $0, $8 and
   $59, respectively, of stock
   based compensation)............   1,539    4,207    6,569    5,438    7,179
  General and administrative
   (excludes $0, $0, $0, $6 and
   $31, respectively, of stock
   based compensation)............   1,050    1,531    1,494    1,921    1,887
  Stock based compensation........     --       --       --        14       90
                                   -------  -------  -------  -------  -------
Total operating expenses..........   2,589    5,738    8,063    7,373    9,156
                                   -------  -------  -------  -------  -------
Operating loss....................  (2,589)  (5,738)  (8,063)  (3,773)  (8,556)
Other income (expense), net.......    (115)     (44)     116       35      142
                                   -------  -------  -------  -------  -------
Loss before provision for income
 taxes............................ $(2,704) $(5,782) $(7,947) $(3,738) $(8,414)
Provision for income taxes........     --       --       --       360       60
                                   -------  -------  -------  -------  -------
Net loss.......................... $(2,704) $(5,782) $(7,947) $(4,098) $(8,474)
Preferred stock dividends.........     --       --       --       --       (62)
                                   -------  -------  -------  -------  -------
Net loss available to common
 stockholders..................... $(2,704) $(5,782) $(7,947) $(4,098) $(8,536)
                                   =======  =======  =======  =======  =======
Net loss per common share--basic
 and diluted...................... $ (1.73) $ (3.22) $ (4.01) $ (1.99) $ (3.53)
                                   =======  =======  =======  =======  =======
Weighted average common shares
 outstanding--basic and diluted...   1,567    1,798    1,981    2,061    2,401
Pro forma net loss per common
 share--basic and diluted.........                                     $ (0.54)
                                                                       =======
Pro forma weighted average common
 shares outstanding
 --basic and diluted..............                                      15,561

                                                      As of December 31, 1999
                                                   -----------------------------
                                                                      Pro Forma
                                                   Actual  Pro Forma As Adjusted
                                                   ------- --------- -----------
                                                          (in thousands)
Balance Sheet Data:
Cash and cash equivalents......................... $22,728  $22,728    $93,138
Total assets......................................  23,930   23,930     94,340
Convertible preferred stock.......................  45,895      --         --
Common stock......................................       2       19         24
Total stockholders' equity........................  17,080   17,120     87,530

See the financial statements and notes thereto included elsewhere in this prospectus for a description of the computation of the historical and pro forma net loss per share and the number of shares used in the historical and pro forma per share calculations in the statement of operations data above.

4

The pro forma column of the balance sheet data shows 18,652,068 shares of our common stock outstanding immediately after the automatic conversion, at the time of the closing of this offering, of all of our outstanding shares of preferred stock.

The pro forma as adjusted column of the balance sheet data shows 24,152,068 shares of our common stock outstanding immediately after the automatic conversion, at the time of the closing of this offering, of all of our outstanding shares of preferred stock and our receipt of the net proceeds from the sale of the 5,500,000 shares of our common stock offered in this offering at an assumed initial public offering price of $14.00 per share. See "Use of Proceeds" and "Capitalization" for a discussion about how we intend to use the net proceeds from this offering and about our capitalization.

5

RISK FACTORS

The shares of common stock offered by this prospectus involve a substantial risk of loss. Before making an investment in our common stock, you should carefully read this entire prospectus 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 prospectus. These factors include, without limitation, the risk factors listed below and other factors presented throughout this prospectus.

If our products fail in clinical studies, we will be unable to obtain FDA approval and will not be able to sell those products.

To achieve profitable operations, we must, alone or with others, successfully identify, develop, introduce and market proprietary products. Even if we identify potential products, we will have to conduct significant additional development activities and preclinical and clinical tests, and obtain regulatory approval before our products 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. We have not submitted any products for marketing approval by the United States Food and Drug Administration (FDA) or any other regulatory body.

Generally, all of our product candidates are in research or preclinical development, with only three, INS365 Respiratory, INS365 Ophthalmic and INS316 Diagnostic, currently in clinical trials. The results of preclinical and initial clinical testing of our products under development may not necessarily indicate the results that will be obtained from subsequent or more extensive testing. Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. Our ongoing clinical studies might be delayed or halted for various reasons, including:

. the drug is not effective, or physicians think that the drug is not effective;

. patients experience severe side effects during treatment;

. patients die during the clinical study 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 studies at the rate we expect;

. drug supplies are not sufficient to treat the patients in the studies; or

. we decide to modify the drug during testing.

Because our product candidates utilize a new mechanism of action, obtaining regulatory approval may be difficult, expensive and prolonged, which would delay any marketing of our products.

We cannot apply for regulatory approval to market a product candidate until we successfully complete pivotal clinical trials for the product. To complete successfully clinical trials, the products must meet the endpoints we establish for the product in the clinical study. Generally, we will establish these endpoints in consultation with the regulatory authorities, in accordance with design guidelines on the efficacy, safety and tolerability measures required for approval of products.

Because our existing product candidates utilize a new approach to the treatment of respiratory and eye diseases, we may have trouble establishing endpoints that the regulatory authorities agree sufficiently evaluate the effectiveness of each product candidate. For this and other reasons, we could encounter delays and increased expenses in our clinical trials if the regulatory authorities determine that the endpoints established for a clinical trial do not predict a clinical benefit, and the authorities will not approve the product for marketing without further clinical trials. The regulatory authorities could change their view on clinical trial design and the

6

establishment of appropriate efficacy and safety and tolerability measures and require a change in study design, additional data or even further clinical trials before approval of a product candidate.

After initial regulatory approval, regulatory authorities continue to review a marketed product and its manufacturer. They may require us to conduct long- term safety studies after approval. Discovery of previously unknown problems through adverse event reporting may result in restrictions on the product, including withdrawal from the market. Additionally, we and our officers and directors could be subject to civil and criminal penalties.

If physicians and patients do not accept our product candidates, they may 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 factors:

. acceptance by physicians and patients of our products as safe and effective therapies;

. reimbursement of drug and treatment costs by third-party payors;

. 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 product candidates. Our current product candidates for the treatment or diagnosis of respiratory disorders, INS365 Respiratory and INS316 Diagnostic, have been administered using a jet nebulizer, a device that generates and delivers a fine mist derived from a liquid, which is inhaled into the lungs, in their respective clinical studies. Although the use of a jet nebulizer is an effective and well accepted means for administering products for inhalation with respect to acute use and, to a lesser degree, chronic use, we believe more convenient methods of delivery and administration, such as a hand-held inhalation device, will be necessary in the case of INS365 Respiratory, to more fully address chronic use. Although we have successfully completed a test of a prototype hand-held inhalation device in 12 healthy patients, our testing of such devices is at an early stage and we may not be able to develop or find a convenient hand-held device that works in patients with chronic bronchitis. Our current product candidate for the treatment of dry eye disease, INS365 Ophthalmic, has been administered using a single dose administrator. Patients may prefer a multi-dose formulation. We have not yet established a plan to develop a multi-dose formulation. Similar challenges exist in identifying and perfecting convenient methods of administration for many of our other product candidates.

We intend to rely on third parties to develop, market, distribute and sell our product candidates and those third parties may not perform.

We do not have the ability to independently conduct clinical studies, obtain regulatory approvals, market, distribute or sell our products and intend to rely on experienced third parties to perform, or assist us in the performance of, all of those functions. We may not identify acceptable partners or enter into favorable agreements with them. If third parties do not successfully carry out their contractual duties or meet expected deadlines, we will be unable to obtain required governmental marketing approvals and will be unable to sell our products.

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

Our business strategy depends upon the formation of research collaborations, licensing and/or marketing arrangements. We currently have development collaborations with three collaborators, Genentech, Kissei and Santen. The termination of any collaboration 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.

7

Genentech has the right, by giving us 150 days prior notice, to terminate our collaboration. We cannot be sure that we will be able to maintain the Genentech, Kissei or Santen collaborations or establish additional research and development collaborations or licensing arrangements necessary to develop and commercialize therapeutic or diagnostic products using our technology. We cannot be sure that any future collaborations or licensing arrangements will be on terms favorable to us or that our current or any future collaborations or licensing arrangements ultimately will be successful. Under our current strategy, and for the foreseeable future, we do not expect to develop or market therapeutic or diagnostic products on our own. As a result, we will continue to depend on collaborators and contractors for the preclinical study and clinical development of therapeutic products and for regulatory approval, manufacturing and marketing of therapeutic and diagnostic products which result from our technology. The agreements with collaborators typically will 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 products revenues relating to our research programs.

We intend to rely on Genentech, Kissei, Santen and any future collaborators for significant funding in support of our development efforts. If Genentech, Kissei or Santen reduces or terminates its funding, we will need to devote additional internal resources to product development, scale back or terminate certain research and development programs or seek alternative collaborators. See "Risk Factors--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 development" and "Business--Corporate Collaborations."

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.

If we are unable to contract with third parties for synthesis and manufacturing of product candidates for preclinical testing and clinical trials and for large scale manufacturing of any of our drug candidates, we may be unable to develop or commercialize products.

We have no experience or capabilities in large scale commercial manufacturing of any of our product candidates or any experience or capabilities in the manufacturing of pharmaceutical products generally. We do not generally expect to engage directly in the manufacturing of products, but instead intend to contract with others for these services. To date, we have relied upon supply agreements with third parties for the manufacture and supply of our product candidates for purposes of preclinical testing and clinical trials. Although we have previously received preclinical and clinical supplies of our product candidates from several suppliers, we presently depend upon Yamasa Corporation as the sole supplier for our supply of product candidates. If we are unable to obtain or retain third party manufacturing on commercially acceptable terms, we may not be able to commercialize products as planned. Our manufacturing strategy presents the following risks:

. the manufacturing processes for most of our product candidates have not been tested in quantities needed for commercial sales;

. delays in scale-up to commercial quantities and any change to a manufacturer other than Yamasa Corporation could delay clinical studies, regulatory submissions and commercialization of our products;

. manufacturers of our products are subject to the FDA's good manufacturing practices regulations and similar foreign standards, and we do not have control over compliance with these regulations by the third-party manufacturers;

8

. if we need to change to manufacturers other than Yamasa Corporation, FDA and comparable foreign regulators would require new testing and compliance inspections and the new manufacturers would have to be educated in the processes necessary for the production of our product candidates;

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

. 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.

If we are unable to supply Kissei and Santen with sufficient quantities of materials we may breach our agreements with such parties.

We are currently a party to a development, license and supply agreement with each of Kissei and Santen, under which we granted each a license to develop and market INS365 Respiratory and INS365 Ophthalmic, respectively. See "Business-- Corporate Collaborations." Generally, the agreements with Kissei and Santen will require us to supply such partners with either sufficient quantities of materials or finished products, as applicable, for the purpose of commercial distribution. We will need to establish, alone or with third parties, a manufacturing process in relation to each product. Our dependence upon third parties for the manufacture of products may adversely affect our ability to develop and deliver products on a timely and competitive basis.

Our inability to successfully manufacture commercial products could result in our breach of the terms of our agreements with Kissei and Santen. Any of these factors could delay our preclinical studies, clinical trials or commercialization of our product candidates, entail higher costs and result in our inability to effectively sell our product candidates.

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 upon our ability to protect our products and processes, proprietary methods and technology. Except for one patent covering novel 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 European and possibly other countries due to their particular patent laws. Besides our use patents, we have patents covering pharmaceutical formulations of these chemical compounds. We also have patent applications covering processes for large-scale manufacturing of these chemical compounds. Many of the chemical compounds included in the claims of our use patents, formulation patents and process applications were known in the scientific community prior to our formation as a company. Consequently, these previously known chemical compounds themselves are not covered by any of our patents, and are in the public domain. As a result, competitors may be able to commercialize products that use the same chemical compounds used by us for the treatment of disorders and diseases not covered by our use patents. In such case, physicians, pharmacies and wholesalers could possibly substitute these products for our products. Such substitution would reduce any revenues received from the sale of our products.

We believe that there may be 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, it is possible that others currently have or will acquire patent rights which we might be accused of infringing. If we are required to defend a patent suit, or if we choose to initiate a suit to have a third party patent declared invalid, there could be a considerable expenditure of money and management time in litigation. We cannot be sure that we would prevail in a patent infringement action. A judgement against us could cause us to pay monetary damages, require us to obtain licenses, or prevent us from manufacturing or marketing the affected products. In addition,

9

we may need to initiate litigation to enforce our proprietary rights against others, or we may have to participate in interference proceedings in the United States Patent and Trademark Office (USPTO) to determine the priority of invention of any of our technologies.

In general, the development of patent rights in pharmaceutical, biopharmaceutical and biotechnology products to degree sufficient to support commercial efforts in these areas is typically uncertain and involves complex legal and factual questions. For instance, while the USPTO has recently issued guidelines addressing the requirements for demonstrating utility for biotechnology inventions, USPTO examiners may not follow these guidelines in examining patent applications. Such applications may have to be appealed to the USPTO's Appeals Board for a final determination of patentability. Furthermore, we cannot be certain that we will continue to develop technologies that are patentable, or even if patents are obtained, that they will adequately support our commercial efforts.

If we fail to reach milestone or other obligations, The University of North Carolina at Chapel Hill and other licensors may terminate our agreements with them.

Our current technologies, discoveries and our original patents are based in part on two exclusive licenses and one non-exclusive license from The University of North Carolina at Chapel Hill. See "Business--Patents and Proprietary Rights." Generally, if we fail to meet milestones under the respective UNC licenses, UNC may terminate the applicable license. In addition, it may be necessary in the future for us to obtain additional licenses from UNC or other third parties to develop future commercial opportunities or to avoid infringement of third party patents. If such licenses are necessary, we may not be able to obtain licenses on fair business terms, if at all. Failure to license or otherwise acquire necessary technologies may reduce or eliminate our ability to develop product candidates. Even if all necessary licenses are acquired, if we breach any license provision, either intentionally or unintentionally, we may not be allowed continued use the licensed technology.

Because 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 regarding 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.

Because all of our product candidates are designed to use related mechanisms of action, we may not be able to commercialize our products if the mechanism of action is not effective.

Any products resulting from our product development efforts are not expected to be available for sale for a number of years, if at all. Two of our product candidates, INS365 Respiratory and INS37217 Respiratory, operate in a similar manner. If the clinical results of one of the compounds is not favorable, the results of the other compound may not be favorable. Moreover, we have designed all of our product candidates to utilize related mechanisms of action. If these mechanisms of action are not effective, we may not be able to commercialize any of our product candidates. Even if all of our product candidates prove effective, we may choose not to commercialize all of them. We cannot be sure that we, alone or with our collaborators, will successfully develop, commercialize, manufacture or market any products.

10

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 $8.5 million for the year ended December 31, 1999, $4.1 million for the year ended December 31, 1998 and $7.9 million for the year ended December 31, 1997. As of December 31, 1999, our accumulated deficit was approximately $29.4 million. We expect to incur significant additional operating losses over the next several years and expect cumulative losses to increase substantially in the near term due to expanded research and development efforts, preclinical studies and clinical trials. 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;

. the level of patient demand for our products;

. timing of payments to and from licensors and corporate partners; and

. timing of investments in new technologies.

No regulatory authorities have approved any of our product candidates for marketing, and therefore we are not generating any revenues from product sales. 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 do not expect to generate product revenues for at least the next few years. We cannot be sure that we will ever 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.

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 development.

We have used substantial amounts of cash to fund our research and development activities. In 1999 our operating expenses exceeded $9,000,000. We expect our capital and operating expenditures to increase over the next several years as we expand our research and development activities, address possible difficulties with clinical studies and prepare for commercial sales. Many factors will influence our future capital needs. These factors include:

. the progress of our research programs;

. the number and breadth of these programs;

. our ability to attract collaborators for our products;

. achievement of milestones under our existing collaborations with Genentech, Kissei and Santen;

. our ability to establish and maintain additional collaborations;

. progress by our collaborators: Genentech, Kissei and Santen;

. the level of our activities relating to commercialization rights we retain in our collaborations;

. competing technological and market developments;

. the costs involved in enforcing patent claims and other intellectual property rights; and

. the costs and timing of regulatory approvals.

We anticipate that our operating expenses will exceed $20,000,000 over the next twelve months. We also expect to purchase capital equipment at a cost of approximately $1,000,000. Following such twelve month period, we expect our operating expenses to increase as we continue to develop our product candidates. We intend to rely on Genentech, Kissei, Santen, future collaborators and the proceeds of this offering for significant funding in support of our development efforts. In addition, we may seek 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

11

be diluted if we raise additional capital by issuing equity securities. If we raise additional funds through collaborations and licensing arrangements, we may have to relinquish 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. As of March 24, 2000, we had cash on hand of approximately $22,000,000.

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

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. 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. These competitors include Abbott, Astra Zeneca, Aventis, Boehringer Ingelheim, Glaxo Wellcome, Pfizer and SmithKline Beecham. Many of these competitors employ greater financial and other resources, including larger research and development staffs and more effective marketing and manufacturing organizations, than we or our collaborative partners. Acquisitions of competing companies and potential competitors by large pharmaceutical companies or others could enhance financial, marketing and other resources available to such competitors. As a result of academic and government institutions becoming increasingly aware of the commercial value of their research findings, such institutions are more likely to enter into exclusive licensing agreements with commercial enterprises, including our competitors, to market commercial products. Our competitors may not succeed in developing technologies and drugs that are safer, more effective or less costly than any which we are developing or which would render our technology and future drugs obsolete and non-competitive. The products of our competitors marketed to treat chronic bronchitis include anti- inflammatory products, such as Azmacort(R) and Beclovevent(R), bronchodilators such as Atrovent and Proventil(R), and antibiotics such as Biaxon(R) and Zothromax(R). Pulmozyme(R), a Genentech product, and TOBI(R) from PathoGenesis are examples of products used to treat cystic fibrosis. The current treatments for dry eye disease consists primarily of artificial tear replacement drops. In addition, alternative approaches to treating diseases which we have targeted, such as gene therapy, may make our product candidates obsolete. Our competitors may also be more successful in production and marketing. See "Business-- Competition" for a discussion of competitors and the advantages of their products.

In addition, some 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 drug 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. We cannot be sure that drugs resulting from our research and development efforts, or from our joint efforts with our collaborative partners, will be able to compete successfully with competitors' existing products or products under development or that they will obtain regulatory approval in the United States or elsewhere.

Failure to hire and retain key personnel may hinder our product development programs and our business development efforts.

We depend on the principal members of our management and scientific staff, including Christy L. Shaffer, Ph.D., our President, Chief Executive Officer and director; and Gregory J. Mossinghoff, our Chief Business Officer. If any of these people leaves us, our ability to conduct our operations may be negatively affected. We have not entered into agreements with any of the above principal members of our management and scientific staff that bind any of them to a specific period of employment. We do not maintain key person life insurance. Our future success also will depend in part on our ability to attract, hire 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 continue to attract and retain such personnel.

12

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 could be substantial.

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 by our collaborative partners may expose us to liability claims from the use of such pharmaceutical products. Although we carry clinical trial liability insurance, we currently do not carry product liability insurance. We or our collaborators may not be able to obtain or maintain sufficient or even any insurance. If we can, it may not be at a reasonable cost. If we cannot or are unable otherwise to protect against potential product liability claims, we may find it difficult or impossible to commercialize pharmaceutical products we or our collaborators develop. If claims or losses exceed our liability insurance coverage, we may go out of business.

If third party payors will not provide coverage or reimburse patients for any products we develop, our ability to derive revenues will suffer.

Our success will depend in part on the extent to which government and health administration authorities, private health insurers and other third party payors will pay for our products. Reimbursement for newly approved health care products is uncertain. In the United States and elsewhere, third party payors, such as Medicare, are increasingly challenging the prices charged for medical products and services. Government and other third party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new therapeutic products. In the United States, a number of legislative and regulatory proposals aimed at changing the health care system have been proposed in recent years. In addition, an increasing emphasis on managed care in the United States has and will continue to increase pressure on pharmaceutical pricing. While we cannot predict whether legislative or regulatory proposals will be adopted or what effect those proposals or managed care efforts, including those relating to Medicare payments, may have on our business, the announcement and/or adoption of such proposals or efforts could increase our costs and reduce or eliminate profit margins. We cannot be certain that any third party insurance coverage will be available to patients for any products we discover or develop. If government and other third party payors do not provide adequate coverage and reimbursement levels for our products, the market acceptance of these products may be reduced. In various foreign markets, pricing or profitability of medical products is subject to government control.

Because our management will have broad discretion over the use of the proceeds from this offering, the offering proceeds may be used in ways stockholders do not deem to be advisable.

The net proceeds of this offering are estimated to be approximately $70.4 million, or about $81.2 million if the underwriters exercise their over- allotment option in full. This calculation assumes that the initial public offering price is $14.00 per share and the underwriting discounts and commissions and our estimated offering expenses are $6.6 million. Our management will retain broad discretion as to the allocation of the proceeds of this offering, including the timing and conditions of the use of the proceeds. Consequently, our management may allocate the proceeds to uses that stockholders do not deem advisable. If management spends the funds unwisely, we may not have sufficient working capital to become profitable.

13

Our existing directors, executive officers and principal stockholders will retain a substantial amount of our common stock even after this offering and may be able to prevent other stockholders from influencing significant corporate decisions.

After this offering, our directors, executive officers and current 5% stockholders and their affiliates will beneficially own approximately 51.0% of the common stock. These stockholders, if they all act together, may be able to direct 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 amended and restated certificate of incorporation. The decisions of these stockholders may conflict with our interests or those of our other stockholders.

Anti-takeover provisions in our amended and restated certificate of incorporation and 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.

Our amended and restated certificate of incorporation and 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 amended and restated certificate of incorporation allows our board of directors to issue shares of preferred stock. The Board 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.

Effective simultaneously with the closing of this offering, our amended and restated certificate of incorporation will provide 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 bylaws will not permit our stockholders to call a special meeting of stockholders. Under the bylaws, only our President, Chairman of the Board or a majority of the board of directors will be able to call special meetings. The bylaws also require that stockholders give advance notice to our secretary of any nominations for director or other business to be brought by stockholders at any stockholders' meeting. These provisions may delay or prevent changes of control or management.

Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Under this law, if anyone becomes an "interested stockholder" in the company, we may not enter a "business combination" with that person for three years without special approval. These provisions could delay or prevent a change of control. These provisions could adversely affect the market price of the common stock.

Our common stock has never been publicly traded and we cannot predict the extent to which a trading market will develop.

Before this offering, there has been no public market for the common stock. We cannot predict the extent to which an active public market for the common stock will develop or be sustained after this offering. We will negotiate the initial public offering price with the representatives of the underwriters. The price we determine may not be indicative of future market prices.

Our common stock price is likely to be highly volatile and your investment in our stock may decline in value.

The market price of our common stock is likely to be highly volatile. In addition to various risks described elsewhere in this prospectus, the following factors could also cause volatility and could result in declines in the market price of our common stock:

. announcements made by us concerning the results of our clinical trials with INS365 Respiratory, INS365 Ophthalmic, INS316 Diagnostic and any other product candidates;

. changes in government regulations;

14

. regulatory actions as a result of their new therapeutic approach;

. changes in concerns of our collaborators, in particular our collaborations with Genentech, Santen and Kissei;

. developments concerning proprietary rights including patents by us or our competitors;

. variations in our operating results; and

. litigation.

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

Future sale by our current stockholders may cause our stock price to decline and may adversely affect our ability to raise funds in new stock offerings.

Sales of our common stock by our current stockholders in the public market after this offering could cause the market price of our stock to fall. Sales may also 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. Upon the completion of this offering, we will have 24,314,069 shares of common stock outstanding, assuming no exercise of options or warrants and assuming no exercise of the underwriters' over-allotment option. Of these outstanding shares of common stock, the 5,500,000 shares sold in this offering will be freely tradable, without restriction under the Securities Act of 1933, as amended, unless purchased by our "affiliates." The remaining 18,814,069 shares of common stock held by existing stockholders are "restricted securities" and may be resold in the public market only if registered or pursuant to an exemption from registration, such as Rule 144 under the Securities Act.

Immediately following the completion of this offering, holders of 16,191,949 shares of common stock and options and warrants to purchase 356,748 shares of common stock will be entitled to registration rights. Upon registration, these shares may be freely sold in the public market.

All of our officers, directors and holders of at least one percent of our stock have signed lock-up agreements, in which they agreed that they will not, directly or indirectly, offer, sell or agree to sell, or otherwise dispose of any shares of our common stock or other securities in the public market without the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days after the final prospectus relating to this offering. The lock-up agreements do not apply to any shares acquired in this offering through the directed share program. The agreement of one of the stockholders excludes 206,963 shares currently held and all shares acquired in the future. Upon expiration of the lock-up agreements approximately 16,885,000 shares of common stock covered by these agreements will be immediately eligible for resale, subject to the requirements of Rule 144.

We may issue additional shares:

. to employees, directors and consultants;

. in connection with corporate alliances;

. in connection with acquisitions; and

. to raise capital.

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.

15

Purchasers in this offering will suffer immediate dilution in the net tangible book value of the common stock that is purchased.

If you purchase common stock in this offering, the value of your shares based upon the actual book value of the company will immediately be less than the offering price you paid. This is known as "dilution." Based upon the net tangible book value of the common stock at December 31, 1999, your shares will be worth $10.39 less per share than the price you paid in the offering. If options and warrants we previously granted are exercised, additional dilution is likely to occur.

16

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "could," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential," or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward- looking statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus, to conform such statements to actual results or to note any changes or exceptions.

SPECIAL NOTE REGARDING MARKET DATA

Statistical market data contained in "Prospectus Summary" and in "Business" come from or are based on estimates prepared by us using data from various sources. In certain cases we have made assumptions based on such data and our knowledge of the specific diseases, which assumptions we believe to be reasonable. References to prevalence and market size in the major international pharmaceutical markets refer to the U.S., Canada, Japan, Germany, France, Italy, Spain and the U.K., except that figures for chronic bronchitis exclude Canada. With respect to chronic bronchitis, we have relied on data from a Decision Resources report published in 1998, reporting 1996 prevalence and market size and estimated 2001 market size. With respect to cystic fibrosis, prevalence data is based, in the case of the U.S., on a Cystic Fibrosis Foundation report published in 1999 and, in the case of the major international pharmaceutical markets, on a 1994 Decision Resources report; market size solely for the U.S. was estimated from patient usage data from a Cystic Fibrosis Foundation report published in 1998. With respect to sinusitis, we estimated prevalence solely in the U.S., based on data contained in a 1998 report from the Centers for Disease Control and Prevention projected for the U.S. population as a whole. With respect to dry eye disease, we have estimated market size based on 1996 data published in a 1997 IMS report and we estimated prevalence in the major international pharmaceutical markets by extrapolating, based on population, from U.S. figures set forth in Lacrimal Gland, Tear Film, and Dry Eye Syndrome (New York, 1998). With respect to retinal detachment, we have estimated prevalence in the major international pharmaceutical markets by extrapolating, based on population, from a twenty year study ending in 1995 conducted by the Department of Ophthalmology, Mayo Clinic in a metropolitan area in the U.S.

17

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $70.4 million, or approximately $81.2 million if the underwriters exercise their over-allotment option in full. For purposes of this calculation, we have assumed an initial public offering price of $14.00 per share. We have estimated that the underwriting discounts and commissions and our offering expenses will be approximately $6.6 million.

We estimate that we will use approximately 50% of the net proceeds of this offering for the clinical development of our product candidates and product commercialization. We estimate that we will use approximately 25% of the net proceeds of this offering for discovery research and preclinical activities. We estimate that we will use approximately 20% of the net proceeds on working capital and general corporate purposes. We may also use approximately 5% of the net proceeds to acquire businesses, technologies, or products complementary to our business even though we do not currently have any specific plans.

The information above represents our best estimate of our use of the net proceeds of this offering based upon the current state of our business operations, our current business plan and strategy, and current economic and industry conditions. Actual allocation of the net proceeds may differ from the estimates set forth above. The amount and timing of our expenditures will vary depending on the following:

. the progress of our clinical and preclinical development projects;

. signing of new corporate partners and the attainment of milestones with our existing corporate partners;

. the progress of our research and development activities;

. technological changes;

. competitive conditions; and

. general industry and economic conditions.

Pending use of the net proceeds for the purposes described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

We have never declared or paid any dividends on our common stock. Following this offering, our board of directors will determine and may change from time to time our dividend practices with respect to our common stock. Any payment of dividends will be based upon our earnings, financial condition, capital requirements and other factors considered important by our board of directors. Under Delaware law and our amended and restated certificate of incorporation, our board of directors is not required to declare dividends on our common stock. We expect to retain all earnings, if any, generated by our operations for the development and growth of our business and do not anticipate paying any dividends to our stockholders in the foreseeable future.

Since December 17, 1999, dividends have been accruing on our Series G preferred stock at prime rate plus 1%. Such accrued dividends will be paid to the holders of Series G preferred stock in shares of common stock upon the automatic conversion of the Series G preferred stock into common stock upon the closing of this offering.

18

CAPITALIZATION

You should read the following table with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the notes included elsewhere in this prospectus. The table shows as of December 31, 1999:

. our actual capitalization;

. our pro forma capitalization after giving effect to the automatic conversion, at the time of the closing of this offering, of our outstanding shares of preferred stock into 16,186,211 shares of our common stock and a 1-for-1.75 reverse-split of our common stock that will take effect before the closing date of this offering; and

. our pro forma as adjusted capitalization, adjusted to show the sale of 5,500,000 shares of common stock sold in this offering at an assumed initial public offering price of $14.00 per share after deducting underwriting discounts and commissions and our estimated offering expenses.

                                                    As of December 31, 1999
                                                 ------------------------------
                                                                     Pro forma
                                                 Actual   Pro forma As Adjusted
                                                 -------  --------- -----------
                                                  (in thousands, except share
                                                             data)
Notes payable and capital leases, excluding
 current portion................................ $   357   $   357    $   357
Stockholders' equity:
  Convertible preferred stock, $0.001 par value;
   52,000,000 shares authorized; 28,059,666
   shares issued and outstanding (actual); no
   shares issued or outstanding (pro forma and
   pro forma as adjusted).......................  45,895       --         --
  Common stock, $0.001 par value; 56,000,000
   shares authorized;
   2,465,857 shares issued and outstanding
   (actual); 18,652,068 shares issued and
   outstanding (pro forma); 60,000,000 shares
   authorized; 24,152,068 shares issued and
   outstanding (pro forma as adjusted)..........       2        19         24
  Additional paid in capital....................     908    46,826    117,231
  Accumulated deficit........................... (29,396)  (29,396)   (29,396)
  Deferred compensation.........................    (329)     (329)     (329)
                                                 -------   -------    -------
    Total stockholders' equity..................  17,080    17,120     87,530
                                                 -------   -------    -------
Total capitalization............................ $17,437   $17,477    $87,887
                                                 =======   =======    =======

This table assumes no exercise of stock options or warrants outstanding as of December 31, 1999. As of December 31, 1999, there were options outstanding under our stock plan to purchase a total of 1,474,518 shares of common stock, with a weighted average exercise price of $0.35 per share, 265,397 shares of common stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $7.72 per share, and 208,170 shares of preferred stock that are reserved for the exercise of outstanding warrants for preferred stock that will convert into warrants to purchase 118,954 shares of our common stock at the time of the closing of this offering with a weighted average exercise price of $2.10 per share.

19

DILUTION

Our historical net tangible book value as of December 31, 1999 was approximately $16.8 million, or $6.82 per share, based on the number of common shares outstanding as of December 31, 1999. Historical net tangible book value per share is equal to the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of December 31, 1999.

As of December 31, 1999, our pro forma net tangible book value was approximately $16.9 million or $0.90 per share after taking into account the delivery of 16,186,211 shares of common stock upon the automatic conversion, at the time of the closing of this offering, of our outstanding shares of preferred stock. Without taking into account any other changes in our net tangible book value after December 31, 1999, other than to give effect to this offering at an assumed initial offering price of $14.00 per share and our receipt of the estimated net proceeds from the offering, our net tangible book value, pro forma as adjusted at December 31, 1999, would have been approximately $87.3 million or $3.61 per share. This represents an immediate increase in the net tangible book value of $2.71 per share of our common stock to present stockholders and an immediate dilution of $10.39 or 74.19% per share to new investors. The following table shows this dilution:

Assumed initial public offering price per share.................        $14.00
  Historical net tangible book value per share at December 31,
   1999......................................................... $6.82
  Decrease per share attributed to the conversion of preferred
   stock........................................................ (5.92)
                                                                 -----
  Pro forma net tangible book value per share before this
   offering.....................................................  0.90
  Increase per share attributable to new investors..............  2.71
Pro forma as adjusted net tangible book value per share after
 this offering..................................................          3.61
                                                                        ------
Dilution per share to new investors.............................        $10.39
                                                                        ======

If the underwriters exercise their over-allotment in full, there will be an increase in pro forma as adjusted net tangible book value to $3.02 per share to existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $10.08 to new stockholders. Our existing stockholders would own 74.7% and our new public investors would own 25.3% of the total number of shares of our common stock outstanding after this offering.

The following table summarizes, on a pro forma basis as of December 31, 1999, the differences between existing stockholders and investors in this offering including the number and percentage of shares of our common stock purchased from us, the amount and percentage of consideration paid, and the average price paid per share of our common stock, before deduction of underwriting discounts and commissions and our estimated offering expenses:

                             Shares Owned           Consideration
                         --------------------- ----------------------- Average Price
                           Number   Percentage    Amount    Percentage   Per Share
                         ---------- ---------- ------------ ---------- -------------
Existing stockholders... 18,652,068    77.2%   $ 47,143,832    38.0%      $ 2.53
New investors...........  5,500,000    22.8      77,000,000    62.0       $14.00
                         ----------   -----    ------------   -----
  Total................. 24,152,068   100.0%   $124,143,832   100.0%      $ 5.14
                         ==========   =====    ============   =====

The discussion and tables above assume no exercise of stock options or warrants outstanding as of December 31, 1999. As of December 31, 1999, there were options outstanding under our stock plan to purchase a total of 1,474,518 shares of common stock, with a weighted average exercise price of $0.35 per share, 265,397 shares of common stock reserved for the exercise of outstanding warrants, with a weighted average exercise price of $7.72 per share and 208,170 shares of preferred stock that are reserved for the exercise of outstanding warrants for preferred stock, with a weighted average exercise price of $1.20 per share, which will convert into warrants to purchase 118,954 shares of our common stock at the time of the closing of this offering with a weighted average exercise price of $2.10 per share. To the extent that any of these options or warrants are exercised, there will be further dilution to new investors.

20

SELECTED FINANCIAL DATA

The following selected financial data should be read with our financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1997, 1998 and 1999, and the balance sheet data at December 31, 1998 and 1999 are derived from financial statements included elsewhere in this prospectus that have been audited by PricewaterhouseCoopers LLP, independent auditors. The statement of operations data for the fiscal years ended December 31, 1995 and 1996 and the balance sheet data at December 31, 1995, 1996 and 1997 are derived from our audited financial statements that are not included in this prospectus. Historical results do not necessarily show future results.

                                           Year Ended December 31,
                                   -------------------------------------------
                                    1995     1996     1997     1998     1999
                                   -------  -------  -------  -------  -------
                                       (in thousands, except per share
                                                  amounts)
Statement of Operations Data:
Revenue........................... $   --   $   --   $   --   $ 3,600  $   600
                                   -------  -------  -------  -------  -------
Operating Expenses:
  Research and development
   (excludes $0, $0, $0, $8 and
   $59, respectively, of stock
   based compensation)............   1,539    4,207    6,569    5,438    7,179
  General and administrative
   (excludes $0, $0, $0, $6 and
   $31, respectively, of stock
   based compensation)............   1,050    1,531    1,494    1,921    1,887
  Stock based compensation........     --       --       --        14       90
                                   -------  -------  -------  -------  -------
Total operating expenses..........   2,589    5,738    8,063    7,373    9,156
                                   -------  -------  -------  -------  -------
Operating loss....................  (2,589)  (5,738)  (8,063)  (3,773)  (8,556)
Other income (expense), net.......    (115)     (44)     116       35      142
                                   -------  -------  -------  -------  -------
Loss before provision for income
 taxes............................  (2,704)  (5,782)  (7,947)  (3,738)  (8,414)
Provision for income taxes........     --       --       --       360       60
                                   -------  -------  -------  -------  -------
Net loss..........................  (2,704)  (5,782)  (7,947)  (4,098)  (8,474)
Preferred stock dividends.........     --       --       --       --       (62)
                                   -------  -------  -------  -------  -------
Net loss available to common
 stockholders..................... $(2,704) $(5,782) $(7,947) $(4,098) $(8,536)
                                   =======  =======  =======  =======  =======
Net loss per common share--basic
 and diluted...................... $ (1.73) $ (3.22) $ (4.01) $ (1.99) $ (3.53)
                                   =======  =======  =======  =======  =======
Weighted average common shares
 outstanding--basic and diluted...   1,567    1,798    1,981    2,061    2,401
Pro forma net loss per common
 share--basic and
 diluted..........................                                     $ (0.54)
                                                                       =======
Pro forma weighted average common
 shares outstanding--basic and
 diluted..........................                                      15,561
                                             As of December 31,
                                   -------------------------------------------
                                    1995     1996     1997     1998     1999
                                   -------  -------  -------  -------  -------
                                               (in thousands)
Balance Sheet Data:
Cash and cash equivalents......... $ 6,537  $   843  $ 5,826  $ 4,138  $22,728
Total assets......................   7,953    2,568    7,229    5,446   23,930
Convertible preferred stock.......   9,100    9,100   22,067   24,467   45,895
Common stock......................       2        2        2        2        2
Total stockholders' equity
 (deficit)........................   6,277      508    5,546    3,904   17,080

See the financial statements and notes included elsewhere in this prospectus for a description of the computation of the historical and pro forma net loss per share and the number of shares used in the historical and pro forma per share calculations in the statement of operations data above.

21

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this section with the financial statements and notes included elsewhere in this prospectus.

Overview

We were founded in October 1993 under the name Innovative Pharmaceuticals, Inc. We changed our name to Inspire Pharmaceuticals in June 1994. In March 1995, we commenced operations subsequent to our first substantial financing. Since that time, we have engaged primarily in research and development efforts related to the P2Y\\2\\ receptor, which coordinates the body's innate defense mechanisms of mucosal hydration and mucociliary clearance. To date, we have three product candidates in advanced clinical development. Our collaborators include Genentech, Kissei and Santen.

To date, we have devoted substantially all of our efforts to research, clinical development and establishing strategic partnerships for the development and potential marketing of our product candidates when they are approved. We have not derived any commercial revenues from product sales and we do not expect to receive sales revenues for at least the next several years. We recognized $3.6 million and $600,000 in revenues from a collaborative research and development agreement with Kissei in 1998 and 1999, respectively, and expect to recognize revenues in 2000 from our collaborative research and development agreements with Kissei and Genentech. We have incurred significant operating losses since our inception in 1993 and, as of December 31, 1999, we had an accumulated deficit of $29.4 million. We have primarily funded our losses by raising $45.9 million in private sales of equity securities. There can be no assurance if or when we will become profitable. We expect that our losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Our achieving profitability depends upon our ability, alone and with others, to successfully complete the development of our product candidates, obtain required regulatory clearances and successfully manufacture and market our products.

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 has met a contractual milestone triggering a payment to us. Non-refundable fees received at the initiation of collaborative agreements for which we have an ongoing research and development commitment, such as Genentech, are deferred and recognized ratably over the period of the ongoing research and clinical development commitment. License fees received under collaborative research and development agreements for which we have no future research or clinical development commitment, such as Kissei, are recognized when received. We are also entitled to receive milestone payments under our collaborative research and development agreements based upon achievement of development milestones by us or our collaborative partners. We recognize milestone payments at the date the milestone is achieved and acknowledged by the collaborative partner, which is generally at the date payment is received from the collaborative partner.

Results of Operations

Year Ended December 31, 1999 and 1998

Revenues

Revenues are primarily derived from collaborative research and development agreements with strategic partners. We receive milestone payments under these collaborative research and development agreements based both on achievement by us and our partners of defined development milestones.

Our revenues decreased $3.0 million to $600,000 in 1999 from $3.6 million in 1998. Revenue for 1998 included the receipt of a non-refundable license fee from Kissei for which we have no ongoing research and development commitment. In December 1999, we received a $5.0 million payment from Genentech in connection with the signing of our collaborative research agreement. This amount was deferred and will be recognized ratably as revenue over the period of our research commitment for our development of INS365 Respiratory, which is expected to occur in 2000 and 2001. Revenue for 1999 is comprised of a $600,000

22

milestone payment received under our collaborative research and development agreement with Kissei which is related to a development milestone reached by us on behalf of Kissei.

Research and Development

Research and development expenses are primarily comprised of personnel and related costs and costs of contract research organizations that are performing research and development activities, including clinical studies, for us, and costs of filing and maintaining our patent portfolio.

Research and development expense increased by approximately $1.8 million to $7.2 million in 1999 from $5.4 million in 1998. This increase was due to an increase of approximately $400,000 in contract research costs related to clinical studies, an increase of $175,000 in patent related costs, $185,000 in increased personnel and related costs as we added personnel to support the expansion of our clinical study activities and an increase of $1.2 million in costs related to preclinical activities as we added research personnel to support our increased discovery activity related to new compounds and potential new indications for existing compounds.

General and Administrative

General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, facilities and information systems expenses.

General and administrative expenses increased by approximately $34,000 to $1.9 million in 1999. The increase in general and administrative expense is primarily due to increased facilities and equipment costs in 1999 as a result of the increase in our business activities.

Stock Based Compensation

Stock based compensation expense consists of the amortization of deferred compensation, related to stock options granted to employees with an exercise price below the estimated fair market value of our common stock at the date of the grant. We recorded deferred compensation of approximately $290,000 in 1998 and $144,000 in 1999. Deferred compensation is amortized to operating expense over the vesting period of the related stock options which is generally four years. Stock based compensation expense increased to $90,000 in 1999 as compared to $14,000 in 1998.

Other Income (Expense), Net

Other income (expense), net consists of interest income earned on cash deposits and short-term investments, reduced by interest expense on notes payable and capital lease obligations and gains and losses on sales of property and equipment. Other income (expense), net increased by approximately $107,000 to income of $142,000 in 1999 as compared to income of $35,000 in 1998. The increase is primarily due to an increase in interest income of $70,000 due to higher average cash and investment balances in 1999 as compared to 1998 and a decrease in interest expense of approximately $25,000 resulting from the lower average notes payable balance in 1999 as compared to 1998.

Income Tax Expense

Provision for income taxes decreased by approximately $300,000 to $60,000 in 1999 from $360,000 in 1998. Income taxes in 1999 and 1998 are comprised of Japanese withholding taxes on license payments received from Kissei. The decrease in income tax expense is due to the reduction in license payments received from Kissei in 1999 as compared to 1998.

Year Ended December 31, 1998 and 1997

Revenues

Our revenues increased to $3.6 million in 1998 from zero in 1997. This increase was the result of the receipt of a non-refundable license fee from Kissei in 1998 for which we have no ongoing research and development commitment.

23

Research and Development

Research and development expense decreased by approximately $1.2 million to $5.4 million in 1998 from $6.6 million in 1997. This decrease was due primarily to the fact that in 1997, we were required to make milestone payments of $500,000 to entities from which we licensed some of our drug compounds while we made only $30,000 of such license payments in 1998. In addition, in 1998 we had a decline of approximately $800,000 in costs related to clinical and preclinical studies as compared to 1997.

General and Administrative

General and administrative expenses increased by approximately $400,000 to $1.9 million in 1998 from $1.5 million in 1997. The increase in general and administrative expense is primarily due to an increase in personnel costs as we added administrative and finance staff in 1998 to support the growth in our business.

Stock Based Compensation

Stock based compensation expense increased to $14,000 in 1998 from zero in 1997 because before 1998 all stock option grants had been made with an exercise price equal to the fair value of our common stock at the date of the grant.

Other Income (Expense), Net

Other income (expense), net decreased by $81,000 to income of $35,000 in 1998 as compared to income of $116,000 in 1997. The decrease is primarily due to a decrease in interest income of $112,000 due to lower average cash and investment balances in 1998 as compared to 1997 partially offset by a decrease in interest expense on capital leases of $49,000.

Income Tax Expense

Provision for income taxes increased to $360,000 in 1998 from zero in 1997. Income taxes in 1998 are comprised of Japanese withholding taxes on a license payment received from Kissei. No such license payments were received in 1997.

Liquidity and Capital Resources

We have historically derived a significant portion of our liquidity and operating capital from the private placements of preferred stock and from payments received under collaboration or license agreements related to our technologies. At December 31, 1999, cash and cash equivalents totaled $22.7 million, an increase of $18.6 million as compared to December 31, 1998. The increase in cash and cash equivalents resulted from our receipt of $21.4 million in net proceeds from the private placement of our Series E and Series G preferred stock in July, October and December 1999. In addition, we received a non-refundable license fee of $5.0 million upon the signing of a collaboration agreement with Genentech on December 17, 1999, which was recorded as deferred revenue, and a milestone payment of $600,000 from Kissei in 1999. Cash used for operating expenses was $7.9 million, excluding the license fees received from Genentech and Kissei for our operating expenses, cash used by investing activities of $151,000 and payments on capital lease obligations of $457,000.

Cash used by operations of $2.3 million during 1999 represented our net loss of $8.5 million partially offset by the $5.0 million license fee received upon the signing of the Genentech agreement in December 1999, non-cash charges to our net loss of $741,000 and an increase in accounts payable and accrued liabilities of $472,000. The increase in accounts payable and accrued liabilities is primarily due to the increase in spending in our clinical and preclinical activities in 1999 as compared to 1998.

Cash used in investing activities of $151,000 was comprised of purchases of property and equipment. Cash provided by financing activities of $21.0 million resulted from the receipt of $11.4 million in net proceeds from the sale of our Series E preferred stock in July and October 1999 and net proceeds of $10.0 million from the sale of our Series G preferred stock in December 1999 partially offset by payments of $457,000 on our capital lease obligations.

24

At December 31, 1998, cash and cash equivalents totaled $4.1 million, a decrease of $1.7 million as compared to December 31, 1997. The decrease in cash and cash equivalents resulted from cash used in operations of $3.6 million, which was primarily due to our net loss, and $462,000 in payments on our notes payable and capital lease obligations partially offset by $2.4 million in proceeds received from the sale of our Series C and Series D preferred stock in September and December 1998.

Cash used by operations in 1998 of $3.6 million reflects our net loss of $4.1 million partially offset by non-cash charges of $607,000 and a decrease in accounts payable and accrued liabilities of $107,000. The decrease in accounts payable and accrued liabilities resulted primarily from timing of the receipt of invoices related to our clinical and preclinical activities.

Cash used by investing activities in 1998 of $43,000 represented the purchase of property and equipment partially offset by the proceeds from disposal of property and equipment.

Cash provided by financing activities of $2.0 million resulted from the receipt of $900,000 in proceeds from the sale of our Series C preferred stock in September 1998 and the receipt of $1.5 million in proceeds from the sale of our Series D preferred stock in December 1998 partially offset by $462,000 in payments on our notes payable and capital lease obligations.

We have experienced a substantial increase in our operating expenses since our inception in connection with the increase in the number of compounds in both preclinical and clinical development. Our capital requirements are expected to continue to increase as we expect to move more compounds into clinical trials during 2000. The timing and amount of these expenditures will depend upon numerous factors, including:

. timing of initiation of clinical trials;

. design and duration of clinical trials;

. our ability to negotiate favorable terms with contract research organizations to perform these clinical trials;

. number of compounds and level of our preclinical activities; and

. timing of achievement by us or our partners of development milestones and resulting receipt by us of milestone payments under our collaborative research agreements.

We expect that the proceeds from this offering, combined with our current cash and cash equivalents, short-term investments and funding from existing collaborative arrangements will be sufficient to fund our operations for at least the next two years. This estimate is a forward-looking statement that involves risks and uncertainties which are described under the caption "Risk Factors" in this prospectus.

Recently Enacted Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued the Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. This Standard establishes accounting and reporting standards for derivatives and hedging activities and supersedes and amends a number of existing standards. The Standard, as amended by Statement of Financial Accounting Standard No. 137, is effective for all fiscal quarters in all fiscal years beginning after June 15, 2000, but earlier application is encouraged. Upon the Standard's application, all derivatives are required to be recognized in the statement of financial position as either assets or liabilities and to be measured at fair value. In addition, all hedging relationships must be designated, reassessed and documented. The Company does not currently, nor does it intend in the future, to use derivative instruments and, as a result, it does not expect that the adoption of SFAS 133 will have any impact on its financial position or results of operations.

Impact Of Year 2000

Many currently installed computer systems and software products were unable to distinguish between twentieth century dates and twenty-first century dates. As a result, many companies had to upgrade or replace their software and computer systems to comply with year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities.

25

State of Readiness

The majority of the computer programs and hardware we currently use in our own internal operations did not require replacement or modification as a result of the year 2000 issue. We have not, to date, experienced any material year 2000 problem. We believe that our significant vendors and service providers are year 2000 compliant and we have not, to date, been made aware that any of our significant vendors or service providers have suffered disruptions in their systems.

Costs

To date, we have incurred some expenses, which have not been significant, related to the operating costs associated with time spent by employees in the evaluation process and year 2000 compliance testing generally. We presently do not anticipate that future expenditures will be significant.

Risks

We completed internal assessments of our year 2000 readiness prior to December 31, 1999, with emphasis on our operating and administrative systems and are not aware of any year 2000 problems that could reasonably be expected to have a significant negative effect on our business. Our assessment plans consisted of internal testing of our systems, contacting third party vendors of hardware, software and services, assessing and implementing repairs or replacements as required and developing contingency plans if year 2000 problems still arise. We contacted our major vendors for software, hardware and related services. These vendors indicated that they are year 2000 compliant. To date, we have not experienced any significant year 2000 problems. However, we can not guarantee that we have identified all year 2000 compliance problems in our infrastructure that may require substantial revisions and repairs. Also, despite our testing and reviews, we may experience year 2000 problems related to the third party software, hardware or other systems on which we are reliant, and any of these problems may be time consuming or expensive to fix.

Contingency Plan

We have been engaged in an ongoing assessment of our readiness and have developed contingency plans to address year 2000 problems that may arise. The results of our analyses and the responses received from third party vendors and service providers were taken into account in developing these plans.

Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on the increase or decrease in the amount of interest expense we must pay with respect to our various outstanding debt instruments. Our risk associated with fluctuating interest expense is limited, however, to our capital lease obligations, the interest rates are closely tied to market rates, and our investments in interest rate sensitive financial 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 our invested principal funds by limiting default risks, market risk and reinvestment risk. We reduce default risk by investing in investment grade securities. 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 December 31, 1998 or December 31, 1999. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time will increase our interest expense.

26

BUSINESS

Overview

We discover and develop new drugs, or pharmaceutical products, to treat diseases characterized by deficiencies in the body's innate defense mechanisms of mucosal hydration and mucociliary clearance. Our products are based on our proprietary technology relating to P2Y receptors. Studies indicate that a subtype of this family, the P2Y\\2\\ receptor, coordinates the mechanisms of mucosal hydration and mucociliary clearance. These complex mechanisms, which involve movement of salt and water, a protein substance made in specialized cells that act to lubricate surfaces called mucin, and the movement of cilia, or hairlike projections on the surface of cells that move together in a sweeping motion to move liquid and particles forward, can be regulated therapeutically through the stimulation of this receptor. Our lead products target respiratory and ophthalmic diseases with inadequate current treatments. We currently have three product candidates in advanced clinical development:

. INS365 Respiratory for the treatment of chronic bronchitis;

. INS365 Ophthalmic for the treatment of dry eye disease; and

. INS316 Diagnostic to aid in the diagnosis of lung cancer and lung infection.

In addition, we have two products that are scheduled to enter clinical trials later this year: INS37217 Respiratory for the treatment of cystic fibrosis and INS37217 Ophthalmic for the treatment of retinal detachment. We have entered into development and commercialization alliances with Genentech, Kissei and Santen. We are also exploring other target diseases where we believe P2Y receptors play important biological roles.

We commenced operations in March 1995. At that time, we acquired a license to our initial technology, including patents relating to P2Y receptors and on method of use for INS316 in the respiratory area, from The University of North Carolina at Chapel Hill. We initially focused on the clinical development of INS316 for the treatment of respiratory diseases such as cystic fibrosis and chronic bronchitis. In early 1996, we initiated a research program to develop an improved P2Y\\2\\ agonist compound, INS365. A joint patent for this compound was granted to us and The University of North Carolina at Chapel Hill. We began preclinical studies of INS365 for respiratory uses in 1997, and clinical testing of INS365 for respiratory uses in early 1998. We filed an investigational new drug application (IND) in the United States in the spring of 1998. We acquired an exclusive license to use INS365 to treat respiratory disease from The University of North Carolina at Chapel Hill in 1998. During the development of INS365 for respiratory uses, our scientists began to recognize the potential for using INS365 to treat eye diseases such as dry eye. We initiated ophthalmic clinical testing of INS365 in the United Kingdom in early 1999 and filed an IND in the United States in the fall of 1999. Our chemistry lab also synthesised INS37217, a new P2Y\\2\\ receptor agonist, in 1998. We began preclinical testing of INS37217 for respiratory uses in 1998, and for ophthalmic uses in 1999. This preclinical work is ongoing at this time.

Background

Mucosal hydration and mucociliary clearance processes are observed at a number of human mucosal surfaces including those in the respiratory tract, eyes and sinuses. Mucosal hydration and mucociliary clearance are natural mechanisms for cleansing and protecting mucosal surfaces and require a coordinated balance of salt, water and mucus. Studies indicate that P2Y\\2\\ receptors regulate these mechanisms on epithelial cells that line mucosal surfaces. Diseases that are characterized by impairment of mucosal hydration and mucociliary clearance include chronic bronchitis, sinusitis, cystic fibrosis and dry eye disease.

Respiratory

For lungs to function normally, airway surfaces must be kept properly hydrated and clear of particles. Airway liquid, including salt and water, is secreted through channels in the membranes of respiratory epithelial

27

cells. Mucus, secreted by goblet cells, traps microorganisms and particulates. Specialized epithelial cells containing cilia beat synchronously to propel the overlying "mucociliary blanket" of salt, water and mucus to the mouth and throat where secretions are swallowed or expelled. This process is the principal mechanism by which the body keeps airway surfaces free of dust, pollutants, bacteria and viruses. Genetic and environmental factors can lead to a breakdown in the normal process of mucosal hydration and mucociliary clearance that is observed in many debilitating respiratory diseases, including chronic bronchitis and cystic fibrosis. Studies indicate that stimulating P2Y\\2\\ receptors with effective agonists can help restore the respiratory system's innate defense mechanisms.

Chronic Bronchitis

Chronic bronchitis is a serious and potentially life-threatening lung condition characterized by acute and chronic airway inflammation, chronic obstruction of airflow and a mucus-producing cough. Patients with chronic bronchitis experience shortness of breath, labored breathing, excessive and chronic coughing and production and retention of excessive mucus. Chronic bronchitis can be caused by smoking, environmental toxins, and viral or bacterial infections. Chronic bronchitis is defined by the American Thoracic Society as the presence of a mucus-producing cough most days of the month, three months of the year, for at least two successive years without obvious alternative explanation. Patients with chronic bronchitis experience acute flare-ups of the illness, their medication usage increases and they may require hospitalization. If left untreated, these patients experience progressive deterioration in lung function, which can eventually result in respiratory failure and death.

The American Thoracic Society guidelines for the treatment of chronic bronchitis recommend three main objectives to pharmaceutical intervention:
dilation of the airways, reduction of airway inflammation, and clearance of retained respiratory secretions. Current management of chronic bronchitis treats the symptoms, but does not cure the disease, and is based on the degree of airflow obstruction and the extent of the patient's disability. Physicians generally prescribe bronchodilators, which act to open airways in the lungs. These are usually inhaled medications such as Serevent(R), Ventolin(R), Atrovent(R), or Combivent(R). Physicians may also prescribe inhaled steroids such as Beclovent(R) and Azmacort(R) to reduce the inflammation in the airways. Additionally, physicians often use antibiotics during acute flare-ups of the illness if they diagnose or suspect bacterial infections. There is currently no FDA approved pharmaceutical agent that effectively clears retained mucous secretions in this disease.

Approximately 31 million patients have been diagnosed with chronic bronchitis in the eight major international prescription pharmaceutical markets, including 14 million in the United States, making it more prevalent than asthma. Chronic bronchitis is estimated to account for approximately $14 billion in direct costs annually. In the United States, there are estimated to be 500,000 hospitalizations per year due to acute flare-ups of the illness of chronic bronchitis and it is the fourth leading cause of death. In the eight major international prescription pharmaceutical markets, sales of ethical/proprietary pharmaceutical products to treat chronic bronchitis were approximately $1.3 billion in 1996 and have been estimated to reach approximately $2 billion in 2001.

Cystic Fibrosis

Cystic fibrosis is a life-threatening disease involving a genetic mutation that disrupts the cystic fibrosis transmembrane regulator protein. In healthy individuals, this protein acts as an ion-specific channel that modulates salt and water movement. In cystic fibrosis patients, a defect in this channel leads to poorly hydrated, thickened mucous secretions in the airways and severely impaired mucociliary clearance. Impairments in these vital lung defense mechanisms typically begin in early childhood. Chronic secondary infections invariably occur, resulting in progressive lung dysfunction and deterioration. Cystic fibrosis-induced damage to the respiratory tract accounts for more than 95% of the morbidity and mortality associated with this disease. According to the U.S. Cystic Fibrosis Foundation, the average life expectancy for patients is 32 years.

28

The current therapeutic approaches to address cystic fibrosis mainly treat the symptoms, but do not cure the disease, and are aimed primarily at reducing respiratory infections and breaking up thickened mucous secretions that cause airflow obstruction and harbor bacteria. For example, TOBI(R) is an inhaled antibiotic that treats the infection, and Pulmozyme(R) is an inhaled protein that breaks up excessive DNA in cystic fibrosis mucus which reduces the thickness and tackiness of the respiratory secretions. While both products are approved for the treatment of cystic fibrosis, neither product is designed to address the underlying ion-transport defect, which results in dehydrated mucus and severely impaired mucociliary clearance.

There are approximately 30,000 diagnosed cystic fibrosis patients in the United States and approximately 75,000 in the eight major international prescription pharmaceutical markets. The average annual cost of treating a cystic fibrosis patient in the United States exceeds $45,000, and the annual cost for patients in the United States is over $1 billion. We estimate that in the United States sales of ethical/proprietary pharmaceutical products to treat cystic fibrosis currently are in excess of $200 million annually.

Respiratory Diagnostics

Physicians use microscopic examination of lung cells to diagnose lung cancer and lung infections, including pneumonia and tuberculosis. Effective diagnosis requires the collection of an adequate specimen, one which is enriched with deep-lung material, a mucous specimen obtained from the lower part of the lung. Bronchoscopy, an invasive medical procedure, is sometimes performed to obtain a specimen; however it is a procedure that costs over $1,000 and poses some risk to patients with impaired lung function. The induction of sputum, either spontaneously or with inhaled solutions, is a less invasive and less costly alternative for obtaining a deep-lung specimen. Once the specimens are collected, they are tested for the presence of cancerous cells or pathogens associated with lung infections. However, many patients have difficulty producing adequate specimens on their own, which is a key barrier to early and effective diagnosis and treatment.

There are no FDA approved agents currently available to enhance the production of an adequate specimen. In an effort to produce a quality specimen, non-approved agents are frequently used, including inhaled solutions such as hypertonic saline and propylene glycol, which cause irritation and excessive coughing. Because these agents have limited utility and are often poorly tolerated, pulmonologists and respiratory therapists have expressed a strong interest in a better tolerated and more efficacious adjunctive therapy, which if effective could reduce the need for bronchoscopies.

Market research conducted by us, including interviews with pulmonologists and oncologists, indicates that deep-lung specimens are frequently collected for the diagnosis of lung cancer and lung infections. The testing of specimens is a recommended component of annual physical examinations in Japan.

Ophthalmic

The eyes and inner eyelids are surrounded by a mucosal surface which serves as an important innate defense mechanism, keeping the surface of the eye, or ocular surface, moist, clear and free from infection. Tears produced by the mucosal hydration process and the lacrimal glands help maintain eye moisture and in response to physical stimuli can be greatly increased to flush out irritants. This tear film is a complex mixture of fluid, ions, mucin and proteins that, when mixed in the proper proportions, coats the cornea with a protective film. The mucosal hydration process and the lacrimal glands maintain an optimal balance of salt, water, mucin and proteins in people with a healthy ocular surface. Studies indicate that stimulating P2Y\\2\\ receptors with effective compounds can help restore the eye's innate mucosal defense mechanism on the ocular surface.

Dry Eye Disease

Dry eye, an ocular surface disease, is the general term for a condition in which abnormalities in the eye's tear film lead to red, irritated and dry eyes. These abnormalities are typically characterized by a decrease in tear

29

production, an increase in tear evaporation or the improper mixture of the eye's tear film components. If left untreated, dry eye disease can result in permanent corneal damage and visual impairment.

The current treatments for dry eye disorders in the major markets consist primarily of artificial tear solutions and lubricant drops. In some cases, small plugs are inserted by physicians in the corner of the eyes to slow tear drainage. Artificial tears, which are available as over-the-counter and, in some countries, as prescription products, provide temporary relief of symptoms, but also wash out the natural proteins and other components that keep an eye healthy. There are currently no approved pharmacologically active agents, drugs that work by affecting a biological process such as stimulation of a receptor, for dry eye disease.

We estimate, based on an extrapolation from United States data, that moderate to severe dry eye affects approximately nine million people in the eight major international prescription pharmaceutical markets and can be caused by eye stress, aging, environmental factors, autoimmune disorders and various medications. The market for dry eye treatments consists of both prescription and over-the-counter products. Because dry eye disease is more prevalent among the elderly and post-menopausal women, this market is expected to grow as populations age. We estimate that, in the eight major international prescription pharmaceutical markets, sales of ethical/proprietary pharmaceutical products for dry eye treatments exceed $230 million annually.

Inspire's Solution

Mucosal hydration and mucociliary clearance are natural mechanisms for cleansing and protecting epithelial surfaces and require a coordinated balance of salt, water and mucus. Studies indicate that P2Y\\2\\ receptors coordinate these processes that can be regulated therapeutically by the local delivery of compounds that bind to and stimulate these receptors. We have focused our efforts on developing P2Y\\2\\ receptor agonists to treat diseases by activating natural processes of mucosal hydration and mucociliary clearance.

We believe that P2Y\\2\\ agonists represent a novel, pharmacological approach to the treatment of respiratory and eye diseases. We also believe that a P2Y\\2\\ agonist may be effective as a drug that enhances the production of deep-lung sputum samples for diagnostic tests. Importantly, our product candidates can be applied directly to these mucosal surfaces in a topical form such as inhaled aerosols and eye drops. These products act and are degraded locally, resulting in minimizing the potential for systemic side effects. Our current products are designed to address the medical need for effective new products for chronic bronchitis, cystic fibrosis, respiratory diagnostics, dry eye disease and other diseases that involve impairment of mucosal hydration and mucociliary clearance on epithelial surfaces. Our principal products are:

INS365 Respiratory: We are developing INS365 Respiratory as an inhaled product for the treatment of chronic bronchitis. We believe our product will be the first FDA approved product that addresses the need for an effective agent to clear the build-up of mucus in the airways of bronchitis sufferers. Thus, we believe our product will reduce the need for antibiotics, steroids and bronchodilators, and may reduce the frequency and length of flare-ups of the illnesses and hospitalizations. In many cases, we believe that our product will be complementary to existing treatments.

INS37217 Respiratory: We are developing INS37217 Respiratory as an inhaled product for the treatment of cystic fibrosis. We believe our product will be the first FDA approved product that mitigates the underlying ion-transport defect in the airways of patients with cystic fibrosis. We believe our product will improve respiratory symptoms, reduce infections and enhance the health status of patients with this disease and will be complementary to other currently approved products.

INS316 Diagnostic: We are developing INS316 Diagnostic as an inhaled diagnostic drug to aid in the detection of lung cancer and lung infection. We believe that INS316 Diagnostic will be an effective acute-use product to enhance the production of adequate deep-lung specimens for diagnostic purposes. As such, we believe our product will facilitate the diagnosis of lung cancer and lung infection and potentially reduce the need for costly and invasive bronchoscopies.

30

INS365 Ophthalmic: We are developing INS365 Ophthalmic as an eye drop for dry eye disease. We believe that, by promoting the eyes' natural defense mechanism, INS365 Ophthalmic will be one of the first FDA approved pharmacologically effective agents to treat the symptoms of dry eye, and the first one with this mechanism of action. We believe our product will help restore a natural corneal tear film, reduce dry eye symptoms and help prevent long-term corneal damage in dry eye sufferers.

Business Strategy

Our objective is to become a leading biopharmaceutical company focused on developing novel treatments primarily for diseases involving impaired mucosal hydration or inadequate mucociliary clearance. The principal elements of our strategy include:

Aggressively Advance Our Lead Products. Our focus is on discovering and developing therapies where current treatments are ineffective and where large therapeutic market opportunities exist. By the end of 2000, we expect to have five products in clinical development that target chronic bronchitis, cystic fibrosis, respiratory diagnostics, dry eye disease and retinal detachment. We intend to continue to develop and commercialize rapidly these products and to advance other preclinical product candidates toward clinical development.

Establish Collaborative Relationships with Market Leaders while Selectively Retaining Marketing Rights. In order to minimize the costs to us of late-stage clinical trials and in order to more effectively market our products, we will continue to establish and expand strategic alliances with leading corporations in our target markets. In general, we seek to advance our compounds into later- stage clinical trials before partnering such compounds so as to retain maximum economic benefit to us. Additionally, we may selectively retain partial or full commercialization rights to our products in some limited indications. An example is our co-development and co-promotion options under the Genentech agreement for cystic fibrosis that enable us to retain additional economic benefit in this opportunity.

Use Our Proprietary Technology Relating to P2Y Receptors to Develop Novel Products. Our research focus is to discover novel pharmaceutical products based on our P2Y receptor technology. Studies indicate that a subtype of this family, the P2Y\\2\\ receptor, has broad applicability as regulators of the body's innate defense mechanisms of mucosal hydration and mucociliary clearance. One of our key strengths is our ability to understand the role and importance of P2Y\\2\\ receptors and, through research, high-throughput screening techniques and pharmacology models, develop compounds that target a patient's impaired mucosal hydration and clearance mechanisms. Our discovery group is pursuing opportunities to expand our base of compounds and therapeutic targets for P2Y\\2\\ agonists and the biological role of other P2Y receptor subtypes. This group generates opportunities internally and through collaborative relationships with academic and governmental organizations and private enterprises.

Protect and Enhance Our Technology Leadership Position. We have a substantial intellectual property position related to our technology. We intend to continue to pursue an aggressive patent strategy to protect our expanding proprietary discoveries.

31

Product Development Programs

The following table provides a summary of our development programs by indication, development status and corporate partners.

       Indication       Product Candidate    Development Status     Corporate Partners
---------------------------------------------------------------------------------------
  Respiratory:

    Chronic bronchitis INS365 Respiratory  Phase IIa planned in    Genentech (ex-Japan)
                                           2000                    Kissei (Japan)
    Cystic fibrosis    INS37217            Phase I planned in      Genentech (ex-Japan)
                       Respiratory         2000
    Sinusitis          Unnamed P2Y\\2\\    Preclinical             Genentech
                       agonist                                     (worldwide)
    Diagnostic Adjunct INS316 Diagnostic   Phase III planned in    Uncommitted
    for Lung Disease                       2000
---------------------------------------------------------------------------------------

  Ophthalmic:

    Dry eye            INS365 Ophthalmic   Phase IIb ongoing       Santen (Asia)
                                                                   Uncommitted
                                                                   outside Asia
    Retinal detachment INS37217 Ophthalmic Phase I planned in      Uncommitted
                                           2000

INS365 Respiratory for Chronic Bronchitis

INS365 Respiratory is being developed in an inhaled form for the treatment of chronic bronchitis. We have conducted three Phase I clinical trials of INS365 Respiratory, and one is ongoing. These trials have evaluated the safety and preliminary efficacy of INS365 Respiratory in healthy volunteers, chronic smokers who are at a high risk for developing chronic bronchitis and cystic fibrosis patients with airflow obstruction. In total, these studies enrolled approximately 200 subjects. These studies have indicated that INS365 Respiratory was well tolerated and significantly enhanced mucus clearance when compared to placebo. One of these studies, conducted in 35 chronic smokers, indicated that INS365 Respiratory in single inhaled doses significantly enhanced clearing of mucus from the lungs, which occurred rapidly following dosing. This effect was dose-related and was significantly greater than mucus cleared from lungs following inhalation of a saline placebo; the results were statistically significant. We have conducted a series of good laboratory practice toxicology studies, including 28-day inhalation studies, which, together with the Phase I data, will allow us to progress INS365 Respiratory into a Phase II program.

We are planning, in consultation with our strategic partner, Genentech, to initiate a Phase IIa clinical study in patients with chronic bronchitis in the second half of 2000. This trial is being designed to be a multi-center study and would enroll patients with mild to moderate chronic bronchitis. We intend to dose patients for up to one month using standard air-jet nebulizers. The clinical efficacy measures in this study are intended to include respiratory symptoms, health status, quality of life using a validated respiratory questionnaire, lung function and adverse events. Kissei, our partner in Japan, filed a Japanese IND for INS365 Respiratory in December 1999 and initiated a Phase I clinical trial in smokers and non-smokers.

We have developed a drug delivery strategy for INS365 Respiratory based on segmenting the chronic bronchitis patient population by severity of disease-- mild, moderate and severe. We anticipate that each segment may have different drug delivery needs based on convenience, ease of use, and degree of patient mobility, such as whether the patient is working, homebound or hospitalized. In recognizing this variety of

32

needs, we are exploring various delivery options which will allow for flexibility in dosing across the various segments of the chronic bronchitis market. One option will be plastic unit-dose vials that are used with a standard air-jet nebulizer system. Another approach, a novel, hand-held, portable delivery system, has been evaluated in a radio-labeled lung deposition study in 12 healthy volunteers. Results from this study suggest that this novel system can be used to deliver a small volume of concentrated INS365 Respiratory in one to two breaths providing rapid delivery in a convenient manner to patients. We have recently initiated an additional study of this hand-held delivery system in 12 chronic smokers to evaluate the lung deposition profile of INS365 Respiratory and its effect on mucociliary clearance. This study is expected to be completed in the first half of 2000. These studies are being conducted to assist our strategic partners to demonstrate that this product can be delivered in a more convenient device.

In September 1998, we entered into a joint development, license and supply agreement with Kissei through which Kissei received exclusive rights to develop and market INS365 Respiratory for respiratory therapeutic indications in Japan. In December 1999, we entered into a development, supply and license agreement with Genentech to develop P2Y\\2\\ agonists, including INS365 Respiratory, for respiratory diseases, including chronic bronchitis, throughout the world outside Japan. See "--Corporate Collaborations."

INS37217 Respiratory for Cystic Fibrosis

INS37217 Respiratory is a second-generation P2Y\\2\\ agonist with an extended duration of action. This product is highly stable in the mucous secretions of cystic fibrosis patients making it an attractive product candidate for this disease. The previous studies we have conducted with INS365 Respiratory provide the scientific rationale for the use of INS37217 Respiratory for cystic fibrosis. We have completed a number of key preclinical studies and we intend to initiate an inhalation toxicology program in March 2000. Pending the toxicology study results, all of these preclinical studies will provide support for the filing of an IND and the initiation of clinical studies. We intend to initiate a Phase I clinical trial for the development of INS37217 Respiratory for cystic fibrosis in the second half of 2000. We intend to develop INS37217 Respiratory for cystic fibrosis as a chronic use agent in an inhaled form using both a standard air-jet nebulizer and a novel, portable inhaler.

INS37217 Respiratory is designed to enhance the lung's innate mucosal hydration and mucociliary clearance mechanisms, which in cystic fibrosis patients are impaired by a genetic defect. By hydrating airways and stimulating mucociliary clearance through stimulation of the P2Y\\2\\ receptor, we expect that INS37217 Respiratory will help keep the lungs of cystic fibrosis patients clear of thickened mucus, reducing infections and the damage that occurs as a consequence of the retention of thick and tacky infected secretions. We further believe that these effects may result in reduced frequency and length of hospitalizations, reduced need for antibiotics and other medications, reduced deterioration of respiratory function, and improved respiratory symptoms and quality of life. In addition, this product is expected to be complementary with the two approved products, Pulmozyme(R) and TOBI(R), neither of which affects the underlying ion-transport defects in cystic fibrosis airways.

We expect to receive orphan drug status and an accelerated regulatory approval process for INS37217 Respiratory for the treatment of cystic fibrosis. In December 1999, we entered into a co-development partnership with Genentech to develop P2Y\\2\\ agonists for respiratory diseases, including cystic fibrosis, throughout the world outside Japan. See "--Corporate Collaborations."

P2Y\\2\\ Agonist for Sinusitis

We plan to select, in collaboration with Genentech, an existing P2Y\\2\\ agonist for development to treat sinusitis, an infectious and inflammatory condition of the nose and sinuses that often results in painful flare-ups of the illness. We believe that increasing mucociliary clearance in the nose and sinuses with a P2Y\\2\\ receptor agonist may be beneficial for treating this condition. Clinical studies with other P2Y\\2\\ agonists such as INS316 have already shown that these agents open ion channels in the nasal mucosa thus hydrating this surface. It is expected that P2Y\\2\\ agonists will also stimulate mucociliary clearance in the sinuses. We estimate that sinusitis

33

affects approximately 12% of the U.S. adult population, or approximately 25 million adults. The current market consists of both over-the-counter and prescription treatments. Our research and development of drug candidates in this area depends on our collaboration with Genentech. See "--Corporate Collaborations."

INS316 for Respiratory Diagnostics

INS316 Diagnostic, a P2Y\\2\\ agonist with a short duration of action, is being developed as an acute-use inhaled solution to stimulate enhanced clearing of mucus from the lungs and serve as a drug that assists in diagnostic tests for diagnosing lung diseases and lung infections, called a diagnostic adjunct. We have conducted four clinical trials to evaluate INS316 Diagnostic's utility as an acute use agent. These clinical studies have demonstrated that INS316 Diagnostic is well tolerated and appears to enhance the ability of patients to produce rapidly an adequate deep-lung specimen. These studies were conducted in healthy volunteers, as well as chronic smokers and patients with chronic bronchitis who are at a high risk for developing lung cancer and lung infections.

INS316 Diagnostic has been administered by inhalation to more than 300 patients during such clinical trials, and has been well tolerated in these trials. INS316 Diagnostic's safety profile is based on studies including non- smokers, smokers and patients with obstructive lung diseases, and on the results of good laboratory practice, genotoxicity and 28-day inhalation toxicology studies. We believe that INS316 Diagnostic is rapidly degraded in blood and plasma and, so has minimal systemic absorption. Therefore, the potential for unwanted side effects is minimized.

These studies have also demonstrated that single inhaled doses of INS316 Diagnostic significantly enhance clearing of mucus from the lungs relative to that following administration of normal saline solution. These effects occurred within a few minutes following dosing and were dose-related. Specimens obtained from individuals exposed to INS316 Diagnostic were found to be highly enriched with cell types characteristic of deep lung secretions, including alveolar macrophages and ciliated epithelial cells, when compared to samples from individuals exposed to a placebo. These findings were statistically significant. In a trial in 25 patients with chronic bronchitis who are at high risk for lung cancer, 90% of the patients produced an adequate deep-lung specimen following INS316 Diagnostic inhalation versus only 25% following inhalation of a placebo. These study results were statistically significant. Based on these encouraging results, we have discussed our Phase III plans with the pulmonary division of the FDA. We plan to initiate a Phase III clinical trial program to evaluate the efficacy of INS316 Diagnostic to improve the diagnostic outcome in lung cancer in the second half of 2000.

INS365 Ophthalmic for Dry Eye Disease

INS365 Ophthalmic is being developed as a topical eye drop for the treatment of dry eye disease. A series of good laboratory practice ocular toxicology studies have been completed to support the ongoing clinical program. In preclinical testing, topically applied INS365 Ophthalmic produced a consistent, statistically significant increase in tear secretion, relative to that produced by normal saline controls. INS365 Ophthalmic has also enhanced mucin secretion on the ocular surface in several preclinical models. Many of these studies were conducted by our Asian partner, Santen. The preclinical study results were statistically significant in multiple relevant dry eye models.

We have completed one Phase I clinical trial in 50 healthy subjects and demonstrated good ocular safety and tolerability. We have completed the safety portion of a Phase IIa study in 35 patients with mild to moderate dry eye. This study also showed the product to be well tolerated. A multi-center Phase IIb clinical trial was initiated in the United States in January 2000 and will enroll up to 150 patients with dry eye disease. Patients will be treated with multiple-daily doses of placebo (saline drops) or INS365 Ophthalmic for up to four weeks. Clinical efficacy measures include ocular comfort, patient diary cards, rescue with artificial tears, corneal staining and tear-secretion. We anticipate that this study will be completed in the second half of 2000.

34

In December 1998, we entered into a joint development, license and supply agreement with Santen in Asia. Santen is a premier ophthalmic company and markets the only approved prescription product for dry eye disease in Japan. Santen intends to file an IND with Japanese regulatory authorities and begin clinical trials in late 2000. See "--Corporate Collaborations."

INS37217 Ophthalmic for Retinal Detachment

INS37217 Ophthalmic, a second-generation proprietary P2Y\\2\\ receptor agonist, is being developed as a sterile intravitreal injection for the treatment of retinal detachment, a separation of the retina from the eye. Retinal detachment occurs when fluid accumulates between the retina and the underlying retinal epithelium. We estimate, based on an extrapolation from United States data, that retinal detachment affects approximately 200,000 people in the eight major international prescription pharmaceutical markets. This condition leads to loss of vision, and when left untreated, often results in permanent damage to the retina, a sensory organ at the back of the eye that is responsible for vision, and irreversible blindness. Previous work conducted in vitro has shown that the retinal pigment epithelium contains P2Y\\2\\ receptors at the retinal-facing membrane, which can be stimulated by appropriate agonists to enhance fluid absorption across the retinal pigment epithelium. Subsequent work conducted in vivo has demonstrated the ability of INS37217 Ophthalmic to facilitate the reattachment of the retina to the retinal pigment epithelium in various animal models of retinal detachment. Retinal detachment in humans may result from several ophthalmic diseases, ocular trauma, or side-effects from invasive intraocular surgery. There is currently no pharmaceutical treatment for retinal detachment.

We have completed a series of preclinical studies with INS37217 Ophthalmic and have initiated intravitreal toxicology to support initiation of clinical studies in 2000. We intend to file an IND with the FDA and initiate clinical testing in patients in the second half of 2000.

Corporate Collaborations

Genentech, Inc.

In December 1999, we entered into a collaboration with Genentech to develop treatments for respiratory disorders, including chronic bronchitis, cystic fibrosis and sinusitis. Under the terms of the agreement, we granted an exclusive license to Genentech for the use of INS365 Respiratory and our other related P2Y\\2\\ agonists existing on the date of the agreement for all human therapeutic uses for the treatment of respiratory tract disorders throughout the world, excluding Japan. In addition, Genentech has an exclusive license for the use of INS365 Respiratory and such existing P2Y\\2\\ agonists for all human therapeutic uses for the treatment of sinusitis and middle ear infection worldwide. Finally, Genentech has the right to use related P2Y\\2\\ agonists we discover and develop during the term of the agreement upon reimbursing us for discovery costs or funding our discovery efforts leading to those compounds. However, even if Genentech does not reimburse or fund our discovery efforts, we have agreed not to develop any such P2Y\\2\\ agonist for use in the therapeutic respiratory field during the term of our agreement.

We have established joint project teams to oversee and coordinate the joint development programs and a joint steering committee to establish the strategy and manage the relationship. Under the terms of the agreement, we provide bulk active drug substance to Genentech for its requirements, at an agreed-upon price, through the end of Phase II. After Phase II, Genentech is responsible for obtaining or manufacturing all of its bulk active drug substance requirements.

We received an up-front payment of $15 million, comprising a non-refundable cash license fee, funding for the Phase IIa clinical trials for chronic bronchitis and the purchase of our Series G preferred stock. In addition, depending on whether all milestones in each of the chronic bronchitis, cystic fibrosis and sinusitis

35

development programs are met, we could receive additional payments of up to $63 million. Genentech is required to pay us royalties on net sales of products licensed under the agreement.

In the United States, we will lead the early clinical development of INS37217 Respiratory for the treatment of cystic fibrosis through the end of Phase II clinical trials. We then have the option to continue to co-fund the development of the product in the United States in exchange for a share of United States operating profits instead of royalties. In addition, we have the option, any time before Genentech initiates pre-launch activities, to choose to co-promote the product in the United States at our own expense.

We are responsible for conducting, in collaboration with Genentech, the Phase IIa clinical trials for INS365 Respiratory for chronic bronchitis. We will also lead the preclinical program for a P2Y\\2\\ agonist selected by the joint steering committee for the treatment of sinusitis, and will be responsible for filing the IND for such compound. We expect our development obligations under the agreement to be completed by the end of 2001.

Genentech is responsible for all other development conducted under the agreement, including all development outside the United States, and for all other regulatory submissions, filings and approvals relating to products. Genentech is required to use commercially reasonable efforts to conduct development, seek regulatory approvals and market and sell the products.

The agreement will be in effect until all patents licensed under the agreement have expired. If we exercise our option to co-fund the development of INS37217 Respiratory for the treatment of cystic fibrosis, then the agreement will remain in effect for those products in the United States until the products are no longer being marketed in the United States. Either Genentech or we may terminate the agreement if the other materially breaches the agreement. In addition, Genentech has the right, by giving us 150 days prior notice, to terminate the agreement at any time. If Genentech breaches the agreement or terminates the agreement early other than for our breach, Genentech's license will terminate, Genentech must provide us with all data and information relating to our products, and Genentech must assign or permit us to cross- reference all regulatory filings and approvals.

Kissei Pharmaceutical Co., Ltd.

In September 1998, we entered into a Joint Development, License and Supply Agreement with Kissei for the development of INS365 Respiratory for all therapeutic respiratory applications, excluding sinusitis and middle ear infection, in Japan. We granted Kissei an exclusive license to INS365 Respiratory in the field in Japan and a first right to negotiate a license to particular P2Y\\2\\ agonists that show utility as inhalation products for respiratory uses in Japan.

We established a joint development committee with Kissei to oversee the development program, approve development plans, protocols and studies, and review and approve all regulatory submissions and filings. In consultation with Kissei, we are responsible for formulation of the compound and the design of the delivery system to be used. We are also responsible, through the use of development and manufacturing liaisons, for coordinating and facilitating communications among our corporate partners for the worldwide development and manufacture of INS365 Respiratory. Kissei is responsible for all development of the compound and all regulatory filings.

We received an up-front payment of $4.5 million, which included the purchase of our Series C preferred stock. In addition, depending on whether all milestones are met, we could receive additional payments of up to $13 million, as well as royalties on net sales of licensed products. To date, we have received $2.1 million in milestone payments. We also are receiving funding for development and manufacturing liaison staff positions.

We are obligated to supply Kissei with its requirements of INS365 Respiratory in bulk drug substance and in an inhalation formulation for all preclinical trials conducted by Kissei. In addition, we are obligated to supply Kissei with its requirements of finished product contained in a vial or nebule and in a delivery system approved by the joint development committee for all clinical trials to be conducted by Kissei. Kissei will pay us an agreed-upon transfer price for all such supplies. We have also agreed to negotiate a commercial supply arrangement with Kissei at the appropriate time to supply Kissei's requirements of finished product and the delivery system.

36

The agreement will terminate when all patents licensed under the agreement have expired. Either Kissei or we may terminate the agreement if the other materially breaches the agreement. In addition, Kissei has the right, by giving us three months' prior notice, to terminate the agreement at any time if Kissei determines that continued development or marketing of the product is scientifically or economically infeasible. If Kissei breaches the agreement or terminates the agreement early other than for our breach, Kissei's license will terminate, Kissei will provide us with all data and information relating to our products, and Kissei will assign or permit us to cross-reference all regulatory filings and approvals,

Santen Pharmaceutical Co., Ltd.

In December 1998, we entered into a Development, License and Supply Agreement with Santen for the development of INS365 Ophthalmic for the therapeutic treatment of ocular surface diseases, such as dry eye disease, in Asia. Under the agreement, we granted Santen an exclusive license to market INS365 Ophthalmic for ocular surface diseases in Japan, China, South Korea, the Philippines, Thailand, Vietnam, Taiwan, Singapore, Malaysia and Indonesia.

We established a coordinating committee to review and evaluate Santen's progress in the development and commercialization of products and to provide input and recommendations regarding the development of the products. Santen is responsible for all development, regulatory submissions, filings and approvals, and all marketing of products. We are obligated to supply Santen with its requirements of INS365 Ophthalmic in bulk drug substance form for all preclinical studies, clinical trials and commercial requirements at agreed-upon prices.

Under the terms of the agreement, we received an up-front equity investment of $1.5 million in our Series D preferred stock. In addition, depending on whether all milestones are met, we could receive additional payments of up to $4.75 million, as well as royalties on net sales of licensed products.

The agreement will terminate when all patents licensed under the agreement have expired. Either Santen or we may terminate the agreement if the other materially breaches the agreement. In addition, we have the right to terminate the agreement at any time if we determine, subject to the coordinating committee's review and arbitration, that Santen has not made reasonably sufficient progress in the development or commercialization of products. If Santen breaches the agreement, or if we terminate the agreement because Santen has not made sufficient progress, Santen's license will terminate, and Santen will provide us with all data and information relating to our products, and will assign or permit us to cross-reference all regulatory filings and approvals.

Discovery

Our scientists have specific expertise and proprietary knowledge relating to the design and synthesis of P2Y receptor agonists, and we have invested heavily in state-of-the-art equipment and laboratory space for performing synthetic chemistry, determination of compound structure and molecular modeling. We have acquired, by licenses and/or material transfer agreements, rights to three of the five unique human P2Y receptors that have been functionally expressed. We have cloned and expressed the other two receptors in-house.

Our discovery effort is primarily focused on conducting studies using our proprietary cell-based MUCOSA(TM) assay system, a cell-based assay that measures activities caused by stimulation of P2Y receptors, to identify novel compounds that specifically and selectively bind to members of the P2Y receptor family. The MUCOSA high-throughput assay enables us to identify agonists and antagonists that act at specific receptor subtypes and have demonstrated a level of specificity and activity that merits further investigation. We use data from the assays to design and synthesize compounds specific to each P2Y receptor subtype which can be advanced to clinical trials.

37

By screening against several P2Y receptor subtypes, we have been able to identify agonists and/or antagonists that interact preferentially with a specific receptor subtype. Several proprietary discovery compounds, including new chemical entities, with promising stability and metabolic profiles, are being actively explored. We intend to conduct further preclinical development studies to advance such proprietary compounds to project status, if appropriate. These compounds will then be targeted to the treatment of new disease areas, as identified through our strategic planning process.

We obtain access to chemical libraries through our own proprietary combinatorial chemistry, commercial sources, and corporate agreements. The chemicals are screened for both agonist and antagonist activity. Our chemistry department also assists in the development of analytical protocols used by contract service organizations for analysis of a drug substance, clinical trials material, and drug stability studies which will be incorporated into IND and new drug application (NDA) filings.

We use sponsored research agreements to investigate specific biological processes to augment our technology platform. We are currently sponsoring research at major universities, including The University of North Carolina at Chapel Hill, Columbia University, the University of Southern California, Duke University, Schepens Eye Research Institute and Brigham and Women's Hospital.

Patents and Proprietary Rights

We believe that the proprietary protection of our product candidates, processes and know-how is important to the success of our business. We aggressively file and prosecute patents covering our proprietary technology, and, if warranted, will defend our patents and proprietary technology. As of December 31, 1999, we owned or licensed patent rights consisting of 17 issued United States patents, none of which expire before 2011, and thirteen pending applications in the United States and numerous corresponding patents and patent applications in foreign jurisdictions. We seek patent protection for our proprietary technology and products in the United States and Canada and in key commercial European and Asia/Pacific countries and other major commercial sectors of the world, as appropriate. We intend to seek protection in the United States and foreign countries trademarks from time to time. We also rely upon trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain our competitive position.

In March 1995 and September 1998, we entered into two agreements with The University of North Carolina at Chapel Hill granting us exclusive worldwide licenses to develop, make, use and sell products based on UNC patented technology relating to the use of P2Y\\2\\ receptor agonists for respiratory therapeutics, such as INS365 Respiratory, and respiratory diagnostics, such as INS316 Diagnostic. The United States government may have limited rights in some of this UNC patented technology. We also entered into a third agreement that granted us a non-exclusive worldwide license to use other UNC patented technology as a research tool to identify agonists and antagonists for P2Y receptors. The agreements require us to pay licensing fees upon the attainment of development milestones and royalties on net sales or a share of sublicensing income on products covered by the patents. We are also required to meet due diligence milestones and UNC may terminate the licenses if we fail to do so. In connection with the licenses, we issued to UNC an aggregate of 326,286 shares of our common stock, of which 128,610 shares have been transferred to the inventors of the licensed UNC patented technology. We have also entered into consulting agreements with some of the inventors of these technologies, all of whom are from The University of North Carolina at Chapel Hill, including Dr. Richard C. Boucher, one of our founders and a member of our Board of Directors, M. Jackson Stutts, Kendall Harden and Michael Knowles, in which they agreed to consult with us regarding their respective fields of knowledge.

Additional patent applications have since been filed on discoveries made in support of such technologies, from research conducted at The University of North Carolina at Chapel Hill or in our own laboratories. Our sponsored research agreements, material transfer agreements, and other collaborations have the potential to result in license agreements with universities, institutes, and businesses. We believe that our patents and licensed patents provide a substantial proprietary base that will allow us, and our collaborative partners, to exclude others from conducting our business as described in this prospectus and as encompassed by our issued patents and issued patents licensed to us. We cannot be sure, however, that pending or future applications will

38

issue, that the claims of any patents which do issue will provide any significant protection of our technology, or that our directed discovery research will yield compounds and products of therapeutic and commercial value.

Our competitors or potential competitors may have filed for or have received U.S. and foreign patents and may obtain additional patents and proprietary rights relating to compounds or processes which may compete with our product candidates. Accordingly, there can be no assurance that our patent applications will result in patents being issued or that, if issued, the claims of the patents will afford protection against competitors with similar technology; nor can we be sure that others will not obtain patents that we would need to license or get around.

Manufacturing and Supply

We do not engage in, and do not expect to engage in, the manufacture of bulk active pharmaceutical ingredient for preclinical, clinical or commercial purposes. We rely on a contract manufacturing supply agreement with a single manufacturer for the development stage production of INS316 and INS365. We have identified an alternative supplier as a backup. We have already obtained clinical trial grade material of both products from both the lead and backup supplier. In addition, we expect the same lead manufacturer will supply commercial quantities of INS316 and INS365 for both respiratory and ophthalmic applications. We believe this lead manufacturer is capable of producing sufficient quantities for commercial purposes within current good manufacturing practices. In addition, we have obtained preclinical supplies of INS37217 for both respiratory and ophthalmic applications from the same lead manufacturer and we have discussed entering into an agreement for the clinical supply of INS37217. See "Risk Factors--If we are unable to contract with third parties for synthesis and manufacturing of our product candidates for preclinical testing and clinical trials and for large scale manufacturing of any of our drug candidates, we may be unable to develop or commercialize products."

We currently obtain all of our bulk active ingredient for INS316, INS365 and INS37217 from Yamasa Corporation, in Choshi, Japan, but the first two are also available from other fine chemical manufacturers. In addition to the bulk active ingredient, our products are made up of sodium chloride, sodium hydrochloric acid and sterile water, all of which are readily available from numerous sources. Our products are packaged in unit-dose vials, which we obtain from Automatic Liquid Packaging of Woodstock, Illinois, but these vials are also available from other commercial filling and packing companies.

Competition

Many drug companies engage in research and development to commercialize products to treat chronic bronchitis, cystic fibrosis, dry eye disease and other diseases that we are researching. We compete with these companies for funding, access to licenses, personnel, third-party collaborators and product development. Almost all of these companies have substantially greater financial, marketing, sales, distribution and technical resources, and more experience in research and development, clinical trials and regulatory matters, than we do. We are aware of existing palliative treatments that will compete with our products.

We believe that several major pharmaceutical companies have initiated research programs to design P2Y receptor agonists or antagonists; however, we are not aware of any competing P2Y\\2\\ receptor agonists that have entered clinical testing. If successfully developed and commercialized, our products will compete with existing therapeutics and improved versions of these treatments.

The current therapeutic approaches used in the treatment of chronic bronchitis are palliative and are aimed primarily at reducing airway inflammation, respiratory infections and airflow obstruction. These approaches include corticosteroids and other anti-inflammatory agents, bronchodilators and antibiotics. We are aware of many anti-inflammatory agents, including Azmacort(R), Beclovent(R) and antibiotics such as Biaxin(R), and Zithromax(R). We believe that other anti-inflammatory agents are in development. Numerous bronchodilators are also on the market, including among others generic albuterol, Alupent(R), Proventil(R), Ventolin(R), Serevent(R), and

39

Theo-Dur(R). Outside of the United States, mucolytics, agents that liquefy or reduce the viscoelastic consistency of mucus, are widely used even though they have shown minimal efficacy in well-controlled trials.

Although we believe that none of the therapeutic approaches described above address the underlying problem of excessive retained mucus and impaired mucociliary clearance, drugs based on other therapeutic mechanisms may be efficacious in treating respiratory diseases. The development by others of treatments that are not related to our mucociliary clearance approach could render our product candidates non-competitive or obsolete.

There are two products approved in the United States specifically for the treatment of cystic fibrosis: Pulmozyme(R), an agent designed to break up thickened airway secretions, and TOBI(R), an inhaled antibiotic. Pulmozyme(R) is marketed by Genentech, which is one of our collaborative partners.

The current prescription and non-prescription treatments for dry eye disease include primarily artificial tear replacement therapy or lubricant drops. The only prescription pharmacological agent in late-stage clinical trials for dry eye is Restasis(R) from Allergan. We are aware of early clinical trials with various other potential products as possible alternative modes of therapy.

Governmental Regulation

The research, development, testing, manufacture, promotion, marketing and distribution of human therapeutic and diagnostic products are extensively regulated by government authorities in the United States and other countries. In the United States, the FDA regulates drugs and diagnostic products and similar regulatory bodies exist in other countries. The steps ordinarily required before a new drug may be marketed in the United States, which are similar to steps required in most other countries, include:

. Preclinical laboratory tests, preclinical studies in animals and formulation studies and the submission to the FDA of an IND for a new drug;

. Adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for each indication;

. The submission of an NDA to the FDA; and

. FDA review and approval of the NDA before any commercial sale or shipment of the drug.

Preclinical tests include laboratory evaluation of product toxicity and formulation, as well as animal studies. The results of preclinical testing are submitted to the FDA as part of an IND. A 30-day waiting period after the filing of each IND is required before the commencement of clinical testing in humans. At any time during this 30-day period or later, the FDA may halt proposed or ongoing clinical trials until the FDA authorizes trials under specified terms. The IND process may be extremely costly and substantially delay development of our products. Moreover, positive results of preclinical tests will not necessarily indicate positive results in clinical trials.

Clinical trials to support NDAs are typically conducted in three sequential phases, but the phases may overlap. During Phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated with increasing doses. Phase II usually involves studies in a limited patient population to:

. Assess the efficacy of the drug in specific, targeted indications;

. Assess dosage tolerance and optimal dosage; and

. Identify possible adverse effects and safety risks.

If a compound is found to be potentially effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials, also called pivotal studies, major studies or advanced clinical trials, are undertaken

40

to further demonstrate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical study sites.

After successful completion of the required clinical testing, generally a NDA is submitted. The FDA may request additional information before accepting a NDA for filing, in which case the application must be resubmitted with the additional information. Once the submission has been accepted for filing, the FDA has 180 days to review the application and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the NDA to an appropriate advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee.

If FDA evaluations of the NDA and the manufacturing facilities are favorable, the FDA may give us either an approval letter or an approvable letter. An approvable letter will usually contain a number of conditions that must be met in order to secure final approval of the NDA and authorization of commercial marketing of the drug for particular indications. The FDA may refuse to approve the NDA or give us a non-approvable letter, outlining the deficiencies in the submission and often requiring additional testing or information. If regulatory approval of a product is granted, it will be limited to particular disease states or conditions.

We and any of our contract manufacturers are also required to comply with the applicable FDA current good manufacturing practice regulations. Good manufacturing practice regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA. These facilities must be approved before we can use them in commercial manufacturing of our products. Our contract manufacturers or we may not be able to comply with the applicable good manufacturing practice requirements and other FDA regulatory requirements.

Outside the United States, our ability to market our products will also depend on our receipt of marketing authorizations from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country. At present, foreign marketing authorizations are applied for at a national level, although within Europe procedures are available to companies wishing to market a product in more than one European Union member state. If the regulatory authority is satisfied that adequate evidence of safety, quality and efficacy has been presented, a marketing authorization will be granted. This foreign regulatory approval process, including those in Europe and Japan, involves all of the risks associated with FDA clearance discussed above.

Employees

As of the date of this prospectus, we have 30 full-time employees, 16 of whom are involved in our drug discovery and preclinical programs, eight of whom are engaged in development programs, and six of whom are involved in administrative activities. Thirteen of our employees hold a Ph.D., Pharm.D. or M.D. degree. In addition, we utilize part-time employees and outside contractors and consultants as needed. Employees are required to execute a confidentiality and assignment of trade secrets agreement. Our employees are not represented by a labor union and we believe that our relations with employees are good.

Facilities

We lease facilities that comprise approximately 17,500 square feet in Durham, North Carolina adjacent to the Research Triangle Park, through several leases. The leases expire in August 2003, May 2003 and December 2003 and are renewable. We anticipate having sufficient space to allow for all potential expansionary needs over the next two years.

Legal Proceedings

We are not a party to any material legal proceedings.

41

Scientific Advisory Board

We are advised by an international scientific advisory board currently composed of eight members with expertise in the fields of statistics, molecular biology, genetic research and medicine. We meet periodically with our scientific advisory board to review and discuss specific projects with those members who are experts in the subjects being discussed. In addition, we may consult individual board members as to matters in their respective areas of expertise. Our scientific advisory board currently is composed of the following individuals:

Richard Boucher, M.D. is the Chairman of the Scientific Advisory Board. See "Management--Executive Officers and Directors."

Dennis Ausiello, M.D. is Chief of Medicine at Massachusetts General Hospital, and Professor of Medicine at Harvard Medical School. He is an internationally recognized expert in the cell biology of ATP receptors, sodium ion channels and water channels.

Carol Basbaum, Ph.D. is Professor of Anatomy at the University of California at San Francisco and is an expert in lung mucin production. Her interests focus on both the biology of the mucin secretory cell in the lung and the regulation of mucin gene expression. A particular interest has been bacterial pathogen- mucin gene regulatory interactions.

Geoffrey Burnstock, D.Sc. is Director, Autonomic Neuroscience Institute, and Professor, Department of Anatomy and Developmental Biology, Royal Free Hospital School of Medicine. He originally conceived the idea of purinergic nerves and receptors for extracellular adenine nucleotides. He is the leader of the purinergic receptor field. He is the recipient of many international awards and is a fellow of the Royal Society.

Jeffrey Drazen, M.D. is Chief of the Pulmonary and Critical Care Division of the Brigham and Women's Hospital and the Parker B. Francis Professor of Medicine, Harvard Medical School. He is an expert in the field of lung diseases, with particular expertise in the pathogenesis/genetics of asthma and clinical trial design.

Mark Leppert, Ph.D. is Associate Professor, Eccles Institute of Human Genetics, University of Utah. He is a geneticist/molecular biologist. He is a central figure in the internationally recognized University of Utah human genome effort. His particular interest is mapping human diseases to define the molecular basis of human disease.

Lee Limbird, Ph.D. is Associate Vice Chancellor for Research, Vanderbilt University Medical Center, Professor of Pharmacology and Chair, Department of Pharmacology Vanderbilt University. Her research has focused on the structure and function of G-protein coupled receptors with particular emphasis on adrenergic receptors. A current interest is delineation of the molecular basis of membrane targeting of receptors in polarized cells. She was awarded the John Jacob Abel Award given to the most outstanding young pharmacologist in 1987.

David Westfall, Ph.D. is Vice President, Academic Affairs, University of Nevada-Reno and Professor of Pharmacology, University of Nevada School of Medicine. He has been a leader in physiological and pharmacological studies of purinergic receptors for the last two decades. His research includes a major interest in purinergic receptors in the nervous system and on smooth muscle of the urinary tract.

Other Advisory Committees

In addition to our scientific advisory board, we have a chronic bronchitis advisory board, a cystic fibrosis advisory board and a critical care advisory board. These committees consist of clinical experts in their respective fields.

42

MANAGEMENT

Executive Officers and Directors

Our executive officers and directors as of the date of this prospectus are as follows:

Name                                     Age              Position
----                                     ---              --------
Christy L. Shaffer, Ph.D................ 42  President, Chief Executive
                                             Officer and Director
Gregory J. Mossinghoff.................. 39  Chief Business Officer, Secretary
                                             and Treasurer
Donald J. Kellerman, Pharm.D. .......... 45  Vice President, Development
Benjamin R. Yerxa, Ph.D................. 34  Vice President, Discovery
Janet L. Rideout, Ph.D(1)............... 61  Senior Vice President, Discovery
Terrance G. McGuire..................... 44  Chairman of the Board
Richard Boucher, M.D. .................. 55  Director
Andre L. Lamotte, Sc.D. ................ 51  Director
H. Jefferson Leighton, Ph.D. ........... 54  Director
W. Leigh Thompson, M.D., Ph.D., D.Sc. .. 61  Director
Jesse I. Treu, Ph.D. ................... 53  Director


(1) Dr. Rideout has informed us that she will retire following this offering. However, Dr. Rideout has agreed to serve as a consultant for a period of at least a year.

Following are brief descriptions of our current executive officers and directors:

Christy L. Shaffer, Ph.D. has served as our President, Chief Executive Officer and as a director since January 1999. Dr. Shaffer joined us in June 1995 as our first full time employee, Director, Clinical Operations, was promoted to Senior Director, Development in June 1996 and to Vice President, Development and Chief Operating Officer in January 1998. Dr. Shaffer has over ten years of experience in drug development within the pharmaceutical industry. She previously served in a variety of positions in the clinical research division of Burroughs Wellcome Co. including Associate Director of pulmonary research in the department of pulmonary/critical care medicine during the period from February to June 1995. Dr. Shaffer coordinated several IND submissions and one NDA submission at Burroughs Wellcome. Dr. Shaffer received a Ph.D. in pharmacology from the University of Tennessee and completed two years of postdoctoral training in cardiovascular research in the Biochemistry Department at the Chicago Medical School before her postdoctoral appointment at UNC.

Gregory J. Mossinghoff has served as our Chief Business Officer since December 1999. Mr. Mossinghoff joined us in June 1998 as our Senior Director of Strategic Planning and Operations and was promoted to Vice President, Corporate Development in January 1999. Mr. Mossinghoff has also served as our Secretary since October 1998, and as our Treasurer since March 2000. In his current role he helps us develop and realize strategic objectives, expand our corporate partnerships in the United States and abroad, and oversee all business-related activities including operations and finance. Before joining us, from February 1996 to June 1998, Mr. Mossinghoff was worldwide Director of Business Analysis at Glaxo Wellcome plc, with specific responsibility for the CNS therapeutic area. Before joining Glaxo Wellcome, Mr. Mossinghoff held various roles with increasing responsibility at Hoffmann LaRoche Inc., from June 1988 to February 1996, including Manager, Business Development and Strategic Planning from 1994 to 1996. Mr. Mossinghoff received a BA degree in Economics from the University of Virginia, Charlottesville, VA and an MBA in Financial Management & Analysis from George Mason University, Fairfax, VA.

Donald J. Kellerman, Pharm.D. has served as our Vice President, Development since July 1999. He is responsible for all of our clinical development programs and regulatory affairs. Before joining us, Dr. Kellerman spent 11 years with Glaxo Wellcome, from August 1997 to July 1999 and from April 1988 to

43

August 1996, where he was Director of various groups, including International OTC, U.S. Infectious Diseases, and the Inhaled Corticosteroid Group. He was clinical project leader for Flovent(R) from first U.S. clinical studies in 1989 to approval in 1996. From September 1996 to August 1997, he was Vice President of Clinical Research at Sepracor, where he was project leader for the Xopenex(R) NDA team. Before Glaxo Wellcome, Dr. Kellerman worked at E.R. Squibb and Sons and Ciba-Geigy on several cardiovascular products. Dr. Kellerman holds a Doctor of Pharmacy and Bachelor of Science degree from the University of Minnesota.

Benjamin R. Yerxa, Ph.D. has served as our Vice President, Discovery since February 2000. Dr. Yerxa joined us in August 1995 and previously held several positions, including Senior Director of Preclinical Programs. He supervises both the Biology and the Chemistry Discovery teams and all early preclinical drug development activities. He created a novel strategic opportunity for us by developing the concept of ophthalmic uses for our core P2Y\\2\\ technology. Before being promoted to the position of Senior Director of Preclinical Programs in December 1999, Dr. Yerxa was Director of Preclinical Programs and, before that, Senior Research Chemist. While in chemistry, he served as the preclinical project leader for INS365. As a Senior Research Chemist his work focused on designing and synthesizing novel P2Y receptor agonists. Before joining us, from October 1993 to August 1995, Dr. Yerxa was a Research Scientist at Burroughs Wellcome Co. Dr. Yerxa worked at Biophysica, Inc. for over two years, synthesizing radiocontrast agents. He developed scale-up procedures for the industrial production of Oxilan, a marketed imaging product. Dr. Yerxa received his Ph.D. in Organic Chemistry from UC Irvine in 1993.

Janet Rideout, Ph.D. has served as our Senior Vice President, Discovery since February 2000. Dr. Rideout joined us in 1995 as Director of Chemistry and was promoted to Senior Director, Discovery, in June 1996 and Vice President, Discovery in January 1998. Before joining us, Dr. Rideout spent more than 26 years at Burroughs Wellcome Co., ultimately serving as associate division director of organic chemistry. Dr. Rideout holds more than 40 patents, most notably as co-inventor for AZT (Retrovir(R)). She is a member of three divisions of the American Chemical Society, the New York Academy of Sciences, the American Association for the Advancement of Science, and a Life Fellow and past member of the board of directors of the American Institute of Chemists. She received the Distinguished Chemist Award from the North Carolina Institute of Chemists in 1994. Dr. Rideout received her Ph.D. in organic chemistry from the State University of New York at Buffalo.

Terrance G. McGuire has served as our Chairman of the Board and a director since October 1993, and is one of our four founders. He currently serves as chairman of the compensation and audit committees of the board and as a member of the nominating committee of the board. He also served as our Treasurer from October 1993 to March 2000. Since March 1986, he has been a founding general partner of Polaris Venture Partners L.P. Since 1992, he has served as a general partner of Alta V Management Partners L.P., which is the general partner of Alta V Limited Partnership, a fund associated with Burr, Egan, Deleage & Co. He is a director of Akamai Technologies, Inc., Aspect Medical Systems, Inc., Wrenchead.com, Inc., Paradigm Genetics, Inc. and several other private healthcare and information technology companies. Mr. McGuire received his B.S. in Physics and Economics from Hobart College, his M.S. in Engineering from Dartmouth College and his MBA from the Harvard Business School.

Richard Boucher, M.D. has served as a director since March 1995, and is a member of our nominating committee. One of our four founders, Dr. Boucher is the William Rand Kenan Professor of Medicine, Chief of Pulmonary Medicine and Director of the Cystic Fibrosis/Pulmonary Research and Treatment Center at The University of North Carolina at Chapel Hill School of Medicine. Dr. Boucher obtained his M.D. degree from Columbia University College of Physicians and Surgeons. Following residency training, he joined the Faculty of Medicine at The University of North Carolina at Chapel Hill in 1977. Dr. Boucher has authored or co-authored more than 200 original research articles and more than 100 additional publications including book chapters. He received the Doris Tulcin and Paul Di Sant'Agnese CF Research Awards and the Julius Comroe Award from The American Physiology Society. He is an established principal investigator with the National Institutes of Health, and is a member of the American College of Physicians and the Association of American Physicians. In recent years, Dr. Boucher has pioneered novel approaches for the treatment of cystic fibrosis.

44

Andre L. Lamotte, Sc.D. has served as a director since October 1993 and is one of our four founders. Dr. Lamotte also currently serves as a member of our nominating committee. In 1989, Dr. Lamotte founded Medical Science Partners, which specializes in early stage life sciences investments in affiliation with Harvard University and has served as the managing general partner since such time. Before founding Medical Science Partners, Dr. Lamotte served as a general manager at Pasteur Merieux from April 1983 to April 1988. He also serves as the managing general partner of Medical Science Partners II, L.P. and Medical Science II Co-Investment, L.P. Dr. Lamotte is a director of Ascent Pediatrics, Inc. Dr. Lamotte holds a Ph.D. in chemistry from the Massachusetts Institute of Technology and an M.B.A. from Harvard University.

H. Jefferson Leighton, Ph.D. has served as a director since October 1993 and is one of our four founders. He served as our President and Chief Executive Officer from October 1993 until December 1995. Dr. Leighton also serves as a member of our audit committee. Dr. Leighton has more than 20 years of experience in large pharmaceutical companies in various research and development positions. More recently, he has founded, reorganized, and merged several small pharmaceutical companies including ICAgen, Exogen, Biodesign, Sphinx, SemaCo. and AdipoGenix.

W. Leigh Thompson, M.D., Ph.D., D.Sc. has served as a director since April 1996. In December 1994 Dr. Thompson retired from Eli Lilly and Co. where he served as chief scientific officer and a member of the management committee. Dr. Thompson has enjoyed a distinguished career in both academic medicine and the pharmaceutical industry and has published extensively, particularly in the area of critical care medicine. He is a member of numerous corporate, academic, and civic boards, and consults in the areas of health informatics, enterprise strategic planning, and related areas. Since 1995, Dr. Thompson has been the Chief Executive Officer of Profound Quality Resources, Inc., a worldwide scientific consulting firm. He is currently a director of Bioanalytical Systems Inc., DepoMed Inc., Orphan Medical Inc., Guilford Pharmaceuticals, Inc., Medarex Inc. and Ophidian Pharmaceuticals Inc.

Jesse I. Treu, Ph.D. has served as a director since March 1995 and is a member of our compensation and audit committees. He is a managing member of Domain Associates, L.L.C. and has served in this or similar capacities with the firm since 1986. He has served as a director of over 20 early-stage companies, eleven of which have so far become public companies. He is currently a director of Focal, Inc., Geltex Pharmaceuticals, Inc., Trimeris, Inc., OraPharma, Inc., and Simione Central Holdings, Inc. Before the formation of Domain, Dr. Treu had 12 years of health care experience at General Electric and Technicon Corporation in a number of research, marketing management and corporate staff positions. Dr. Treu received his B.S. from Rensselaer Polytechnic Institute and his M.A. and Ph.D. degrees in physics from Princeton University.

Director Compensation

Directors do not receive cash compensation for services on the board of directors or any board committee. In 1996, we granted Dr. Thompson an option to purchase 27,428 shares of our common stock at an exercise price of $0.12 per share. In March 2000, we granted each non-employee director an option to purchase 5,714 shares of our common stock at an exercise price equal to the price of our common stock sold in this offering. All such options are subject to conditions relating to vesting and retention for each recipient's participation on the board of directors. All directors are reimbursed for expenses incurred in connection with attendance at board of directors and committee meetings.

Board Committees

Our board of directors has established an audit committee, a compensation committee and a nominating committee. Our audit committee, which consists of Mr. McGuire, as chairperson, Dr. Treu and Dr. Leighton, reviews the results and scope of our annual audit and the services provided by our independent auditors. Our compensation committee, which consists of Mr. McGuire, as chairperson, and Dr. Treu, administers our stock plan and reviews and approves issues and matters concerning the compensation of employees and consultants and the objectives and policies instituted by the board of directors. Our nominating committee, which consists of Mr. McGuire, Dr. Boucher and Dr. Lamotte, reviews the qualifications of and proposes candidates for consideration for election to the board of directors or any committee of the board.

45

Compensation Committee Interlocks and Insider Participation

During the fiscal year ended December 31, 1999, Mr. McGuire and Dr. Treu served as members of our compensation committee. We have never employed any member of the compensation committee of our board of directors. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or our compensation committee of the board of directors. For information on recent purchases of our capital stock by the members of our compensation committee or their respective affiliates, please see the description under the caption "Certain Transactions" included in this prospectus.

Executive Compensation

The following table provides information concerning the annual and long-term compensation for the fiscal year ended December 31, 1999 of (i) our chief executive officer, and (ii) our other executive officers as of December 31, 1999 whose salary and bonus earned during the fiscal year ended December 31, 1999 exceeded $100,000. Following the rules of the Securities and Exchange Commission, the compensation described in the table does not include medical, group life insurance or some other benefits which are available generally to all of our salaried employees. These individuals are referred to as the named officers in other parts of this prospectus.

Summary Compensation Table

                              Annual       Long-Term
                           Compensation   Compensation
                         ---------------- ------------
                                           Securities
Name and Principal                         Underlying
Position                  Salary   Bonus    Options
------------------       -------- ------- ------------
Christy L. Shaffer,      $192,800 $40,000         0
 Ph.D ..................
 President, Chief
 Executive Officer and
 Director
Gregory J.               $139,667 $42,600    71,429
 Mossinghoff ...........
 Chief Business Officer
Janet L. Rideout,        $138,417 $42,600   102,857
 Ph.D ..................
 Senior Vice President,
 Discovery

The following table sets forth information concerning grants of stock options to the named officers during the fiscal year ended December 31, 1999.

Option Grants in Last Fiscal Year

                                                                          Potential
                                     Percentage                        Realizable Value
                                      of Total                         at Assumed Rates
                          Number of   Options                           of Stock Price
                          Securities Granted to                        Appreciation for
                          Underlying Employees  Exercise or              Option Term
                           Options   in Fiscal  Base Price  Expiration ----------------
Name                       Granted      1999     per Share     Date      5%       10%
----                      ---------- ---------- ----------- ---------- ----------------
Christy L. Shaffer,
 Ph.D...................         0       --          --           --       --       --
Gregory J. Mossinghoff..    71,429      18.1%      $0.84     10/12/09   97,734  155,625
Janet L. Rideout,
 Ph.D...................   102,857      26.0%      $0.42     04/06/09   70,368  112,050

The figures above represent options granted under our stock plan. We granted options to purchase 395,000 shares of our common stock in 1999.

46

The options granted to our employees typically vest as to 25% on the first anniversary of the date of grant and as to the remaining 75% in 36 generally equal monthly installments commencing on the first month following the first anniversary of the date of grant. Mr. Mossinghoff's 1999 options vest as to 17,857 shares on October 31, 2000, vest as to an additional 1,489 on the last day of each month for 35 months after that date, and vest as to the remaining 1,471 shares on October 31, 2003. Dr. Rideout's 1999 options vest as to 51,429 shares on April 6, 2000 and as to 51,429 shares on April 6, 2001, except that the options become fully vested upon the closing of this offering. Options granted to the named officers expire 10 years from the grant date.

The potential realizable value represents amounts, net of exercise price before taxes, that may be realized upon exercise of the options immediately before the expiration of their terms assuming appreciation of 5% and 10% over the option term. The 5% and 10% values are calculated based on rules promulgated by the Securities and Exchange Commission and are applied to an assumed initial public offering price of $14.00 per share and do not reflect our estimate of future stock price growth. The actual value realized may be greater or less than the potential realizable value shown in the table.

We have never granted stock appreciation rights.

The following table shows information concerning the value and number of exercisable and unexercisable stock options held by the named officers as of December 31, 1999. The value of unexercised in-the-money options at December 31, 1999 represents an amount equal to the difference between the assumed initial public offering price of $14.00 per share and the option exercise price, multiplied by the number of unexercised options. An option is in-the- money if the fair market value of the underlying shares exceeds the option's exercise price.

Fiscal Year-End Option Values

                                                             Value of Unexercised
                             Number of Unexercised          In-the-Money Options of
                          Options at Fiscal Year-End            Fiscal Year-End
                          ------------------------------   -------------------------
Name                      Exercisable     Unexercisable    Exercisable Unexercisable
----                      -------------   --------------   ----------- -------------
Christy L. Shaffer,
 Ph.D...................          187,946          212,054 $2,536,240    2,963,760
Gregory J. Mossinghoff..           25,201          117,656 $  324,300    1,597,700
Janet L. Rideout,
 Ph.D...................           71,188          104,297 $1,417,236    1,798,964

Stock Plan

We established our stock plan, as amended, for the purposes of attracting and retaining the best available personnel, to provide additional incentive to our employees, officers, directors and consultants and to promote our success. The stock plan provides for the grant of incentive stock options to our employees and the grant of non-qualified stock options and restricted stock to our employees, directors and consultants on such terms and conditions as may be determined by our board of directors or a committee of the board which has general responsibility for the administration of the plan. The powers of our board of directors or a committee, as the case may be, include the determination of which employees and consultants are to receive stock option grants or grants of restricted shares, the exercise price, number of shares, the vesting schedule of the grants, payment methods, and other terms and conditions applicable to such grants. The total number of shares of our common stock authorized for use by the stock plan is 3,428,571. As of March 24, 2000, options to purchase 2,748,089 shares of our common stock were granted (and not subsequently forfeited), of which options to purchase 1,906,241 shares of our common stock were outstanding and options to purchase 841,848 shares had been exercised. The exercise prices of the outstanding options range from $0.12 to $14.00 per share.

The exercise price per share for incentive stock options may not be less than the fair market value of our common stock on the date of grant as determined in good faith by the board of directors; provided, however, in the case of an incentive stock option granted to an individual who owns at least 10% of the total combined

47

voting power of all classes of our capital stock, the exercise price shall be no less than 110% of the fair market value per share on the date of grant. The aggregate fair market value of shares which may be purchased for the first time during any calendar year through the exercise of an incentive stock option granted under the stock plan, or any other incentive stock option plan of the company, may not exceed $100,000, based on such fair market value at the time of grant. Under the stock plan, stock options may be exercisable for up to 11 years, in the case of non-qualified stock options, and for up to 10 years, in the case of incentive stock options.

If we consolidate or merge with another corporation, sell or exchange substantially all of our assets, or are reorganized or liquidated, a holder of an option under the stock plan, upon exercise of the option by the terms of the option, will receive the same shares, securities or property that the optionholder would have received had he or she, immediately before the event described above, held the number of shares of our stock purchasable under the option. Alternatively, our board of directors can choose to cancel unexercised options outstanding under the stock plan by providing optionholders with at least 20 days' advance written notice. Our board of directors also may in its discretion accelerate or waive any deferred exercise period under the option.

The board of directors may amend or terminate the stock plan at any time, subject to any required stockholder approval.

401(k) Profit Sharing Plan

We adopted a 401(k) profit sharing plan for qualified employees, effective August 1, 1995. Subject to some maximum contribution limitations, participants may elect a salary reduction of up to an amount equal to 15% of their respective work compensation. The plan allows us to match participant salary reductions of up to 8% of a participant's work compensation or make other discretionary contributions with respect to participants, neither of which has been done with respect to any period ending on or before December 31, 1999.

Under the 401(k) plan, a participant's interest in our matching or discretionary contributions, if any are made, will become 20% vested upon the participant's completion of two years of service, with such vesting increasing at the rate of 20% for each additional year of service so that 100% vesting is achieved when the participant has completed six years of service. A participant at all times is 100% vested in his interest in the plan which are made by to salary reduction contributions.

Employee Confidentiality, Invention Assignment and Non-Compete Agreements

All of our employees, including each of the named officers, Dr. Kellerman and Dr. Yerxa, have entered into employee confidentiality, invention assignment and, with respect to our management-level employees, non-compete agreements which provide, among other things, that the employee will not disclose any confidential information or trade secrets in any unauthorized manner. The agreements also provide that all inventions by the employee relating to our current or anticipated business which occur during the time of employment will be our property. Finally, the agreements provide that, with respect to any management-level employee, the employee will not compete with us during the time of employment and for one additional year.

48

CERTAIN TRANSACTIONS

We entered into a Consultation and Scientific Advisory Board Agreement with Dr. Richard Boucher, a member of our board of directors, in March 1995. The terms of the agreement provide that Dr. Boucher will serve as the Chairman of our Scientific Advisory Board for an initial term of three years. The agreement automatically renews itself thereafter for successive one year terms unless terminated by either party. Under the agreement, Dr. Boucher also agreed to consult on the field of airway diseases and the development of low molecular weight molecules for therapeutic or diagnostic purposes. We are currently paying Dr. Boucher $4,166.67 a month for his services, and he has received 400,000 shares of our common stock as partial compensation for his service. In December 1998, in recognition of his contributions, we granted Dr. Boucher an option to purchase 114,286 shares of our common stock at $0.21 per share. Such shares vest pro rata and will be fully vested on June 30, 2002.

In March 1995, we entered into a Sponsored Research Agreement with The University of North Carolina at Chapel Hill. Under the agreement, we fund a research program relating to uses of the P2Y receptor family. Drs. Richard C. Boucher, M. Jackson Stutts and C. William Davis currently serve as the principal investigators with respect to the research. We paid approximately $141,120 in 1999 for the research program under the agreement.

On July 1, 1999 and October 29, 1999 we sold an aggregate of 6,201,985 shares of Series E preferred stock at a purchase price of $2.00 per share. The following holders of more than 5% of our voting securities purchased Series E preferred stock in those transactions in the amounts shown below. See "Principal Stockholders" for more detail on securities held by these stockholders.

                                                           Common Stock
                                                            into which
                                                             Series E
                                             Series E     Preferred Stock
Purchaser                                 Preferred Stock  Will Convert
---------                                 --------------- ---------------
Alta V Limited Partnership...............      395,840         226,194
Benefit Capital Management Corporation...      500,000         285,714
Domain Partners III, L.P.................      373,832         213,618
InterWest Partners VII, L.P..............    2,857,843       1,633,053
NMT New Medical Technologies.............    1,250,000         714,285

Terrance G. McGuire, a director, is a general partner of Alta V Management Partners, L.P., which is the general partner of Alta V Limited Partnership. Jesse I. Treu, Ph.D., a director, is a general partner of One Palmer Square Associates III, L.P., the general partner of Domain Partners III, L.P.

In connection with our entering into a Development, License and Supply Agreement with Genentech, Inc., we sold 1,000,000 shares of Series G preferred stock at $10.00 per share under the terms of a Series G Preferred Stock and Warrant Purchase Agreement, dated December 17, 1999. The Series G preferred stock, including accrued dividends, will automatically convert at the time of the closing of this offering into 717,107 shares of our common stock. At the time we also issued Genentech a warrant to purchase 253,968 shares of our common stock, at an exercise price of $7.88 per share. In addition, upon the occurrence of certain milestone events, we are obligated to sell, and Genentech is obligated to purchase: (i) up to $2,000,000 of our common stock, at a per share price determined using the 20-day trailing average close price of common stock as quoted on an established stock exchange, and (ii) warrants for up to 50,793 shares of common stock at an exercise price of $7.88 per share. See "Business--Corporate Collaborations" for a description of the terms of our collaboration with Genentech.

During 1999, we contracted with a contract research organization to perform research on behalf of Kissei, one of our collaborative partners and the holder of 375,000 shares of our Series C preferred stock. We were reimbursed by Kissei for the cost of the study. The total amount reimbursed by Kissei for this study in 1999 was $813,000.

49

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial ownership of our common stock as of March 24, 2000 on a fully diluted basis, and as of such date, as adjusted to show the effect of this offering, by (i) each person who is known to own beneficially more than 5% of our common stock and (ii) each of the named officers and our current directors, and (iii) all of the directors and executive officers as a group.

Except as indicated by footnote, beneficial ownership is determined on a fully diluted basis and includes all options and warrants which are exercisable within 60 days of March 24, 2000. In addition to assuming the conversion of all outstanding shares of preferred stock into shares of common stock upon the closing of this offering, the information in this table assumes the conversion of all outstanding warrants to purchase shares of preferred stock into warrants to purchase shares of common stock. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table have sole voting and investment power for to all shares of common stock shown as beneficially owned by them.

                           Number of Shares      Percentage         Percentage
                          Beneficially Owned Beneficially Owned Beneficially Owned
Name and Address of          Before This        Before This         After This
Beneficial Owner               Offering           Offering           Offering
-------------------       ------------------ ------------------ ------------------
Burr, Egan, Deleage
 Funds(1)...............      2,879,180             15.3%              11.8%
 Burr, Egan, Deleage &
  Co.
 One Post Office Square
 Suite 3800
 Boston, MA 02109
Domain Partners
 Entities(2)............      2,594,985             13.8%              10.7%
 Domain Associates,
  L.L.C.
 One Palmer Square,
  Suite 515
 Princeton, N.J. 08542
InterWest Partners
 Entities(3)............      1,707,142              9.1%               7.0%
 InterWest Investors
  VII, LP
 3000 Sand Hill Road
 Bldg. 3, Suite 255
 Menlo Park, CA 94025
Medical Science Partners
 Entities(4)............      1,500,935              8.0%               6.2%
 c/o Medical Science
  Partners
 161 Worcester Road,
  Suite 301
 Framingham, MA 01701
JAFCO Entities(5).......      1,428,570              7.6%               5.9%
 c/o JAFCO Co., Ltd.
 Tekko Building, 1-8-2
  Monanouchi
 Chiyoda-Ku
 Tokyo, 100 Japan
Benefit Capital
 Management
 Corporation(6).........      1,238,095              6.6%               5.1%
 39 Old Ridgebury Road
 Danbury, CT 06817
Genentech, Inc.(7)......        994,848              5.2%               4.0%
 1 DNA Way
 South San Francisco, CA
  94080-4990

50

                           Number of Shares      Percentage         Percentage
                          Beneficially Owned Beneficially Owned Beneficially Owned
Name and Address of          Before This        Before This         After This
Beneficial Owner               Offering           Offering           Offering
-------------------       ------------------ ------------------ ------------------
Christy L. Shaffer,
 Ph.D.(8)...............        219,480              1.2%                 *
Gregory J.
 Mossinghoff(9).........         32,521                *                  *
Janet L. Rideout,
 Ph.D.(10)..............        234,034              1.2%               1.0%
Richard Boucher,
 M.D.(11)...............        556,668              3.0%               2.3%
Andre L. Lamotte,
 Sc.D.(12)..............      2,460,935             13.1%              10.1%
H. Jefferson Leighton,
 Ph.D.(13)..............        400,000              2.1%               1.6%
Terrance G. McGuire(1)..      2,879,180             15.3%              11.8%
W. Leigh Thompson, M.D.,
 Ph.D., D.Sc.(14).......         27,785                *                  *
Jesse I. Treu,
 Ph.D.(2)...............      2,594,985             13.8%              10.7%
All directors and
 executive officers as a
 group (9 people)(1),
 (2), (8), (9), (10),
 (11), (12), (13), (14)
 .......................      8,442,722             43.9%              34.1%


* Less than one percent

(1) Includes 2,849,236 shares held by Alta V Limited Partnership and 29,944 shares held by Customs House Partners. Alta V Management Partners, L.P. is the general partner of Alta V Limited Partnership. Burr, Egan, Deleage & Co. directly or indirectly provides investment advisory services to various venture capital funds, including Alta V Limited Partnership and Customs House Partners. Mr. McGuire is a general partner of Alta V Management Partners, L.P. In his capacity as a general partner of the Alta V Management Partners, L.P., Mr. McGuire may be deemed to share voting and investment powers with respect to the shares held by Alta V Limited Partnership. Mr. McGuire disclaims beneficial ownership of all of such shares held by Alta V Limited Partnership except to the extent of his proportional pecuniary interest therein. Mr. McGuire also disclaims beneficial ownership to all of the shares of Customs House Partners. Does not include 5,714 shares of common stock underlying stock options granted to Mr. McGuire which will not have vested within sixty days after March 24, 2000.

(2) Includes 2,514,456 shares held by Domain Partners III, L.P. and 80,529 shares held by DP III Associates, L.P. One Palmer Square Associates III, L.P. is the general partner of Domain Partners III, L.P. and DP III Associates, L.P. Jesse I. Treu, Ph.D. is a general partner of One Palmer Square Associates III, L.P. Dr. Treu shares voting and investment power with respect to these shares and disclaims beneficial ownership of such shares except to the extent of his proportional interest therein. Does not include 5,714 shares of common stock underlying stock options granted to Dr. Treu which will not have vested within sixty days after March 24, 2000.

(3) Includes 1,633,053 shares held by InterWest Partners VII, L.P. and 74,089 shares held by InterWest Investors VII, L.P. InterWest Management Partners VII, L.L.C. is the general partner of InterWest Partners VII, L.P. and InterWest Investors VII, L.P. Arnold L. Oronsky, a managing director of InterWest Management Partners VII, L.L.C., and each of the other managing directors and members of InterWest Management Partners VII, L.L.C. disclaim beneficial ownership of the shares except to the extent of their pro rata interest therein.

(4) Includes 1,339,177 shares held by Medical Science Partners II, L.P. and 161,758 shares held by Medical Science II Co-Investment, L.P. Medical Science Partners is the general partner of Medical Science Partners II, L.P. and the co-manager of Medical Science II Co-Investment, L.P. Dr. Lamotte is a managing general partner of Medical Science Partners.

(5) Includes 285,714 shares held by Jafco Co., Ltd., 117,142 shares held by JAFCO-JS-3 Investment Enterprise Partnership, 196,000 shares held by JAFCO-R-3 Investment Enterprise Partnership, 176,000 shares held by JAFCO- G-6(A) Investment Enterprise Partnership, 176,000 shares held by

51

JAFCO-G-6(B) Investment Enterprise Partnership, 238,857 shares held by JAFCO-G-7(A) Investment Enterprise Partnership, and 238,857 shares held by JAFCO-G-7(B) Investment Enterprise Partnership. Jafco Co., Ltd. is the Executive Partner of JAFCO-JS-3 Investment Enterprise Partnership, JAFCO- R-3 Investment Enterprise Partnership, JAFCO-G-6(A) Investment Enterprise Partnership, JAFCO-G-6(B) Investment Enterprise Partnership, JAFCO-G-7(A) Investment Enterprise Partnership and JAFCO-G-7(B) Investment Enterprise Partnership. Mr. Mitsumasa Murase is the President of Jafco Co., Ltd.

(6) Includes 1,238,095 shares held by Benefit Capital Management Corporation ("Benefit") as Investment Manager for The Prudential Insurance Company of America, Separate Account No. VCA-GA-5298. Benefit has voting power and investment power as to the shares held by it. Benefit is a wholly owned subsidiary of Union Carbide Corporation, a New York corporation ("UCC"). Benefit manages the assets of UCC's retirement program plan for employees of UCC and its participating subsidiaries. In connection with the purchase of certain annuities by the retirement program plan, Prudential has established a separate insurance account. Prudential disclaims beneficial ownership of the shares.

(7) Includes 740,880 shares and a warrant for 253,968 shares of common stock. The number of shares held by Genentech is based on an assumption that dividends on Series G preferred stock will accrue through April 30, 2000.

(8) Includes 40,000 shares of common stock and 179,480 shares of common stock underlying stock options granted to Dr. Shaffer which will have vested within sixty days after March 24, 2000. Does not include 294,805 shares of common stock underlying stock options granted to Dr. Shaffer which will not have vested within sixty days after March 24, 2000.

(9) Includes 32,521 shares of common stock underlying stock options granted to Mr. Mossinghoff which will have vested within sixty days after March 24, 2000. Does not include 196,050 shares of common stock underlying stock options granted to Mr. Mossinghoff which will not have vested within sixty days after March 24, 2000.

(10) Includes 58,800 shares of common stock, and 175,233 shares of common stock underlying stock options granted to Dr. Rideout which will have vested within sixty days after March 24, 2000, assuming the accelerated vesting of 90,000 shares upon the closing of this offering. Does not include 251 shares of common stock underlying stock options granted to Dr. Rideout which will not have vested within sixty days after March 24, 2000.

(11) Includes 504,954 shares of common stock and 51,714 shares of common stock underlying stock options granted to Dr. Boucher which will have vested within sixty days after March 24, 2000. Does not include 68,285 shares of common stock underlying stock options granted to Dr. Boucher which will not have vested within sixty days after March 24, 2000.

(12) Includes 1,339,177 shares held by Medical Science Partners II, L.P., 161,758 shares held by Medical Science II Co-Investment, L.P. and 960,000 shares held by NMT New Medical Technologies. Medical Science Partners is the general partner of Medical Science Partners II, L.P. and the co- manager of Medical Science II Co-Investment, L.P. Dr. Lamotte is a managing general partner of Medical Science Partners. Dr. Lamotte is a director of NMT New Medical Technology. Dr. Lamotte disclaims beneficial ownership of Medical Science II Co-Investment, L.P.'s shares. Dr. Lamotte disclaims beneficial ownership of NMT New Medical Technology's shares except to the extent of his proportional pecuniary interest therein. Does not include 5,714 shares of common stock underlying stock options granted to Dr. Lamotte which will not have vested within sixty days after March 24, 2000.

(13) Includes 400,000 shares of common stock. Does not include 5,714 shares of common stock underlying stock options granted to Dr. Leighton which will not have vested within sixty days after March 24, 2000.

(14) Includes 27,214 shares of common stock and 571 shares of common stock underlying stock options granted to Dr. Thompson which will have vested within sixty days after March 24, 2000. Does not include 5,714 shares of common stock underlying stock options granted to Dr. Thompson which will not have vested within sixty days after March 24, 2000.

52

DESCRIPTION OF CAPITAL STOCK

At the time of the closing of this offering, our authorized capital stock consists of 62,000,000 shares, of which 60,000,000 shares are common stock, $0.001 par value, and 2,000,000 shares are preferred stock, which our board of directors has the power and authority to designate into classes or series. Immediately following this offering, there will be 24,314,069 shares of common stock and no shares of preferred stock outstanding. The following is a summary of various provisions of our common stock and preferred stock.

Common Stock

As of March 24, 2000, there were 1,906,241 shares of our common stock issued and outstanding and held of record by 43 stockholders. An additional 16,209,984 shares of our common stock will be issued upon the automatic conversion of all outstanding shares of our preferred stock on the closing of this offering, assuming an initial public offering price of $14.00. In addition, as of March 24, 2000, 265,397 shares of our common stock were reserved for the exercise of outstanding warrants, 208,170 shares of our preferred stock were reserved for the exercise of outstanding warrants and 3,428,571 shares of our common stock were reserved for the exercise of options under our stock plan, of which options to purchase 2,748,089 shares of our common stock were granted (and not subsequently forfeited). Of these, 1,906,241 shares are reserved for the exercise of outstanding options and 841,848 shares have been purchased pursuant to the exercise of such options.

The following summarizes the rights of the holders of our common stock:

. each holder of shares of common stock is entitled to one vote per share on all matters to be voted on by stockholders generally, including the election of directors;

. there are no cumulative voting rights;

. the holders of our common stock are entitled to dividends and other distributions as may be declared from time to time by the board of directors out of funds legally available for that purpose, if any, provided that no cash dividend may be declared or paid on our common stock until paid on various series of outstanding preferred stock along with its terms;

. upon our liquidation, dissolution or winding up, the holders of shares of common stock will be entitled to share ratably in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities and the payment of the liquidation preference of any outstanding preferred stock; and

. under the terms of our amended and restated certificate of incorporation, the holders of common stock have no preemptive or other subscription rights to purchase shares of our stock, nor are they entitled to the benefits of any redemption or sinking fund provisions.

Preferred Stock

Upon the closing of this offering, there will be no shares of preferred stock outstanding. Our amended and restated certificate of incorporation authorizes our board of directors to create and issue one or more series of preferred stock and determine the rights and preferences of each series within the limits permitted by our amended and restated certificate of incorporation and applicable law. Among other rights, the board of directors may decide, without further vote or action by our stockholders:

. the number of shares constituting the series and the distinctive designation of the series;

. the dividend rate on the shares of the series, whether dividends will be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series;

. whether the series will have voting rights in addition to the voting rights provided by law, and if so, the terms of the voting rights;

. whether the series will have conversion privileges and, if so, the terms and conditions of conversion;

53

. whether or not the shares of the series will be redeemable, and, if so, the dates, terms and conditions of redemption, as the case may be;

. whether the series will have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of the sinking fund; and

. the rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up and the relative rights or priority, if any, of payment of shares of the series.

Unless our board of directors decides otherwise, the shares of all series of preferred stock will rank equally regarding the payment of dividends and the distribution of assets upon liquidation. Although we have no present plans to issue any shares of preferred stock, any future grant of shares of preferred stock, or the grant of rights to purchase preferred shares, may have the effect of delaying, deferring or preventing a change in control in our company or an unsolicited acquisition proposal. The grant of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could negatively affect the rights and powers, including voting rights, of the holders of the common stock.

Registration Rights

Following the expiration of all applicable lock-up periods, the holders of at least 50% of the shares of our common stock to be received upon the automatic conversion of the outstanding shares of Series A preferred stock at the time of the closing of this offering may request that we file a registration statement under the Securities Act. At any time after April 8, 2002, the holders of at least 50% of the shares of our common stock to be received upon the automatic conversion of the outstanding shares of Series A preferred stock and Series B preferred stock at the time of the closing of this offering may request that we file a registration statement. At any time after December 31, 2002, the holders of more than 50% of the shares of our common stock to be received upon the automatic conversion of the outstanding shares of any two of the following series of preferred stock may request that we file a registration statement: Series A preferred stock, Series B preferred stock, Series E preferred stock or Series G preferred stock. Furthermore, the holders of at least 50% of the outstanding shares of common stock issued upon the conversion of any of the Series A preferred stock, Series B preferred stock, Series E preferred stock and Series G preferred stock may request that we file a registration statement on Form S-3. Upon such a request and subject to minimum size conditions, we generally will be required to use our best efforts to register those shares. In addition, if we propose to register any of our common stock, either for our own account or for the account of our stockholders, we are required, with some exceptions, to notify the holders described above and, with some limitations, to include in that registration all of the shares of our common stock received upon conversion of the shares of our Series A preferred stock, Series B preferred stock, Series E preferred stock and Series G preferred stock requested to be included by stockholders. We are generally obligated to bear the expenses, other than underwriting discounts and sales commissions, of these registrations.

Under agreements with the holders of Series C preferred stock and Series D preferred stock, we have agreed to notify the holders in the event we propose to register any of our common stock, either for our own account or for the account of stockholders, and, subject to certain limitations, to include in the registration all of the shares of common stock issued upon the conversion of the Series C preferred stock and Series D preferred stock at the time of closing of this offering, as requested to be included by such holders. We are generally obligated to bear the expenses, other than underwriting discounts and sales commissions, of these registrations.

All such registration rights terminate five years after the closing of this offering.

Any exercise of registration rights may hinder our efforts to arrange future financings and may have a negative effect on the market price of our common stock.

54

Stockholders' Agreement

The holders of our common stock, our Series A, B and E preferred stock and we are parties to a stockholders agreement in which stockholders have agreed to vote their shares for the election of directors, as follows: one person designated by stockholders affiliated with Burr, Egan, Deleage & Co., one designated by stockholders affiliated with Medical Science Partners, one designated by stockholders affiliated with Domain Associates, one designated by NMT New Medical Technologies, the Chief Executive Officer and three non- employees designated by those four persons. In addition, the holders of our common stock granted us and our Series A, B and E preferred stockholders a right of first refusal to purchase their stock. This agreement will terminate upon the conversion of all shares of Series A, B and E preferred stock into shares of common stock upon the closing of this offering.

Delaware Law and Certain Charter and By-Law Provisions

We are subject to Section 203 of the Delaware General Corporation Law which is an anti-takeover provision. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes a merger, asset sale or other transaction resulting in financial benefit to the stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of a corporation's voting stock.

Our amended and restated certificate of incorporation authorizes our board of directors to create and issue one or more series of preferred stock and determine the rights and preferences of each series within the limits set forth in our amended and restated certificate of incorporation and applicable law. Use of our preferred stock could have the effect of delaying, deferring or preventing a change in control, as removal of our board of directors and management may be rendered more difficult. Further, use of the preferred stock may have an negative impact on the ability of our stockholders to participate, if applicable, in a tender offer or exchange offer for the common stock, which would diminish the value of the common stock.

Effective simultaneously with the closing of this offering, our amended and restated certificate of incorporation will provide that the members of the board will be divided into three classes. The terms of Mr. Lamotte and Dr. Shaffer will expire in 2001. The term of Dr. Treu and Mr. McGuire will expire in 2002. The terms of Drs. Thompson, Leighton and Boucher will expire in 2003. After this initial term, each class of directors will have a three year term.

Our bylaws will not permit our stockholders to call a special meeting of stockholders. Under the bylaws, only our President, Chairman of the Board, or a majority of the Board will be able to call a special meeting. The bylaws also require that stockholders give advance notice to our secretary of any nominations for director or other business to be brought by stockholders at any stockholders' meeting. These provisions may delay or prevent changes of control or management.

The Delaware General Corporation Law authorizes a corporation in its certificate of incorporation to limit the personal liability of its directors for violations of their fiduciary duty of care. Our amended and restated certificate of incorporation states that a director will not be personally liable to us or to our stockholders for monetary damages resulting from any fiduciary wrongdoing as a director, except in circumstances involving wrongful acts, such as the breach of the director's duty of loyalty to us or our stockholders, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or a transaction from which the director derived an improper personal benefit. The Delaware General Corporation Law also authorizes a corporation to indemnify its directors and officers, and our amended and restated certificate of incorporation requires that we indemnify each director and executive officer to the fullest extent allowable under the Delaware General Corporation Law. We believe that these provisions will assist us in attracting and retaining individuals to serve as directors.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock will be American Securities Transfer & Trust, Inc.

55

SHARES ELIGIBLE FOR FUTURE SALE

Before this offering there has been no public market for our common stock. Future sales of substantial amounts of our common stock, or even the possibility of future sales of our common stock sales, could reduce the prevailing market price. As described below, only a limited number of shares of common stock currently held by our stockholders will be available for sale shortly after this offering because of contractual and legal restrictions on resale. Sales of substantial amounts of common stock in the public market after the restrictions lapse could negatively affect the prevailing market price and our ability to raise equity capital in the future.

Upon the closing of this offering, 24,314,069 shares of our common stock will be outstanding based on the number of shares of our preferred stock and common stock outstanding as of March 24, 2000, and assuming no exercise of the underwriters' over-allotment option. Of these shares, the 5,500,000 shares of common stock being sold in this offering will be freely tradable (unless purchased by our "affiliate" as such term is defined in the Securities Act) without restriction or registration under the Securities Act. All remaining shares of common stock were issued and sold in private transactions and are "restricted securities" which are eligible for public sale only if registered under the Securities Act or sold as required by Rule 144 under that Act. In addition, upon closing of this offering 2,290,592 shares of common stock will be delivered upon the exercise of warrants and options.

All of our officers, directors and holders of at least one percent of our stock have signed lock-up agreements, in which they agreed that they will not, directly or indirectly, offer, sell or agree to sell, or otherwise dispose of any shares of our common stock or other securities in the public market without the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days after the final prospectus relating to this offering. The lock-up agreements do not apply to any shares acquired in this offering through the directed share program. The agreement of one of the stockholders excludes 206,963 shares currently held and all shares acquired in the future.

Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus a person or persons whose shares are aggregated, who has beneficially owned restricted securities for at least one year, including the holding period of any earlier owner except an affiliate, will be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

. 1% of the number of shares of our common stock then outstanding, which will equal approximately 243,141 shares immediately after this offering; or

. the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks before the filing of a notice on Form 144 with respect to the sale.

Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about Inspire.

Rule 144(k). Under Rule 144(k), a person who is not one of our affiliates at any time during the 90 days before a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any earlier owner except an affiliate, is entitled to sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

Registration Rights. As described above, holders of 17,638,528 shares of our common stock which are restricted securities and 356,824 shares of our common stock reserved for the exercise of outstanding warrants will be entitled to demand registration of their shares. Registration of their shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of that registration.

56

Rule 701. In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors, other than affiliates, who purchases or receives shares from us in connection with our stock plan or other written agreement will be eligible to resell their shares beginning 90 days after the date of this prospectus, subject only to the manner of sale provisions of Rule 144, and by affiliates under Rule 144 without compliance with its holding period requirements.

Stock Options. Following this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering the shares of common stock reserved for issuance under our stock plan. The registration statement on Form S-8 will become effective upon filing with the Securities and Exchange Commission. Accordingly, shares registered under that registration statement will, subject to limitations applicable to affiliates, be available for sale in the open market after the filing, except those shares subject to lock-up agreements and unvested shares.

Warrants. We have issued various warrants to purchase shares of our preferred stock which shall, upon the closing of this offering, convert into warrants to purchase an aggregate of 118,954 shares of our common stock. Each of the preferred stock warrants will expire on the fifth anniversary of the date of this offering. On January 29, 1999 we issued a ten-year warrant to a consultant for 11,429 shares of our common stock as partial consideration under a consulting agreement. On December 17, 1999 we issued a five-year warrant to Genentech to purchase 253,968 shares of our common stock.

57

UNDERWRITING

Subject to the terms and conditions provided in an agreement among the underwriters and us, the underwriters named below, through their representatives Bear, Stearns & Co. Inc., Deutsche Bank Securities Inc. and U.S. Bancorp Piper Jaffray Inc., have severally agreed to purchase from us the aggregate number of shares of our common stock indicated opposite their names below:

                                                                 Number of
Underwriter                                                       Shares
-----------                                                      ---------
Bear, Stearns & Co. Inc.........................................
Deutsche Bank Securities Inc....................................
U.S. Bancorp Piper Jaffray Inc..................................
Total...........................................................

The underwriting agreement provides that the obligations of the several underwriters are subject to approval of various legal matters by their counsel and to various other conditions, including delivery of legal opinions by our counsel, the delivery of a letter by our independent auditors and the accuracy of the representations and warranties made by us in the underwriting agreement. Under the underwriting agreement, the underwriters are obliged to purchase and pay for all the above shares of our common stock if any are purchased.

Public Offering Price

The underwriters propose to offer the shares of our common stock directly to the public at the offering price set forth on the cover page of this prospectus and at that price less a concession not in excess of $ per share of common stock to other dealers who are members of the National Association of Securities Dealers, Inc. The underwriters may allow, and those dealers may reallow, concessions not in excess of $ per share of common stock to other underwriters or to other dealers. After this offering, the offering price, concessions and other selling terms may be changed by the underwriters. Our common stock is offered subject to receipt and acceptance by the underwriters and subject to other conditions, including the right to reject orders in whole or in part. The underwriters have informed us that the underwriters do not expect to confirm sales of common stock to any accounts over which they exercise discretionary authority.

The following table summarizes the per share and total public offering price of the shares of common stock in the offering, the underwriting compensation to be paid to the underwriters by us and the proceeds of the offering, before expenses, to us. The information presented assumes either no exercise or full exercise by the underwriters of their over-allotment option.

                                                             Total
                                                    -----------------------
                                                      Without      With
                                              Per      Over-       Over-
                                             Share   Allotment   Allotment
                                             ------ ----------- -----------
Public offering price....................... $14.00 $77,000,000 $88,550,000
Underwriting discounts and commissions
 payable by us..............................    .98   5,390,000   6,198,500
Proceeds, before expenses, to us............  13.02  71,610,000  82,351,500

The underwriting discount and commission per share is equal to the public offering price per share of our common stock less the amount paid by the underwriters to us per share of common stock.

We estimate total offering expenses payable by us, other than the underwriting discounts and commissions referred to above, will be approximately $1,200,000.

58

Over-Allotment Option to Purchase Additional Shares

We have granted a 30-day over-allotment option to the underwriters to purchase up to an aggregate of 825,000 additional shares of our common stock exercisable at the offering price less the underwriting discounts and commissions, each as provided on the cover page of this prospectus. If the underwriters exercise this option in whole or in part, then each of the underwriters will be obligated to purchase additional shares of common stock in proportion to their respective purchase commitments as shown in the table provided above, subject to various conditions.

Indemnification and Contribution

The underwriting agreement provides that we will indemnify the underwriters against liabilities specified in the underwriting agreement under the Securities Act, including liabilities arising from material misstatements or omissions in connection with disclosure, or will contribute to payments that the underwriters may be required to make regarding those liabilities. The underwriters have agreed to indemnify us against liabilities specified in the underwriting agreement under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to the underwriters, the underwriters have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Lock-Up Agreements

All of our officers, directors and holders of at least one percent of our stock have signed lock-up agreements, in which they agreed that they will not, directly or indirectly, offer, sell or agree to sell, or otherwise dispose of any shares of our common stock or other securities in the public market without the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days after the final prospectus relating to this offering. The lock-up agreements do not apply to any shares acquired in this offering through the directed share program. The agreement of one of the stockholders excludes 206,963 shares currently held and all shares acquired in the future.

In addition, we have agreed that for a period of 180 days from the date of this prospectus, we will not, without the prior written consent of Bear, Stearns & Co. Inc., directly or indirectly, offer, sell or otherwise dispose of any shares of common stock, pledge, make any short sale or maintain any short position, establish or maintain a put position, enter into any swap, derivative transaction or other arrangement that transfers to another any of the economic consequences of ownership of common stock, or otherwise dispose of any common stock or any interest in common stock held by us.

Nasdaq National Market Quotation

Before this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the common stock will be determined by negotiations between us and the representatives of the underwriters. Among the factors to be considered in determining the initial public offering price will be estimates of our prospects in the industry in which we compete, an assessment of our management, the general state of the securities markets at the time of this offering, and certain financial and operating information of companies engaged in similar activities. We have applied for approval for the quotation of our common stock on the Nasdaq National Market, under the symbol "ISPH." We cannot assure you, however, that an active or orderly trading market will develop for the common stock or that the common stock will trade in the public market subsequent to this offering at or above the initial offering price.

Stabilization, Syndicate Short Position and Penalty Bids

In order to facilitate this offering, certain persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock during and after this offering. Specifically, the underwriters may over-allot or otherwise create a short position in the common stock for their

59

own account by selling more shares of common stock than we have actually sold to them. The underwriters may elect to cover any such short position by purchasing shares of common stock in the open market and may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in this offering are reclaimed if shares of common stock previously distributed in this offering are repurchased in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the common stock to the extent that it discourages resales of common stock. No representation is made as to the magnitude or effect of any such stabilization or other transactions. Such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.

Directed Share Program

At our request, the underwriters have reserved for sale at the initial public offering price up to 275,000 shares of common stock to be sold in this offering for sale to our directors, officers, employees, business associates, vendors and related persons. Purchases of reserved shares are to be made through an account at Bear, Stearns & Co. Inc. by following Bear, Stearns & Co. Inc.'s procedures for opening an account and transacting in securities. The number of shares available for sale to the general public will be reduced to the extent that any reserved shares are purchased. Any reserved shares not purchased by our directors, officers, employees, business associates, vendors and related persons will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

60

LEGAL MATTERS

The validity of the common stock offered and some of the legal matters arising in connection with this offering will be passed upon for us by Smith, Stratton, Wise, Heher & Brennan, Princeton, New Jersey. Other legal matters in connection with this offering will be passed upon for the underwriters by Coudert Brothers, New York, New York.

EXPERTS

The financial statements as of December 31, 1998 and 1999, and for each of the three years in the period ended December 31, 1999, included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

The statements in this prospectus under the captions "Risk Factors--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," "Risk Factors--If we fail to reach milestone or other obligations, The University of North Carolina at Chapel Hill and other licensors may terminate our agreements with them," "Risk Factors--Because 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," "Business--Business Strategy-- Protect and Enhance our Technology Leadership Position," and "Business--Patents and Proprietary Rights" have been reviewed and approved by Howrey Simon Arnold & White, LLP, our patent counsel, as patent experts, and are included in this prospectus in reliance upon that review and approval.

CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS

In November 1999, we dismissed KPMG LLP as our independent accountants. The former independent accountants' report did not contain an adverse opinion, a disclaimer of opinion or any qualifications or modifications related to uncertainty, limitation of audit scope or application of accounting principles. The former independent accountants' report does not cover any of our financial statements in this registration statement. There were no disagreements with the former public accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure regarding our financial statements up through the time of dismissal that, if not resolved to the former accountants' satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their report. In November 1999, we retained PricewaterhouseCoopers LLP as our independent public accountants. The decision to retain PricewaterhouseCoopers LLP was approved by resolution of the board of directors. Before retaining PricewaterhouseCoopers LLP, we had not consulted with PricewaterhouseCoopers LLP regarding accounting principles.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission, Washington, D.C., a registration statement on Form S-1 (together with required schedules and exhibits) under the Securities Act regarding the shares of common stock offered. This prospectus, which constitutes a part of the registration statement, does not contain all of the information provided in the registration statement, some terms of which are omitted in accordance with the rules and regulations of the Securities and Exchange Commission. You can find additional information regarding us and the common stock in the registration statement, which may be inspected without charge, at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center, 13th Floor, New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials may be obtained from the public reference section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C., 20549, at prescribed rates. The registration statement is also publicly available through the Securities and Exchange Commission's web site located at http://www.sec.gov.

61

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

INDEX TO FINANCIAL STATEMENTS

                                                                        Page(s)
                                                                        -------
Report of Independent Accountants......................................   F-2
Balance Sheets at December 31, 1998 and 1999...........................   F-3
Statements of Operations for the years ended December 31, 1997, 1998
 and 1999 and the period from inception (October 28, 1993) to December
 31, 1999..............................................................   F-4
Statements of Stockholders' Equity (Deficit) for the period from
 inception (October 28, 1993) to December 31, 1999.....................   F-5
Statements of Cash Flows for the years ended December 31, 1997, 1998
 and 1999 and the period from inception (October 28, 1993) to December
 31, 1999..............................................................   F-6
Notes to Financial Statements..........................................   F-7

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders Inspire Pharmaceuticals, Inc.

The 1 for 1.75 reverse split discussed in Note 15 to the financial statements has not been consummated at March 29, 2000. When it has been consummated, we will be in a position to furnish the following audit report:

"In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Inspire Pharmaceuticals, Inc. (a development stage company) at December 31, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 and the period from inception (October 28, 1993) to December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above."

/s/ PricewaterhouseCoopers LLP

Raleigh, North Carolina

February 21, 2000

F-2

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

BALANCE SHEETS

                                            December 31,           Pro Forma
                                      --------------------------  December 31,
                                          1998          1999          1999
                                      ------------  ------------  ------------
                                                                  (unaudited)
                                                                    (Note 2)
Assets
Current assets:
  Cash and cash equivalents.......... $  4,137,628  $ 22,727,687  $ 22,727,687
  Accounts receivable................        5,726        19,540        19,540
  Prepaid expenses...................      123,372       131,891       131,891
                                      ------------  ------------  ------------
Total current assets.................    4,266,726    22,879,118    22,879,118
Property and equipment, net..........    1,046,195       789,028       789,028
Other, net...........................      133,114       261,611       261,611
                                      ------------  ------------  ------------
Total assets......................... $  5,446,035  $ 23,929,757  $ 23,929,757
                                      ============  ============  ============
Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable................... $    290,473  $    631,497  $    631,497
  Accrued expenses...................      447,835       650,650       611,150
  Capital leases, current portion....      441,645       210,259       210,259
                                      ------------  ------------  ------------
Total current liabilities............    1,179,953     1,492,406     1,452,406
Capital leases, excluding current
 portion.............................      341,382       333,383       333,383
Notes payable........................       20,825        23,714        23,714
Deferred revenue.....................          --      5,000,000     5,000,000
                                      ------------  ------------  ------------
    Total liabilities................    1,542,160     6,849,503     6,810,003
Commitments (Note 12)................          --            --            --
Stockholders' equity:
  Convertible preferred stock, $0.001
   par value; 52,000,000 shares
   authorized; 20,857,681 and
   28,059,666 shares issued and
   outstanding at December 31, 1998
   and 1999, respectively; 0 shares
   issued and outstanding pro forma..   24,466,659    45,895,143           --
  Common stock, $0.001 par value per
   share; 56,000,000 shares
   authorized; 2,159,082 and
   2,465,857 shares issued and
   outstanding at December 31, 1998
   and 1999, respectively; 18,652,068
   shares issued and outstanding pro
   forma.............................        2,159         2,466        19,188
  Additional paid-in capital.........      570,887       907,972    46,825,893
  Deficit accumulated during the
   development stage.................  (20,860,276)  (29,396,259)  (29,396,259)
  Deferred compensation..............     (275,554)     (329,068)     (329,068)
                                      ------------  ------------  ------------
Total stockholders' equity...........    3,903,875    17,080,254    17,119,754
                                      ------------  ------------  ------------
Total liabilities and stockholders'
 equity.............................. $  5,446,035  $ 23,929,757  $ 23,929,757
                                      ============  ============  ============

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

F-3

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

STATEMENTS OF OPERATIONS

                                                                    Cumulative
                                                                       from
                                                                    Inception
                                                                   (October 28,
                                  Year Ended December 31,            1993) to
                            -------------------------------------  December 31,
                               1997         1998         1999          1999
                            -----------  -----------  -----------  ------------
Revenues:
  Collaborative research
   agreements.............  $       --   $ 3,600,000  $   600,000  $  4,200,000
                            -----------  -----------  -----------  ------------
Operating expenses:
  Research and development
   (excludes $0, $8,379
   and $59,448,
   respectively, of stock
   based compensation)....    6,568,914    5,438,405    7,178,909    25,250,042
  General and
   administrative expenses
   (excludes $0, $5,687
   and $30,938,
   respectively, of stock
   based compensation)....    1,494,593    1,921,088    1,887,272     7,895,313
  Stock based
   compensation...........          --        14,066       90,386       104,452
                            -----------  -----------  -----------  ------------
  Total operating
   expenses...............    8,063,507    7,373,559    9,156,567    33,249,807
                            -----------  -----------  -----------  ------------
  Operating loss..........   (8,063,507)  (3,773,559)  (8,556,567)  (29,049,807)
                            -----------  -----------  -----------  ------------
Other income (expense),
 net:
  Interest income.........      280,402      167,514      237,581     1,108,741
  Interest expense........     (164,321)    (115,295)     (90,175)     (644,641)
  Loss on disposal of
   property and
   equipment..............          --       (16,587)      (4,790)     (328,520)
                            -----------  -----------  -----------  ------------
  Other income (expense),
   net....................      116,081       35,632      142,616       135,580
                            -----------  -----------  -----------  ------------
  Loss before provision
   for income taxes.......   (7,947,426)  (3,737,927)  (8,413,951)  (28,914,227)
Provision for income
 taxes....................          --       360,000       60,000       420,000
                            -----------  -----------  -----------  ------------
  Net loss................   (7,947,426)  (4,097,927)  (8,473,951)  (29,334,227)
Preferred stock
 dividends................          --           --       (62,032)      (62,032)
                            -----------  -----------  -----------  ------------
  Net loss available to
   common stockholders....  $(7,947,426) $(4,097,927) $(8,535,983) $(29,396,259)
                            ===========  ===========  ===========  ============
Net loss per common
 share--basic and
 diluted..................  $     (4.01) $     (1.99) $     (3.53)
                            ===========  ===========  ===========
Weighted average common
 shares outstanding
 --basic and diluted......    1,980,699    2,061,398    2,401,029
                            ===========  ===========  ===========
Pro forma net loss per
 common share--basic and
 diluted..................                            $     (0.54)
                                                      ===========
Pro forma weighted average
 common shares
 outstanding--basic and
 diluted..................                             15,561,462
                                                      ===========

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

F-4

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from Inception (October 28, 1993) to December 31, 1999

                        Convertible                              Class A and B                  Deficit
                      Preferred Stock        Common Stock        Common Stock                 Accumulated
                   ---------------------- ------------------- -------------------  Additional  During the
                     Number                Number              Number               Paid-In   Development     Deferred
                   of Shares    Amount    of Shares Par Value of shares Par Value   Capital      Stage      Compensation
                   ---------- ----------- --------- --------- --------- ---------  ---------- ------------  ------------
Inception
(October 28,
1993)............         --  $       --        --   $  --         --   $    --     $    --   $        --    $      --
                   ---------- ----------- ---------  ------    -------  --------    --------  ------------   ----------
Balance at
December 31,
1993.............         --          --        --      --         --        --          --            --           --
 Issuance of
 Class A and B
 common stock....         --          --        --      --      10,000    10,000         --            --           --
 Net loss........         --          --        --      --         --        --          --       (329,503)         --
                   ---------- ----------- ---------  ------    -------  --------    --------  ------------   ----------
Balance at
December 31,
1994.............         --          --        --      --      10,000    10,000         --       (329,503)         --
 Issuance of
 common stock and
 cancellation of
 Class A and B
 common stock....         --          --    850,286     850    (10,000)  (10,000)      9,150           --           --
 Stock issued for
 consulting
 services........         --          --    585,714     586        --        --       71,164           --           --
 Stock issued in
 exchange for
 exclusive
 license.........         --          --    297,714     298        --        --       36,172           --           --
 Issuance of
 Series A
 convertible
 preferred
 stock...........   9,200,000   9,100,403       --      --         --        --          --            --           --
 Issuance of
 Series A
 warrants........         --          --        --      --         --        --       91,410           --           --
 Net loss........         --          --        --      --         --        --          --     (2,703,917)         --
                   ---------- ----------- ---------  ------    -------  --------    --------  ------------   ----------
Balance at
December 31,
1995.............   9,200,000   9,100,403 1,733,714   1,734        --        --      207,896    (3,033,420)         --
 Issuance of
 common stock....         --          --    227,340     227        --        --       13,134           --           --
 Net loss........         --          --        --      --         --        --          --     (5,781,503)         --
                   ---------- ----------- ---------  ------    -------  --------    --------  ------------   ----------
Balance at
December 31,
1996.............   9,200,000   9,100,403 1,961,054   1,961        --        --      221,030    (8,814,923)         --
 Issuance of
 Series B
 convertible
 preferred
 stock...........  10,866,014  12,966,256       --      --         --        --          --            --           --
 Issuance of
 common stock....         --          --     31,954      32        --        --       18,370           --           --
 Net loss........         --          --        --      --         --        --          --     (7,947,426)         --
                   ---------- ----------- ---------  ------    -------  --------    --------  ------------   ----------
Balance at
December 31,
1997.............  20,066,014  22,066,659 1,993,008   1,993        --        --      239,400   (16,762,349)         --
 Issuance of
 common stock....         --          --    137,502     137        --        --       16,861           --           --
 Stock issued in
 exchange for
 exclusive
 license.........         --          --     28,572      29        --        --       17,971           --           --
 Issuance of
 Series C
 convertible
 preferred
 stock...........     375,000     900,000       --      --         --        --          --            --           --
 Issuance of
 Series D
 convertible
 preferred
 stock...........     416,667   1,500,000       --      --         --        --          --            --           --
 Issuance of
 Series B
 warrants........         --          --        --      --         --        --        7,035           --           --
 Deferred
 compensation....         --          --        --      --         --        --      289,620           --      (289,620)
 Amortization of
 deferred
 compensation....         --          --        --      --         --        --          --            --        14,066
 Net loss........         --          --        --      --         --        --          --     (4,097,927)         --
                   ---------- ----------- ---------  ------    -------  --------    --------  ------------   ----------
Balance at
December 31,
1998.............  20,857,681  24,466,659 2,159,082   2,159        --        --      570,887   (20,860,276)    (275,554)
 Issuance of
 common stock....         --          --    306,775     307        --        --       37,754           --           --
 Issuance of
 Series E
 convertible
 preferred
 stock...........   6,201,985  11,405,952       --      --         --        --          --            --           --
 Issuance of
 Series G
 convertible
 preferred
 stock...........   1,000,000  10,000,000       --      --         --        --          --            --           --
 Issuance of
 Series F
 warrants........         --          --        --      --         --        --       18,242           --           --
 Issuance of
 common stock
 warrants........         --          --        --      --         --        --      137,189           --           --
 Preferred stock
 dividends.......         --       22,532       --      --         --        --          --        (62,032)         --
 Deferred
 compensation....         --          --        --      --         --        --      143,900           --      (143,900)
 Amortization of
 deferred
 compensation....         --          --        --      --         --        --          --            --        90,386
 Net loss........         --          --        --      --         --        --          --     (8,473,951)         --
                   ---------- ----------- ---------  ------    -------  --------    --------  ------------   ----------
Balance at
December 31,
1999.............  28,059,666 $45,895,143 2,465,857  $2,466        --   $    --     $907,972  $(29,396,259)  $ (329,068)
                   ========== =========== =========  ======    =======  ========    ========  ============   ==========
                        Total
                    Stockholders'
                   Equity/(Deficit)
                   ---------------- --- --- --- ---
Inception
(October 28,
1993)............    $       --
                   ----------------
Balance at
December 31,
1993.............            --
 Issuance of
 Class A and B
 common stock....         10,000
 Net loss........       (329,503)
                   ----------------
Balance at
December 31,
1994.............       (319,503)
 Issuance of
 common stock and
 cancellation of
 Class A and B
 common stock....            --
 Stock issued for
 consulting
 services........         71,750
 Stock issued in
 exchange for
 exclusive
 license.........         36,470
 Issuance of
 Series A
 convertible
 preferred
 stock...........      9,100,403
 Issuance of
 Series A
 warrants........         91,410
 Net loss........     (2,703,917)
                   ----------------
Balance at
December 31,
1995.............      6,276,613
 Issuance of
 common stock....         13,361
 Net loss........     (5,781,503)
                   ----------------
Balance at
December 31,
1996.............        508,471
 Issuance of
 Series B
 convertible
 preferred
 stock...........     12,966,256
 Issuance of
 common stock....         18,402
 Net loss........     (7,947,426)
                   ----------------
Balance at
December 31,
1997.............      5,545,703
 Issuance of
 common stock....         16,998
 Stock issued in
 exchange for
 exclusive
 license.........         18,000
 Issuance of
 Series C
 convertible
 preferred
 stock...........        900,000
 Issuance of
 Series D
 convertible
 preferred
 stock...........      1,500,000
 Issuance of
 Series B
 warrants........          7,035
 Deferred
 compensation....            --
 Amortization of
 deferred
 compensation....         14,066
 Net loss........     (4,097,927)
                   ----------------
Balance at
December 31,
1998.............      3,903,875
 Issuance of
 common stock....         38,061
 Issuance of
 Series E
 convertible
 preferred
 stock...........     11,405,952
 Issuance of
 Series G
 convertible
 preferred
 stock...........     10,000,000
 Issuance of
 Series F
 warrants........         18,242
 Issuance of
 common stock
 warrants........        137,189
 Preferred stock
 dividends.......        (39,500)
 Deferred
 compensation....            --
 Amortization of
 deferred
 compensation....         90,386
 Net loss........     (8,473,951)
                   ----------------
Balance at
December 31,
1999.............    $17,080,254
                   ================

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

F-5

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

STATEMENTS OF CASH FLOWS

                                                                  Cumulative
                                                                     from
                                                                  Inception
                                                                 (October 28,
                               Year Ended December 31,             1993) to
                         --------------------------------------  December 31,
                            1997         1998          1999          1999
                         -----------  -----------  ------------  ------------  ---
Cash flows from
 operating activities:
 Net loss..............  $(7,947,426) $(4,097,927) $ (8,473,951) $(29,334,227)
 Adjustments to
  reconcile net loss to
  net cash used by
  operating activities:
  Depreciation and
   amortization........      496,598      541,704       622,806     2,118,726
  Stock issue for
   exclusive licenses..          --        18,000           --         54,470
  Stock issued for
   consulting
   services............          --           --            --         71,750
  Amortization of
   deferred
   compensation........          --        14,066        90,386       104,452
  Amortization of debt
   issuance costs......       15,235       16,408        22,959        73,646
  Loss on disposal of
   property and
   equipment...........          --        16,587         4,790       328,520
  Deferred revenue.....          --           --      5,000,000     5,000,000
  Changes in operating
   assets and
   liabilities:
    Accounts
     receivable........        2,084       (5,404)      (13,814)      (19,540)
    Prepaid expenses...       19,630       18,708        (8,519)     (131,891)
    Other assets.......      (26,000)     (24,599)        1,161      (187,790)
    Accounts payable...       51,837     (208,380)      341,024       655,261
    Accrued expenses...      (32,259)     101,160       130,974       601,432
                         -----------  -----------  ------------  ------------
      Net cash used in
       operating
       activities......   (7,420,301)  (3,609,677)   (2,282,184)  (20,665,191)
                         -----------  -----------  ------------  ------------
Cash flows from
 investing activities:
 Purchase of property
  and equipment........     (185,597)    (169,911)     (150,860)   (1,432,892)
 Proceeds from sale of
  property and
  equipment............          --       127,037           --        127,037
 Sale of certificate of
  deposit..............          --           --            --        (78,000)
                         -----------  -----------  ------------  ------------
      Net cash used in
       investing
       activities......     (185,597)     (42,874)     (150,860)   (1,383,855)
                         -----------  -----------  ------------  ------------
Cash flows from
 financing activities:
 Proceeds from bridge
  loans................          --           --            --        780,000
 Proceeds from issuance
  of notes payable.....       10,000        9,000         1,000       408,200
 Payments on notes
  payable..............     (158,183)    (142,651)          --       (400,000)
 Issuance of common
  stock, net...........       18,402       16,998        38,061        96,822
 Issuance of
  convertible preferred
  stock, net...........   12,966,256    2,400,000    21,441,127    45,096,435
 Payments on capital
  lease obligations....     (247,916)    (319,273)     (457,085)   (1,204,724)
                         -----------  -----------  ------------  ------------
      Net cash provided
       by financing
       activities......   12,588,559    1,964,074    21,023,103    44,776,733
                         -----------  -----------  ------------  ------------
      Increase
       (decrease) in
       cash and cash
       equivalents.....    4,982,661   (1,688,477)   18,590,059    22,727,687
Cash and cash
 equivalents, beginning
 of period.............      843,444    5,826,105     4,137,628           --
                         -----------  -----------  ------------  ------------
Cash and cash
 equivalents, end of
 period................  $ 5,826,105  $ 4,137,628  $ 22,727,687  $ 22,727,687
                         ===========  ===========  ============  ============

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

F-6

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS

1. Organization

Inspire Pharmaceuticals, Inc. (the "Company") was founded on October 28, 1993 to develop and commercialize novel pharmaceutical products that treat respiratory and ophthalmic diseases which are characterized by deficiencies in the body's innate defense mechanisms of mucosal hydration and mucociliary clearance. The Company's technologies are based in part on exclusive license agreements with The University of North Carolina at Chapel Hill for rights to certain developments from the founders' laboratories.

The Company is considered a development stage enterprise. Since inception, the Company has devoted substantially all of its efforts towards establishing its business and research and development programs.

2. Summary of Significant Accounting Policies

Unaudited Pro Forma Balance Sheet

The Board of Directors has authorized the Company to file a Registration Statement with the Securities and Exchange Commission permitting the Company to sell shares of common stock in an initial public offering ("IPO"). If the IPO is consummated as presently anticipated, all shares of the Series A, Series B, Series D and Series E preferred stock will automatically convert into shares of common stock at a 1-for-1.75 conversion ratio. The Series C preferred stock will automatically convert into shares of common stock at a 1 to 1.75 conversion ratio plus an additional 6,438 shares of common stock to be received by the Series C preferred stockholders as a result of their antidilution protection (Note 8). The unaudited pro forma balance sheet reflects the conversion of the Series A, Series B, Series C, Series D and Series E preferred shares into 15,469,104 shares of our common stock as if such conversion had occurred as of December 31, 1999.

The Company's Series G preferred stock will automatically convert into shares of common stock based on the assumed initial pubic offering price of $14.00 per share (See Note 10) plus an additional 2,821 shares of common stock to be received by the Series G preferred stockholders in payment of accrued dividends of $39,500 at December 31, 1999. The unaudited pro forma balance sheet reflects the conversion of the Series G preferred shares into 717,107 shares of common stock as if such conversion had occurred on December 31, 1999.

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 could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.

Property and Equipment

Property and equipment is primarily comprised of furniture, laboratory and computer equipment and leasehold improvements which are recorded at cost and depreciated using the straight-line method over their estimated useful lives which range from three to five years. Property and equipment includes certain equipment under capital leases. These items are depreciated over the shorter of the lease period or the estimated useful life of the equipment.

F-7

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

Other Assets

Other assets include deferred financing costs which were incurred when the Company entered into capital lease obligations. These costs are amortized using the effective interest rate method over the life of the related lease.

Stock-Based Compensation

The Company accounts for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), which states that no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the Company's common stock on the grant date. In the event that stock options are granted with an exercise price below the estimated fair value of the Company's common stock, the difference between the estimated fair value of the Company's common stock and the exercise price of the stock option is recorded as deferred compensation. The Company recognized deferred compensation of $289,620 and $143,900 related to stock option grants during the years ended December 31, 1998 and 1999, respectively. Deferred compensation is amortized over the vesting period of the related stock option, which is generally four years. The Company recognized $14,066 and $90,386 of stock based compensation expense related to amortization of deferred compensation during the years ended December 31, 1998 and 1999, respectively. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" which requires compensation expense to be disclosed based on the fair value of the options granted at the date of the grant.

Income Taxes

The Company accounts for income taxes using the liability method which requires the recognition of deferred tax assets or liabilities for the temporary differences between financial reporting and tax bases of the Company's assets and liabilities and for tax carryforwards at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Revenue Recognition

Revenue is recognized under collaborative research agreements when services are performed or when contractual obligations are met. Nonrefundable fees received at the initiation of collaboration agreements for which the Company has an ongoing research and development commitment are deferred and recognized ratably over the period of the related research and development commitment. License fees received from research agreements for which the Company has no future research and development commitments are recognized when received. Milestone payments under collaboration agreements and research agreements will be recognized on the date the Company achieves the indicated milestone and such achievement is acknowledged by the collaborative partner, which generally coincides with the receipt of the milestone payment.

Research and Development

Research and development costs include all direct costs, including salaries for Company personnel, outside consultant's costs of clinical trials, sponsored research and clinical trials insurance, related to the development of drug compounds. These costs have been charged to operating expense as incurred. Costs associated with

F-8

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

obtaining and maintaining patents on the Company's drug compounds and license initiation and continuation fees, including milestone payments by the Company's to its licensors, are evaluated based on the stage of development of the related drug compound and whether the underlying drug compound has an alternative use. Costs of these types incurred for drug compounds not yet approved by the United States Food and Drug Administration ("FDA") and for which no alternative use exists are recorded as research and development expense. In the event the drug compound has been approved by the FDA or an alternative use exists for the drug compound, patent costs and license costs are capitalized and amortized over the expected life of the related drug compound. License milestone payments to the Company's licensors are recognized when the underlying requirement is met by the Company.

Significant Customers and Credit Risk

All revenues recorded in 1998 and 1999 were from a single collaborative partner. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of short-term cash investments. The Company primarily invests in short-term interest-bearing investment-grade securities and certificates of deposits. Cash deposits are all in financial institutions in the United States.

Cash Flows

The Company made cash payments for interest of $149,085, $98,887 and $67,216 for the years ended December 31, 1997, 1998 and 1999, respectively. The Company made cash payments for foreign withholding taxes of $360,000 and $60,000 during the years ended December 31, 1998 and 1999, respectively.

The Company acquired property and equipment through the assumption of capital lease obligations amounting to $418,810 and $218,157 during the years ended December 31, 1998 and 1999, respectively.

Net Income (Loss) Per Common Share

Historical

Basic net income (loss) per common share ("Basic EPS") is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted net income (loss) available to common stockholders per common share ("Diluted EPS") is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants and conversion of convertible preferred stock. The calculation of net loss per share available to common stockholders for the years ended December 31, 1997, 1998 and 1999 does not include 8,749,562, 12,143,320 and 14,132,450, respectively, of potential shares of common stock equivalents, as their impact would be antidilutive.

Pro Forma (Unaudited)

Pro forma net income (loss) per common share is calculated assuming conversion of all convertible preferred stock, plus accrued dividends on the Series G preferred stock, which will convert automatically upon the closing of the Company's initial public offering into 16,186,211 shares of the Company's common stock (see Note 8), at the beginning of the applicable period or date of issuance, if later.

Segment Reporting

The Company has determined that it did not have any separately reportable operating segments as of December 31, 1998 or 1999.

F-9

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

Internal Use Software

In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance regarding when software developed or obtained for internal use should be capitalized. The Company adopted SOP 98-1 effective January 1, 1999. The adoption of SOP 98-1 did not have a material impact on the Company's financial position or results of operations.

Comprehensive Income (Loss)

The Company had no items of other comprehensive income during the years ended December 31, 1997, 1998 or 1999.

Recent Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives"), and for hedging activities. SFAS 133 as amended by SFAS 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier application encouraged. The Company does not currently nor does it intend in the future to use derivative instruments and therefore does not expect that the adoption of SFAS 133 will have any impact on its financial position or results of operations.

3. Property and Equipment

Property and equipment consist of the following:

                                                        December 31,
                                                   ------------------------
                                                      1998         1999
                                                   -----------  -----------
Equipment under capital leases.................... $ 1,529,759  $ 1,801,347
Leasehold improvements............................     666,192      671,539
Computers and office equipment....................     311,346      392,445
                                                   -----------  -----------
                                                     2,507,297    2,865,331
Less--accumulated depreciation and amortization...  (1,461,102)  (2,076,303)
                                                   -----------  -----------
Property and equipment, net....................... $ 1,046,195  $   789,028
                                                   ===========  ===========

4. Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable and accounts payable at December 31, 1998 and 1999 approximated their fair value due to the short-term nature of these items.

The fair value of the Company's short-term investments, which are included in cash and cash equivalents at December 31, 1998 and 1999, approximate their carrying values as these investments were primarily in short-term interest- bearing investment-grade securities.

The carrying value of the Company's notes payable and capital lease obligations at December 31, 1998
and 1999 approximate their fair value as the interest rates on these obligations approximate rates available in the financial market at such dates.

F-10

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

5. Accrued Expenses

Accrued expenses are comprised of the following:

                                                              December 31,
                                                            -----------------
                                                              1998     1999
                                                            -------- --------
Research costs............................................. $133,264 $380,807
Accrued payroll and benefits...............................   49,038   31,848
Accrued legal and patent costs.............................  106,956   40,571
Accrued preferred stock dividends..........................      --    39,500
Other......................................................  158,577  157,924
                                                            -------- --------
                                                            $447,835 $650,650
                                                            ======== ========

6. Income Taxes

The components of the Company's 1997, 1998 and 1999 income tax expense consist of the following:

                                                      1997    1998    1999
                                                     ------ -------- -------
Current expense (benefit):
  Federal........................................... $  --  $    --  $   --
  Foreign...........................................    --   360,000  60,000
  State.............................................    --       --      --
                                                     ------ -------- -------
  Current tax expense (benefit).....................    --   360,000  60,000
Deferred expense (benefit):
  Federal...........................................    --       --      --
  State.............................................    --       --      --
  Deferred tax expense (benefit)....................    --       --      --
                                                     ------ -------- -------
  Net tax expense (benefit)......................... $  --  $360,000 $60,000
                                                     ====== ======== =======

There was no current or deferred federal and state income tax expense for the years ended December 31, 1997, 1998 and 1999 because the Company generated net operating losses. The foreign tax represents foreign withholding tax paid on amounts received from a foreign entity.

F-11

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

Significant components of the Company's deferred tax assets and liabilities at December 31, 1998 and 1999 consist of the following:

                                                      1998          1999
                                                   -----------  ------------
Deferred tax assets:
  Domestic net operating loss carryforwards....... $ 7,544,056  $  8,597,519
  Deferred revenue................................         --      1,939,250
  Research and development credit.................     759,449       910,890
  Fixed and intangible assets.....................     298,983       553,265
  Compensation related items......................      60,147        52,864
  Stock warrants..................................      28,477        37,381
  Other...........................................       8,862        41,404
                                                   -----------  ------------
    Gross deferred tax assets.....................   8,699,974    12,132,573
    Less valuation allowance......................  (8,699,974)  (12,132,573)
                                                   -----------  ------------
    Net deferred tax assets....................... $       --   $        --
                                                   ===========  ============

For 1998 and 1999, the Company has provided a full valuation allowance against its net deferred assets since realization of these benefits could not be reasonably assured. The increase in valuation allowance of $3,432,598 resulted primarily from the generation of net operating loss carryforwards.

As of December 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $22,167,000 and $22,165,000, respectively. The net operating loss carryforwards expire in various amounts starting in 2008 and 2000 for federal and state tax purposes, respectively. The utilization of the federal net operating loss carryforward may be subject to limitation under the rules regarding a change in stock ownership as determined by the Internal Revenue Code. If the Company's utilization of its net operating loss carryforwards is limited and the Company has taxable income which exceeds the permissible yearly net operating loss carryforward, the Company would incur a federal income tax liability even though its net operating loss carryforwards exceed its taxable income.

Additionally, the Company has net research and development credit carryforwards of $910,890 which expire beginning in 2010.

Taxes computed at the statutory federal income tax rate of 34% are reconciled to the provision for income taxes as follows:

                                       1997         1998         1999
                                   ------------  -----------  -----------
United States federal tax at
 statutory federal income tax
 rate............................. $ (2,702,125) $(1,269,365) $(2,860,743)
State taxes (net of federal
 benefit).........................     (419,846)    (202,328)    (404,804)
Change in valuation reserve.......    3,472,665    1,863,576    3,432,598
Research and development credit...     (353,445)    (274,183)    (151,441)
Foreign withholding tax, net of
 federal benefit..................          --       237,600       39,600
Other, net........................        2,751        4,700        4,790
                                   ------------  -----------  -----------
Provision for income taxes........ $        --   $   360,000  $    60,000
                                   ============  ===========  ===========

F-12

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

7. Notes Payable

On October 13, 1995, the Company entered into an unsecured loan agreement with a lessor whereby the Company borrowed $400,000 from the lessor. The promissory note bore interest at a rate of 10.75% and was payable in monthly installments through October 1998. The note was fully repaid during 1998.

On November 13, 1996, the Company entered into a Collaborative Funding Agreement ("CFA") with the North Carolina Biotechnology Center ("NCBC") and the Kenan Institute whereby NCBC agreed to loan the Company a total of $20,000. Loans made to the Company by NCBC under the CFA are to be used for specific research activities. All such loans are unsecured and bear interest at 8.25%, with principal and accrued interest payable on November 7, 2001. The Company had total borrowings from NCBC under the CFA of $19,000 and $20,000 as of December 31, 1998 and 1999, respectively. Accrued interest on these loans, which is included in notes payable, totaled $1,825 and $3,714 at December 31, 1998 and 1999, respectively.

8. Stockholders' Equity

At December 31, 1999, the Company was authorized to issue 56,000,000 shares of common stock with a par value of $.001 per share and 52,000,000 shares of preferred stock. Of the 52,000,000 shares of preferred stock: (i) 9,365,000 shares have been designated as Series A Convertible Preferred Stock ("Series A Preferred") of which 9,200,000 are issued and outstanding at December 31, 1998 and 1999; (ii) 10,881,014 shares have been designated as Series B Convertible Preferred Stock ("Series B Preferred") of which 10,866,014 are issued and outstanding at December 31, 1998 and 1999; (iii) 375,000 shares have been designated as Series C Convertible Preferred Stock ("Series C Preferred") and are issued and outstanding at December 31, 1998 and 1999; (iv) 416,667 shares have been designated as Series D Convertible Preferred Stock ("Series D Preferred") and are issued and outstanding at December 31, 1998 and 1999; (v) 8,000,000 shares have been designated as Series E Convertible Preferred Stock ("Series E Preferred") of which 0 and 6,201,985 shares are issued and outstanding at December 31, 1998 and 1999, respectively; (vi) 1,200,000 shares have been designated as Series G Convertible Preferred Stock ("Series G Preferred") of which 0 and 1,000,000 shares are issued and outstanding at December 31, 1998 and 1999, respectively; (vii) 9,365,000 shares have been designated as Series AA Convertible Preferred Stock ("Series AA Preferred") none of which are issued or outstanding at December 31, 1998 and 1999; (viii) 10,881,014 shares have been designated as Series BB Convertible Preferred Stock ("Series BB Preferred") none of which are issued or outstanding at December 31, 1998 and 1999; and (ix) 28,170 shares have been designated as Series F Convertible Preferred Stock ("Series F Preferred") none of which are issued or outstanding at December 31, 1998 and 1999.

Common Stock

Dividends

The holders of common stock shall be entitled to receive dividends from time to time as may be declared by the Board of Directors. No cash dividend may be declared or paid to common stockholders until paid on each series of outstanding preferred stock in accordance with its terms.

Voting

The holders of shares of common stock are entitled to one vote for each share held with respect to all matters voted on by the shareholders of the Company.

F-13

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

Liquidation

After payment to the preferred stockholders, holders of common stock shall be entitled, together with holders of preferred stock, to share ratably in all remaining assets of the Company.

Class A and B Common Stock

During 1994, 10,000 shares of Class A and B common stock were issued to one of the Company's founders and to the initial group of investors. During 1995, the outstanding Class A and B common shares were exchanged for the issuance of 850,286 shares of common stock.

Preferred Stock

Outstanding preferred stock at December 31, 1998 and 1999 are as follows:

                                  December 31, 1998      December 31, 1999
                                ---------------------- ----------------------
                                Number of              Number of
Description                       Shares     Amount      Shares     Amount
-----------                     ---------- ----------- ---------- -----------
Series A Preferred.............  9,200,000 $ 9,100,403  9,200,000 $ 9,100,403
Series B Preferred ............ 10,866,014  12,966,256 10,866,014  12,966,256
Series C Preferred.............    375,000     900,000    375,000     922,532
Series D Preferred.............    416,667   1,500,000    416,667   1,500,000
Series E Preferred.............        --          --   6,201,985  11,405,952
Series G Preferred.............        --          --   1,000,000  10,000,000
                                ---------- ----------- ---------- -----------
                                20,857,681 $24,466,659 28,059,666 $45,895,143
                                ========== =========== ========== ===========

Dividends

The holders of Series A Preferred, Series B Preferred, Series C Preferred and Series E Preferred shall be entitled to receive dividends equal to any dividends paid on common stock. If dividends are declared on any series of preferred stock other than Series G Preferred, dividends shall be declared pari passu among the holders of the series on which such dividends are declared and the holders of the Series A Preferred, Series B Preferred, Series C Preferred and Series E Preferred. The number of preferred shares on which dividends would be paid would be based on the number of shares of common shares into which a share of preferred stock is convertible. The holders of Series G Preferred shall be entitled to cumulative dividends at the prime rate plus 1% of the Series G Preferred preference amount calculated on a per share basis. The dividends shall accrue and be payable upon the liquidation, dissolution or winding up of the Company or upon conversion to common stock. Accrued dividends on the Series G Preferred totaled $39,500 for the year ended December 31, 1999. No dividends have been declared or paid from the date of inception (October 28, 1993) through December 31, 1999.

Liquidation

In the event of liquidation, dissolution, or winding up of the Company, holders of preferred stock shall be entitled, in the following order, before any distribution is made to holders of common stock, to be paid an amount equal to (i) $1.00 per share of Series A Preferred or Series AA Preferred, $1.20 per share of Series B Preferred or Series BB Preferred, and $2.00 per share of Series E Preferred; (ii) $2.40 per share of Series C Preferred; (iii) $3.60 per share of Series D Preferred, $2.40 per share of Series F Preferred and $10.00 per share

F-14

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

of Series G Preferred; plus, in each case, any declared but unpaid dividends. In the event that assets of the Company are insufficient to permit payment of the above mentioned amounts, holders shall share ratably in any distribution of the remaining assets and funds of the Company in proportion to the respective amounts which would otherwise be payable under these circumstances in the order of liquidity preference.

Conversion

Each share of preferred stock, other than Series G Preferred, shall be convertible, at the option of the holder at any time after the date of issuance and without payment of additional consideration, into shares of common stock at a 1-to-1.75 conversion rate subject to certain adjustments. Each holder converting shares of preferred stock shall be entitled to all declared but unpaid dividends up to the date of conversion. In the event that a sale of any series of preferred stock is made at price per share lower than the per share price of either the Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred then the conversion price of the respective series of preferred stock will be adjusted to equal the per share sales price of the most recent series of preferred stock. As a result of the sale of the Series E Preferred for $2.00 per share in July and October 1999, the number of common shares that Series C Preferred converts into was increased by 6,438 shares which resulted in the Company recognizing a preferred stock dividend of $22,532. Series G Preferred shall be convertible into shares of the Company's common stock at the option of the holder at any time after the second anniversary of the date of issuance provided the conversion would not cause a single shareholder to exceed a 19.5% ownership interest in the Company. In such event, the conversion price for the Series G Preferred will be determined based on the facts and circumstances at the time of such conversion.

The conversion price will be reduced in the event the Company would issue any shares of its common stock without consideration or for consideration per share of less than the conversion price of any series of preferred stock in effect immediately prior to the time of such issuance except when such common stock is issued upon conversion of preferred stock or is issued to officers, directors, employees, or consultants of the Company pursuant to actions or stock compensation plans in existence as of the initial issue date of the respective series of preferred stock or any other stock purchase or option plan for employees or directors.

Automatic Conversion

Each share of preferred stock, other than Series G Preferred, shall automatically be convertible into common stock at the conversion price upon (i) the completion of an underwritten public offering involving the sale of the Company's common stock at a price of at least $2.00 per share and resulting in gross proceeds to the Company of not less than $10,000,000 or (ii) the consent of 80% or more of the preferred shares then outstanding. Each share of Series G Preferred shall automatically be converted into shares of common stock upon the completion of an underwritten public offering provided that such conversion would not cause the holder of the converted shares to exceed 19.5% ownership interest in the Company.

In the event of an initial public offering of the Company's common stock, the Series G Preferred shall automatically be convertible into common stock at an exchange rate determined by dividing the total proceeds from the sale of Series G Preferred, plus accrued and unpaid dividends, by the initial offering price of the Company's common stock.

Mandatory Conversion

In the event that (i) the Company issues additional shares of common stock or options or rights to purchase common stock at a price per share less than the then applicable conversion price of Series A Preferred or Series B Preferred ("Diluted Stock") and (ii) a holder of Diluted Stock fails to purchase their pro rata share

F-15

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

of such issuance, each such nonparticipating holder's shares of Diluted Stock shall be automatically converted to an equivalent number of shares of Series AA Preferred or Series BB Preferred, as the case may be, which shall have all the rights and preferences of the Diluted Stock except that the initial conversion price of the Series AA Preferred and Series BB Preferred shall not take into account any adjustment resulting from the dilutive issuance triggering such conversion. Thereafter, the conversion price of the Series AA Preferred and Series BB Preferred shall be subject to adjustment in the same manner as that of the Diluted Stock. At December 31, 1999, there are no shares of Series AA Preferred or Series BB Preferred outstanding.

Voting

Each holder of preferred stock, other than Series G Preferred, shall be entitled to vote upon any matter submitted to a stockholder for a vote, as though the common stock and preferred stock constituted a single class of stock, except with respect to those matters on which Delaware General Corporation Law requires that a vote must be by a separate class or classes or by separate series, as to which each class or series shall have the right to vote in accordance with such law. The holder of preferred stock shall have the number of votes per share equal to the number of shares of common stock into which the preferred stock is convertible. The holders of Series A Preferred, Series B Preferred, Series E Preferred and common stock are obligated to vote to elect the Company's Board of Directors as provided in the Second Amended and Restated Stockholders' Agreement dated April 8, 1997, as amended, among the Company and such stockholders. The agreement terminates upon conversion of the outstanding shares of the Series A Preferred, Series B Preferred and Series E Preferred.

Restrictions

The Company cannot, without the consent of the holders of a majority of Series A Preferred, Series B Preferred, Series C Preferred and Series E Preferred, (i) amend, repeal, or add any provision to the certificate of incorporation or by-laws if such actions would change the preferences, rights, privileges, powers of, or restrictions provided for the benefit of, the Series A Preferred, Series B Preferred, Series C Preferred and Series E Preferred,
(ii) authorize any merger or consolidation of the Company into any other corporation or entity, or (iii) authorize the sale of all or substantially all of the assets of the Company.

Sales of Preferred Stock

In March 1995, the Company issued 8,388,679 shares of Series A Preferred to a group of investors at a price per share of $1.00 which resulted in proceeds to the Company of $8,289,082, net of offering costs of $99,597. In addition, bridge loans from the Series A Preferred investors totaling $811,321, including accrued interest, were converted into 811,321 shares of Series A Preferred, using a conversion price of $1.00 per share.

In June and September 1997, the Company issued 10,866,014 shares of Series B Preferred to a group of investors at a price per share of $1.20 which resulted in proceeds to the Company of $12,966,256, net of offering costs of $72,960.

In September 1998, the Company issued 375,000 shares of Series C Preferred to a strategic partner, Kissei Pharmaceutical Co. Ltd. ("Kissei"), at a price per share of $2.40 which resulted in proceeds to the Company of $900,000, in conjunction with entering into a research agreement with Kissei relating to the development of INS365 Respiratory (see Note 10).

In December 1998, the Company issued 416,667 shares of Series D Preferred to Santen Pharmaceutical Company Ltd., at a price per share of $3.60 which resulted in proceeds to the Company of $1,500,000, in

F-16

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

conjunction with entering into a research agreement relating to the development of INS365 Ophthalmic (See Note 10).

In July and October 1999, the Company issued 6,201,985 shares of Series E Preferred to a group of venture capital investors at a price per share of $2.00 which resulted in proceeds to the Company of $11,405,952, net of offering costs of $998,018.

In December 1999, the Company issued 1,000,000 shares of Series G Preferred to Genentech, Inc. ("Genentech"), at a price per share of $10.00 which resulted in proceeds to the Company of $10,000,000 in conjunction with entering into a collaboration agreement (See Note 10). The shares will automatically convert into shares of the Company's common stock upon an initial public offering at an exchange rate determined by dividing the total proceeds plus accrued and unpaid dividends by the initial offering price of the Company's common stock.

9. Stock Options and Warrants

1995 Stock Incentive Plan

During 1995, the Company adopted the 1995 Stock Plan (the "Plan") which provided for the grant of up to 1,005,714 options to directors, officers, employees and consultants. In April 1999, the Plan was amended and restated, and is now the Amended and Restated 1995 Stock Plan. In September 1999, the option pool was increased to 2,285,714 shares and in January 2000 the option pool was further increased to 3,428,571 shares. Under the Plan, both incentive and non-qualified, as well as restricted stock, can be granted. The Board of Directors shall determine the term and dates of the exercise of all options at their grant date, provided that for incentive stock options, such price shall not be less than the fair market value of the Company's stock on the date of grant. The maximum exercise terms for an option grant is ten years from the date of the grant. Options granted under the plan generally vest 25% upon completion of one full year of employment and on a monthly basis over the following three years. Vesting begins from the date of hire for new employees and on the date of grant for existing employees.

The following table summarizes the stock option activity for the Plan:

                                                                    Weighted
                                                                    Average
                                                         Number of  Exercise
                                                          Shares     Price
                                                         ---------  --------
Options outstanding, December 31, 1996..................   780,482  $ 0.123
  Granted...............................................    43,485    0.137
  Exercised.............................................   (31,954)  (0.123)
  Forfeited.............................................      (239)  (0.123)
                                                         ---------  -------
Options outstanding, December 31, 1997..................   791,774    0.124
  Granted...............................................   927,714    0.250
  Exercised.............................................  (137,502)  (0.124)
  Forfeited.............................................   (91,884)  (0.170)
                                                         ---------  -------
Options outstanding, December 31, 1998.................. 1,490,102    0.200
  Granted...............................................   395,000    0.688
  Exercised.............................................  (306,775)  (0.124)
  Forfeited.............................................  (103,809)  (0.212)
                                                         ---------  -------
Options outstanding, December 31, 1999.................. 1,474,518  $ 0.345
                                                         =========  =======

F-17

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

The following table summarizes information concerning options outstanding at December 31, 1999:

                                                                   Weighted
                                                                    Average
                                                         Weighted  Remaining
                                                         Average  Contractual
                                               Number of Exercise    Life
                                                Shares    Price   (In Years)
                                               --------- -------- -----------
Options outstanding--price range
  $0.123......................................   247,715  $0.123     5.97
  $0.140......................................     5,481   0.140     6.42
  $0.210......................................   652,036   0.210     8.58
  $0.315......................................    31,429   0.315     8.79
  $0.420......................................   286,428   0.420     9.14
  $0.840......................................   251,429   0.840     9.70
                                               ---------  ------     ----
Options outstanding........................... 1,474,518  $0.345     8.44
                                               =========  ======     ====
Options exercisable...........................   581,473  $0.187
                                               =========  ======

Subsequent to December 31, 1999, the Company has made the following stock option grants:

                           Number of Options Exercise
           Date                 Granted        Price
           ----            ----------------- ---------
January 2000..............       32,857          $1.75
February 2000.............       74,286         $12.69
February 2000.............      428,571      IPO price
March 2000................       34,286      IPO price

The Company has recorded deferred compensation of approximately $210,000 related to the stock option grants made in January 2000 to reflect the difference between the estimated fair value of the Company's common stock at the date of the grants and the exercise price of the related stock options of $1.75 per share.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123") requires the Company to disclose pro forma information regarding option grants made and warrants issued to its employees. SFAS 123 specifies certain valuations techniques that produce estimated compensation charges that are included in the pro forma results below. These amounts have not been reflected in the Company's statement of operations, because the Company has made the election to use the provisions of APB 25 to account for its stock based compensation.

The fair value of options granted to employees was estimated using the following assumptions for the years ended December 31, 1997, 1998 and 1999:

                                                           December 31,
                                                       1997    1998    1999
                                                      ------- ------- -------
Expected dividend yield..............................   0.00%   0.00%   0.00%
Expected stock price volatility......................   0.00%   0.00%   0.00%
Risk-free interest rate..............................   6.03%   5.02%   5.39%
Expected life of options............................. 5 years 5 years 5 years

F-18

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

For purposes of pro forma disclosures, the estimated fair value of equity instruments is amortized to expense over their respective vesting period. If the Company had elected to recognize compensation expense based on the fair value of stock-based instruments at the grant date, as prescribed by SFAS 123, its pro forma net loss and net loss per common share would have been as follows:

                                     1997          1998          1999
                                 ------------  ------------  ------------
Net loss available to common
 stockholders--as reported...... $ (7,947,426) $ (4,097,927) $ (8,535,983)
Net loss available to common
 stockholders--
 SFAS 123 pro forma............. $ (7,955,969) $ (4,111,486) $ (8,552,123)
Net loss per common share--SFAS
 123 pro forma..................       $(4.02)       $(1.99)       $(3.56)

Warrants

Preferred Stock Warrants

In connection with the capital lease agreement executed on October 13, 1995, the Company issued warrants which entitle the holder to purchase 165,000 shares of Series A Preferred with an exercise price of $1.00 per share. These warrants had an estimated fair value of $91,410 at the date of issuance which was deferred and is being amortized as an increase to interest expense over the term of the related lease agreement using the effective interest rate method. The warrants shall be exercisable prior to the earlier of the tenth anniversary of the grant date or the fifth anniversary date of the Company's initial public offering.

In connection with an amendment on June 18, 1998 to increase the amount of equipment under the capital lease agreement executed on October 13, 1995, the Company issued warrants which entitle the holder to purchase 15,000 shares of Series B Preferred with an exercise price of $1.20 per share. These warrants had an estimated value of $7,035 at the date of issuance which was calculated using the Black-Scholes method in accordance with SFAS 123. This amount was deferred and is being amortized as an increase to interest expense over the term of the related lease agreement using the effective interest rate method. The warrants shall be exercisable prior to the earlier of the tenth anniversary of the grant date or the fifth anniversary date of the Company's initial public offering.

In connection with additional amendments to increase the amount of equipment under the Company's capital lease agreement which were executed on February 8, 1999 and April 15, 1999, the Company issued warrants which entitle the holder to purchase 20,000 and 8,170 shares, respectively, of Series F Preferred with an exercise price of $2.40 per share. These warrants had an estimated fair value of $18,242 at their respective dates of issuance which was calculated using the Black-Scholes method in accordance with SFAS 123. These amounts were deferred and are being amortized as an increase to interest expense over the term of the related lease agreement using the effective interest rate method. The warrants shall be exercisable prior to the earlier of the tenth anniversary of the grant date or the fifth anniversary date of the Company's initial public offering.

None of the preferred stock warrants have been exercised as of December 31, 1999.

Common Stock Warrants

In connection with a consulting agreement, the Company issued 11,429 warrants on January 15, 1999 to purchase shares of the Company's common stock with an exercise price of $4.20 per share. The warrants had an estimated value of $300 at the date of issuance as calculated using the Black-Scholes model in accordance with SFAS 123. The warrants shall be exercisable prior to the tenth anniversary of the grant date.

F-19

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

In connection with the sale of the Series G Preferred and the collaboration agreement entered into with Genentech on December 17, 1999, the Company issued warrants which entitle the holder to purchase 253,968 shares of common stock with an exercise price of $7.88 per share. The warrants had an estimated value of $136,889 at the date of issuance as determined using the Black-Scholes model which was deferred and will be amortized to research and development expense over the period of the Company's research and development commitment. The warrants shall be exercisable prior to the fifth anniversary of the grant date.

None of the common stock warrants have been exercised as of December 31, 1999.

Outstanding warrants to purchase the Company's common and preferred stock at December 31, 1999 are as follows:

                                                        Number of Exercise
Type of Warrant                                         Warrants   Price
---------------                                         --------- --------
Series A Preferred.....................................  165,000   $1.00
Series B Preferred.....................................   15,000   $1.20
Series F Preferred.....................................   28,170   $2.40
Common.................................................   11,429   $4.20
Common.................................................  253,968   $7.88

10. Collaboration Agreements

On September 10, 1998, the Company entered into a Joint Development, License and Supply Agreement (the "Kissei Agreement") with Kissei related to the development of INS365 Respiratory for all therapeutic respiratory applications, excluding sinusitis and middle ear infection, in Japan. INS365 Respiratory for respiratory therapeutic uses is licensed by the Company from UNC. Under the terms of the Kissei Agreement, Kissei will develop, commercialize, and market INS365 Respiratory in Japan. The Company has no ongoing research and development commitment as it relates to the Kissei Agreement. The Company maintains the right to manufacture and supply INS365 to Kissei.

The Kissei Agreement provided that Kissei would pay the Company an up front payment of $4,500,000, which included the purchase of $900,000 in equity in the form of Series C Preferred. In addition, depending on whether all milestones are met, the Company could receive milestone payments of up to $13,000,000 over the term of the Kissei Agreement. The Company is receiving reimbursement for liaison staff positions which totaled $62,500 and $250,000 during the years ended December 31, 1998 and 1999. In addition, the Company will receive royalties on net sales of INS365 Respiratory by Kissei.

Upon the signing of the Kissei Agreement, Kissei purchased 375,000 shares of the Company's Series C Preferred for $900,000 or $2.40 per share. In addition, the Company received a nonrefundable up front license fee of $3,600,000 which was recorded as license revenue when received as the Company has no ongoing research commitment under the Kissei Agreement. During 1999, the Company received a milestone payment under the Kissei Agreement of $600,000 based on achievement of technical milestones by Inspire. Subsequent to December 31, 1999, the Company received a milestone payment of $1,500,000 based on achievement of a technical milestone by Kissei in its development of INS365 Respiratory.

During 1999, the Company contracted with a contract research organization ("CRO") to perform research and development on behalf of Kissei. The Company is reimbursed by Kissei for the costs of this study. The total amount paid to the CRO and reimbursement received from Kissei during 1999 totaled $813,000.

F-20

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

On December 16, 1998, the Company entered into a Development, License and Supply Agreement (the "Santen Agreement") with Santen Pharmaceutical Company, Ltd. ("Santen") to complete the development of INS365 Ophthalmic for the therapeutic treatment of ocular surface diseases. Santen received an exclusive license to INS365 Ophthalmic in Japan, China, South Korea, the Philippines, Thailand, Vietnam, Taiwan, Singapore, Malaysia and Indonesia ("the Territory") in the field. Under the terms of the Santen Agreement, Santen will develop, commercialize, and market INS365 Ophthalmic in the Territory. The Company retains the right to manufacture and supply INS365 Ophthalmic in bulk drug substance to Santen.

The Santen Agreement provided that Santen would make the Company an up front payment through an equity investment of $1,500,000 in Series D Preferred. In addition, depending on whether all milestones under the Santen Agreement are met, the Company could receive milestone payments of up to $4,750,000. No milestone payments were received under the Santen Agreement during 1998 or 1999. In addition, the Company will receive royalties on net sales on INS365 Ophthalmic by Santen.

Upon the signing of the Santen Agreement, Santen purchased 416,667 shares of the Company's Series D Preferred for $1,500,000 or $3.60 per share.

On December 17, 1999, the Company entered into a Development, License and Supply Agreement (the "Genentech Agreement") with Genentech to jointly develop INS365 Respiratory and other related P2Y\\2\\ agonists existing on the date of the Genentech Agreement for all human therapeutic uses for (a) the treatment of respiratory tract disorders, including chronic bronchitis and cystic fibrosis, throughout the world, excluding Japan and (b) the treatment of sinusitis and middle ear infection worldwide. The Company will maintain the right to manufacture and supply such compounds in bulk drug substance form to Genentech during the research and development period and up to the end of Phase II clinical trials for each indication. The agreement will be in effect until all patents licensed under the agreement have expired, except that if the Company exercises its option to co-fund the development of INS37217 Respiratory for the treatment of cystic fibrosis, then the agreement will remain in effect until the product is no longer being marketed in the United States.

The Genentech Agreement provided that Genentech would pay the Company a non- refundable, non-creditable up-front payment of $5,000,000 upon execution of the Genentech Agreement, which the Company will record as license revenue over the term of its research and development commitment, which is estimated to be completed by December 31, 2001. In addition, the Company could receive milestone payments of up to an additional $63,000,000 over the term of the Genentech Agreement. No milestone payments were received under the Genentech Agreement during 1999. In addition, the Company will receive royalties on net sales by Genentech of INS365 Respiratory and other indications for INS365 represented in the collaborative research agreement.

Upon the signing of the agreement, Genentech purchased 1,000,000 shares of Series G Preferred for $10.00 a share or an aggregate purchase price of $10,000,000 and Genentech was issued 253,968 warrants to purchase shares of the Company's common stock with an exercise price of $7.88 per share. In addition, upon the occurrence of certain milestone events, the Company is obligated to sell, and Genentech is obligated to purchase: (i) up to $2,000,000 of the Company's common stock, at a per share price determined, using the 20-day trailing average close price of the Company's common stock as quoted on an established stock exchange, and (ii) Genentech will be issued warrants for up to 50,793 shares of the Company's common stock at an exercise price of $7.88 per share. In the event these warrants are issued, the Company will be required to record a charge equal to the difference between the trading price of the Company's common stock on the date the warrants are issued and the exercise price of the warrants.

F-21

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

11. License Agreement

On March 10, 1995, the Company licensed the rights to the patent for a Method of Treating Lung Disease with Urinide Triphosphates which covers INS316 Diagnostic from the University of North Carolina at Chapel Hill ("UNC"). In connection with this license agreement, the Company paid $65,000 in license initiation fees and issued 297,714 shares of common stock with an estimated value at the date of issuance of $36,470 or $0.12 per share and has agreed to make milestone payments totaling up to $1,000,000. The Company reached one such milestone in 1997 and made the milestone payment of $500,000 in the same year. A $10,000 milestone payment was made during each of 1998 and 1999.

On September 1, 1998, the Company licensed the rights to the patents for a Method of Treating Cystic Fibrosis with Dinucleotides, a Method of Treating Bronchitis with Uridine Triphosphates and related compounds, and a Method of Treating Ciliary Dyskinesia with Uridine Triphosphates and related compounds, which cover INS365 Respiratory, from UNC. In connection with this license agreement, the Company paid $15,000 in license initiation fees and issued 28,571 shares of common stock with an estimated value at the date of issuance of $18,000 or $0.63 per share and has agreed to pay milestone payments totaling $160,000. The Company reached one such milestone and made milestone payments of $30,000 in 1999.

In connection with the license agreements with UNC, the Company has agreed to pay royalties based on net sales of certain Licensed Products (as defined in the license agreements).

The Company enters into sponsored research and development and clinical trial agreements with the UNC on an annual basis whereby direct and indirect costs, as defined, are reimbursed by the Company.

12. Commitments

The Company is obligated under a master capital lease for furniture, equipment, and computers. Each lease term under the master lease agreement expires between 30 to 48 months from the date of inception.

The Company also has several non-cancelable operating leases, primarily for office space and office equipment, that extend through November 2003 and are subject to certain voluntary renewal options. Rental expense for operating leases during 1998, 1999 and for the cumulative period from inception (October 28, 1993) to December 31, 1999 was $163,833 (net of sublease rentals $24,938), $145,347 (net of sublease rentals of $65,483) and $610,261 (net of sublease rentals of $96,656), respectively.

Future minimum lease payments under non-cancelable operating leases (net of related sublease rentals) with remaining lease payments as of December 31, 1999 are as follows:

                                                         Capital   Operating
                                                          Leases    Leases
                                                         --------  ---------
Year ending December 31:
------------------------
  2000.................................................. $267,098  $190,429
  2001..................................................  166,829   147,040
  2002..................................................  142,889   144,164
  2003..................................................   36,964    89,576
                                                         --------  --------
Total minimum lease payments............................  613,780  $571,209
                                                                   ========
Less amount representing interest.......................  (70,138)
                                                         --------
Present value of net minimum capital lease payments.....  543,642
Less current portion capital lease obligations..........  210,259
                                                         --------
Capital lease obligations, excluding current portion.... $333,383
                                                         ========

F-22

INSPIRE PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS--(Continued)

The Company has a purchase commitment as of December 31, 1999 with Summit Pharmaceuticals Corp. for certain drug compounds in an amount of $375,000 which is expected to be paid as the drug compound is delivered in March and April 2000.

The Company is subject to various legal matters in the ordinary course of business. In the opinion of management, the ultimate outcome of such matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

The Company has contractual commitments or purchase arrangements with various clinical research organizations, manufacturers of drug product and others. Most of these arrangements are for a period of less than 12 months. The amount of the Company's financial commitments under these arrangements totals approximately $4,800,000.

13. Employee Benefit Plan

The Company has adopted a 401(k) Profit Sharing Plan ("the Plan") covering all qualified employees. The effective date of the Plan is August 1, 1995. Participants in the Plan must be 21 years of age or older. Participants may elect a salary reduction of 1% to 15% as a contribution to the Plan. Modifications of salary reductions can be made quarterly.

The Plan permits employer matching of up to 8% of a participant's salary, but the Company has elected not to match participants' contributions at this time. If employer matching is implemented, participants will begin vesting in employer contributions after one year of employment at a rate of 20% per year until fully vested.

14. Related Party Transaction

In 1995, the Company issued 585,714 shares of common stock to four founding scientists with an estimated value of $71,750 in recognition of prior consulting services provided to the Company.

15. Subsequent Event

On March 27, 2000, the Board of Directors of the Company approved a 1-for- 1.75 reverse common stock split to be effective upon the effectiveness of the Company's initial public offering. All common share and per common share amounts for all periods presented in the accompanying financial statements have been restated to reflect the effect of this reverse common stock split.

In addition, the Board of Directors approved an amendment to the certificate of incorporation to take effect as of the effective date of the registration statement, increasing the authorized capital stock to 60,000,000 shares of common stock and 2,000,000 shares of preferred stock each with a par value of $0.001.

F-23



You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that con- tained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this pro- spectus or of any sale of the common stock.

Until , 2000, all dealers that effect transactions of these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a pro- spectus when acting as underwriters and regarding their unsold allotments or subscriptions.


TABLE OF CONTENTS


                                                                          Page
                                                                          ----
Prospectus Summary.......................................................   1
Risk Factors.............................................................   6
Special Note Regarding Forward-Looking Statements ......................   17
Special Note Regarding Market Data.......................................  17
Use of Proceeds..........................................................  18
Dividend Policy..........................................................  18
Capitalization...........................................................  19
Dilution.................................................................  20
Selected Financial Data..................................................  21
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  22
Business.................................................................  27
Management...............................................................  43
Certain Transactions.....................................................  49
Principal Stockholders...................................................  50
Description of Capital Stock.............................................  53
Shares Eligible for Future Sale..........................................  56
Underwriting.............................................................  58
Legal Matters............................................................  61
Experts..................................................................  61
Change in Independent Public Accountants.................................  61
Where You Can Find More Information......................................  61
Index to Financial Statements............................................ F-1





[LOGO OF INSPIRE]

5,500,000 Shares

Common Stock


PROSPECTUS


Bear, Stearns & Co. Inc.

Deutsche Banc Alex. Brown

U.S. Bancorp Piper Jaffray

, 2000




PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table lists the costs and expenses, other than underwriting discounts and commissions, which we expect to incur in connection with the issuance and distribution of the securities being registered. Except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market fees, the amounts listed below are estimates:

SEC Registration Fee................................................. $
NASD filing fee......................................................
Nasdaq Listing application fee.......................................
Legal fees and expenses..............................................
Blue Sky fees and expenses...........................................
Accounting fees and expenses.........................................
Printing and engraving expenses......................................
Transfer Agent and Registrar fees....................................
Miscellaneous expenses...............................................
                                                                      -----
  Total.............................................................. $
                                                                      =====

All expenses of registration incurred in connection herewith are being borne by us.

Item 14. Indemnification of Directors and Officers.

Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") enables a corporation in its certificate of incorporation to limit the personal liability of its directors for violations of their fiduciary duty of care. Accordingly, Article Eighth of our amended and restated certificate of incorporation states that a director will not be personally liable to the company or to our stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that the elimination or limitation of liability is prohibited under the DGCL as in effect when such liability is determined. Subsection (b)(7) of Section 102 of the DGCL states that such provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to us or to our stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended, then the liability of a director will be eliminated or limited to the fullest extent permitted by the amended DGCL.

Subsection (a) of Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.

Subsection (b) of Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or

II-1


settlement of that action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. No indemnification will be made, however, in respect to any claim, issue or matter as to which that person is adjudged to be liable to the corporation, unless and only to the extent that the Court of Chancery or the court in which that action or suit was brought will determine upon application that, despite the adjudication of liability but in view of all of the circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the Court of Chancery or such other court deems proper.

Section 145 further provides that to the extent a present or former director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein, that person will be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him; that the indemnification provided by Section 145 will not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that the scope of indemnification extends to directors, officers, employees, or agents of a constituent corporation absorbed in a consolidation or merger and persons serving in that capacity at the request of the constituent corporation for another. The determination of whether indemnification is proper under the circumstances, unless made by a court, is determined by: (a) a majority of the disinterested members of the board of directors or board committee; (b) independent legal counsel (if a quorum of the disinterested members of the board of directors or board committee is not available or if the disinterested members of the board of directors or a board committee so direct); or (c) the stockholders.

Section 145 also empowers us to purchase and maintain insurance on behalf of our directors or officers against any liability asserted against them or incurred by them in any such capacity or arising out of their status as our directors or officers whether or not we would have the power to indemnify them against the liabilities under Section 145. We currently carry liability insurance for the benefit of our directors and officers, including Scientific Advisory Board members, that provides coverage for any compensatory damages (excluding punitive or exemplary damages, taxes, matters uninsurable pursuant to any applicable law, fines or penalties), settlements, and reasonable and necessary legal fees and expenses incurred by any of the officers or directors resulting from any written demand for civil damages, any civil proceeding, or any formal administrative or regulatory proceeding initiated during the policy period against any of the officers or directors in which they shall be subjected to a binding adjudication of liability for damages or other relief, including any appeal therefrom, for any actual or alleged error, act, omission, misstatement, misleading statement, neglect, or breach of duty committed or attempted by any officer or director in their capacity as a director or officer of the company (or any subsidiary of the company) or with consent of the company in the position of director, officer or trustee of any non-profit entity, or any matter claimed against any director or officer solely by reason of their serving in such capacity or position. Among other exclusions, our current policy specifically excludes coverage for any claim: involving an accounting of profits made in fact from the purchase or sale of the securities of the company by officers or directors; based upon actual or alleged pollution or any decision to test for or clean up pollutants or nuclear material; for violations of the Employee Retirement Income Security Act of 1974; by or on behalf of the company, other officers or directors or any security holder of the company (in most instances); brought about by any deliberately dishonest, fraudulent or malicious act or omission or any willful violation of law established by an adverse final adjudication; based upon any personal profit, remuneration or advantage gained by any director or officer to which they were not legally entitled; based upon or arising out of their services as directors, officers or employees of any entity other than the company (or a subsidiary of the company) except for service, with consent of the company, by a director or officer in the position of director, officer or trustee in any non-profit entity, if such claim is brought and maintained without the participation of the non-profit entity; for defamation, bodily injury, sickness, disease, death, false arrest or imprisonment, assault, battery, outrage, humiliation, mental anguish, emotional distress, abuse of process, malicious prosecution, violation or invasion of any right of privacy or private occupancy, trespass, nuisance or wrongful entry or eviction, or for damage to or destruction of any tangible property including loss of use thereof; based any claim related to allegations that computer software or hardware failed to function properly because of a year 2000 problem; for, based upon, a rising from, or in any way related to any demand, suit, or other

II-2


proceeding which was pending on or existed prior to January 23, 1998 with respect to the first $1,000,000 in coverage, and prior to January 23, 1999, with respect to the remaining coverage; which, in whole or in part, is brought or maintained by or on behalf of David Drutz, including his estate, any beneficiary of his estate, or assignee, trustee or receiver thereof. In addition, the policy excludes all or part of such claim that is, directly or indirectly, based on, attributable to, arising out of, resulting from or in any manner relating to the Initial Public Offering of the Company's securities and/or any registration statement or prospectus related thereto, however, the Company intends to procure liability insurance for the benefit of its directors and officers which includes the coverage relating to the Initial Public Offering which is excluded from its current policy, provided it can obtain reasonable quotations.

Article Ninth of our amended and restated certificate of incorporation requires that we indemnify, to the fullest extent permitted by the DGCL, each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a director or officer of Inspire, or is or was serving, or has agreed to serve, at our request, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom.

Any amendment or repeal of Article Ninth of our amended and restated certificate of incorporation shall not adversely affect any right or protection of a director or officer with respect to any act or omission of such director or officer occurring prior to such amendment or repeal.

Further, the Underwriting Agreement, a proposed form of which is filed as Exhibit 1.1 hereto, contains provisions for indemnification by our underwriters and their officers, directors and other specified persons, against specified civil liabilities, including particular liabilities under the Securities Act.

Item 15. Recent Sales of Unregistered Securities.

In the three years preceding the filing of this registration statement, we sold the following securities that were not registered under the Securities Act.

(1) During the period of April 10, 1995 to March 24, 2000, we granted stock options to employees, directors and consultants under our stock plan covering an aggregate of 2,978,454 shares of our common stock. Of these, approximately 264,651 shares have been cancelled without being exercised, approximately 841,848 shares have been exercised and 1,906,241 are currently outstanding. The weighted average exercise price of the stock options outstanding as of March 24, 2000 was $4.18 per share. During the period of April 10, 1995 to March 24, 2000, we sold 841,848 shares of our common stock to employees, directors and consultants upon the exercise of outstanding stock options for exercise prices ranging from $0.12 to $14.00 per share.

(2) On June 19, 1997, June 30, 1997 and September 10, 1997, we sold an aggregate of 10,866,014 shares of our Series B convertible preferred stock to several accredited investors for an aggregate purchase price of $13,039,217.

(3) On June 18, 1998, we issued Comdisco, Inc. a 10-year warrant to purchase 15,000 shares of our Series B convertible preferred stock at $1.20 per share.

(4) On September 1, 1998, we issued 28,571 shares of our common stock to The University of North Carolina at Chapel Hill as partial consideration for technology licensed pursuant to an Exclusive License Agreement dated September 1, 1998.

(5) On September 10, 1998, we sold 375,000 shares of our Series C convertible preferred stock to Kissei Pharmaceutical Co., Ltd. for an aggregate purchase price of $900,000.

II-3


(6) On December 16, 1998, we sold 416,667 shares of our Series D convertible preferred stock to Santen Pharmaceuticals Co., Ltd. for an aggregate purchase price of $1,500,000.

(7) On January 29, 1999, we issued PharmaLogic Development, Inc. a 10-year warrant to purchase 11,429 shares of our common stock at $4.20 per share;

(8) On February 8, 1999, we issued Comdisco, Inc. a 10-year warrant to purchase 20,000 shares of our Series F convertible preferred stock at $2.40 per share;

(9) On April 15, 1999, we issued Comdisco, Inc. a 10-year warrant to purchase 8,170 shares of our Series F convertible preferred stock at $2.40 per share;

(10) On July 1, 1999 and October 29, 1999, we sold an aggregate of 6,201,985 shares of our Series E convertible preferred stock to several accredited investors for an aggregate purchase price of $12,403,970. In connection with these sales, we paid Pacific Growth Equities placement fees of $744,238.

(11) On December 17, 1999, we sold 1,000,000 shares of Series G convertible preferred stock to Genentech, Inc. for an aggregate purchase price of $10,000,000 and a five-year warrant to purchase 253,968 shares of common stock at $7.88 per share.

The sale and issuances of securities in the transactions described in paragraph (1) above were deemed to be exempt from registration under the Securities Act by virtue of Rule 701 (promulgated thereunder in that they were offered and sold either pursuant to a written compensatory benefit plan or pursuant to a written contract relating to compensation, as evidenced by Rule 701, or were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) as transactions not involving any public offering.

The sale and issuance of securities in the transactions described in paragraphs (2) through (11) above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) and/or Regulation D as transactions not involving any public offering, or Regulation S as offers and sales that occurred outside the United States. Where appropriate, the purchasers represented their intention to acquire the securities for investment only and not with a view to the distribution thereof, or that they were non- U.S. persons. Appropriate legends are affixed to the stock certificates issued in those transactions. All recipients either received adequate information about us or had access, through employment or other relationships, to adequate information.

Item 16. Exhibits and Financial Statement Schedules.

Exhibits

Exhibit
Number                                Description
-------                               -----------
 1.1*   Underwriting Agreement
 3.1    Amended and Restated Certificate of Incorporation
 3.2    Amended and Restated Bylaws
 4.1    Specimen Common Stock Certificate
 5.1*   Opinion of Smith, Stratton, Wise, Heher & Brennan
10.1+   Amended and Restated 1995 Stock Plan, as amended
10.2+   Form of Incentive Stock Option
10.3*   Form of Non-statutory Stock Option
10.4+   Consultation and Scientific Advisory Board Agreement between Inspire
        Pharmaceuticals, Inc. and Dr. Richard Boucher, dated March 10, 1995
10.5+** Sponsored Research Agreement between Inspire Pharmaceuticals, Inc. and
        The University of North Carolina at Chapel Hill, effective March 10,
        1995, as amended
10.6+** Clinical Trial Agreement between Inspire Pharmaceuticals, Inc. and The
        University of North Carolina at Chapel Hill, effective March 10, 1995,
        as amended
10.7**  Exclusive License Agreement between Inspire Pharmaceuticals, Inc. and
        The University of North Carolina at Chapel Hill, dated as of March 10,
        1995

II-4


Exhibit
Number                                Description
-------                               -----------
10.8    Lease between Inspire Pharmaceuticals, Inc. and Imperial Center,
        Limited Partnership regarding Royal Center I, Durham, North Carolina,
        dated as of May 17, 1995, as amended
10.9    Master Lease Agreement between Inspire Pharmaceuticals, Inc. and
        Comdisco, Inc., dated October 13, 1995
10.10   Lease Agreement between Inspire Pharmaceuticals, Inc. and Petula
        Associates Ltd. regarding Royal Center II, Durham, North Carolina,
        dated as of December 30, 1997
10.11   Sublease Agreement between ICAgen, Inc. and Inspire Pharmaceuticals,
        Inc. regarding premises located at 4222 Emperor Boulevard, Suite 500,
        Durham, North Carolina, dated September 22, 1997 and extension of
        Sublease Agreement dated February 14, 2000
10.12** Exclusive License Agreement between Inspire Pharmaceuticals, Inc. and
        The University of North Carolina at Chapel Hill, dated September 1,
        1998
10.13** Joint Development, License and Supply Agreement between Inspire
        Pharmaceuticals, Inc. and Kissei Pharmaceutical Co., Ltd., dated as of
        September 10, 1998
10.14   Registration Rights Agreement between Inspire Pharmaceuticals, Inc.
        and Kissei Pharmaceutical Co., Ltd., dated as of September 10, 1998
10.15** Development, License and Supply Agreement between Inspire
        Pharmaceuticals, Inc. and Santen Pharmaceutical Co., Ltd., dated as of
        December 16, 1998
10.16   Registration Rights Agreement between Inspire Pharmaceuticals, Inc.
        and Santen Pharmaceutical Co., Ltd., dated as of December 16, 1998
10.17** Clinical Research Agreement between Inspire Pharmaceuticals Inc. and
        Simbec Research Limited, dated August 30, 1999
10.18** Services Agreement between Inspire Pharmaceuticals, Inc. and
        Pharmaceutical Development Associates, Inc. (ClinSites/PDA) dated
        November 1, 1999
10.19** Quotation between Inspire Pharmaceuticals, Inc. and Simbec Research
        Limited regarding research study, dated December 17, 1999
10.20** Development, License and Supply Agreement between Inspire
        Pharmaceuticals, Inc. and Genentech, Inc., dated as of December 17,
        1999
10.21** Series G Preferred Stock and Warrant Purchase Agreement between
        Inspire Pharmaceuticals, Inc. and Genentech, Inc., dated as of
        December 17, 1999
10.22   Warrant Agreement between Inspire Pharmaceuticals, Inc. and Genentech,
        Inc., dated as of December 17, 1999
10.23   Amended and Restated Investors' Rights Agreement among Inspire
        Pharmaceuticals, Inc. and the holders of Series A, B, E and G
        Preferred Stock of the Company dated as of December 17, 1999
10.24   Employee Confidentiality, Invention Assignment and Non-Compete
        Agreement between Inspire Pharmaceuticals, Inc. and Donald J.
        Kellerman dated February 3, 2000
10.25   Employee Confidentiality, Invention Assignment and Non-Compete
        Agreement between Inspire Pharmaceuticals, Inc. and Gregory J.
        Mossinghoff dated February 4, 2000
10.26   Employee Confidentiality, Invention Assignment and Non-Compete
        Agreement between Inspire Pharmaceuticals, Inc. and Benjamin R. Yerxa
        dated February 4, 2000
10.27   Employee Confidentiality, Invention Assignment and Non-Compete
        Agreement between Inspire Pharmaceuticals, Inc. and Janet L. Rideout
        dated February 4, 2000
10.28   Employee Confidentiality, Invention Assignment and Non-Compete
        Agreement between Inspire Pharmaceuticals, Inc. and Christy L. Shaffer
        dated February 10, 2000
16.1    Letter of KPMG LLP dated February 25, 2000
23.1    Consent of PricewaterhouseCoopers, L.L.P., independent public
        accountants
23.2*   Consent of Smith, Stratton, Wise, Heher & Brennan (contained in
        Exhibit 5.1)
24.1+   Power of Attorney
27.1    Financial Data Schedule


* To be filed by amendment. ** Confidential treatment has been requested with respect to a portion of this Exhibit.

+ Previously filed.

II-5


Financial Statement Schedules

No schedules are required because the information is either not applicable or is presented elsewhere herein.

Item 17. Undertakings.

We hereby undertake to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Inspire pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of Inspire in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

We hereby undertake that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act will be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus will be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof.

II-6


SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 1 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Durham, State of North Carolina on March 28, 2000.

Inspire Pharmaceuticals, Inc.

        /s/ Christy L. Shaffer
By: _________________________________
          Christy L. Shaffer,
  President, Chief Executive Officer
             and Director

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the registration statement has been signed by the following persons in the capacities and on the dates stated.

              Signature                          Title                   Date
              ---------                          -----                   ----

        /s/ Christy L. Shaffer         President, Chief Executive   March 28, 2000
______________________________________  Officer (principal
          Christy L. Shaffer            executive officer) and
                                        Director

      /s/ Gregory J. Mossinghoff       Chief Business Officer       March 28, 2000
______________________________________  (principal financial
        Gregory J. Mossinghoff          officer and principal
                                        accounting officer)

                  *                    Chairman of the Board        March 28, 2000
______________________________________
         Terrance G. McGuire

                  *                    Director                     March 28, 2000
______________________________________
        Richard Boucher, M.D.
                  *                    Director                     March 28, 2000
______________________________________
       Andre L. Lamotte, Sc.D.

                  *                    Director                     March 28, 2000
______________________________________
        H. Jefferson Leighton

                  *                    Director                     March 28, 2000
______________________________________
          W. Leigh Thompson

                  *                    Director                     March 28, 2000
______________________________________
            Jesse I. Treu


* By her signature set forth below, the undersigned, pursuant to duly authorized powers of attorney filed with the Securities and Exchange Commission, has signed this Amendment No. 1 to the registration statement on behalf of the persons indicated.

       /s/ Christy L. Shaffer

By: ____________________________

Christy L. Shaffer,

Attorney-In-Fact

II-7


INDEX TO EXHIBITS

Exhibit
Number                                Description
-------                               -----------
 1.1*   Underwriting Agreement
 3.1    Amended and Restated Certificate of Incorporation
 3.2    Amended and Restated Bylaws
 4.1    Specimen Common Stock Certificate
 5.1*   Opinion of Smith, Stratton, Wise, Heher & Brennan
10.1+   Amended and Restated 1995 Stock Plan, as amended
10.2+   Form of Incentive Stock Option
10.3*   Form of Non-statutory Stock Option
10.4+   Consultation and Scientific Advisory Board Agreement between Inspire
        Pharmaceuticals, Inc. and Dr. Richard Boucher, dated March 10, 1995
10.5+** Sponsored Research Agreement between Inspire Pharmaceuticals, Inc. and
        The University of North Carolina at Chapel Hill, effective March 10,
        1995, as amended
10.6+** Clinical Trial Agreement between Inspire Pharmaceuticals, Inc. and The
        University of North Carolina at Chapel Hill, effective March 10, 1995,
        as amended
10.7**  Exclusive License Agreement between Inspire Pharmaceuticals, Inc. and
        The University of North Carolina at Chapel Hill, dated as of March 10,
        1995
10.8    Lease between Inspire Pharmaceuticals, Inc. and Imperial Center,
        Limited Partnership regarding Royal Center I, Durham, North Carolina,
        dated as of May 17, 1995, as amended
10.9    Master Lease Agreement between Inspire Pharmaceuticals, Inc. and
        Comdisco, Inc., dated October 13, 1995, as amended
10.10   Lease Agreement between Inspire Pharmaceuticals, Inc. and Petula
        Associates Ltd. regarding Royal Center II, Durham, North Carolina,
        dated as of December 30, 1997
10.11   Sublease Agreement between ICAgen, Inc. and Inspire Pharmaceuticals,
        Inc. regarding premises located at 4222 Emperor Boulevard, Suite 500,
        Durham, North Carolina, dated September 22, 1997 and extension of
        Sublease Agreement dated February 14, 2000
10.12** Exclusive License Agreement between Inspire Pharmaceuticals, Inc. and
        The University of North Carolina at Chapel Hill, dated September 1,
        1998
10.13** Joint Development, License and Supply Agreement between Inspire
        Pharmaceuticals, Inc. and Kissei Pharmaceutical Co., Ltd., dated as of
        September 10, 1998
10.14   Registration Rights Agreement between Inspire Pharmaceuticals, Inc.
        and Kissei Pharmaceutical Co., Ltd., dated as of September 10, 1998
10.15** Development, License and Supply Agreement between Inspire
        Pharmaceuticals, Inc. and Santen Pharmaceutical Co., Ltd., dated as of
        December 16, 1998
10.16   Registration Rights Agreement between Inspire Pharmaceuticals, Inc.
        and Santen Pharmaceutical Co., Ltd., dated as of December 16, 1998
10.17** Clinical Research Agreement between Inspire Pharmaceuticals Inc. and
        Simbec Research Limited, dated August 30, 1999
10.18** Services Agreement between Inspire Pharmaceuticals, Inc. and
        Pharmaceutical Development Associates, Inc. (ClinSites/PDA) dated
        November 1, 1999
10.19** Quotation between Inspire Pharmaceuticals, Inc. and Simbec Research
        Limited regarding research study, dated December 17, 1999
10.20** Development, License and Supply Agreement between Inspire
        Pharmaceuticals, Inc. and Genentech, Inc., dated as of December 17,
        1999
10.21** Series G Preferred Stock and Warrant Purchase Agreement between
        Inspire Pharmaceuticals, Inc. and Genentech, Inc., dated as of
        December 17, 1999
10.22   Warrant Agreement between Inspire Pharmaceuticals, Inc. and Genentech,
        Inc., dated as of December 17, 1999
10.23   Amended and Restated Investors' Rights Agreement among Inspire
        Pharmaceuticals, Inc. and the holders of Series A, B, E and G
        Preferred Stock of the Company dated as of December 17, 1999


Exhibit
Number                                Description
-------                               -----------
10.24   Employee Confidentiality, Invention Assignment and Non-Compete
        Agreement between Inspire Pharmaceuticals, Inc. and Donald J.
        Kellerman dated February 3, 2000
10.25   Employee Confidentiality, Invention Assignment and Non-Compete
        Agreement between Inspire Pharmaceuticals, Inc. and Gregory J.
        Mossinghoff dated February 4, 2000
10.26   Employee Confidentiality, Invention Assignment and Non-Compete
        Agreement between Inspire Pharmaceuticals, Inc. and Benjamin R. Yerxa
        dated February 4, 2000
10.27   Employee Confidentiality, Invention Assignment and Non-Compete
        Agreement between Inspire Pharmaceuticals, Inc. and Janet L. Rideout
        dated February 4, 2000
10.28   Employee Confidentiality, Invention Assignment and Non-Compete
        Agreement between Inspire Pharmaceuticals, Inc. and Christy L. Shaffer
        dated February 10, 2000
16.1    Letter of KPMG LLP dated February 25, 2000
23.1    Consent of PricewaterhouseCoopers, L.L.P., independent public
        accountants
23.2*   Consent of Smith, Stratton, Wise, Heher & Brennan (contained in
        Exhibit 5.1)
24.1+   Power of Attorney
27.1    Financial Data Schedule


* To be filed by amendment. ** Confidential treatment has been requested with respect to a portion of this Exhibit.

+ Previously filed.


EXHIBIT 3.1

AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION
OF
INSPIRE PHARMACEUTICALS, INC.

Christy L. Shaffer, Ph.D. hereby certifies that:

1. The original name of this corporation is Innovative Pharmaceuticals, Inc. (the "Corporation"), and the date of filing of the original Certificate of Incorporation of this corporation with the Secretary of State of the State of Delaware is October 28, 1993.

2. She is the duly elected President and Chief Executive Officer of the Corporation.

3. The Certificate of Incorporation of the Corporation, as previously amended and restated and thereafter further amended, is hereby amended and restated to read in its entirety as follows:

"FIRST. The name of the Corporation is Inspire Pharmaceuticals, Inc.

SECOND. The address of the registered office of the Corporation in the State of Delaware is:

The Corporation Trust Company 1209 Orange Street
Wilmington, Delaware 19801 County of New Castle

The name of the Corporation's registered agent at said address is The Corporation Trust Company.

THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware (as may be in effect from time to time, the "Delaware Corporation Law").

FOURTH.

Section 1. CAPITAL STOCK

Section 1.1. Capital Stock Prior to Reverse Split. The total number of shares of all classes of stock which the Corporation shall have authority to issue is One Hundred Eight Million (108,000,000), consisting of Fifty Six Million (56,000,000) shares of common stock, par value $0.001 per share (the "Common Stock"), and Fifty Two Million (52,000,000) shares of preferred stock, par value $0.001 per share.

-1-

Section 1.2. Reverse Stock Split. Immediately prior to the conversion of all outstanding shares of the Preferred Stock (as hereinafter defined) pursuant to Sections 3.4(b)(i)(1) and 3.4(b)(ii), every one and three quarters (1.75) shares of Common Stock issued and outstanding or held in the treasury of the Corporation will be reclassified and changed into one fully paid and nonassessable share of Common Stock, and each holder of record of a certificate for shares of Common Stock at such time shall be entitled to receive, as soon as practicable upon their surrender of such certificate(s), a new certificate representing one share of Common Stock for each 1.75 shares of Common Stock represented by the surrendered certificate(s) of such holder. No fractional shares of Common Stock shall be issued as a result of the reclassification of the Common Stock pursuant to this Section 1.2. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the initial public offering price of the Common Stock. The determination as to whether or not any fractional shares are issuable upon reclassification of the Common Stock pursuant to this Section 1.2 shall be based upon the total number of shares of Common Stock evidenced by the stock certificate(s) surrendered by the holder at any given time, and not upon each share of Common Stock evidenced by such stock certificate(s).

Section 1.3. Capital Stock Following Reverse Split. After giving effect to the reverse-stock split set forth in Section 1.2 above and the conversion of all outstanding shares of the Preferred Stock pursuant to Sections 3.4(b)(i)(1) and 3.4(b)(ii), the total number of shares of all classes of stock which the Corporation shall have authority to issue will be Sixty Two Million (62,000,000), consisting of Sixty Million (60,000,000) shares of Common Stock, and Two Million (2,000,000) shares of preferred stock, par value $0.001 per share.

Section 2. COMMON STOCK

Section 2.1. Voting Rights. The holders of shares of Common Stock shall be entitled to one vote for each share so held with respect to all matters voted on by the stockholders of the Corporation, subject in all cases to Sections 3.5 and 3.7 of this Article Fourth.

Section 2.2. Liquidation Rights. Subject to the prior and superior right of the Corporation's preferred stock, upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of Common Stock shall be entitled to receive that portion of the remaining funds to be distributed to holders of Common Stock, subject to and as provided in Section 3.3 of this Article Fourth.

Section 2.3. Dividends. Dividends may be paid on the Common Stock as and when declared by the Board of Directors; provided, however, that no cash dividends may be declared or paid on the Common Stock unless dividends shall first have been declared and paid with respect to the Corporation's preferred stock, as provided in Section 3.6 of this Article Fourth.

-2-

Section 3. PREFERRED STOCK

Section 3.1. Designation of Preferred Stock Generally. Subject to Sections 3.5 and 3.7, the preferred stock of the Corporation may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in this Amended and Restated Certificate of Incorporation (as may be amended from time to time, the "Certificate of Incorporation"), to fix, or alter the existing dividend rights, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and/or liquidation preferences of any wholly unissued series of preferred stock, and the number of shares constituting any such series and the designation thereof, or any of the foregoing; and to increase or decrease the number of shares of any series of preferred stock subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series of preferred stock shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

Section 3.2. Current Designation of Preferred Stock. Of the 52,000,000 shares of preferred stock which the Corporation has authority to issue: (i) 9,365,000 shall be designated and known as "Series A Convertible Preferred Stock" ("Series A Preferred"); (ii) 9,365,000 shall be designated and known as "Series AA Convertible Preferred Stock" ("Series AA Preferred"); (iii) 10,881,014 shares shall be designated and known as "Series B Convertible Preferred Stock" ("Series B Preferred"); (iv) 10,881,014 shares shall be designated and known as "Series BB Convertible Preferred Stock" ("Series BB Preferred"); (v) 375,000 shall be designated and known as "Series C Convertible Preferred Stock" ("Series C Preferred"); (vi) 416,667 shall be designated and known as "Series D Convertible Preferred Stock" ("Series D Preferred"); (vii) 8,000,000 shall be designated and known as "Series E Convertible Preferred Stock" ("Series E Preferred"); (vii) 28,170 shall be designated and known as "Series F Convertible Preferred Stock" ("Series F Preferred"); and (viii) 1,200,000 shall be designated and known as "Series G Convertible Non Voting Preferred Stock" ("Series G Preferred") (the Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred, Series C Preferred, Series D Preferred, Series E Preferred, Series F Preferred and Series G Preferred are hereinafter collectively referred to as the "Preferred Stock"), and each such series shall have the respective rights, preferences and privileges set forth below.

Section 3.3. Liquidation Rights.

(a) Preference as to Payment. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation:

(i) the holders of shares of Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred and Series E Preferred then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be

-3-

distributed to the holders of any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred and Series E Preferred (such senior Preferred Stock is referred to as "Senior Preferred"), but before any payment shall be made to the holders of the Series C Preferred, Series D Preferred, Series F Preferred, Series G Preferred and Common Stock or any other class or series of stock ranking on liquidation junior to the Senior Preferred, Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred and Series E Preferred (such Common Stock and other classes or series of stock being collectively referred to as "Junior Stock"), by reason of their ownership thereof, an amount equal to (A) $1.00 per share with respect to each share of Series A Preferred or Series AA Preferred, (B) $1.20 per share with respect to each share of Series B Preferred or Series BB Preferred, and (C) $2.00 per share with respect to each share of Series E Preferred, plus, in each case, an amount equal to any declared but unpaid dividends to and including the date full payment shall be tendered to the holders of the Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred and Series E Preferred with respect to such liquidation, dissolution or winding up (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares);

(ii) the holders of shares of Series C Preferred then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of the Senior Preferred, Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred, Series E Preferred and any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Series C Preferred, but before any payment shall be made to the holders of the Series D Preferred, Series F Preferred, Series G Preferred and Common Stock or any other class or series of stock ranking on liquidation junior to the Series C Preferred, by reason of their ownership thereof, an amount equal to $2.40 per share of Series C Preferred, plus an amount equal to any declared but unpaid dividends to and including the date full payment shall be tendered to the holders of the Series C Preferred with respect to such liquidation, dissolution or winding up (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares); and

(iii) the holders of shares of Series D Preferred, Series F Preferred and Series G Preferred then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of the Senior Preferred, Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred, Series C Preferred, Series E Preferred and any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Series D Preferred, Series F Preferred and Series G Preferred, but before any payment shall be made to the holders of Common Stock or any other class or series of stock ranking on liquidation junior to the Series D Preferred, Series F Preferred and Series G Preferred, by reason of their ownership thereof, an amount equal to (A) $3.60 per share of Series D Preferred, (B) $2.40 per share of Series F Preferred, and (C) $10.00 per share of Series G Preferred, plus an amount equal to any declared but unpaid

-4-

dividends to and including the date full payment shall be tendered to the holders of the Series D Preferred, Series F Preferred and Series G Preferred with respect to such liquidation, dissolution or winding up (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares). In addition to the amount equal to $10.00 per share plus the declared but unpaid dividends as provided above for Series G Preferred, the holders of Series G Preferred shall be entitled to the dividends accrued pursuant to Section 3.6(c) (which dividends shall be deemed accrued on a per diem basis through the date of such event and thereafter). The amount equal to $10.00 per share, plus the dividends accrued pursuant to Section 3.6(c) or otherwise declared and unpaid shall collectively be referred to herein as the "Series G Preference Amount".

(b) Payment. Upon the dissolution, liquidation or winding up of the Corporation, all preferential amounts required to be paid by the Corporation shall be paid first to the holders of Senior Preferred Stock and any other class or series of stock of the Corporation ranking on liquidation on a parity with the Senior Preferred Stock; second, to the holders of Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred, and Series E Preferred Stock and any other class or series of stock of the Corporation ranking on liquidation on a parity with the holders of Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred, Series E Preferred; third, to the holders of Series C Preferred and any other class or series of stock of the Corporation ranking on liquidation on a parity with the Series C Preferred; and fourth, to the holders of Series D Preferred, Series F Preferred, and Series G Preferred and any other class or series of stock of the Corporation ranking on liquidation on a parity with the Series D Preferred, Series F Preferred and Series G Preferred. After the payments set forth in the preceding sentence, the remaining assets and funds of the Corporation available for distribution to its stockholders shall be distributed among the holders of shares of Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred, Series E Preferred, Series C Preferred, Series D Preferred, Series F Preferred, Series G Preferred and Common Stock and any other class or series of stock entitled to participate in liquidation distributions with the holders of Common Stock, pro rata based on the number of shares of Common Stock held by each (assuming conversion into Common Stock of all such shares).

(c) Allocation Among Series A, AA, B, BB and E Preferred if Funds
Insufficient. If the assets or surplus funds to be distributed to the holders of the Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred and Series E Preferred are insufficient to permit the payment to such holders of their full preferential amount, the assets and surplus funds legally available for distribution shall be distributed ratably among the holders of the Series A Preferred, Series AA Preferred, Series B Preferred, Series BB and Series E Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive.

(d) Allocation With Respect to Series C Preferred if Funds
Insufficient. If, after the payment to the holders of the Series A Preferred, Series AA Preferred, Series B Preferred Series BB Preferred and Series E Preferred of their full preferential amounts, the

-5-

assets or surplus funds to be distributed to the holders of the Series C Preferred are insufficient to permit the payment to such holders of their full preferential amount, the assets and surplus funds legally available for distribution shall be distributed ratably among the holders of the Series C Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive.

(e) Allocation Among Series D, F and G Preferred if Funds
Insufficient. If, after the payment to the holders of the Series A Preferred, Series AA Preferred, Series B Preferred, Series BB Preferred, Series E Preferred and Series C Preferred of their full preferential amounts, the assets or surplus funds to be distributed to the holders of the Series D Preferred, Series F Preferred and Series G Preferred are insufficient to permit the payment to such holders of their full preferential amount, the assets and surplus funds legally available for distribution shall be distributed ratably among the holders of the Series D Preferred, Series F Preferred and Series G Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive.

(f) Certain Events Deemed Liquidation; Exception. A sale of all or substantially all of the assets of the Corporation or the consolidation or merger of the Corporation, or sale of more than fifty percent (50%) of the capital stock of the Corporation in a transaction or series of related transactions shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 3.3, but only if the holders of the outstanding stock of the Corporation immediately prior to the closing of such sale, merger or consolidation hold, immediately after such closing, less than a majority in interest of the issued and outstanding shares of voting securities (as measured by voting power) of the entity purchasing all or substantially all of the Corporation's assets or of the entity (including without limitation the Corporation) surviving or resulting from such merger or consolidation, as the case may be; provided, however, that such transaction shall not be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation and, to the extent applicable, all outstanding shares of a given series of Preferred Stock shall be treated under the provisions of Section 3.4(d)(vii) in lieu of this Section 3.3 in connection with such sale, merger or consolidation in the event that the holders of a majority of the outstanding shares of such series of Preferred Stock so elect, by notice to the Corporation no later than fifteen (15) days before the effective date of such event.

(g) Non-cash Consideration. In any transaction subject to Section 3.3(f), if the consideration payable to the Corporation and allocable to the holders of the shares of any series of Preferred Stock or directly payable to the holders of the shares of such series of Preferred Stock in connection with any such sale, merger or consolidation (the "Transaction Consideration") does not consist entirely of cash, the Corporation may satisfy its obligations under
Section 3.3(b) by paying to the holders of the shares of the applicable series of Preferred Stock a portion of the Transaction Consideration with a fair market value equal to the amount required to be distributed pursuant to this Section
3.3. The fair market value of the Transaction Consideration shall be determined by mutual agreement of the Corporation and the holders of a majority of the outstanding shares of the applicable series of Preferred Stock. If the Transaction Consideration consists of more than one type of

-6-

consideration, then each type of consideration shall be distributed to each holder of shares of such series of Preferred Stock in the same proportions as such type of consideration represents of the total Transaction Consideration.

Section 3.4. Conversion. The holders of Preferred Stock and the Corporation shall have conversion rights as follows (the "Conversion Rights"):

(a) Right to Convert.

(i) Each share of Preferred Stock other than the Series G Preferred shall be convertible at the option of the holder thereof at any time after the date of issuance and without the payment of any additional consideration therefor into that number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) $1.00 with respect to the Series A Preferred; (ii) $1.00 with respect to the Series AA Preferred; (iii) $1.20 with respect to the Series B Preferred; (iv) $1.20 with respect to the Series BB Preferred; (v) $2.40 with respect to the Series C Preferred; (vi) $3.60 with respect to the Series D Preferred; (vii) $2.00 with respect to the Series E Preferred; and (viii) $2.40 with respect to the Series F Preferred, by the applicable Conversion Price (as defined below) in effect at the time of conversion. The initial Conversion Price of (s) Series A Preferred shall be $1.00; (t) Series AA Preferred shall be $1.00; (u) Series B Preferred shall be $1.20; (v) Series BB Preferred shall be $1.20; (w) Series C Preferred shall be $2.40; (x) Series D Preferred shall be $3.60; (y) Series E Preferred shall be $2.00; and (z) Series F Preferred shall be $2.40. Subject to Section 3.4(e), the Conversion Price of each series of Preferred Stock shall be subject to adjustment (in order to adjust the number of shares of Common Stock into which a share of each series of the Preferred Stock is convertible) in accordance with this Section 3.4. Each person so converting shares of Preferred Stock shall be entitled to all declared but unpaid dividends up to the time of the conversion. Such dividends shall be paid to each such person within thirty (30) days of the date of conversion.

(ii) Each share of Series G Preferred shall be convertible, at the option of any holder thereof or at the option of the Corporation, at any time after the date of the second anniversary of the date of issuance of the first share of Series G Preferred issued by the Corporation; provided that no such conversion shall be made with respect to any single holder to the extent that such conversion would cause such single holder of such converted shares to exceed a 19.5% ownership interest in the Corporation. Any such conversion shall be made, without the payment of any additional consideration therefor, into that number of fully paid and non-assessable shares of Common Stock as is determined as follows: (1) in the event that either a Qualified Financing or a Public Offering (as such terms are defined in Section 3.4(h)) has occurred prior to the date of such conversion under this Section 3.4(a)(ii), by dividing the Series G Preference Amount by the Series G Conversion Price established under Section 3.4(h); or (2) if neither a Qualified Financing nor a Public Offering (as such terms are defined in Section 3.4(h)) has occurred prior to the date of such conversion under this Section 3.4(a)(ii), then by dividing the Series G Preference Amount by the Appraisal Price (as hereinafter defined). As used herein, the "Appraisal Price" shall mean the greater of $2.00 or the quotient obtained by dividing the Appraised Value (as

-7-

hereinafter defined) by the number of shares of Common Stock outstanding or issuable before the conversion of Convertible Securities (as defined in Section 3.4(d)(i)(3) hereof) or the exercise of Options (as defined in Section 3.4(d)(i)(1) hereof) on the date the shares of Series G Preferred are surrendered pursuant to Section 3.4(c)(ii) hereof. Appraised Value shall mean the value of the Corporation as determined pursuant to Section 3.4(a)(iii).

(iii) Within thirty (30) days of receiving notice from a holder of Series G Preferred that it wishes to convert shares of its Series G Preferred pursuant to this Section 3.4(a) or within thirty (30) days after providing notice to a holder of Series G Preferred that the Corporation wishes to convert shares of the Series G Preferred pursuant to Section 3.4(a) (in either case, the holder of Series G Preferred shall be referred to as the "Redeeming Holder"), the Corporation shall cause an internal valuation of the Corporation to be prepared (the "Corporation's Valuation") and sent to the Redeeming Holder and all other holders of Series G Preferred. Upon receipt of such notice, any holder of Series G Preferred may become a Redeeming Holder hereunder by returning the Response Notice described below. Within 15 days after receipt of the Corporation's Valuation (the "Response Period"), a Redeeming Holder shall have the right to deliver to the Corporation a written notice (a "Response Notice") indicating such Redeeming Holder's disapproval of the Corporation's Valuation. In the event that a Redeeming Holder does not approve of the Corporation's Valuation, such Redeeming Holder shall, within 15 days after delivery of the Response Notice to the Corporation, cause an internal valuation of the Corporation to be prepared (the "Redeeming Holder's Valuation") and delivered to the Corporation. The Corporation and such Redeeming Holder shall then have a period of 15 days to agree upon the Appraised Value; provided that if the Corporation and such Redeeming Holder are unable to agree on such amount, they shall select an arbitrator (which arbitrator must be a disinterested third party with reasonable qualifications in the valuation of businesses in the pharmaceutical industry), who will be instructed to make a decision within thirty (30) days thereafter on the basis of "baseball arbitration" principles (such that the arbitrator must select one of the two valuations presented to the arbitrator by the Corporation and the Redeeming Holder). The Corporation and such Redeeming Holder shall share equally all expenses of any arbitrator. Within five (5) days after the determination of the Appraised Value, the Corporation shall give notice of the Appraised Value and the date on which such conversion may take place, which shall be not less than ten (10) days after such notice is given to the Redeeming Holder.

(b) Automatic Conversion.

(i) Each share of Preferred Stock, other than Series G Preferred, shall automatically be converted into shares of Common Stock, according to the ratio set forth in Section 3.4(a), upon:

(1) the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public at a public offering price of at least $3.00 per share (with such amount to be

-8-

appropriately adjusted in the event of any stock dividend, stock distribution, subdivision combination or consolidation, as provided in Section 3.4(d)(vi)) and having an aggregate offering price to the public resulting in gross proceeds to the Corporation of not less than $10,000,000; or

(2) the written consent of holders in interest of eighty percent (80%) or more of the Preferred Stock, excluding the Series G Preferred, outstanding at that time.

(ii) Each share of Series G Preferred shall automatically be converted into shares of Common Stock at the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public; provided that no such conversion shall be made with respect to any single holder to the extent that such conversion would cause such single holder of such converted shares to exceed a 19.5% ownership interest in the Corporation. Any such conversion shall be made, without the payment of any additional consideration therefor, into that number of fully paid and non-assessable shares of Common Stock as is determined by dividing the Series G Preference Amount by the Series G Conversion Price determined pursuant to Section 3.4 (h)(i) or 3.4(h)(ii). In the event that there are shares of Series G Preferred that are not converted under this provision due to the foregoing limitation, then: (1) any such affected holders and the Corporation shall promptly enter into good faith discussions to determine a mutually acceptable mechanism to cause such outstanding shares of Series G Preferred to convert to Common Stock as soon as reasonably practical following the closing of such public offering; and (2) such outstanding shares of Series G Preferred shall continue to automatically convert to Common Stock as and when such conversion may be made in conformance with the foregoing limitation.

(iii) The person(s) entitled to receive Common Stock issuable upon a conversion of Preferred Stock hereunder shall not be deemed to have converted the Preferred Stock until immediately prior to the closing of such offering or the receipt by the Corporation of such consent if applicable, at which time such conversion shall be deemed to have been effective. Upon the effectiveness of such conversion, the Preferred Stock shall no longer be outstanding on the books of the Corporation, and thereafter the holders of the Preferred Stock shall be treated for all purposes as the record holders of the Common Stock issued upon the conversion thereof. Each person who holds of record Preferred Stock immediately prior to an automatic conversion shall be entitled to all declared but unpaid dividends up to the time of the automatic conversion. Such dividends shall be paid to all such holders within thirty (30) days of the automatic conversion.

(iv) In furtherance of Section 3.8 hereof, upon the conversion of all outstanding shares of the Preferred Stock pursuant to Sections 3.4(b)(i)(1) and 3.4(b)(ii), all authorized shares of Preferred Stock will be cancelled and will not be reissued, sold or transferred, whether or not such authorized shares were outstanding on the date of conversion.

-9-

(c) Mechanics of Conversion.

(i) No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective applicable Conversion Price. The determination as to whether or not any fractional shares are issuable upon conversion of Preferred Stock shall be based upon the total number of shares of Preferred Stock being converted at any one time by any holder thereof, and not upon each share of Preferred Stock being converted by such holder.

(ii) Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock pursuant to Section 3.4(a), such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same and shall state therein his name or the name or names of his nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued, together with the applicable federal taxpayer identification number(s). The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holders of Preferred Stock or to his nominee or nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date.

(iii) In connection with any automatic or mandatory conversion of Preferred Stock pursuant to Section 3.4(b) or 3.4(e), the Corporation, at its discretion, may require that the holders of such Preferred Stock surrender the certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holders a certificate or certificates for the number of shares of Common Stock or preferred stock to which such holders, respectively, shall be entitled, together with cash in lieu of any fraction of a share of Common Stock.

(d) Adjustments to Conversion Price for Diluting Issues.

(i) Special Definitions. For purposes of this Section 3.4(d), the following definitions shall apply:

(1) "Option" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities.

-10-

(2) "Original Issue Date" shall mean, as to a series of Preferred Stock, the date on which the first share of such series was issued.

(3) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than Common Stock or other stock issued on conversion of the Preferred Stock or any other series of preferred stock) or other securities directly or indirectly convertible into or exchangeable for Common Stock.

(4) "Additional Shares of Common Stock" shall mean, with respect to the Series A Preferred, Series B Preferred, Series C Preferred and Series E Preferred, all shares of Common Stock issued (or, pursuant to
Section 3.4(d)(iii)(1), deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable:

(A) upon conversion of shares of Preferred Stock or by way of dividend or distribution on shares of Preferred Stock;

(B) in connection with strategic alliances, joint ventures or partnerships, or in connection with the licensing or acquisition by the Corporation of technology or intellectual property, each as approved by the Board of Directors of the Corporation; and

(C) to officers, directors or employees of, or consultants to, the Corporation pursuant to action by the Board of Directors prior to the Original Issue Date, pursuant to the Corporation's Stock Option Plan in existence as of the Original Issue Date or pursuant to any other stock purchase or option plan or other employee or director stock incentive or compensation program (collectively, the "Plans") approved by a majority of the members of the Board of Directors designated by the holders of Preferred Stock.

(ii) No Adjustment of Conversion Price. No adjustment in the number of shares of Common Stock into which a share of any series of Preferred Stock is convertible shall be made by adjustment in the Conversion Price of such series of Preferred Stock, in respect of the issuance of Additional Shares of Common Stock or otherwise, (a) unless, with respect to adjustment in the Conversion Price under Section 3.4(d)(iv), the consideration per share for such Additional Shares of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price of such series of Preferred Stock in effect on the date of, and immediately prior to, the issue of such Additional Shares of Common Stock, or (b) if prior to such issuance, the Corporation receives written notice from the holders of at least fifty-and-one-tenth percent (50.1%) of the then outstanding shares of such series of affected Preferred Stock agreeing that no such adjustment shall be made as the result of the issuance of Additional Shares of Common Stock or such other that otherwise would cause an adjustment in the Conversion Price under this Section 3.4(d).

-11-

(iii) Issue of Certain Securities Deemed Issue, Not Issue of Additional Shares of Common Stock.

(1) Options and Convertible Securities. In the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument(s) relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon (x) the exercise of such Options or (y) in the case of Convertible Securities, the conversion or exchange of such Convertible Securities, or (z) in the case of Options for Convertible Securities, the conversion or exchange of the Convertible Securities issuable upon the exercise of such Options, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date; provided, however, that such Additional Shares of Common Stock shall not be deemed to have been issued if (i) such shares of Common Stock are excluded from the definition of Additional Shares of Common Stock set forth in Section 3.4(d)(i)(4), or (ii) with respect to any of the Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred, as the case may be, the consideration per share (determined pursuant to Section 3.4(d)(v)) of such Additional Shares of Common Stock is not less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue, or such record date, as the case may be; and provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued under this Section 3.4(d)(iii)(1):

(A) no further adjustment in the Conversion Price of any of the Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred, as the case may be, shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options, conversion or exchange of such Convertible Securities, or conversion or exchange of the Convertible Securities issued upon the exercise of Options for Convertible Securities;

(B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price of any the Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred, as the case may be, computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities;

(C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have

-12-

been exercised, the Conversion Price of any of the Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred, as the case may be, computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon shall, upon such expiration, be recomputed as if:

(I) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the additional consideration, if any, actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and

(II) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise of such Options were issued at the time of issue of such Options, and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation (determined pursuant to Section 3.4(d)(v)) upon the issue of the Convertible Securities with respect to which such Options were actually exercised; provided, however, that upon the subsequent expiration of any rights of conversion or exchange under the Convertible Securities actually issued upon the exercise of such Options, a recomputation of the Conversion Price of any of the Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred, as the case may be, as originally recomputed under this Section 3.4(d)(iii)(1)(C)(II) and any subsequent adjustments based thereon, shall be made pursuant to Section 3.4(d)(iii)(1)(C)(I).

(D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price of any of the Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred, as the case may be, to an amount which exceeds the lower of (i) the Conversion Price of such series of Preferred Stock on the original adjustment date, or (ii) the Conversion Price of such series of Preferred Stock that would have resulted from any other issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date;

(E) in the case of any Options which expire by their terms not more than thirty (30) days after the date of issue thereof, no adjustment of the Conversion Price of any series of the Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred shall be made until the expiration and/or exercise of all such Options, whereupon such adjustment shall be made in the same manner provided in Section 3.4(d)(iii)(1)(C); and

-13-

(F) if such record date shall have been fixed and such Options or Convertible Securities are not issued on the date fixed therefor, the adjustment previously made in the Conversion Price of any of the Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred, as the case may be, which became effective on such record date shall be cancelled as of the close of business on such record date, and thereafter the Conversion Price of such series of Preferred Stock shall be adjusted pursuant to this Section 3.4(d)(iii) as of the actual date of issuance of such Options or Convertible Securities.

(2) Stock Dividends, Distributions and Subdivisions. In the event the Corporation at any time or from time to time after the Original Issue Date of Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred shall declare or pay any dividend or make any other distribution on the Common Stock payable in Common Stock, or effect a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then and in any such event, Additional Shares of Common Stock shall not be deemed to have been issued, but the Conversion Price of each series of Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred shall be adjusted in accordance with
Section 3.4(d)(vi)(1).

(3) Stock Combinations and Consolidations. In the event the Corporation at any time or from time to time after the Original Issue Date of any series of Preferred Stock shall combine or consolidate the outstanding shares of Common Stock, by reclassification or otherwise, into a lesser number of shares of Common Stock, then and in any such event, Additional Shares of Common Stock shall not be deemed to have been issued, but the Conversion Price of each series of Preferred Stock shall be adjusted in accordance with Section 3.4(d)(vi).

(iv) Adjustment of Conversion Price Upon Issuance of Additional
Shares of Common Stock.

(1) Adjustment Generally. Subject to the provisions of Sections 3.4(d)(ii), 3.4(d)(iii)(2)-(3) and 3.4(e), in the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 3.4(d)(iii)(1)) without consideration or for consideration per share less than the Conversion Price of any of the Series A Preferred, Series B Preferred, Series C Preferred or Series E Preferred, as the case may be, in effect on the date of, and immediately prior to, such issue, then and in such event, such Conversion Price shall be reduced, concurrently with such issue, in order to increase the number of shares of Common Stock into which a share of such series of Preferred Stock is convertible, to a price (calculated to the nearest cent) determined by dividing (A) (i) the Conversion Price of such series of Preferred Stock multiplied by the number of shares of Common Stock outstanding immediately prior to such issue (excluding the shares of Common Stock issuable upon conversion of the series of Preferred Stock for which such adjustment is being made, but including shares of Common Stock issuable upon conversion of any outstanding Options,

-14-

Convertible Securities and shares of all other series of Preferred Stock), plus
(ii) the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued, by (B) (i) the number of shares of Common Stock outstanding immediately prior to such issue (excluding the shares of Common Stock issuable upon conversion of the series of Preferred Stock for which such adjustment is being made but including shares of Common Stock issuable upon conversion of any outstanding Options, Convertible Securities and shares of all other series of Preferred Stock), plus (ii) the total number of such Additional Shares of Common Stock so issued, provided that the Conversion Price shall not be so reduced at such time if the amount of such reduction would be an amount less than $0.01, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $0.01 or more.

(2) Adjustments Applicable to Series AA and BB Preferred.
Until shares of Series AA Preferred are issued and outstanding, the Conversion Price of Series AA Preferred shall be adjusted as and when the Conversion Price of the Series A Preferred is adjusted, regardless of the Original Issue Date of the Series AA Preferred. Until shares of Series BB Preferred are issued and outstanding, the Conversion Price of Series BB Preferred shall be adjusted as and when the Conversion Price of the Series B Preferred is adjusted, regardless of the Original Issue Date of the Series BB Preferred.

(v) Determination of Consideration. For purposes of this Section 3.4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:

(1) Cash and Property. Such consideration shall:

(A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends;

(B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and

(C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in Sections 3.4(d)(v)(1)(A) and (B), as determined in good faith by the Board of Directors.

(2) Options and Convertible Securities. The aggregate consideration received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 3.4(d)(iii)(1), relating to Options and Convertible Securities, shall be determined by computing the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible

-15-

Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instrument(s) relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration until such subsequent adjustment occurs) payable to the Corporation upon (i) the exercise in full of such Options, (ii) in the case of Convertible Securities, the conversion or exchange in full of such Convertible Securities, or (iii) in the case of Options for Convertible Securities, the exercise in full of such Options for Convertible Securities and the conversion or exchange in full of such Convertible Securities. The total number of Additional Shares of Common Stock so issued shall be determined by calculating the maximum number of shares of Common Stock (as set forth in the instrument(s) relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number until such subsequent adjustment occurs) issuable upon (x) the exercise in full of such Options, (y) in the case of Convertible Securities, the conversion or exchange in full of such Convertible Securities, or (z) in the case of Options for Convertible Securities, the exercise in full of such Options for Convertible Securities and the conversion or exchange in full of such Convertible Securities.

(vi) Adjustment for Dividends, Distributions, Subdivisions,
Combinations or Consolidation of Common Stock.

(1) Stock Dividends, Distributions or Subdivisions. In the event the Corporation at any time or from time to time shall declare or pay any dividend or make any other distribution on the Common Stock payable in Common Stock, or effect a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), the Conversion Price of each series of Preferred Stock in effect immediately prior to such stock dividend, stock distribution or subdivision shall, concurrently with the effectiveness of such stock dividend, stock distribution or subdivision, be proportionately decreased.

(2) Combinations or Consolidations. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price of each series of Preferred Stock in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased.

(vii) Adjustment for Merger or Reorganization. Subject to the last sentence of this Section 3.4(d)(vii), in case of any consolidation or merger of the Corporation with or into another corporation or the conveyance of all or substantially all of the assets of the Corporation or the sale of more than fifty percent (50%) of the capital stock of the Company in a transaction or series of related transactions to another corporation in which the holders of Common Stock will be entitled to receive shares of stock, other securities or property, each share of Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or the property to which a holder of the number of shares

-16-

of Common Stock of the Corporation deliverable upon conversion of such Preferred Stock would have been entitled upon such consolidation, merger or conveyance. In any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interest thereafter of the holders of the Preferred Stock, to the end that such provisions (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Preferred Stock. In the event that such merger or consolidation of the Corporation or the sale of all or substantially all its assets or the sale of more than fifty percent (50%) of the capital stock of the Company in a transaction or series of related transactions shall also be subject to the provisions of Section 3.3, the Corporation shall give notice to all of the holders of Preferred Stock at least thirty (30) days before the effective date of such event. The holders of a majority of each series of outstanding Preferred Stock may elect to obtain treatment of all outstanding shares of such series of Preferred Stock under this Section 3.4(d)(vii) in lieu of that described in
Section 3.3, notice of which election shall be submitted in writing to the Corporation no later than fifteen (15) days before the effective date of such event.

(e) Mandatory Conversion of Preferred Stock to New Series of Preferred
Stock.

(i) Special Definitions. For purposes of this Section 3.4(e), the following definitions shall apply:

(1) "Series Preferred Stock" shall mean the Series A Preferred and Series B Preferred, collectively.

(2) "Pro Rata Share" shall mean that portion of a Dilutive Issuance which equals the lesser of:

(A) the product of (a) times (b), where (a) equals the ratio of (x) the number of shares of Common Stock issued or issuable upon conversion of the Series Preferred Stock or other preferred stock issued on conversion of Series Preferred Stock that is then held by a holder of Series Preferred Stock or such other preferred stock, to (y) the total number of shares of Common Stock then outstanding plus the number of shares of Common Stock issuable upon conversion of then outstanding Series Preferred Stock, preferred stock, or other convertible securities or on exercise of options, rights, or warrants, and (b) equals the gross consideration received by the Corporation in connection with a Dilutive Issuance; or

(B) the product of (a) times (b), where (a) equals the ratio of (x) the number of shares of Common Stock issued or issuable upon conversion of the Series Preferred Stock or other preferred stock issued on conversion of the Series Preferred Stock that is then held by a holder of Series Preferred Stock or such other preferred stock issued on conversion of Series Preferred Stock, to (y) the number of shares of Common

-17-

Stock issued or issuable upon conversion of the Series Preferred Stock or other preferred stock issued on conversion of the Series Preferred Stock held by all holders of Series Preferred Stock or other preferred stock issued on conversion of Series Preferred Stock, and (b) equals the dollar amount determined by a majority of members of the Board of Directors to be the aggregate amount of the Dilutive Issuance for purchase by the holders of Series Preferred Stock, provided that such amount shall be deemed to be 100% of Dilutive Issuance in the absence of a determination of the Board of Directors to the contrary.

(3) "Dilutive Issuance" shall mean an issuance of New Securities (as defined in the Investors' Rights Agreement) which results in Diluted Stock.

(4) "Diluted Stock" shall mean shares of Series Preferred Stock (or preferred stock issued on conversion of Series Preferred Stock pursuant to this Section 3.4(e)) that have a Conversion Price per share greater than the consideration per share to be received in a Dilutive Issuance.

(5) "Investors' Rights Agreement" shall mean the Investors' Rights Agreement among the Corporation and certain stockholders, dated as of April 8, 1997, as amended from time to time.

(6) "Participating Investor" shall mean any holder of Diluted Stock who, together with the Affiliates of such holder (regardless of whether such holder itself actually purchases): (i) agrees to purchase, in accordance with Section 1 of the Investors' Rights Agreement, such holder's Pro Rata Share of a Dilutive Issuance on or before the last day of the twenty-day period specified in Section 1.3 of the Investors' Rights Agreement applicable to the Dilutive Issuance, and (ii) purchases such holder's Pro Rata Share of the Dilutive Issuance in accordance with Section 1 of the Investors' Rights Agreement.

(7) "Affiliate" shall mean any person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, a holder of Diluted Stock.

(ii) Converted Shares. Subject to Section 3.4(e)(vii), each share of Diluted Stock held by a person other than a Participating Investor (such shares, "Converted Shares") that belongs to a single series of preferred stock shall automatically be converted simultaneously with the closing of the Dilutive Issuance into one share of a new series of preferred stock pursuant to the terms hereof. The Conversion Price of each such new series of preferred stock immediately after the date of the Dilutive Issuance shall equal the Conversion Price of the corresponding series of preferred stock from which the Converted Shares were converted, as in effect immediately prior to the closing of the Dilutive Issuance, but without giving effect to any adjustments under this
Section 3.4 in connection with such Dilutive Issuance. Other than as set forth in the foregoing sentence, each such new series of preferred stock shall have the same rights and preferences as the corresponding series of preferred stock from which the Converted Shares were converted,

-18-

including the provisions for future adjustment in the Conversion Price in accordance with Section 3.4(d) above and for further automatic conversion under this Section 3.4(e) if not held by a Participating Investor in a future Dilutive Issuance. In the event that Series A Preferred is Diluted Stock and no shares of Series A Preferred have previously been converted under this Section 3.4(e)(ii), then each such Converted Share of Series A Preferred shall automatically be converted into one share of Series AA Preferred, which Series AA Preferred shall conform to the two foregoing sentences. In the event that Series B Preferred is Diluted Stock and no shares of Series B Preferred have previously been converted under this Section 3.4(e)(ii), then each such Converted Share of Series B Preferred shall be automatically converted into one share of Series BB Preferred, which Series BB Preferred shall conform to the foregoing provisions of this Section 3.4(e)(ii). After such initial conversion, Converted Shares (whether shares of Series Preferred Stock, Series AA Preferred, Series BB Preferred or any new series of preferred stock authorized hereafter to effect further conversion under this Section 3.4) belonging to a single series of Preferred Stock shall be converted into shares of new series of preferred stock to be authorized in accordance with this Section 3.4(e).

(iii) Necessary Actions. The Corporation, the Board of Directors and the holders of the outstanding Preferred Stock and Common Stock shall take all necessary actions to designate new series of preferred stock to the extent necessary to accomplish the conversions described in this Section 3.4(e), including any amendment to this Certificate of Incorporation.

(iv) Shares Underlying Warrants, etc. Any shares of Series Preferred Stock which are issuable pursuant to any outstanding right, option, warrant or other convertible security shall remain shares of Series Preferred Stock without regard to whether the holder of such right, option, warrant or other convertible security is a Participating Investor, provided that such shares of Series Preferred Stock shall become subject to this Section 3.4(e) after issuance thereof.

(v) Effectiveness of Conversion. Upon the conversion of Converted Shares as set forth in this Section 3.4(e), such Converted Shares shall no longer be outstanding on the books of the Corporation and the holder of such Converted Shares shall be treated for all purposes as the record holder on the date of closing of the Dilutive Issuance of the shares of Series AA Preferred, Series BB Preferred, or such other new series of preferred stock authorized in accordance with this Section 3.4(e), as the case may be, issued upon conversion of such Converted Shares.

(vi) Reservation of Series AA Preferred and Series BB Preferred. Until the first Dilutive Issuance in which there are Converted Shares, the Corporation shall reserve and keep available out of its authorized but unissued Series AA Preferred and Series BB Preferred such number of shares of Series AA Preferred and Series BB Preferred as shall from time to time be sufficient to effect conversion of all outstanding shares of Series Preferred Stock. The Corporation shall not in any event issue any shares of Series AA Preferred or Series BB Preferred except as provided in this Section 3.4(e).

-19-

(vii) Exclusions. The provisions of this Section 3.4(e) shall not apply in the event that (A) the holders of Diluted Stock are not entitled to purchase their respective Pro Rata Shares of the Dilutive Issuance under the provisions of Section 1 of the Investors' Rights Agreement, or terms substantially similar to such provisions, or (B) the Corporation shall fail to comply with its obligation to offer and sell the New Securities the issuance of which would constitute a Dilutive Issuance in accordance with such provisions or terms.

(f) No Impairment. The Corporation will not, by amendment of this Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this
Section 3.4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment.

(g) Certificate as to Adjustments, etc. Upon the occurrence of any one or more: (i) adjustments or readjustments of any Conversion Price pursuant to this Section 3.4; or (ii) conversions of shares of Preferred Stock under Section 3.4(b) or 3.4(e), the Corporation at its expense shall promptly compute such adjustment, readjustment or conversion in accordance with the terms of this
Section 3.4 and furnish to each holder of shares of Preferred Stock affected by such adjustment, readjustment or conversion a certificate setting forth each such adjustment, readjustment or conversion and showing in detail the facts upon which such adjustment, readjustment or conversion is based; provided, however, that the failure to promptly provide such notice shall not affect the effectiveness of such adjustment, readjustment or conversion. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth: (x) such adjustments and readjustments, (y) the Conversion Price of any series of Preferred Stock at that time in effect, and (z) the number of shares of Common Stock and the amount, if any, of other securities or property which at that time would be received upon the conversion of a share of any series of Preferred Stock.

(h) Series G Conversion Price. The Conversion Price for the Series G Preferred shall be determined as follows:

(i) upon the closing of an offer and sale by the Corporation of any Preferred Stock (other than in connection with a Strategic Transaction (as hereinafter defined), or to employees of the Corporation or in connection with any equipment financing, leasing or banking arrangements) issued and sold in the Corporation's next equity financing with gross proceeds to the Corporation from outside investors of at least $2,500,000 (a "Qualified Financing"), and provided that such Qualified Financing occurs prior to a Public Offering (as defined in
Section 3.4(h)(ii)), then the Conversion Price shall be the conversion price at which the securities sold in the Qualified Financing may be converted into Common

-20-

Stock. As used herein, Strategic Transaction shall mean a transaction described in Section 3.4(d)(i)(4)(B) hereof.

(ii) upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public (a "Public Offering"), and provided that such Public Offering occurs prior to a Qualified Financing (as defined in
Section 3.4(h)(i), then the Conversion Price shall be the price per share at which the Common Stock is offered and sold to the public in the Public Offering.

(i) Notices of Record Date. In the event of (i) any taking by the Corporation of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend which is the same as cash dividends paid in previous quarters) or other distribution, or (ii) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, and any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, then the Corporation shall mail to each holder of Preferred Stock a notice specifying, to the extent applicable, (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (C) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. Any such notice shall be mailed at least thirty (30) days in advance of the date specified in clause (A), (B) or (C) above, as applicable.

(j) Common Stock Reserved. The Corporation shall reserve and keep available out of its authorized but unissued Common Stock such number of shares of Common Stock as shall from time to time be sufficient to effect conversion of the Preferred Stock that shall be outstanding from time to time.

Section 3.5. Voting Rights.

(a) Preferred Stock Generally. The holders of shares of outstanding Preferred Stock other than the Series G Preferred shall be entitled to notice of any stockholders' meeting and to vote upon any matter submitted to the stockholders for a vote, as though the Common Stock and the Preferred Stock (other than the Series G Preferred) constituted a single class of stock, except with respect to those matters on which the Delaware Corporation Law requires that a vote must be by a separate class or classes or by separate series, as to which each such class or series shall have the right to vote in accordance

-21-

with such law, and except as provided in Sections 3.5(b) and 3.7, on the following basis: A holder of Preferred Stock shall have that number of votes per share as is equal to the number of shares of Common Stock into which each share of Preferred Stock held by such holder is then convertible. The holders of Series G Preferred shall have no voting rights, except as specifically provided by the Delaware Corporation Law.

(b) Election of Directors.

(i) The management of the business and the conduct of the affairs of the Company shall be vested in its Board of Directors. The Board of Directors shall consist of one or more members, the number thereof to be determined in the manner provided in the By-Laws.

(ii) The directors of the Company need not be elected by written ballot unless the By-Laws so provide.

(iii) (1) Until the conversion of all of the Company's outstanding Preferred Stock, other than Series G Preferred, to Common Stock pursuant to Section3.4(b)(i)(1), the holders of Series A Preferred, Series B Preferred, Series E Preferred and Common Stock shall vote upon the election of directors in accordance with the Second Amended and Restated Stockholders Agreement among the Corporation and the other parties thereto, dated as of April 8, 1997, as amended from time to time.

(2) Upon the conversion of all of the Company's outstanding Preferred Stock, other than Series G Preferred, to Common Stock pursuant to Section3.4(b)(i)(1), the Board of Directors shall be divided into three classes, which are hereby designated as Class A, Class B and Class C respectively, as nearly equal in number as the then total number of directors constituting the whole Board permits. At the next annual meeting of the stockholders following the creation of classes of directors, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting, and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. At each annual meeting of stockholders following such initial classification and election, directors in numbers equal to the number of the class whose terms expire at the time of such meeting shall be elected to hold office until the third succeeding annual meeting of stockholders. Each director shall hold office until his successor is elected and qualified, or until his earlier resignation or removal.

Section 3.6. Dividend Rights.

(a) Dividends on Common Stock. The holders of outstanding Series A Preferred, Series B Preferred, Series C Preferred and Series E Preferred shall be entitled to receive, and shall receive, a dividend (determined on the basis of the number of shares of Common Stock into which each share of each such series of Preferred Stock is then

-22-

convertible) equal to any dividend paid on Common Stock.

(b) Dividends on Preferred Stock other than Series G Preferred. In the event that the Board of Directors declares and/or pays a dividend that is payable on any series of Preferred Stock other than Series G Preferred (including, without limitation, Series D Preferred and Series F Preferred) (the "Dividend Series"), the Board shall do so on a pari passu basis among: (i) all holders of the Dividend Series, and (ii) all holders of any of Series A Preferred, Series B Preferred, Series C Preferred and/or Series E Preferred (determined on the basis of the number of shares of Common Stock into which each share of each such series of Preferred Stock is then convertible), to the extent that each such series is not the Dividend Series.

(c) Dividends on Series G Preferred. The holders of the Series G Preferred shall be entitled to receive, out of any assets legally available therefor, cumulative dividends at the per share rate of the prime rate (as published in The Wall Street Journal on the date of the calculation of such dividend) plus 1% of the Series G Preference Amount (as defined in Section 3.3(a)(iii)), which Series G Preference Amount shall be adjusted annually as of January 1st, of a given year for each share of Series G Preferred held by such holder in preference and priority to any payment of any dividend on the Common Stock or any other class or series of Preferred Stock of the Corporation. Such dividends shall accrue on any given share from the date of the original issuance of such share, and such dividends shall accrue from day to day whether or not declared, based on the actual number of days elapsed and shall be payable only:

(i) upon the liquidation, dissolution or winding up of the Company pursuant to the formula in Section 3.3; and

(ii) upon conversion of the Series G Preferred pursuant to
Section 3.4.

(d) Payment. Any declared and unpaid dividend, other than the dividend set forth in Section 3.6(c) above, shall be payable on liquidation and conversion in accordance with Sections 3.3 and 3.4.

Section 3.7. Covenants, Consent of Series A, B, C and E Preferred Required.

(a) Vote of All Preferred as a Class. In addition to Section 3.5 and any vote which any series of Preferred Stock may have under Delaware law, so long as any shares of Series A, B, C or E Preferred or shares of any series of preferred stock issued as a result of the conversion of Series A, B, C or E Preferred in accordance with Section 3.4(e)(ii) shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of more than fifty percent (50%) of the outstanding Series A, B, C and E Preferred, voting together as a single class:

-23-

(i) amend or repeal any provision of, or add any provision to, the Certificate of Incorporation or the by-laws of the Corporation (as may be amended from time to time, the "By-Laws") if such action would change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Series A, B, C or E Preferred generally, including the reclassification of any Common Stock into shares having any preference or priority as to dividends, voting, anti-dilution or assets superior to or on a parity with any such preference or priority of the Series A, B, C or E Preferred, or the creation or issuance of any other class or classes of stock or series of preferred stock (other than pursuant to Section 3.4(e)) having any preference or priority as to dividends, voting, anti-dilution or assets superior to or on a parity with any such preference or priority of the outstanding Series A, B, C or E Preferred; or

(ii) authorize (x) any merger or consolidation of the Corporation with or into any other corporation or entity (except into or with a wholly owned subsidiary with the requisite stockholder approval), or (y) the sale of all or substantially all of the assets of the Corporation.

(b) Separate Vote of Individual Series of Preferred Stock. So long as any shares of Preferred Stock are outstanding, the Corporation shall not alter or change the rights, preferences, privileges or restrictions of a series of Preferred Stock so as to adversely affect such shares in a manner different than the other series of Preferred Stock without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of the series of Preferred Stock so affected.

Section 3.8. Converted or Otherwise Acquired Shares. Any share of Preferred Stock that is converted under Section 3.4 or otherwise acquired by the Corporation will be canceled and will not be reissued, sold or transferred.

Section 3.9. No Preemptive Rights. Stockholders shall have no preemptive rights except as granted by the Corporation pursuant to written agreements, whether prior or subsequent to the date hereof.

Section 3.10. Notice. Any notice required under the provisions of this Section 3 shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, or if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices shall be addressed, in the case of a stockholder, to such holder of record at the address of such holder appearing on the books of the Corporation and, in the case of the Corporation, to the principal office of the Corporation.

-24-

Section 3.11. Residual Rights. All rights accruing to the outstanding shares of the Corporation not expressly provided for to the contrary in this
Section 3 shall be vested in the Common Stock.

FIFTH. The Corporation is to have perpetual existence.

SIXTH. Election of directors need not be by written ballot unless the By- Laws shall so provide.

SEVENTH. The Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal the By-Laws.

EIGHTH. A director shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that the elimination or limitation of liability is prohibited under the Delaware Corporation Law as in effect when such liability is determined. No amendment or repeal of this provision shall deprive a director of the benefits hereof with respect to any act or omission occurring prior to such amendment or repeal.

NINTH. The Corporation shall, to the fullest extent permitted by the Delaware Corporation Law, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom.

Indemnification may include payment by the Corporation of expenses in defending an action or proceeding in advance of the final disposition of such action or proceeding upon receipt of any undertaking by the person indemnified to repay such payment if it is ultimately determined that such person is not entitled to indemnification under this Article, which undertaking may be accepted without reference to the financial ability of such person to make such repayments.

The Corporation shall not indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person unless the initiation thereof was approved by the Board of Directors of the Corporation.

The indemnification rights provided in this Article (i) shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any law, agreement or vote of stockholders or disinterested directors or otherwise, and (ii) shall inure to the benefit of the heirs, executors and administrators of such persons. The Corporation may, to the

-25-

extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article.

Any person seeking indemnification under this Article shall be deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established.

Any amendment or repeal of this Article shall not adversely affect any right or protection of a director or officer of this Corporation with respect to any act or omission of such director or officer occurring prior to such amendment or repeal.

TENTH. Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under (S) 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under (S) 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement, and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganizations shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation.

ELEVENTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation."

4. This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the Delaware Corporation Law by the Board of Directors and the stockholders of the Corporation. The total number of outstanding shares entitled to vote thereon was 31,616,900 shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Common Stock voting together as a class. Holders of 56%, in the aggregate, of such outstanding shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Common Stock approved such amendment by written consent in accordance with Section 228 of the Delaware Corporation Law, and written notice of such was given by this Corporation in accordance with said Section 228.

-26-

IN WITNESS WHEREOF, Inspire Pharmaceuticals, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by its President and Chief Executive Officer this 28th day of March, 2000.

INSPIRE PHARMACEUTICALS, INC.

By:    /s/ Christy L. Shaffer
   --------------------------------
Name: Christy L. Shaffer, Ph.D.
Title: President and Chief Executive Officer

-27-

EXHIBIT 3.2

AMENDED AND RESTATED

BYLAWS

OF

INSPIRE PHARMACEUTICALS, INC.
(A DELAWARE CORPORATION)

(As adopted March 27, 2000)


TABLE OF CONTENTS

                                                              Page
                                                              ----

ARTICLE I STOCKHOLDERS......................................... 1

     SECTION 1.    Place of Meeting............................ 1
                   ----------------
     SECTION 2.    Annual Meeting.............................. 1
                   --------------
     SECTION 3.    Special Meetings............................ 4
                   ----------------
     SECTION 4.    Notice of Meetings.......................... 4
                   ------------------
     SECTION 5.    Voting List................................. 5
                   -----------
     SECTION 6.    Quorum of Stockholders...................... 6
                   ----------------------
     SECTION 7.    Proxies and Voting.......................... 6
                   ------------------
     SECTION 8.    Conduct of Meeting.......................... 6
                   ------------------
     SECTION 9.    Action Without Meeting...................... 7
                   ----------------------

ARTICLE II DIRECTORS........................................... 7

     SECTION 1.    General Powers.............................. 7
                   --------------
     SECTION 2.    Number; Election, Tenure and Qualification.. 7
                   ------------------------------------------
     SECTION 3.    Enlargement of the Board.................... 8
                   ------------------------
     SECTION 4.    Vacancies................................... 8
                   ---------
     SECTION 5.    Resignation................................. 8
                   -----------
     SECTION 6.    Removal..................................... 9
                   -------
     SECTION 7.    Committees.................................. 9
                   ----------
     SECTION 8.    Meetings of the Board of Directors.......... 10
                   ----------------------------------
     SECTION 9.    Quorum and Voting........................... 11
                   -----------------
     SECTION 10    Compensation................................ 11
                   ------------
     SECTION 11.   Action without Meeting...................... 11
                   ----------------------

ARTICLE III OFFICERS........................................... 12

     SECTION 1.    Titles...................................... 12
                   ------
     SECTION 2.    Election and Term of Office................. 12
                   ---------------------------
     SECTION 3.    Qualification............................... 12
                   -------------
     SECTION 4.    Removal..................................... 12
                   -------
     SECTION 5.    Resignation................................. 12
                   -----------
     SECTION 6.    Vacancies................................... 12
                   ---------
     SECTION 7.    Powers and Duties........................... 13
                   -----------------
     SECTION 8.    President and Vice-Presidents............... 13
                   -----------------------------
     SECTION 9.    Secretary and Assistant Secretaries......... 13
                   -----------------------------------
     SECTION 10.   Treasurer and Assistant Treasurers.......... 14
                   ----------------------------------
     SECTION 11.   Bonded Officers............................. 15
                   ---------------
     SECTION 12.   Salaries.................................... 15
                   --------


TABLE OF CONTENTS (continued)

                                                                        Page
                                                                        ----

ARTICLE IV STOCK........................................................ 15

     SECTION 1.    Certificates of Stock................................ 15
                   ---------------------
     SECTION 2.    Transfers of Shares of Stock......................... 16
                   ----------------------------
     SECTION 3.    Lost Certificates.................................... 16
                   -----------------
     SECTION 4.    Record Date.......................................... 17
                   -----------
     SECTION 5.    Fractional Share Interests........................... 17
                   --------------------------
     SECTION 6.    Dividends............................................ 18
                   ---------

ARTICLE V INDEMNIFICATION AND INSURANCE................................. 18

     SECTION 1.    Indemnification...................................... 18
                   ---------------
     SECTION 2.    Insurance............................................ 19
                   ---------

ARTICLE VI GENERAL PROVISIONS........................................... 19

     SECTION 1.    Fiscal Year.......................................... 19
                   ------------
     SECTION 2.    Corporate Seal....................................... 19
                   --------------
     SECTION 3.    Certificate of Incorporation......................... 19
                   ----------------------------
     SECTION 4.    Execution of Instruments............................. 19
                   ------------------------
     SECTION 5.    Voting of Securities................................. 20
                   --------------------
     SECTION 6.    Evidence of Authority................................ 20
                   ---------------------
     SECTION 7.    Transactions with Interested Parties................. 20
                   ------------------------------------
     SECTION 8.    Books and Records.................................... 21
                   -----------------

ARTICLE VII NOTICES..................................................... 21

     SECTION 1.    Notice to Stockholders............................... 21
                   ----------------------
     SECTION 2.    Notice to Directors.................................. 21
                   -------------------
     SECTION 3.    Address Unknown...................................... 22
                   ---------------
     SECTION 4.    Affidavit of Mailing................................. 22
                   --------------------
     SECTION 5.    Time Notices Deemed Given............................ 22
                   -------------------------
     SECTION 6.    Methods of Notice.................................... 22
                   -----------------
     SECTION 7.    Failure to Receive Notice............................ 22
                   -------------------------
     SECTION 8.    Notice to Person with Whom Communication is Unlawful. 23
                   ----------------------------------------------------
     SECTION 9.    Notice to Person with Undeliverable Address.......... 23
                   -------------------------------------------

ARTICLE VIII AMENDMENTS................................................. 24

     SECTION 1.    By the Board of Directors............................ 24
                   -------------------------
     SECTION 2.    By the Stockholders.................................. 24
                   -------------------


AMENDED AND RESTATED

BY-LAWS

OF

INSPIRE PHARMACEUTICALS, INC.

ARTICLE I

STOCKHOLDERS

SECTION 1. Place of Meetings. All meetings of stockholders shall be held at the principal office of the corporation or at such other place as may be named in the notice.

SECTION 2. Annual Meeting. The annual meeting of stockholders for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on such date and at such hour and place as the directors or an officer designated by the directors may determine. If the annual meeting is not held on the date designated therefor, the directors shall cause the meeting to be held as soon thereafter as convenient.

At an annual meeting of stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received

-1-

at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date of the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of the stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include in formation with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the Securities and Exchange Act of 1934, as amended. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph. The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph, and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted.

-2-

Only persons who are nominated in accordance with the procedures set forth in this paragraph shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of Directors at the meeting who complies with the notice set forth in this paragraph. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of the second paragraph of this Section 2. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a Director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a Director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to the second paragraph of this Section 2. At the request of the Board of Directors, any person nominated by a stockholder for election as a Director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the corporation unless

-3-

nominated in accordance with the procedures set forth in this paragraph. The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting and the defective nomination shall be disregarded.

SECTION 3. Special Meetings. Special meetings of the stockholders may be called at any time by the President, the Chairman of the Board, if any, or the Board of Directors, or by the Secretary or any other officer upon the written request of one or more stockholders holding of record at least a majority of the outstanding shares of stock of the corporation entitled to vote at such meeting; provided, however, that following registration of any of the classes of equity securities of the corporation pursuant to the provisions of the Securities Exchange Act of 1934, as amended, special meetings of the stockholders may only be called by the President, the Chairman of the Board, if any, or the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized Directors. Such written request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting.

SECTION 4. Notice of Meetings. Except where some other notice is required by law, written notice of each meeting of stockholders, stating the place, date and hour thereof and the purposes for which the meeting is called, shall be given by or under the direction of the Secretary, not less than ten nor more than sixty days before the date fixed for such meeting, to each stockholder entitled to vote at such meeting of record at the close of business on the day fixed by the Board of Directors as a record date for the determination of the stockholders entitled to vote at such meeting or, if no such date has been fixed, of record at the close of business on the day before the day on which notice is given. Notice shall be given personally to each stockholder or left at his or her residence or usual place of business or mailed postage prepaid

-4-

and addressed to the stockholder at his or her address as it appears upon the records of the corporation. In case of the death, absence, incapacity or refusal of the Secretary, such notice may be given by a person designated either by the Secretary or by the person or persons calling the meeting or by the Board of Directors. A waiver of such notice in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to such notice. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. Except as required by statute, notice of any adjourned meeting of the stockholders shall not be required.

SECTION 5. Voting List. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote at any meeting of stockholders.

-5-

SECTION 6. Quorum of Stockholders. At any meeting of the stockholders, the holders of a majority in interest of all stock issued and outstanding and entitled to vote upon a question to be considered at the meeting, present in person or represented by proxy, shall constitute a quorum for the consideration of such question, but a smaller group may adjourn any meeting from time to time. When a quorum is present at any meeting, a majority of the stock represented thereat and entitled to vote shall, except where a larger vote is required by law, by the certificate of incorporation, or by these by-laws, decide any question brought before such meeting. Any election by stockholders shall be determined by a plurality of the vote cast by the stockholders entitled to vote at the election.

SECTION 7. Proxies and Voting. Unless otherwise provided in the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock held of record by such stockholder, but no proxy shall be voted or acted upon after three years from its date, unless said proxy provides for a longer period. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held, and persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the corporation the pledgee shall have been expressly empowered to vote thereon, in which case only the pledgee or the pledgee's proxy may represent said stock and vote thereon. Shares of the capital stock of the corporation belonging to the corporation or to another corporation, a majority of whose shares entitled to vote in the election of directors is owned by the corporation, shall neither be entitled to vote nor be counted for quorum purposes.

SECTION 8. Conduct of Meeting. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting: the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, a Vice-President, or, if none of the foregoing is in office and present and acting, a chairman to be chosen

-6-

by the stockholders. The Secretary of the corporation, if present, or an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the chairman of the meeting shall appoint a secretary of the meeting.

SECTION 9. Action Without Meeting. Any action required or permitted to be taken at any annual or special meeting of stockholders of the corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders or by proxy for the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at meeting at which all shares entitled to vote on such action were present and voted. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

ARTICLE II

DIRECTORS

SECTION 1. General Powers. The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the corporation which are not by law required to be exercised by the stockholders. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled.

SECTION 2. Number; Election; Tenure and Qualification. The initial Board of Directors shall consist of three (3) persons and shall be elected by the incorporator. Thereafter, the number of directors which shall constitute the whole Board shall be fixed by resolution of the Board of Directors, but in no event shall be less than one. Each director shall be elected by the stockholders at the annual meeting and all directors shall hold office until the next annual

-7-

meeting and until their successors are elected and qualified, or until their earlier death, resignation or removal. The number of directors may be increased or decreased by action of the Board of Directors. Directors need not be stockholders of the corporation.

SECTION 3. Enlargement of the Board. The number of the Board of Directors may be increased at any time, such increase to be effective immediately, by vote of a majority of the directors then in office.

SECTION 4. Vacancies. Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board an unfilled vacancy resulting from the removal of any director for cause or without cause, may be filled by vote of a majority of the directors then in office although less than a quorum, or by the sole remaining director. A director elected to fill a vacancy shall hold office until the next annual meeting of stockholders and until his or her successor is elected and qualified or until his or her earlier death, resignation, or removal. When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective. If at any time there are no directors in office, then an election of directors may be held in accordance with the General Corporation Law of the State of Delaware.

SECTION 5. Resignation. Any director may resign at any time upon written notice to the corporation. Such resignation shall take effect at the time specified therein, or if no time is specified, at the time of its receipt by the President or Secretary.

SECTION 6. Removal. Except as may otherwise be provided by the General Corporation Law, any director or the entire Board of Directors may be removed, with or without cause, at an annual meeting or at a special meeting called for that purpose, by the holders of a

-8-

majority of the shares then entitled to vote at an election of directors. The vacancy or vacancies thus created may be filled by the stockholders at the meeting held for the purpose of removal or, if not so filled, by the directors in the manner provided in Section 4 of this Article II.

SECTION 7. Committees. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board of Directors, designate one or more committees, each committee to consist of one or more directors of the corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of such absent or disqualified member.

A majority of all the members of any such committee may fix its rules or procedure, determine its action and fix the time and place, whether within or without the State of Delaware, of its meetings and specify what notice thereof, if any, shall be given, unless the Board of Directors shall otherwise by resolution provide. The Board of Directors shall have the power to change the members of any such committee at any time, to fill vacancies therein and to discharge any such committee, either with or without cause, at any time.

Any such committee, unless otherwise provided in the resolution of the Board of Directors, or in these by-laws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority denied it by Section 141 of the General Corporation Law of the State of Delaware.

-9-

Each committee shall keep regular minutes of its meetings and make such reports as the Board of Directors may from time to time request.

SECTION 8. Meetings of the Board of Directors. Regular meetings of the Board of Directors may be held without call or formal notice at such places either within or without the State of Delaware and at such times as the Board may by vote from time to time determine. A regular meeting of the Board of Directors may be held without call or formal notice immediately after and at the same place as the annual meeting of the stockholders, or any special meeting of the stockholders at which a Board of Directors is elected.

Special meetings of the Board of Directors may be held at any place either within or without the State of Delaware at any time when called by the Chairman of the Board of Directors, the President, Treasurer, Secretary, or two or more directors. Reasonable notice of the time and place of a special meeting shall be given to each director unless such notice is waived by attendance or by written waiver in the manner provided in these by-laws for waiver of notice by stockholders. Notice may be given by, or by a person designated by, the Secretary, the person or persons calling the meeting, or the Board of Directors. No notice of any adjourned meeting of the Board of Directors shall be required. In any case it shall deemed sufficient notice to a director to send notice by mail at least seventy-two hours, or by facsimile, telegram, telex, or electronic means at least forty-eight hours before the meeting, addressed to such director at his or her usual or last known business or home address.

Directors or members of any committee designated by the directors may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting.

-10-

SECTION 9. Quorum and Voting. A majority of the total number of directors shall constitute a quorum, except that when a vacancy or vacancies exist in the Board, a majority of the directors then in office (but not less than one-third of the total number of the directors) shall constitute a quorum. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting from time to time. The vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except where a different vote is required or permitted by law, by the certificate of incorporation, or by these by-laws.

SECTION 10. Compensation. The Board of Directors may fix fees for their services and for their membership on committees, and expenses of attendance may be allowed for attendance at each meeting. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor.

SECTION 11. Action without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, and without notice, if a written consent thereto is signed by all members of the Board of Directors, or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or such committee.

ARTICLE III

OFFICERS

SECTION 1. Titles. The officers of the corporation shall consist of a President, a Secretary, a Treasurer, and such other officers with such other titles as the Board of Directors

-11-

shall determine, including without limitation a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice- Presidents, Assistant Treasurers, or Assistant Secretaries.

SECTION 2. Election and Term of Office. The officers of the corporation shall be elected annually by the Board of Directors at its first meeting following the annual meeting of the stockholders. Each officer shall hold office until his or her successor is elected and qualified, unless a different term is specified in the vote electing such officer, or until his or her earlier death, resignation or removal.

SECTION 3. Qualification. Unless otherwise provided by resolution of the Board of Directors, no officer, other than the Chairman or Vice-Chairman of the Board, need be a director. No officer need be a stockholder. Any number of offices may be held by the same person, as the directors shall determine.

SECTION 4. Removal. Any officer may be removed, with or without cause, at any time, by resolution adopted by the Board of Directors.

SECTION 5. Resignation. Any officer may resign by delivering a written resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt or at such later time as may be specified therein.

SECTION 6. Vacancies. The Board of Directors may at any time fill any vacancy occurring in any office for the unexpired portion of the term and may leave unfilled for such period as it may determine any office other than those of President, Treasurer and Secretary.

SECTION 7. Powers and Duties. The officers of the corporation shall have such powers and perform such duties as are specified herein and as may be conferred upon or assigned to them by the Board of Directors, and shall have such additional powers and duties as are

-12-

incident to their office except to the extent that resolutions of the Board of Directors are inconsistent therewith.

SECTION 8. President and Vice-Presidents. The President shall be the chief executive officer of the corporation, shall preside at all meetings of the stockholders and the Board of Directors unless a Chairman or Vice-Chairman of the Board is elected by the Board, empowered to preside, and present at such meeting, shall have general and active management of the business of the corporation and general supervision of its officers, agents and employees, and shall see that all orders and resolutions of the Board of Directors are carried into effect.

In the absence of the President or in the event of his or her inability or refusal to act, the Vice-President if any (or in the event there be more than one Vice-President, the Vice-Presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may assign to any Vice-President the title of Executive Vice-President, Senior Vice-President or any other title selected by the Board of Directors.

SECTION 9. Secretary and Assistant Secretaries. The Secretary shall attend all meetings of the Board of Directors and of the stockholders and record all the proceedings of such meetings in a book to be kept for that purpose, shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, shall maintain a stock ledger and prepare lists of stockholders and their addresses as required and shall have custody of the corporate seal which the Secretary or any Assistant Secretary shall have authority to affix to any instrument requiring it and attest by any of their signatures. The Board of Directors may give general authority to any other officer to affix and attest the seal of the corporation.

-13-

The Assistant Secretary if any (or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors of if there be no such determination, then in the order of their election) shall, in the absence of the Secretary or in the event of the Secretary's inability or refusal to act, perform the duties and exercise the powers of the Secretary.

SECTION 10. Treasurer and Assistant Treasurers. The Treasurer shall have the custody of the corporate funds and securities, shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors or the President, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or whenever they may require it, an account of all transactions and of the financial condition of the corporation.

The Assistant Treasurer if any (or if there be more than one, the Assistant Treasurers in the order determined by the Board of Directors or if there be no such determination, then in the order of their election) shall, in the absence of the Treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Treasurer.

SECTION 11. Bonded Officers. The Board of Directors may require any officer to give the corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors upon such terms and conditions as the Board of Directors may specify, including without limitation a bond for the faithful performance of the duties of

-14-

such officer and for the restoration to the corporation of all property in his or her possession or control belonging to the corporation.

SECTION 12. Salaries. Officers of the corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors.

ARTICLE IV

STOCK

SECTION 1. Certificates of Stock. One or more certificates of stock, signed by the Chairman or Vice-Chairman of the Board of Directors or by the President or Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, shall be issued to each stockholder certifying, in the aggregate, the number of shares owned by the stockholder in the corporation. Any or all signatures on any such certificate may be facsimiles. In case any officer, transfer agent or registrar who shall have signed or whose facsimile signature shall have been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue.

Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the certificate of incorporation, the by- laws, applicable securities laws, or any agreement among any number of shareholders or among such holders and the corporation shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction.

SECTION 2. Transfers of Shares of Stock. Subject to the restrictions, if any, stated or noted on the stock certificates, shares of stock may be transferred on the books of the

-15-

corporation by the surrender to the corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the corporation or its transfer agent may reasonably require. The corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to that stock, regardless of any transfer, pledge or other disposition of that stock, until the shares have been transferred on the books of the corporation in accordance with the requirements of these by-laws.

SECTION 3. Lost Certificates. A new certificate of stock may be issued in the place of any certificate theretofore issued by the corporation and alleged to have been lost, stolen, destroyed, or mutilated, upon such terms inconformity with law as the Board of Directors shall prescribe. The directors may, in their discretion, require the owner of the lost, stolen, destroyed or mutilated certificate, or the owner's legal representatives, to give the corporation a bond, in such sum as they may direct, to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft, destruction or mutilation of any such certificate, or the issuance of any such new certificate.

SECTION 4. Record Date. The Board of Directors may fix in advance a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. Such record date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action to which such record date relates.

-16-

If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. Unless otherwise fixed by the Board of Directors, the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose.

A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

SECTION 5. Fractional Share Interests. The corporation may, but shall not be required to, issue fractions of a share. If the corporation does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by those entitled thereto, (2) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or (3) issue scrip or warrants in registered or bearer form which shall entitle the holder to receive a certificate for a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share shall, but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates representing full shares before a specified date, or subject to the conditions that the shares for which scrip or warrants are

-17-

exchangeable may be sold by the corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose.

SECTION 6. Dividends. Subject to the provisions of the certificate of incorporation, the Board of Directors may, out of funds legally available therefor, at any regular or special meeting, declare dividends upon the common stock of the corporation as and when they deem expedient.

ARTICLE V

INDEMNIFICATION AND INSURANCE

SECTION 1. Indemnification. The corporation shall, to the extent permitted by the certificate of incorporation, as amended from time to time, indemnify each person whom it may indemnify pursuant thereto.

SECTION 2. Insurance. The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of the General Corporation Law of the State of Delaware.

-18-

ARTICLE VI

GENERAL PROVISIONS

SECTION 1. Fiscal Year. Except as otherwise designated from time to time by the Board of Directors, the fiscal year of the corporation shall begin on the first day of January and end on the last day of December.

SECTION 2. Corporate Seal. The corporate seal shall be in such form as shall be approved by the Board of Directors. The Secretary shall be the custodian of the seal. The Board of Directors may authorize a duplicate seal to be kept and used by any other officer.

SECTION 3. Certificate of Incorporation. All references in these by-laws to the certificate of incorporation shall be deemed to refer to the certificate of incorporation of the corporation, as in effect from time to time.

SECTION 4. Execution of Instruments. The Chairman and Vice-Chairman of the Board of Directors, if any, the President, any Vice-President, and the Treasurer shall have power to execute and deliver on behalf and in the name of the corporation any instrument requiring the signature of an officer of the corporation, including deeds, contracts, mortgages, bonds, notes, debentures, checks, drafts, and other orders for the payment of money. In addition, the Board of Directors may expressly delegate such powers to any other officer or agent of the corporation.

SECTION 5. Voting of Securities. Except as the directors may otherwise designate, the President or Treasurer may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for this corporation (with or without power of substitution) at any meeting of stockholders or shareholders of any other corporation or organization the securities of which may be held by this corporation.

SECTION 6. Evidence of Authority. A certificate by the Secretary, or an Assistant Secretary, or a temporary secretary, as to any action taken by the stockholders,

-19-

directors, a committee or any officer or representative of the corporation shall, as to all persons who rely on the certificate in good faith, be conclusive evidence of that action.

SECTION 7. Transactions with Interested Parties. No contract or transaction between the corporation and one or more of the directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are director or officers, or have a financial interest, shall be void or voidable solely for that reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because the vote of any such director is counted for such purpose, if:
(1) The material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or
(2) The material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee of the Board of Directors, or the stockholders.

Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.

-20-

SECTION 8. Books and Records. The books and records of the corporation shall be kept at such places within or without the State of Delaware as the Board of Directors may from time to time determine.

ARTICLE VII

NOTICES

SECTION 1. Notice to Stockholders. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent.

SECTION 2. Notice to Directors. Any notice required to be given to any Director may be given by the method stated in Section 1, or by facsimile, telex, telegram or electronic means, except that such notice other than one which is delivered personally shall be sent to such address as such Director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such Director.

SECTION 3. Address Unknown. If no address of a stockholder or Director be known, notice may be sent to the office of the corporation required to be maintained pursuant to Section 2 hereof.

SECTION 4. Affidavit of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or Director or Directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained.

-21-

SECTION 5. Time Notices Deemed Given. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by facsimile, telex, telegram or electronic means shall be deemed to have been given as of the sending time recorded at time of transmission.

SECTION 6. Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect to all Directors, but one permissible method may be employed in respect to any one or more, and any other permissible method or methods may be employed in respect of any other or others.

SECTION 7. Failure to Receive Notice. The period or limitation of time within which any stockholder may exercise any option or rights, or enjoy any privilege or benefit, or be required to act, or within which any Director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such Director to receive such notice.

SECTION 8. Notice to Person with Whom Communication Is Unlawful. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law,

-22-

the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful.

SECTION 9. Notice to Person with Undeliverable Address. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve month period, have been mailed addressed to such person at his address as shown on the records of the Corporation and have been returned undeliverable, the giving of such notice to such person all not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph.

ARTICLE VIII

AMENDMENTS

SECTION 1. By the Board of Directors. These by-laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present.

-23-

SECTION 2. By the Stockholders. These by-laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at any regular meeting of stockholders, or at any special meeting of stockholders provided notice of such alteration, amendment, repeal or adoption of new by-laws shall have been stated in the notice of such special meeting.

-24-

Exhibit 4.1

NUMBER INSPIRE [LOGO] SHARES

PHARMACEUTICALS, INC.

IP Incorporated Under the Laws of the State of Delaware

COMMON STOCK CUSIP 457733 10 3

SEE REVERSE FOR CERTAIN DEFINITIONS

THIS CERTIFIES THAT

IS THE OWNER OF

FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $0.001 PER

SHARE, OF
INSPIRE PHARMACEUTICALS, INC.

transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to the laws of the State of Delaware and the provisions of the Certificate of Incorporation and the By-Laws of the Corporation, as amended from time to time, to which the holder by acceptance hereof assents. This certificate is not valid unless countersigned and registered by the transfer agent and registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.

/s/ Christy L. Shaffer                           Dated:
President and Chief Executive Officer

                                    [SEAL]

                                    Countersigned and Registered:
                                      American Securities Transfer & Trust, Inc.
                                                (DENVER, CO)
                                    BY                          Transfer Agent
/s/ Gregory J. Mossinghoff                                      and Registrar
Chief Business Officer and Secretary

                                                          Authorized Signature


++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

+  NOTICE: The signature to this assignment must correspond with the name as   +
+  written upon the face of the Certificate, in every particular, without      +
+  alteration or enlargement, or any change whatever.                          +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

INSPIRE PHARMACEUTICALS

THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF THE CORPORATION, AND THE QUALIFICATIONS, LIMITATIONS, OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. SUCH REQUESTS MAY BE MADE TO THE CORPORATION AT ITS PRINCIPAL OFFICE OR TO ITS TRANSFER AGENT.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM-as tenants in common          UNIF GIFT MIN ACT-_______Custodian________
                                                        (Cust)          (Minor)

TEN ENT-as tenants by the entireties         under Uniform Gifts to Minors Act


JT TEN-as joint tenants with right           _________________________________
       of survivorship and not as                          (State)
       tenants in common

Additional abbreviations may also be used though not in the above list.

For value received, ______________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE



PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE


__________________________________________________________________________Shares

of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint______________________________________________


Attorney to transfer the said Stock on the books of the within-named Corporation with full power of substitution in the premises.

Dated:_______________________________

X__________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM) PURSUANT TO
S.E.C. RULE 17Ad-15.


EXHIBIT 10.7

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

EXCLUSIVE
LICENSE AGREEMENT

THIS LICENSE AGREEMENT is made and entered into this 10/th/ day of March, 1995 between THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL having an address at 300 Bynum Hall, Chapel Hill, N.C. (hereinafter referred to as University) and Inspire Pharmaceuticals, Inc., a corporation organized and existing under the laws of Delaware and having an address at c/o Burr, Egan, Deleage & Co., One Post Office Square, Boston, Massachusetts (hereinafter referred to as Licensee).

W I T N E S S E T H

WHEREAS, University owns and controls the inventions described in U.S. Patent No. 5,292,498 entitled "Method of Treating Lung Disease with Uridine Triphosphates," certain inventions relating to the therapeutic use of phenamil and benzamil for lung disease, and certain inventions relating to the diagnosis of AIDS-related Pneumocysitis carinii pneumonia ("PCP"), lung cancer, and tuberculosis (collectively, the "Inventions"); and

WHEREAS, the Inventions were developed by Drs. Richard C. Boucher and M. Jackson Stutts (collectively, the "Inventors"), of the University; and

WHEREAS, Licensee is desirous of producing, using and selling products which include the use of the Inventions and is willing to expend best efforts to do so if it can obtain a license to use the Inventions under the terms and conditions set forth herein; and

WHEREAS, University desires to facilitate a timely transfer of its information and technology concerning the Inventions for the ultimate benefit of the public and this transfer is best accomplished by the grant of this license; and

WHEREAS, in the opinion of the University, this transfer can best be accomplished consistent with its mission by affiliation with Licensee;

NOW, THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between the parties as follows:

1. Definitions

1.1. "University Technology" means any unpublished research and development information, unpatented inventions, know-how, clinical data, and technical data in the possession of the University prior to the effective date of this Agreement or which comes into the possession of University during the term of this Agreement which relates to and is necessary for the practice of the Inventions or any Licensed Improvements and which University has the right to provide to Licensee.


1.2. "Licensed Products" means any method, procedure, product, or component part thereof whose manufacture, sale, or use includes any use of University Technology or is covered by any Valid Claim included in the Patent Rights.

1.3. "Patent Rights" means any unexpired U.S. patents and/or pending patent applications covering the Inventions or any Licensed Improvements owned or controlled by University prior to or during the term of this Agreement and which University has the right to provide to Licensee, as well as any continuations, continuations in part, divisions, or reissues thereof, and any foreign counterpart of any of the foregoing.

1.4. "Net Sales Price" means the invoiced sales price, less (i) trade, quantity and cash discounts or rebates actually allowed, (ii) credits or allowances actually given for rejections or returns, (iii) sales, use and value added taxes, and (iv) freight, shipping or other costs of transportation charged to a customer

In the event any Licensed Product is sold as a component of a combination of functional elements, Net Sales Price for purposes of determining royalty payments on such combination shall be calculated by subtracting from the net sales price of the combination the gross selling price of the inhaler device component (if any) and then multiplying this adjusted net sales price by the fraction A over A+B, in which "A" is the gross selling price of the Licensed Product portion of the combination and "B" is the gross selling price of the other active elements of the combination, including the inhaler device component. For the purposes of this Section 1.4, the term "gross selling price" shall mean the price at which the relevant component was sold separately during the accounting period in which the sale of the combination was made. In the event that there is no separate sale of such above designated Licensed Product, inhaler device, or other active element of the combination during the accounting period in which the sale of the combination was made, Net Sales Price shall be calculated by subtracting from the net sales price of the combination the gross selling price, if available, or the fully allocated cost, if not, of the inhaler device component (if any) and then multiplying this adjusted net sales price by the fraction C over C+D, in which "C" is the fully allocated cost of the Licensed Product portion of such combination and "D" is the fully allocated cost of the other active elements of the combination, including the inhaler device component. The fully allocated cost of a component shall be determined in accordance with conventional cost accounting principles. [CONFIDENTIAL TREATMENT REQUESTED].

1.5. "Net Sales" means the total Net Sales Price of Licensed Products. Licensed Products will be considered sold when billed out, or when delivered or paid for before delivery, whichever first occurs.

1.6. "Licensed Territory" means the entire world.

1.7. "Licensed Improvements" shall have the meaning set forth in the Sponsored Research Agreement.

-2-

1.8. "Valid Claim" means a claim of an issued patent which has not lapsed or become abandoned or been declared invalid or unenforceable by a court of competent jurisdiction or an administrative agency for which there is no right of appeal or for which the right of appeal is waived.

1.9. "Sponsored Research Agreement" means the Sponsored Research Agreement attached as Exhibit A.

2. Grant of License and Term

2.1. University grants to Licensee to the extent of the Licensed Territory, an exclusive license (with the right to grant sublicenses) under the Patent Rights and University Technology to make, have made, use and sell Licensed Products, upon the terms and conditions set forth herein.

2.2. Any license granted herein is exclusive for a term beginning on the date of execution of this Agreement and, unless terminated sooner as herein provided, ending at the expiration of the last to expire patent included in the Patent Rights.

2.3. Licensee shall not disclose any unpublished University Technology furnished by University pursuant to Paragraph 2.1 above to third parties during the term of this Agreement or any time thereafter, provided, however, that disclosure may be made of any such University Technology at any time: (1) with the prior written consent of University, (2) after the same shall have become public through no fault of Licensee, (3) as demonstrated by documentary evidence, if the same was independently developed or discovered by Licensee prior to the time of its disclosure, (4) the same is or was disclosed to Licensee at any time, whether prior to or after the time of its disclosure under this Agreement, by a third party having no fiduciary relationship with University and having no obligation of confidentiality with respect to such University Technology or (5) the same is required to be disclosed to comply with applicable laws or governmental regulations, provided the University receives prior written notice of such disclosure and that Licensee takes all reasonable and lawful actions to minimize the extent of such disclosure and, if possible, to avoid such disclosure.

2.4. Notwithstanding the foregoing, any and all licenses granted hereunder are subject to the rights of the United States Government which arise out of its sponsorship of the research which led to the Inventions or any Licensed Improvements.

3. License Fee, Milestone Payments, and Royalties

3.1. (a) Licensee shall pay to University the following license issue

fees:

Amount of Fee            Description of Technology Licensed
-------------            ----------------------------------

.    [CONFIDENTIAL       .    U.S. Patent No. 5,292,498 entitled "Method of
     TREATMENT                Treating Lung Disease with Uridine
     REQUESTED]               Triphosphates."

-3-

.    [CONFIDENTIAL       .    Certain inventions relating to the
     TREATMENT                therapeuticuse of phenamil and benzamil for
                              lung disease.
.    REQUESTED]          .    Certain inventions relating to the
                              diagnosis of AIDS-related Pneumocysitis
                              carinii pneumonia, lung cancer, and
                              tuberculosis.

(b) Licensee will also reimburse the University for properly documented costs (including attorney's fees) arising out of the patenting of the Inventions pursuant to Article 10 of this Agreement.

(c) Licensee shall pay to University the following milestone payments within thirty (30) days after each milestone is achieved:

Payment Milestone

[CONFIDENTIAL TREATMENT REQUESTED]

(d) In partial consideration of the license granted under Section 2.1 of this Agreement, Licensee shall issue to the University a total of Five Hundred Twenty One Thousand shares of Common Stock of the Company, $.001 par value per share.

(e) Both the license issue fee and the reimbursement of patenting costs shall be non-refundable and shall not be a credit against any other amounts due hereunder except as may be provided for elsewhere in this Agreement.

3.2. Beginning on the effective date of this Agreement and continuing for the life of this Agreement, Licensee will pay University a running royalty of
[CONFIDENTIAL TREATMENT REQUESTED] of all Net Sales of the Licensed Product(s) that are sold by Licensee.

3.3. After the first commercial sale of a Licensed Product, Licensee agrees to make quarterly written reports to University within 30 days after the first days of each January,

-4-

April, July, and October during the life of this Agreement and as of such dates, stating in each such report the number, description, and aggregate Net Selling Prices of Licensed Products sold or otherwise disposed of during the preceding three calendar months and upon which royalty is payable as provided in Article 3.2 hereof. The first such reports shall include all such Licensed Products so sold or otherwise disposed of prior to the date of such report.

3.4. Concurrently with the making of each such report, Licensee shall pay to the University royalties at the rate specified in Article 3.2 of this Agreement on the Licensed Products included therein.

3.5. (a) If in any calendar year during the term of this Agreement,
[CONFIDENTIAL TREATMENT REQUESTED]

(b) [CONFIDENTIAL TREATMENT REQUESTED]

3.6. University may, by written notice to Licensee, terminate this Agreement during any April subsequent to the second anniversary of the first commercial sale of a Licensed Product if Licensee, together with its sublicensees, have not practiced the Invention during each calendar year which precedes each such April to the extent of generating earned payments to University under Section 3.2 and 5.3 of this Agreement in an amount no less than
[CONFIDENTIAL TREATMENT REQUESTED].

3.7. Should this Agreement become effective or terminate or expire during a calendar year, the minimum royalty under paragraph 3.5 for such portion of a year shall be determined by multiplying the minimum royalty set forth in said paragraph for the year in which this Agreement becomes effective, terminates or expire, by a fraction, the numerator of which shall be the number of days during such calendar year for which this Agreement shall be in effect and the denominator of which shall be 365.

3.8. In the event of default in payment of any payment owing to University under the terms of this Agreement, and if it becomes necessary for University to undertake legal action to collect said payment, Licensee shall pay all legal fees and costs incurred by University in connection therewith.

3.9. In the event that licensee is legally required to pay license fees or royalties to one or more third parties under patents other than the Patent Rights in order to make, use or sell a Licensed Product, then Licensee shall be entitled to a credit against royalties due University on sales of that Licensed Product in an amount equal to [CONFIDENTIAL TREATMENT REQUESTED] of the royalties paid to such third parties, provided than in no event shall the royalties otherwise due University be reduced by more than [CONFIDENTIAL TREATMENT REQUESTED]. In the event that such third party license fee or royalty payments exceed [CONFIDENTIAL TREATMENT REQUESTED] of the royalties payable to University on sales of that Licensed Product for the quarterly payment period in which such third party license fees or royalties are incurred, the excess shall be carried forward and

-5-

offset against royalties due to University in successive payment periods. This
Section 3.9 shall apply only to the Licensed Product portion of any combination product, as described in Section 1.4 above.

4. Diligence Requirements

4.1. Licensee shall use its best efforts to proceed diligently with the manufacture and sale of Licensed Products and shall earnestly and diligently offer and continue to offer for sale such Licensed Products, both under reasonable conditions, during the term of this Agreement.

4.2. In particular, Licensee shall meet the performance milestones set forth in Exhibit B, which is attached hereto.

5. Sub-licenses

5.1. Subject to this Article, Licensee may grant sub-licenses under its rights under Section 2.1 above provided that each sublicense contains a provision that such sub-license and the rights thereby granted are personal to the sub-licensee thereunder and such sub-license cannot be further sub-licensed.

5.2. Any sub-license granted pursuant to this Article shall be in accordance with the terms and conditions of this Agreement.

5.3. Licensee shall promptly pay University [CONFIDENTIAL TREATMENT REQUESTED] of any royalty income received from any sublicensee in consideration of the grant of sublicense rights pursuant to this Article 5. If non-monetary consideration is so received, then a commercially reasonable monetary value will be assigned for purposes of calculating University's share of sublicense royalty income. Licensee shall retain the entirety of all other payments received from such sublicensees, including without limitation license fees, milestone payments, research and development payments, and payments for the issuance of equity or debt securities of Licensee.

6. Cancellation

6.1. It is expressly agreed that, notwithstanding the provisions of any other paragraph of this contract, if Licensee should fail to deliver to University any royalty at the time or times that the same should be due to University or if either party should in any material respect violate or fail to keep or perform any covenant, conditions, or undertaking of this Agreement on its part to be kept or perform hereunder, then and in such event the affected party shall have the right to cancel and terminate this Agreement, and the license herein provided for, by written notice to the other party if such party has failed to cure any such breach within 30 days of receipt of written notice from the affected party describing such breach. The right to cure a breach with apply only to the first two breaches properly noticed under terms of this Agreement, regardless of the nature of those breaches. Any subsequent breach by that party will entitle the affected party to terminate this Agreement upon proper notice.

-6-

6.2. If Licensee should fail to meet performance milestones number 1, 3, 4 or 5 as set forth on Exhibit B, University may terminate this Agreement upon thirty (30) days written notice to Licensee. If Licensee fails to meet performance milestone number 2 as set forth on Exhibit B, then University may revoke the license granted under Section 2.1 with respect to such amiloride analogs upon 30 days prior written notice to Licensee; provided, however, that all other provisions of this Agreement shall remain in full force and effect, including without limitation the licenses to the Patent Rights and University Technology associated with technologies other than such sodium uptake inhibitors.

6.3. If Licensee should be adjudged bankrupt or enter into a composition with or assignment to its creditors, then in such event University shall have the right to cancel and terminate this Agreement, and the license herein provided for, by written notice to Licensee.

6.4. Any termination or cancellation under any provision of this Agreement shall not relieve Licensee of its obligation to pay any royalty or other fees (including attorney's fees pursuant to Article 3.1 hereof) due or owing at the time of such cancellation or termination.

7. Disposition of Licensed Products On Hand Upon Cancellation or Termination

7.1. Upon cancellation of this Agreement or upon termination in whole or in part, Licensee shall provide University with a written inventory of all License Products in process of manufacture, in use or in stock. Except with respect to termination by University for nonpayment of royalties pursuant to Paragraph 6.1, Licensee shall have the privilege of disposing of the inventory of such Licensed Products within a period of one hundred and eighty (180) days of such termination upon conditions most favorable to University that Licensee can reasonably obtain. Licensee will also have the right to complete performance of all contracts executed by Licensee prior to cancellation or termination by University and requiring use of the University Technology, Patent Rights (except in the case of termination by University for nonpayment of royalties pursuant to Paragraph 6.1) or Licensed Products within and beyond said 180-day period provided that the remaining terms of any such contract does not exceed one year.

8. Use of University's Name

8.1. The use of the name of University, or any contraction thereof, in any manner in connection with the exercise of this license is expressly prohibited except with prior written consent of University. The foregoing notwithstanding, Licensee shall have the right to identify the University and to disclose the terms of this Agreement in any prospectus, offering memorandum, or other document or filing required by applicable securities laws or other applicable law or regulation, provided that Licensee shall have given University at least five (5) days prior written notice of the proposed text of any such identification or disclosure for the purpose of giving University the opportunity to comment on such proposed text.

-7-

9. University Use

9.1. It is expressly agreed that, notwithstanding any provisions herein, University is free to make noncommercial use of university Technology, Patent Rights and Licensed Products for its own research, public service, clinical, teaching and educational purposes without payment of royalties. Furthermore, except as provided in the Sponsored Research Agreement, University shall be free to publish University Technology, as it sees fit.

10. Patents and Infringements

10.1. Licensee shall reimburse University for up to [CONFIDENTIAL TREATMENT REQUESTED] of any properly documented costs incurred to date in relation to patenting the Inventions. As of the effective date of this Agreement, Licensee shall bear the cost of filing and prosecuting U.S. Patent applications and maintenance of issued patents included within the Patent Rights. Such filings and prosecution shall be by counsel of University's choosing but shall be reasonably acceptable to Licensee. University shall keep Licensee advised as to the prosecution of such applications by forwarding to Licensee copies of all official correspondence, (including, but not limited to, Applications, Office Actions, responses, etc.) relating thereto. Licensee shall have the right to advise University as to such prosecution, and further, shall have the right to make reasonable requests as to the conduct of such prosecution.

10.2. As regards filing of foreign patent applications and maintenance of issued patents corresponding to the U.S. applications described in paragraph 10.2 above, Licensee shall designate that country or those countries, if any, in which Licensee desires such corresponding patent application(s) to be filed. Licensee shall pay all costs and legal fees associated with the preparation and filings of such designated foreign patent applications and maintenance of issued patents, and such applications shall be in the University's name and by counsel of the University's choosing and reasonably acceptable to Licensee. University may elect to file corresponding patent applications in countries other than those designated by Licensee, but in that event University shall be responsible for all costs associated with such non-designated filings. In such event, Licensee shall forfeit its rights under this license in the country or countries where University exercises its option to file such corresponding patent applications.

10.3. If the production, sale or use of Licensed Products under this Agreement by Licensee results in any claim for patent infringement against Licensee, Licensee shall promptly notify the University thereof in writing, setting forth the facts of such claim in reasonable detail. As between the parties to this Agreement, Licensee shall have the first and primary right and responsibility at its own expense to defend and control the defense of any such claim against Licensee, by counsel of its own choice. It is understood that any settlement of such actions must be approved by University. Such approval shall not be unreasonably withheld. University agrees to cooperate with Licensee in any reasonable manner deemed by Licensee to be necessary in defending any such action. Licensee shall reimburse University for any out of pocket expenses incurred in providing such assistance.

10.4. If an action is brought against Licensee as described in Section 10.3, Licensee may offset the royalty paid to University in each quarterly royalty period by

-8-

[CONFIDENTIAL TREATMENT REQUESTED] of the amount of expenses incurred in that royalty period as a result of such action, said expenses to include costs, attorney's fees, judgments, and all other expenses incident to the infringement action, to a maximum of [CONFIDENTIAL TREATMENT REQUESTED] of the amount otherwise payable to University in that royalty period. Expenses in excess of the amounts due in any royalty period may be carried over into subsequent royalty periods.

10.5. In the event that any Patent Rights licensed to Licensee are infringed by a third party, Licensee shall have the primary rights, but not the obligation, to institute, prosecute and control any action or proceeding with respect to such infringement, by counsel of its choice, including any declaratory judgment action arising from such infringement. University agrees to cooperation with Licensee in any reasonable manner deemed by Licensee to be necessary in defending any such action, including joining such action if the University is an indispensable party, provided that Licensee shall reimburse University for its out-of-pocket expenses incurred in providing such assistance.
[CONFIDENTIAL TREATMENT REQUESTED].

10.6. Notwithstanding the foregoing, and in University's sole discretion, University shall be entitled to participate through counsel of its own choosing in any legal action involving the Inventions. Nothing in the foregoing sections shall be construed in any way which would limit the authority of the Attorney General of North Carolina.

11. Waiver

11.1. It is agreed that no waiver by either party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent and/or similar breach or default.

12. License Restrictions

12.1. It is agreed that the rights and privileges granted to Licensee are each and all expressly conditioned upon the faithful performance on the part of the Licensee of every requirements herein contained, and that each of such conditions and requirements may be and the same are specific license restrictions.

13. Assignments

13.1. This Agreement is binding upon and shall inure to the benefit of the University, its successors and assigns. This Agreement shall not be assignable or otherwise transferable by either party without the prior written consent of the other, which consent shall not be unreasonably withheld, except that Licensee may assign or otherwise transfer its rights under this Agreement to the following parties without obtaining consent: (1) a successor to Licensee's business, or a successor to that portion of Licensee's business that pertains to the subject matter of the Patent Rights or any University Technology, and (2) any entities controlled by, controlling, or under common control with Licensee.

-9-

14. Indemnity

14.1. Licensee agrees to indemnify, hold harmless and defend University, its officers, employees, and agents, against any and all claims, suits, losses, damage, costs, fees, and expenses asserted by third parties, both government and private, resulting from or arising out of the exercise of this license.

15. Insurance

15.1. Licensee is required to maintain in force at its sole cost and expense, with reputable insurance companies, general liability insurance and products liability insurance coverage in an amount reasonably sufficient to protect against liability under Section 14, above. The University shall have the right to ascertain from time to time that such coverage exists, such right to be exercised in a reasonable manner.

16. Independent Contractor Status.

16.1. Neither party hereto is an agent of the other for any purpose.

17. Representations and Warranties

17.1. University represents that as of the Effective Date the entire right, title, and interest in the patent applications or patents comprising the Patent Rights have been assigned to it and that University has the authority to issue licenses under said Patent Rights. University also represents that it has received no notification that the Patent Rights are invalid nor that the exercise by Licensee of the rights granted hereunder will infringe on any patent or other proprietary right of any third party. University makes no warranties that any patent will issue on University Technology or Inventions. University further makes no warranties, express or implied as to any matter whatsoever, including, without limitation, the condition of any invention(s) or product(s), that are subject of this Agreement; or the merchantability or fitness for a particular purpose of any such invention or product. University shall not be liability for any direct, consequential, or other damages suffered by Licensee or any others resulting from the use of the Inventions of License Products.

17.2. Paragraph 3.1(d) of this Agreement is made with the University in reliance upon the University's representation to the Company, which the University hereby confirms by execution of this Agreement, that the Common Stock to be received by the University (the "Securities") will be acquired for investment for University's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the University has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the University further represents that it does not have any contract, undertaking, agreement, or arrangement with any person to sell, transfer, or grant participation to such person or to any third person, with respect to any of the Securities.

17.3. The University has received all the information that it considers necessary or appropriate for deciding whether to purchase the Securities. The University further

-10-

represents that it has had sufficient opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Securities.

17.4. The University acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities.

17.5. Purchaser understands that the Securities are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act of 1933, as amended (the "Act"), only in certain limited circumstances. In this regard, the University represents that it is familiar with SEC Rule 144, as currently in effect, and understands the resale limitations imposed thereby and by the Act.

18. Accounting and Records

18.1. Licensee will keep complete, true and accurate books of account and records for the purpose of showing the derivation of all amounts payable to University under this Agreement. Such books and records will be kept at Licensee's principal place of business for at least three (3) years following the end of the calendar quarter to which they pertain, and will be open at all reasonable times for inspection by a representative of University for the purpose of verifying licensee's royalty statements, or Licensee's compliance in other respects with this Agreement. The representative and the University will be obliged to treat as confidential all relevant matters except information relating to the accuracy of such reports and payments or except as required by law.

18.2. Such inspections shall be at the expense of University, unless a variation or error in excess of 2% is discovered in the course of any such inspection, whereupon all costs relating thereto paid by Licensee.

18.3. Licensee will pay to University within thirty (30) days of receiving notice from University the full amount of any under payment, together with interest thereon at the maximum rate of interest allowed by law.

19. Compliance with Laws

19.1. In exercising its rights under this license, Licensee shall fully comply with the requirements of any and all applicable laws, regulations, rules and orders of any governmental body having jurisdiction over the exercise of rights under this license. Licensee further agrees to indemnify and hold University harmless from and against any costs, expenses, attorney's fees, citation, fine, penalty and liability of every kind and nature which might be imposed by reason of any asserted or established violation of any such laws, order, rules and/or regulations.

-11-

20. U.S. Manufacture

20.1. It is agreed that any Licensed Products sold in the United States shall be substantially manufactured in the United States.

21. Notices

21.1. Any notice required or permitted to be given to the parties hereto shall be deemed to have been properly given when received by means of confirmed facsimile transmission, recognized national overnight courier, or first-class certified mail to the other party at the appropriate address or facsimile number as set forth below or to such other addresses or facsimile numbers as may be designated in writing by the parties from time to time during the terms of this Agreement.

     UNIVERSITY                                 LICENSEE

Dr. Robert P. Lowman                         H. Jeff Leighton, Ph.D.
Office of Research Services                  President and Chief Executive
CB #4100, 300 Bynum Hall                     Officer
University of North Carolina at Chapel Hill  Inspire Pharmaceuticals, Inc.
Chapel Hill, NC 27599-4100                   c/o Burr, Egan, Deleage & Co.
Ph:  (919) 966-5625                          One Post Office Square
Fax:  (919) 962-0646                         Boston, MA  02110
                                             Ph:  (617) 482-8020
                                             Fax:  (617) 566-0848

                                             With a copy to:

                                             Michael Lytton, Esq.
                                             Palmer & Dodge
                                             One Beacon Street
                                             Boston, MA  02108
                                             Fax:  (617) 227-4420
22.  Governing Laws
     --------------

     22.1.   This Agreement shall be interpreted and construed in accordance
with the laws of the State of North Carolina.

3. Complete Agreement

23.1. Except for the Sponsored Research Agreement, it is understood and agreed between University and Licensee that this Agreement and the Exhibits attached hereto constitute the entire Agreement, both written and oral, between the parties, and that all prior agreements respecting the subject matter hereof, either written or oral, expressed or implied, shall be abrogated, cancelled, and are null and void and of no effect.

-12-

24. Force Majeure.

24.1. Neither party will be responsible for delays resulting from acts beyond the control of such party, provided that the nonperforming party uses reasonable commercial efforts to avoid or remove such causes of nonperformance and continues performance hereunder with reasonable dispatch whenever such causes are removed. This Article 24 does not apply to the diligence requirements set forth on Exhibit B.

25. Survival of Terms

25.1. The provisions of Articles 7, 8, 14, 15, 18, 19 and 22 shall survive the expiration or termination of this Agreement.

-13-

IN WITNESS WHEREOF, both University and Licensee have executed this Agreement, in duplicate originals, by their respective officers hereunto duly authorized, the day and year first above written. The Inventors have likewise indicated their acceptance of the terms hereof by signing below.

THE UNIVERSITY OF NORTH CAROLINA INSPIRE PHARMACEUTICALS, INC. AT CHAPEL HILL

By:   /s/ Wayne R. Jones            By:     /s/ H. Jeff Leighton
      -------------------------        --------------------------------
     Wayne R. Jones                    H. Jeff Leighton, Ph.D.
     Vice Chancellor,                  President & Chief Executive
     Business and Finance              Officer

INVENTORS:

    /s/ Richard C. Boucher
-------------------------------
Richard C. Boucher



    /s/ M. Jackson Stutts
-------------------------------
M. Jackson Stutts

-14-

EXHIBIT A

SPONSORED RESEARCH AGREEMENT


EXHIBIT B

DILIGENCE REQUIREMENTS

[CONFIDENTIAL TREATMENT REQUESTED]


EXHIBIT 10.8

LEASE

FOR

ROYAL CENTER I

                    LANDLORD:      IMPERIAL CENTER LIMITED PARTNERSHIP,
                                   A NORTH CAROLINA LIMITED PARTNERSHIP


                    TENANT:        INSPIRE PHARMACEUTICALS, INC.

STATE OF NORTH CAROLINA:                                LEASE
                                                        -----

COUNTY OF Durham:

THIS LEASE, made as of this 17 day of May 1995, by and between Imperial Center, Limited Partnership, a North Carolina limited partnership hereinafter "Landlord" and Inspire Pharmaceuticals, Inc. hereinafter (whether one or more) "Tenant".

WITNESSETH:

Upon the terms and conditions hereinafter set forth, the Landlord leases to Tenant and tenant leases from Landlord property hereinafter defined and referred to as the Premises, all as follows:

1. PREMISES. The property hereby leased to Tenant is:

That area shown on Exhibit A-1 (Space Plan) consisting of approximately 6,495 rentable square feet and located in Royal Center I (the "Building") with an address at 4222 Emperor Boulevard, Morrisville, North Carolina 27560, the above-described leased property being herein referred to as the Premises which together with common areas both for the Building and the Imperial Center Business Park is also shown on Exhibit A-4 (Business Park Site Plan).

2. TERM. The term of this Lease shall be for a period of five (5) years commencing the first day of June, 1995, and ending on the last day of May, 2000. If for any reason whatsoever, Landlord cannot deliver possession of the Premises as of the foregoing commencement date, this Lease shall not be void or voidable; no obligation of Tenant shall be affected thereby; and neither Landlord nor Landlord's agent shall be liable to Tenant for any loss or damage resulting therefrom; provided, however, that in such event, the commencement and expiration dates of this Lease and all other dates affected thereby may be revised by written notice from Landlord to Tenant within ninety (90) days of the commencement date specified above to conform all affected dates under this Lease to the date of Landlord's delivery of possession to the Tenant. If with Landlord's prior written approval, Tenant occupies the Premises prior to the commencement date specified above, such occupancy by Tenant shall be subject to all terms and conditions of this Lease, shall not advance the expiration date, and Tenant shall pay pro-rated rent for such period of occupancy at the initial monthly rate set forth below.

3. RENT. All rent payable by Tenant shall be without previous demand therefor by Landlord, and without setoff or deduction. The minimum rent ("Minimum Rent") for the term shall be the sum of three hundred twenty-four thousand six hundred fifty-two and 34/100 Dollars ($324,652.34), which rent shall be payable in advance in equal monthly installments as follows:

                                                  MONTHLY        ANNUAL
        MONTHS       RATE PER RENTABLE S.F.         RENT          RENT
        ------      -------------------------  -------------  -----------
         1-2*                $10.26            $1,282.50
(Commencing 6/1/95)
         3-12                $10.26            $5,553.23      $ 58,097.30

        13-60                $10.26            $5,553.23      $ 66,638.76

                        Total Minimum Rent:                   $324,652.34

*Rental for months 1-2 shall be on the existing office area only, an area of approximately 1,500 rentable square feet. Tenant to occupy the remainder of space of approximately 4,995 rentable square feet, which comprises the total rentable area of 6,495 square feet on August 1, 1995.

Each monthly installment of rent shall be payable on or before the first day of each calendar month during the term of this Lease, unless the term commences other than on the first day of the month, in which event rent at the above rate pro-rated until the end of that month shall be due and payable on the commencement date. In addition to such remedies as may be provided under the default provisions of this Lease, Landlord shall be entitled to a late

1

charge of five percent (5%) of the amount of the monthly rent if not received when due, and a charge of Twenty Dollars ($20.00) or the maximum amount allowed by law, whichever is less, for any check given by Tenant not paid when first presented by Landlord.

4. ADDITIONAL RENT. In addition to rent, Tenant shall pay to Landlord, at the same time as monthly installment payments to rent are made, a sum which represents Tenant's proportionate share of insurance costs, taxes and operating expense charges owed by Tenant pursuant to the terms of Sections 18, 19 and 20 of this Lease, respectively. The actual amount of additional rent due from Tenant shall be adjusted on an annual basis as and when the actual amount of Tenant's proportionate share of insurance costs, taxes and operating expenses charges are determined, and if Tenant has under paid, it shall, within thirty
(30) days of notice from Landlord pay the shortfall as a lump sum payment, and if Tenant has overpaid, Landlord shall pay in a lump sum payment, such overage within thirty (30) days. Tenant shall have the right of reasonable access to Landlord's books and records relative to such operating expense and shall have the right to audit the same. In the event that such an audit reveals a discrepancy of greater than ten percent (10%), which has resulted in an overpayment by Tenant in the amount which should have been charged by Landlord, then Landlord shall pay all costs associated with such audit.

4. LANDLORD'S LIEN. Intentionally deleted.

5. USE. The premises may be used for office, warehouse, storage, and light assembly uses as is necessary for Tenant's business and for research, development and medical purposes consistent with the pharmaceutical industry and for no other purpose without Landlord's written consent first had and obtained. The Tenant shall not use or occupy nor permit the Premises to be used or occupied, nor do or permit anything to be done in or on the Premises, in a manner which may (a) make void or voidable any insurance in force with respect thereto; (b) result in any increase in the premiums charged for warehouse insurance or cause Landlord to be unable to obtain at regular rates fire or other insurance required to be maintained; (c) cause structural damage to the building, the Premises or any part thereof; or (d) constitute a public or private nuisance; or (e) otherwise violate any present or future law, ordinance, rule or requirement of any public authority, including, without limitation, any law, ordinance, rule or requirement concerning or relating to Tenant's use, occupancy or alteration of the Premises. If as a result of any act or neglect of Tenant, its employees, agents, representatives, clients or visitors, or change in the manner in which Tenant's business or operations are conducted at the Premises, any insurance rate shall be increased over the existing rate and assessed against Landlord, then and in that event, Tenant shall pay to Landlord on demand the amount of such increase as additional rent.

7. PARKING AND COMMON AREAS. For as long as Tenant affirmatively complies with the terms of this Lease, Landlord grants to Tenant, its employees and invitees, a non exclusive right to use during the term of this Lease, but subject to such rules and regulations as Landlord may enact in accordance with the terms hereof, the common areas shown on Exhibit A-2 (Site Plan) and which areas are or shall be designated by Landlord and are acknowledged to be for use of such persons along with others similarly entitled, for parking, and for ingress and egress between the Premises and other portions of the common areas as shown on Exhibit A-2, which may include adjoining streets, sidewalks, and highways. Landlord represents that the parking facilities at the Building are at a ratio of 2.8 parking spaces per 1,000 square feet of space (127 spaces). Not less than 35 spaces shall be made available for Tenant's use. Such spaces include striping spaces directly behind the building unless prohibited by applicable laws or traffic patterns. The 35 spaces mentioned above are available only if tenant occupies 9,775 rentable square feet. If Tenant finds that parking serving its reasonable needs are insufficient, Landlord will use its best efforts to provide additional space adjacent to the building. Tenant's employees shall park only in areas designated from time to time by Landlord, and not in any other parking area. If Landlord wishes to move Tenant's employees' parking areas, such new areas shall be reasonably satisfactory to Tenant. Three(3)"visitor" spaces will be provided adjacent to Inspire Pharmaceutical, Inc.'s main entrance. In no event shall the Landlord be responsible for patrolling the use of the "visitor" spaces provided. Common areas include, without limitation, parking areas and entrances and exits thereto, driveways and truck serviceways, sidewalks, landscaped areas, business park entrance areas and other areas and facilities provided for the common or joint use and benefit of occupants of the Building and others, their respective employees, agents, representatives, customers and invitees. Landlord reserves the right, from time to time, to reasonably alter the common areas, to exercise control and management of the common areas and to establish, modify, change and enforce such reasonable rules and regulations as Landlord in its discretion may deem desirable for the management of the Building, the business park, the common areas or any part thereof. In using any part of the common areas, Tenant shall not permit anything which may impede the free flow of traffic through

2

such common areas, endanger persons or property or encroach on the loading or unloading, service and parking areas of any other tenant. Rules and Regulations which apply in part to Tenant's use of the common areas are set forth in Exhibit C.

8. UTILITIES. Tenant shall procure for its own account and shall pay all charges for water, telephone, electricity, gas, sewage, and other utilities used by Tenant at or in the Premises, and Landlord agrees at all times to provide Tenant with access to such utilities for the purpose of Tenant maintenance, repair or replacement of such facilities or systems. Tenant shall be responsible for separate meters for all utilities used at or in the Premises. To the extent that any service or utility used by Tenant at or in the Premises is not separately metered, Tenant agrees to pay as additional rent and as a monthly charge its "pro rata share" of the charges due for such service or utility, unless otherwise agreed in writing by Landlord, Tenant and any other affected tenant. Tenant's "pro-rata share" shall be determined in accordance with the terms of Section 18 for calculating the same, except that the denominator for the computation shall be the square footage of all premises affected or served by the particular meter.

9. TENANT REPAIRS. Tenant shall keep the non-structural components of the Premises, together with all systems, fixtures or equipment therein or appurtenant thereto, including, without limitation, interior surfaces, flooring, wiring, plumbing, heating and air conditioning equipment, trade fixtures, loading area components (including, without limitation, overhead doors, bumpers, seals and levelers) and other facilities, systems or equipment, whether or not originally installed by Landlord or Tenant in good condition and repair. Tenant shall be responsibility for maintenance and replacement of all broken plate glass and windows (unless breakage or damage results from settling of the building or faulty initial construction undertaken by Landlord) and of all lights and ballasts. Tenant shall maintain all lighting serving the Premises in good working order at all times during the term of this Lease. In connection with the day-to-day maintenance and repair of the heating and air conditioning systems and equipment at the Premises, Tenant agrees to enter into and maintain (for the term of this Lease) a maintenance contract with a reputable company offering maintenance and repair services acceptable to Landlord, this contract to be subject to the specifications set forth in Exhibit "D". Tenant shall provide Landlord with satisfactory evidence that it has entered into and maintained the aforesaid maintenance contract upon Landlord's request therefor. If, after written notice from Landlord, Tenant fails to repair or maintain any component, system, fixture or facility at the Premises which Tenant is obligated to repair or maintain, then Landlord may, at Landlord's option, repair or maintain the same, and Tenant shall, upon demand by Landlord, reimburse Landlord forthwith for the total costs of such repairs.

10. LANDLORD REPAIRS. The Landlord shall be responsible for maintenance of the roof, downspouts, gutters, foundation and utility lines located outside the Building and structural walls of the Premises. As used herein, the term "wall" shall not include doors, windows or other components of the Premises which are not load bearing. There shall be no allowance to Tenant for a diminution of rentals value and no liability on the part of Landlord for inconvenience, annoyance or injury to business arising from Landlord or others making any construction or repair to the Premises, the Building, the common areas or an adjoining premises, and no liability on the part of Landlord for failure of the Landlord or others, to make any repairs, alterations, additions or improvements in or to any portion of the Premises, the Building or common areas except to the extent caused by Landlord's negligence. Landlord shall not be liable to Tenant for any damage caused to Tenant and its property due to the Premises or the Building, or any part or appurtenance thereof, being improperly constructed or being or becoming out of repair, or arising from the leaking of a pipe, facility or system for gas, water, sewage, steam, electricity or other utility. Tenant shall immediately report to Landlord any defective condition in or about the Premises known to Tenant, and if such defect is not so reported and such failure results in other damage, Tenant shall be liable for the same. Regardless of any obligation otherwise imposed upon Landlord, Tenant shall pay the cost of any repairs or damage resulting from the negligence or the unlawful or willful acts of its employees, representatives or visitors. If, after a 60- day period of time after written notice from Tenant, Landlord fails to make any repair or maintain any facility at the Premises which Landlord is obligated to repair or maintain, then Tenant may, at Tenant's option, repair or maintain the same, and Tenant shall be entitled to deduct the cost of such repair or maintenance from the rental obligations hereunder.

11. SIGNS AND ADVERTISING; USE OF NAME. Without first obtaining the prior approval of Landlord, not to be unreasonably withheld, (and after submitting such design specifications as Landlord may require), Tenant shall not permit the installation, painting and display of any sign, plaque, lettering or advertising material of any kind on or near the exterior of the Premises, or in the interior thereof that will be visible from the exterior. Any such installation of a sign or other advertising by Tenant shall be

3

installed in compliance with applicable law, shall be maintained by Tenant at its sole cost and expense and shall be removed by Tenant at the expiration or sooner termination of this Lease, whereupon Tenant shall repair any damage caused to the Premises or Building by such removal. Tenant shall keep all approved signage and other material in good working order clearly illuminated during business hours. Tenant shall not have any property right or interest in any name or distinctive designation which may become associated with the Building or the common areas of which the Building may be a part. Landlord shall retain all property rights in, and the exclusive right of use of, such name or designation.

12. IMPROVEMENTS. Tenant agrees to accept the Premises in the condition existing as of the date of this Lease. Landlord represents to the best of its knowledge, that (i) it has no knowledge of any material defect at or to the Premises, (ii) that the heating, ventilation and air-conditioning system is operating properly as of the date hereof, and (iii) that the Premises are in compliance with all applicable codes as of the date of the Commencement of the Term of this Lease and that the space is habitable for the purposes intended for Tenant, (iv) that the exterior of the Premises (including the parking area and sidewalks are in compliance with the Americans With Disabilities Act. If there are any initial changes to be made by Landlord or Tenant (with Landlord's prior written approval), such changes, together with the estimated and allocated costs for such changes, shall be set forth in Exhibit B, Up-fit Improvements, to be initialed by both Landlord and Tenant. Unless expressly stated in Exhibit B to the contrary, Tenant shall be responsible for the cost of the Up-fit improvements and agrees to pay Landlord or its designee a charge of ten thousand and No/100 Dollars ($10,000.00) for construction consulting services, including, without limitation, the reviewing of plans and specifications, and the inspecting and coordinating of construction. This charge is payable not later than thirty (30) days after completion of the Up-fit Improvements. Landlord or Landlord's agents have made no representations or promises with respect to the Premises or the Building except as expressly set forth herein. The taking of possession of the Premises by Tenant shall be conclusive evidence as against Tenant, that Tenant accepts the same "as is" and "where is" and that the Premises and Building were in good condition at the time when possession was taken by Tenant. Landlord may at any time construct additional buildings or improvements in any part of the common areas, so long as the same does not materially interfere with Tenant's use and operation at the Premises, and may remodel or remove the Building or any existing building in any part of the common areas. Any sidewall of the Premises may be used by Landlord as a "party wall" for other buildings or improvements. However, in connection with Landlord's construction of any additional buildings or improvements, Landlord shall not unreasonably interfere with Tenant's use and occupancy of the Premises or impair Tenant's rights under this Lease. For any improvements or alterations made at the Premises, Tenant shall have the right to select and hire its own contractor, provided that Landlord reasonably approve said contractor and all plans and specifications for such improvements and alterations. For minor future improvements, there will be no construction management fee; for significant improvements made by Tenant, the construction management fee will be negotiated.

13. FIXTURES AND INTERIOR ALTERATIONS. The Tenant, with Landlord's prior written consent, not to be unreasonably withheld, but at Tenant's own expense, may from time to time during the term of this Lease make interior alterations in and to the Premises which it may deem necessary or desirable providing that in no case may it affect the structural integrity of the Premises or the Building. Any such work shall be done in a good workmanlike manner and in accordance with applicable law and shall not result in any claim or lien against Landlord or its property. All permanent improvements or alterations shall belong to the Landlord and become a part of the Premises upon the expiration or sooner termination of this Lease, unless Landlordrequests the Tenant to remove such improvements or alterations at Tenant's sole expense, whereupon Tenant shall also cause to be repaired any damage to the Premises resulting from the removal. Tenant may construct or install in the Premises, all racks, counters, shelves, mirrors, chairs, and other trade fixtures and equipment in accordance with applicable law as may be necessary or convenient for Tenant's business, which racks, counters, shelves, mirrors, chairs, and other trade fixtures and equipment shall at all times be and remain the property of the Tenant, and if not then in default hereunder, the Tenant shall have the right to remove all or any part of the same from said Premises at any time prior to the expiration or sooner termination of this Lease, provided nevertheless that Tenant shall repair any damage to the Premises resulting from installation or removal. The parties agree that Tenant shall be compensated for the residual value of personal property and fixtures of Tenant remaining in the Premises after the expiration of the term (only if Landlord, at its sole discretion elects to have personal property or fixtures remain in the space), to the extent that Landlord benefits from the value of such personal property and fixtures in the future leasing of the Premises. Tenant and Landlord shall, during the Notice period, negotiate in good faith.

4

14. LIENS. Tenant shall keep the Premises and the Building free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant, and Tenant hereby agrees to indemnify and hold Landlord, its agents, employees, contractors, officers, directors, partners and shareholders harmless from any and all liability, cost or expense for such liens. Tenant shall cause any such lien imposed to be released of record by payment or bonding upon terms acceptable to Landlord within thirty (30) days after the earlier of the imposition of the lien or a written request by Landlord therefor. If Tenant fails to remove any lien within the prescribed thirty (30) day period, then Landlord may do so at Tenant's expense, including costs and attorneys' fees, which expense shall be due as additional rent hereunder.

15. INDEMNIFICATION. Tenant shall indemnify and hold harmless Landlord, its agents, representatives, successors or assigns, from and against any and all losses, damages, liabilities, claims, penalties, costs or expenses (including attorney's fees), whether caused by Tenant or by its agents, servants, employees, independent contractors or licensees, occasioned by, arising or resulting from or growing out of (a) Tenant's use or occupancy of the Premises, or from the conduct of Tenant's business, or from any activity, work or things done, permitted or suffered by Tenant in or about the Premises; (b) the breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease or arising from any act or omission of the Tenant; or (c) any alleged or actual violation of any Environmental Law (as defined below), any unsafe or improper use or storage of any Hazardous Substance (as defined below) or any condition created by or arising therefrom including any actual or threatened pollution or contamination at or about the Premises or the Building, whether or not due to negligence, an omission or a willful act.

The indemnification provisions contained herein shall not be deemed to be limited by the limits of any insurance policies required under this Lease and shall survive the expiration or sooner termination of this Lease. Tenant shall defend any suit, action or proceeding commenced or brought against Landlord in connection with any indemnity or obligation of Tenant contained in this Section regardless of any alleged fault or cause and Tenant shall employ legal counsel reasonably satisfactory to Landlord to defend such suits, actions or proceedings. Tenant shall deliver to Landlord copies of the documents served in any such suit, action or proceeding and, whenever requested by Landlord, shall advise as to the status of such suit, action or proceeding. If Tenant fails to defend diligently any such suit, action or proceeding, or if Landlord elects to defend by written notice to Tenant at any time, Landlord shall have the right (but not the obligation) to defend the same at Tenant's expense. Tenant shall not settle any such suit, action or proceeding without Landlord's prior written consent. Tenant shall give timely notice of such suit, action or proceeding and the claims thereof to Landlord and each insurer issuing an insurance policy required under this Lease.

16. TENANT'S COMPLIANCE; INSURANCE REQUIREMENTS; WAIVER OF SUBROGATION. Tenant shall comply with all applicable laws, ordinances and regulations affecting the Premises, including the Rules and Regulations set forth in Exhibit C and any other rules for tenants as may be developed from time to time by Landlord and delivered to Tenant or posted on the Premises. Tenant shall maintain and care for its personal property and trade fixtures located in the Premises, insure such personal property and fixtures in all respects, and shall neither have nor make any claim against Landlord for any loss or damage to the same, unless caused by negligence of the Landlord. Throughout the term of this Lease, Tenant, at its sole cost and expense, shall keep or cause to be kept for the mutual benefit of Landlord and Tenant the following insurance: (a) commercial general liability insurance naming the Landlord as an additional insured against any and all claims for bodily injury and property damage occurring in or about the Premises arising out of Tenant's use and occupancy of the Premises, such insurance to have a combined single limit coverage of not less than $1,000,000 per occurrence with a $2,000,000 aggregate limit and excess umbrella liability insurance in the amount of $2,000,000 (If the Tenant has other locations that it owns or leases, the policy shall include an aggregate limit per location endorsement) and such insurance to be primary and non- contributing to any insurance available to Landlord and Landlord's insurance shall be in excess thereto, and in no event shall the limits of such insurance be considered as limiting the liability of Tenant under this Lease; (b) personal property insurance insuring all equipment, trade fixtures, inventory, fixtures and personal property located on or in the Premises for perils covered by the causes of loss--special form (all risk), together with coverage for flood, earthquake and boiler and machinery (if applicable), such insurance to be written on a replacement cost basis in an amount equal to one hundred percent (100%) of the full replacement value of the aggregate of the forgoing property;
(c) workers' compensation insurance in accordance with statutory law and employers' liability insurance with a limit of not less than $100,000 per employee and $500,000 per occurrence; and (d) such other insurance as Landlord deems necessary and prudent or required by Landlord's beneficiaries or mortgagees of any deed of

5

trust or mortgage encumbering the Premises. The policies required to be maintained by Tenant shall be with companies rated AX or better in the most current issue of Best's Insurance Reports. Insurers shall be licensed to do business in the State of North Carolina and domiciled in the United States of America. Any deductible amounts under any insurance policies required hereunder shall not exceed $1,000. Certificates of insurance (or certified copies of the policies if required by Landlord) shall be delivered to Landlord prior to the commencement date and thereafter at least thirty (30) days prior to the expiration date of the old policy. Tenant shall have the right to provide insurance coverage which it is obligated to carry pursuant to the terms hereof in a blanket policy, provided such blanket policy expressly affords coverage to the Premises and to Landlord directly as required by this Lease. Each policy of insurance shall provide notification to Landlord at least thirty (30) days prior to any cancellation or modification resulting in a reduction of insurance coverage. Neither Tenant, nor any person claiming through Tenant on Tenant's behalf, shall have any claim, right of action of right or subrogation against Landlord for any loss or damage caused by casualty at or concerning the Premises, or to Tenant's contents, furniture, furnishings, equipment, fixture or other property at or in the Premises, whether such casualty arose from any act, fault or negligence of Landlord, its agents, representatives, employees, or otherwise. All policies of insurance carried or maintained by Tenant pursuant to this Lease shall contain a provision whereby the insurer waives all rights of subrogation against the Landlord.

17. CASUALTY DAMAGE. If the Premises, or any part thereof, shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. In case the Premises shall be so damaged by fire or other casualty that substantial alteration or reconstruction of the Premises shall, in Landlord's sole opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty), Landlord may, at its option, terminate this Lease and the term and estate hereby granted, by notifying Tenant in writing of such termination within sixty (60) days after the date of damage, in which event the rent shall be abated as of the date of damage. If Landlord does not elect to terminate this Lease, Landlord shall within ninety (90) days after the date of such damage commence to repair and restore the Premises and shall proceed to restore the Premises (except that Landlord shall not be responsible for delays beyond its control) to substantially the same condition in which it was immediately prior to the happening of the casualty, except that Landlord shall not be required to rebuild, repair, or replace any part of Tenant's furniture, furnishings, fixtures or equipment removable by Tenant, and such work shall not in any event exceed the scope of the work done by Landlord in originally constructing the Premises nor shall Landlord in any event be required to spend for such work an amount in excess of the insurance proceeds actually received by Landlord as a result of the fire or other casualty. For the period of restoration, rent shall abate as of the date of damage, unless Tenant is able to continue its occupancy of the Premises during restoration whereupon rent shall be adjusted and prorated in the proportion which the area of unusable lease space bears to the total Premises. In any event, Landlord shall not be liable for any inconvenience or annoyance to Tenant, injury to the business of the Tenant, loss of use of any part of the Premises by the Tenant or loss of Tenant's personal property resulting in any way from such damage or the repair thereof. If the Premises or any other portion of the Building are damaged by fire or other casualty resulting from the omission, fault or negligence of Tenant or any of Tenant's agents, employees, or invitees, rent due hereunder shall not be abated or diminished during the repair of such damage and Tenant shall be liable to Landlord without prejudice to subrogation rights of Landlord's insurer for the cost and expense of the repair and restoration of the Premises and Building caused thereby to the extent such costs and expense is not covered by insurance proceeds.

18. PASS THROUGH--PRORATED INSURANCE COSTS. For the term of this Lease, Landlord intends to keep the Building containing the Premises insured against loss or damage by fire with extended coverage endorsement in an amount sufficient to prevent the Landlord from becoming a co-insurer under the terms of applicable policies, but, in any event, in an amount not less than ninety (90%) percent of the full insurable value of the Building as determined from time to time. Tenant agrees to pay Landlord in advance monthly as additional rent its "pro rata share" (as defined below) of the estimated premiums and costs of such Landlord insurance throughout the term of this Lease, and any renewals or extensions hereof. Tenant's "pro rata share" of such insurance costs shall mean that percentage found by dividing the agreed to rentable square footage of the Premises by the agreed to rentable square footage of the Building(s) (in which the Premises is located) subject of the insurance. In this instance, the "pro rata share" computation is as follows: 6,495 rentable square feet of the Premises divided by 41,094 rentable square feet of the Building equals 15.8% This computed monthly charge estimated by Landlord shall be paid by Tenant until such time when the charge shall be adjusted to

6

reflect actual insurance costs for the year. If the reconciliation of the charges shows a deficiency, such deficiency shall be paid by Tenant to Landlord upon demand; if it shows a credit, the credit shall be refunded by Landlord to Tenant within thirty (30) days.

19. PASS THROUGH--PRORATED TAXES. Tenant shall pay Landlord in advance monthly as additional rent its "pro rata share" (as determined in accordance with the terms of Section 18 hereof) of any use and/or occupancy tax imposed on rents collected by Landlord (other than City, State or Federal Income Tax) or any tax on rents in lieu of ad valorem taxes, notwithstanding that any such tax may be levied or assessed against the Landlord. Tenant further agrees to pay Landlord its "pro rata share" (as determined in accordance with the terms of
Section 18) of ad valorem or any other property tax imposed upon the Building(s) (of which the Premises is a part) subject to the tax, regardless of the taxing authority or authorities levying the same. Furthermore, Tenant shall make timely payments of all ad valorem taxes and assessments made against Tenant's stock of merchandise, furniture, furnishings, trade fixtures, equipment, supplies and other property located on or used in connection with the Premises and of all privilege and business licenses, taxes and similar charges for which Tenant may be responsible. If the assessed value of the Building in which the Premises are located is increased by a taxing authority because of alterations or modifications to the Building made at Tenant's request or made by Tenant, then the additional taxes attributable to such increase in valuation shall be the sole responsibility of Tenant, and shall be included monthly as additional rent to be paid by Tenant.

20. PASS THROUGH--OPERATING EXPENSE CHARGES. Landlord will operate and maintain the common areas of the Building and business park, in excellent condition consistent with a first class business park operations and related areas and facilities referred to in Section 7 above, all as shown in Exhibit A-2 (Site Plan). For the term of this Lease or any extension hereof, Tenant shall pay Landlord as additional rent a minimum sum as a common areas operating expense charge equal to seventy-four cents ($.74) per square foot for each rentable square foot of the Premises, per annum, namely the sum of four thousand eight hundred six and 30/100 Dollars ($4,806.30) which shall be due and payable in monthly installments of four hundred and 52/100 Dollars ($400.52) each, in advance as rent is due. In the event that the actual operating expenses for the common areas as prorated shall exceed the minimum sum shown above, Tenant shall pay its "pro rata share" (as determined in accordance with the terms of Section 18 or if with respect to an operating expense concerning the business park common areas, then a "business park amenities pro rata share" determined from a percentage found by dividing the agreed to rentable square footage of the Premises by the rentable square footage of all benefiting buildings within the business park) of any such increase, as a monthly charge in advance as rent is due. As used herein, the term "operating expense" shall mean and include all operating costs concerning the operation or maintenance of the common areas as determined by standard accounting practices and shall include by way of illustration, but not limited to: property management fees, ad valorem real and personal property taxes, legal fees and other costs incurred in connection with protesting tax assessment, hazard and liability insurance premiums, common area utilities, common area maintenance services, common area facilities, business park amenities, landscaping, snow removal, asphalt and pavement repair, labor, materials, supplies, equipment and tools, permits, licenses and inspection fees. The term "operating expense" shall not include depreciation on the Building in which the Premises are located or equipment therein (except for the reasonable amortization of the costs for capital investment items which are purchased and installed for the purpose of reducing "operating expenses" or complying with a governmental requirement), interest, executive salaries or real estate broker commissions. The annual statement of said operating expenses shall be made available to Tenant upon Tenant's request. There will be an annual cap of five percent (5%) on all "controllable expenses." As used herein, the term "controllable direct expense" means and refers to any direct expense the amount of which is directly subject to control by Landlord, including, for example, property management services costs, but exclusive of taxes, insurance premiums, utility costs, the cost of services by a public authority. Parties agree that $2.01 is the current basis for pass-through charges paid by Tenant to Landlord for insurance, taxes, utilities, the cost of services and other operating expenses. The provisions of this Section only apply to the extent that such costs exceed $2.01.

21. ACCOUNTING FOR PASS THROUGH CHARGES. Landlord shall send to Tenant, in writing, a statement of the amount of any additional rent determined due pursuant to Sections 18, 19, and 20 after the end of the year with respect to which such additional rent is due. The amount of such additional rent required to be paid pursuant to the provisions for this Lease, as well as any other sums of money or charges required to be paid by Tenant under this Lease, whether or not the same shall be designated "additional rent" shall nevertheless, if not paid when due, be collectible as additional rent with the next installment of rent thereafter falling due. Nothing herein contained shall be deemed to suspend or delay the payment of any amount of

7

money or charge at the time the same becomes due and payable hereunder or otherwise limit any remedy of Landlord to collect the same. Tenant shall pay to Landlord monthly in advance, one-twelfth (1/12) of the estimated annualized amounts shown as Tenant's "pro rata share" of any additional rent to be paid in anticipation of such rent due to provide for increases in operating expenses and other expenses as specified in Sections 18, 19 or 20 hereof for the then current calendar year, and all such additional monthly payments shall be credited to Tenant's rent next due to the extent that the amount paid by Tenant exceeds the amount actually due. Any deficiency shall be paid by Tenant to Landlord, within thirty (30) days of notice from Landlord, which notice and any overage shall be refunded by Landlord to Tenant within thirty (30) days.

22. LANDLORD LIABILITY. Tenant agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or for any damage to any goods, wares, merchandise, or other property of Tenant, or Tenant's contractors, agents, employees, invitees, customers or any other person in or about the Premises, unless such damage or loss is solely caused by Landlord, its agents, employees or representatives, nor shall Landlord be liable for injury to the person of the Tenant or to the Tenant's contractors, agents, employees, invitees, or customers whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places, regardless of whether the cause of such damage or injury or means of repairing the same is inaccessible to Tenant. Landlord shall not be liable for any loss or damages arising from any act or neglect of any other tenant. The term "Landlord" as used in this Lease so far as covenants or obligations on the part of Landlord are concerned shall be limited to mean and include only the owner or owners of the Premises and Building at the time in question, and in the event of any transfers or conveyances, the then grantor shall be automatically freed and released from and after the date of such transfer or conveyance of all liability unless such liability and obligations are expressly not assumed by the successor as respects the performance of any

covenant or obligation on the part of Landlord contained in this Lease on the part of Landlord shall be binding on the Landlord, its successors and assigns only during and in respect to their respective successive periods of ownership. Notwithstanding any other provision contained herein to the contrary, in the event of a breach hereof by Landlord or the failure of Landlord to perform any of its obligations hereunder, Landlord shall have no personal liability therefor, but Tenant shall look solely to Landlord's interest in the Building for satisfaction of any claim or loss.

23. CARE OF PREMISES. Tenant shall at all time keep the Premises and adjoining areas and appurtenances (subject to its reasonable control) in a clean and neat condition. Tenant covenants and agrees that Tenant, for itself, its employees, representatives and visitors, shall:

(a) Prohibit anything which shall endanger or cause injury to any person or property.
(b) Prohibit any excessive loads within the Premises or any part of the common areas, including parking areas.
(c) Prohibit any disturbing or offensive odors, fumes, gases, smoke, dust, steam vapors, noise or vibrations in violation of applicable law.
(d) Keep the entryways, sidewalk and delivery and service areas clean and free from rubbish, dirt, snow and ice.
(e) Keep the interior building free of vermin except to the extent used in Tenant's business operations.
(f) Prohibit the use of sinks, toilets or urinals for any purpose except that for which they are designated and installed.
(g) Store all trash and garbage inside the Premises and provide for its prompt and regular removal for disposal outside the Building and common areas.
(h) Comply otherwise with all rules and regulations of Landlord, including those Rules and Regulations set forth in Exhibit C.

24. QUIET ENJOYMENT. Upon Tenant's paying the rent and other sums herein reserved and its performing the covenants and agreements hereof, Tenant shall peaceably and quietly have, hold and enjoy the Premises, and all rights, privileges, easements and appurtenances in any way appertaining thereto, during the term of this Lease.

8

25. SURRENDER; HOLDING OVER. Tenant will vacate and deliver up the Premises and all improvements, additions and alterations thereto, except and only to the extent Landlord requests removal of such improvements, additions and alterations pursuant to Section 13 (except Tenant signs, equipment and trade fixtures installed by Tenant at its expense which may be removed by Tenant), at the expiration or termination of this Lease, in a good, clean and tenantable condition as the same were at the beginning of Tenant's occupancy, excepting reasonable wear, damage by fire and other casualty or appropriation by eminent domain. Tenant expressly agrees to perform and complete any and all of its repair or maintenance obligations specified under Section 9 prior to its vacating the Premises. Tenant may remove its trade fixtures and equipment within ten (10) days after the expiration or sooner termination of this Lease, provided
(a) removal of the Tenant item can be accomplished without major damage to the Premises; and (b) Tenant immediately repairs (or reimburses Landlord for the cost of repairing any resulting damage or defacements)." (c) Tenant is not in default hereunder (otherwise, all such items shall become Landlord's property. Upon its surrender of the Premises, Tenant agrees to provide that all entrance and exit doors are repaired and in good order, all lighting and ballast are repaired and in good working order and all lights are replaced, as necessary and burning, in addition to any other Tenant obligation in connection with the condition of the Premises upon surrender.

During any such holdover period, Tenant shall be a tenant from month-to- month only, and shall be subject to and bound by all terms and conditions hereunder, except those as to term hereof and except that during such holdover tenancy, Tenant shall pay to Landlord (a) rent at the rate equal to one hundred thirty percent (130%) at the rate of rent then existing at the end of the Lease, and (b) any and all operating expenses and all other additional rent payable hereunder.

26. ASSIGNMENT AND SUBLEASING. Tenant may not assign, transfer, mortgage or encumber this lease, or sublease the Premises, in whole or in part, without first obtaining the prior written consent of the Landlord, which Landlord shall not unreasonably withhold. Any assignment or sublease to which Landlord may consent (one consent not being any basis to contend that Landlord should consent to a further change) shall not relieve Tenant of any of its obligations hereunder. The withdrawal or change, whether voluntary, involuntary or by operation of law, of persons or entities owning a controlling interest in Tenant, or the sale of Tenant's business, shall not be deemed a voluntary assignment of this Lease and subject to the provisions of this Section 26, it being expressly understood that no further Landlord approvals shall be required from Landlord in order for Tenant to change the ownership structure or control of Tenant's business. Acceptance of rent by Landlord after any non-permitted transfer or assignment shall not constitute approval thereof by Landlord. It is expressly understood that Tenant's right to sublease or assign is subject to any right of first offer of ICAgen, Inc. and then any right of first offer of any other tenant at the Building to Tenant's Premises.

In no event shall this Lease be assignable by operation of any law, and Tenant's rights hereunder may not become, and shall not be listed by Tenant as an asset under any bankruptcy, insolvency or reorganization proceedings. Tenant is not, may not become, and shall never represent itself to be an agent of Landlord, and Tenant expressly recognizes that Landlord's title is paramount, and that it can do nothing to affect or impair Landlord's title. If this Lease shall be assigned or the Premises or any portion thereof sublet by Tenant at a rental that exceeds the rental to be paid to Landlord hereunder attributable to the Premises or that portion thereof so assigned or sublet, as the case may be, then and in such an event, any such excess rent shall be divided evenly between Landlord and Tenant after netting out the reasonable cost associated with such assignment or subletting.

27. SUBORDINATION; ATTORNMENT. Tenant agrees that this Lease will either be subordinate or superior to any mortgage or other security instrument heretofore or hereafter executed by the Landlord covering the Premises, depending on the requirements of such mortgagee. Within fifteen (15) days, Tenant will execute such reasonable agreements making this Lease superior or subordinate as Landlord's mortgagee may request, and will agree to attorn to said mortgagee providing the mortgagee agrees not to disturb Tenant's possession hereunder so long as Tenant is in compliance with this Lease. Landlord consents to Tenant's execution of Landlord's mortgagee's subordination, attornment and non-disturbance agreement, and to be bound by the provisions thereof. Further Tenant agrees to execute within fifteen (15) days of request therefor, and as often as requested, estoppel certificates setting forth the facts with respect to date of occupancy, termination date of this Lease, the amount of rent due and date to which rent is paid, whether or not it has any defenses or offsets to the enforcement of the Lease or knowledge of any known default or breach by Landlord, and that this Lease is in full force and effect except as to any modifications or amendments, copies of which Tenant shall attach to such estoppel certificate. Tenant agrees to

9

attorn to any successor of Landlord.

28. DEFAULT. If Tenant: (a) fails to pay all rent as provided in this Lease within ten (10) days of written notice from Landlord of such deficiency;
(b) breaches any other agreement or obligation herein set forth and such failure continues for thirty (30) days following written notice from Landlord of such failure; (c) files (or has filed against it) any petition or action for relief under any creditor's law (including bankruptcy, reorganizations, or similar actions), either in state or federal court; or (d) becomes insolvent, makes any transfer in fraud of creditors, has a receiver appointed for its assets, or makes an assignment for benefit of creditors, then in addition to any other lawful right or remedy which it may have, Landlord may do the following: (A) declare the rent for the balance of the term immediately due and payable, and collect the same by distress or otherwise; (B) seize and hold any personal property of Tenant located in the Premises and assert against the same a lien for monies due Landlord; (C) without obtaining any court authorization, lock up the Premises and deny Tenant access thereto; (D) terminate this Lease; or (E) repossess the Premises, and with or without terminating, relet the same at such amount as Landlord deems reasonable, and if the amount is less than Tenant's rent, Tenant shall immediately pay the difference on demand to Landlord, but if in excess of Tenant's rent, the entire amount shall belong to Landlord free of any claim of Tenant therto. All expenses of Landlord in repairing, restoring or altering the Premises or reletting, together with leasing fees, all other expenses in seeking and obtaining a new tenant, the unamortized portion of Landlord's upfit costs incurred in connection with this Lease and other damages and costs, shall be charged to and a liability of Tenant. Landlord's reasonably attorneys fees in pursuing any of the foregoing remedies, or in collecting any rents due by Tenant hereunder, shall be paid by Tenant, which fees as to rents collected shall be the greater of fifteen (15%) percent of the amount of such rents or the actual amount of such fees and expenses as may be allowed by law. All rights and remedies of Landlord are cumulative, and the exercise of any one shall not be an election excluding Landlord at any other time from exercising a different or inconsistent remedy. No waiver by Landlord or any covenant or condition shall be deemed to imply or constitute a further waiver of the same at a later time, and acceptance of rent by Landlord even with knowledge of a default by Tenant shall not constitute a waiver of such default.

29. ATTORNEY'S FEES. Tenant and Landlord hereby each agree to pay all reasonable attorney's fees and expenses which the asserting party may incur in enforcing any obligations under this Lease, or in any litigation commenced to enforce a provision of this Lease.

30. INSPECTION. Tenant agrees that the Landlord, its agents and other representatives, shall have the right to enter into, and upon, the Premises, or any part thereof, at all reasonable times mutually agreeable between the parties and upon one (1) day prior notice (although no such notice shall be required in the event of an emergency) for the purposes of inspecting or showing the same. Tenant further agrees that Landlord may enter the Premises at all reasonable times mutually agreeable between the parties and upon one (1) day prior notice to post "For Rent" signs, after notice is given, during the last five (5) months prior to the expiration of the Lease term, which signs may not removed by Tenant.

31. CONDEMNATION. If the Premises are totally taken by condemnation, this Lease shall terminate on the date of taking. If only a portion of the Premises is taken by condemnation and Tenant can continue use of the remainder, then the Lease will not terminate, but rent shall abate in a just and proportionate amount to the loss of use occasioned by the taking. Tenant shall have no right or claim to any part of any award made to or received by the Landlord for any taking and no right or claim for any alleged value of the unexpired portion of this Lease; provided, however, that Tenant shall not be prevented from making a claim against the condemning party (but not against Landlord) for any moving expenses, loss of profits, or taking of Tenant's personal property (other than its leasehold interest) to which Tenant my be entitled.

32. RIGHT TO RELOCATE. Intentionally deleted.

33. SECURITY DEPOSIT. Landlord acknowledges receipt from Tenant of the sum of five thousand and No/100 Dollars ($5,000.00) which sum Landlord shall retain as security for the performance by Tenant of each of its obligations hereunder. If Tenant fails at any time to perform its obligations, Landlord may at its option apply said deposit, or so much thereof as is required, to cure Tenant's default. This deposit shall not bear interest, and unless Landlord uses the same to cure a default of Tenant, or to restore the Premises to the condition that tenant is required to leave them at the conclusion of the term, Landlord shall within thirty (30) days after twelfth (12/th/) month of the Lease refund to Tenant so much of the deposit as remains.

10

34. NOTICES. Any notices which Landlord or Tenant is required or desires to give the other shall be deemed sufficiently given or rendered if, in writing, is delivered personally or sent by regular mail, or if an event of default is claimed, then either delivered personally or sent by certified or registered mail, postage prepaid, to the address listed after the signature of the party to be given notice, at the end of this Lease document. Any notice given herein shall be deemed delivered when the return receipt therefore is signed, or refusal to accept the mailing by the addressee is noted thereon by the postal authorities.

35. HAZARDOUS MATERIALS; ENVIRONMENTAL COMPLIANCE.

A. Tenant's Responsibility. Tenant shall not (either with or without negligence) cause or permit the escape, disposal or release of any biologically active or other hazardous substances, or materials. Tenant shall not allow the storage or use of said substances or materials in any manner not sanctioned by law or by the standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Building or the business park as generally shown in Exhibit A-2 any such materials or substances except to use in the ordinary course of Tenant's business, and then only after written notice is given to Landlord of the identity of such substances or materials. Tenant covenants and agrees that the Premises will, at all times during its use or occupancy thereof, be kept and maintained so as to comply with all now existing or hereafter enacted or issued statutes, laws, rules, ordinances, orders, permits, and regulations of all state, federal, local, and other governmental and regulatory authorities, agencies, and bodies applicable to the Premises, pertaining to environmental matters, or regulating, prohibiting or otherwise having to do with asbestos and all other toxic, radioactive, or hazardous wastes or materials including, but not limited to, the Federal Clean Air Act, the Federal Water Pollution Control Act, and the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as from time to time amended (all hereinbefore and hereinafter collectively called the "Environmental Laws" or "Laws")

B. Tenant's Liability. In addition to the indemnifications contained in Section 15 hereof, Tenant shall hold Landlord, its agents, representatives, successors or assigns, free, harmless, and indemnified from any penalty, fine, claim, demand, liability, costs, or charge whatsoever which Landlord or others as aforesaid shall incur, or would otherwise incur, by reason of Tenant's failure to comply with this Section 35; including, but not limited to: (i) the cost of bringing the Premises into compliance with all Laws; (ii) the reasonable cost of all appropriate tests and examinations of the Premises to confirm that the Premises have been brought into compliance with all Laws; and (iii) the reasonable fees and expenses of Landlord's attorneys, engineers, and consultants incurred by Landlord in enforcing and confirming compliance with Section 35.

C. Property. For the purposes of this Section 35, the Premises shall include the Premises identified in Section 1 above, together with the real estate covered within the Site Plan, Exhibit A-2, and all structures and improvements thereon; all personal property used in connection with the Premises (including that owned by Tenant); and the soil, ground water, and surface water of the Premises, as this term is defined in this Subsection 3(C).

D. Inspections by Landlord. Landlord and its engineers, technicians, and consultants (collectively the "Auditors") may, from time to time as Landlord deems appropriate upon prior notice and in no event in any way that will materially interfere with Tenant's business operations conduct periodic tests and examinations ("Audits") of the Premises to confirm and monitor Tenant's compliance with this Section 35. Such Audits shall be conducted in such manner as to minimize the interference with Tenant's permitted activities on the Premises; however, in all cases, the Audits shall be of such nature and scope as shall be reasonably required by then existing technology to confirm Tenant's compliance with this Section 35. Tenant shall fully cooperate with Landlord and its Auditors in the conduct of such Audits. The cost of such Audits shall be paid by Landlord unless an Audit shall disclose a material failure of Tenant to comply with this Section 35, in which case the cost of such Audit, and the cost of all subsequent Audits made during the Lease term and within thirty (30) days thereafter (not to exceed two (2) such Audits per calendar year) shall be paid for on demand by Tenant.

E. Landlord's Liability. Provided, however, the foregoing covenants and undertakings of Tenant contained in this Section 35 shall not apply to condition or matter constituting a violation of any Law: (i) which existed prior to the commencement of Tenant's use or occupancy of the Premises and was not caused, in whole or in part, by Tenant or Tenant's agents, employees, officers, partners, contractors, representatives or invitees; or (ii) to the extent such violation is solely caused by the acts or neglects of Landlord or Landlord's contractors, agents, employees, representatives or invitees.

11

Landlord represents that to the best of its knowledge, without independent investigation or verification, the premises shall be in full compliance with all environmental laws as of the date of the commencement of the Lease.

F. Tenant's Liability After Termination of Lease. The covenants contained in this Section 35 shall survive the expiration or termination of this Lease, and shall continue for so long as Landlord and its successors and assigns may be subject to any expense, liability, charge, penalty, or obligation against which Tenant has agreed to indemnify Landlord under this Section 35.

36. BROKER'S COMMISSIONS. Tenant represents and warrants that it has not had dealings with any real estate broker, finder, or other person, with respect to this Lease in any manner, except Tri-Properties, Inc. whose address is Post Office Box 13163, Raleigh, North Carolina and Douglas Baker, Corporate Realty Advisors, whose address is 4000 Westchase Boulevard, Suite 390, Raleigh, NC 27607. Landlord shall pay any commissions or fees that are payable to the above-named broker or finder with respect to this Lease. Tenant shall indemnify and hold Landlord harmless from any and all damages resulting from any claims that may be asserted against Landlord by any other broker, finder or other person, with whom Tenant has or purportedly has dealt. The provisions of this
Section 36 shall survive the termination or expiration of this Lease.

37. MISCELLANEOUS. Headings of sections are for convenience only and shall not be considered in construing the meaning of the contents of such sections. The invalidity of any portion of this Lease shall not have any effect on the balance hereof. Should Landlord or Tenant institute any legal proceeding against the other for a breach or non-performance of any provision herein contained, the prevailing party shall be entitled to receive all costs and attorney fees from the other party." Should Landlord institute any legal proceedings against Tenant for breach of any provision herein contained, and prevail in such action, Tenant shall in addition be liable for the costs and expenses of the Landlord, including its reasonable attorney's fees. This Lease shall be binding upon the respective parties hereto and upon their heirs, executors, successors and assigns. This Lease supersedes and cancels all prior negotiations between the parties, and changes shall be in writing signed by the party affected by such change. Landlord reserves the right to make and change from time to time rules it deems appropriate for the common use and benefit of all tenants, with which rules Tenant shall comply. Any agreed to measurement of space shall be done in accordance with Building Owners and Managers Association ("BOMA") standards used to determine "rentable" square feet for warehouse/flex space. Landlord may sell the Premises without affecting the obligations of Tenant hereunder. This Lease may not be recorded without Landlord's prior written consent. The singular shall include the plural, and the masculine, feminine or neuter includes the other. Each of the Landlord and Tenant respectively represent that each has the lawful authority to enter into this Lease and by signing it in their name as set forth below, to be legally bound in accordance with its terms and conditions. No failure by Landlord to insist upon the strict performance or observance of any term or condition of this Lease, or to seek redress or to exercise any right or remedy after any such failure or breach hereof, shall constitute a waiver of any such term, condition, obligation, right or remedy, or any such failure or breach then or thereafter occurring. No term, condition or obligation of this Lease to be performed or observed by Tenant shall be waived, altered or modified except by a writing executed by Landlord. No waiver of any failure, breach or default hereof shall affect or alter this Lease, but each and every term, condition and obligation of this Lease shall continue in full force and effect with respect to any other failure, breach or default. This Lease, and the rights and obligations of each of the Landlord and Tenant hereunder shall be governed by and construed in accordance with the laws of the State of North Carolina. Whenever this Lease references square footage of the Premises, portions thereof, or any additional space to which Tenant may have an option or other prospective leasehold interest, Tenant may verify the square footage of such space pursuant to BOMA standards. In the event in a discrepancy in the square footage stated in the Lease and the actual square footage, all of the charges due hereunder, including Rent, shall be modified accordingly.

12

38. SPECIAL CONDITIONS, EXHIBITS AND ADDENDA. The following special conditions, if any, shall apply, and where in conflict with earlier provisions in this Lease shall control. If any Lease Exhibits or Addenda are noted below, such exhibits and addenda are incorporated herein and made a part of this Lease. If there are no special conditions, exhibits or addenda, the word NONE shall be written in the blank below.

Exhibit A-1:   Floor Plan
Exhibit A-2:   Building Site Plan
Exhibit A-3:   Legal Description of Real Property
Exhibit A-4:   Business Park Site Plan
Exhibit B:     Space Plan
Exhibit C:     Rules and Regulations
Exhibit D:     Contract Standards for HVAC,
               Inspection, Maintenance & Repair
Exhibit E:     Right of First Refusal
Exhibit F:     Right of Cancellation
Exhibit G:     Memorandum of Lease
Exhibit H:     Renewal Option

13

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease by hand and under seal affixed hereto in duplicate originals, all as of the day and year first above written,

LANDLORD:

IMPERIAL CENTER, LIMITED PARTNERSHIP
a North Carolina Limited Partnership
(Seal)

By: PETULA ASSOCIATES, LTD., AN IOWA
CORPORATION, GENERAL PARTNER

[CORPORATE SEAL]

ATTEST:

/s/ Kurt D. Schaeffer               By:  /s/ Michael S. Duffy
---------------------                    --------------------
Vice President & Secretary          Vice President

                                    By:  __________________________________
                                         ______President

                                    Address:  P.O. Box 13163
                                              Raleigh, NC 27709

TENANT:

INSPIRE PHARMACEUTICALS, INC.

[CORPORATE SEAL]

ATTEST:

/s/ Tim R. Gupton                   By:  /s/ H. Jefferson Leighton
-----------------                        -------------------------
Assistant Secretary                      ______President


                                    Address:  4222 Emperor Boulevard, #470
                                              Morrisville, NC 27560

14

(Landlord Acknowledgment(s))

STATE OF _______________________________ (Partnership Acknowledgment)

COUNTY OF ______________________________

I, _______________________________, a Notary Public in and for said County and State, do certify that _________________________, _________________________ of before me this day, executed the foregoing instrument in behalf of said partnership and acknowledged to me that he/she executed the same for the purposes therein stated.

WITNESS my hand and notarial seal this _________________ day of ____________________, 199__.


Notary Public

My Commission Expires:


(NOTARIAL SEAL OR STAMP)

STATE OF      NORTH CAROLINA      (Corporate Acknowledgment)
         ------------------------

COUNTY OF   Durham
           ---------

I, W.E. Walker , a Notary Public in and for said County and State, do

certify that Tim R. Gupton personally came before me this day and acknowledged that he/she is assistant Secretary of Inspire Pharmaceuticals, a Corporation, and that by authority duly given and as the act of the corporation, the foregoing instrument was signed in this name by its _____ President, sealed with its corporate seal, and attested by him/herself as its assistant Secretary.

WITNESS my hand and notarial seal this 17/th/ day of May , 199 5 .

      /s/ W.E. Walker
-------------------------------------
Notary Public

My Commission Expires:

         6/28/97
----------------

(NOTARIAL SEAL OR STAMP)


15

Landlord
(Acknowledgment)

STATE OF     IOWA        (CORPORATE ACKNOWLEGEMENT)
           -------

COUNTY OF    POLK
           --------

I, Lynn Blass, a Notary Public in and for said County and State, do certify that Kurt D. Schaeffer personally came before me this day and acknowledged that he/she is Vice President & Secretary of Petula Associates, Ltd., a Corporation, and that by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by its Vice President, sealed with

its corporate seal, and attested by him/herself as its Vice President and Secretary.

WITNESS my hand and notarial seal this 1/st/ day of June, 199 5 .

          /s/ Lynn Blass
---------------------------------------

Notary Public
My Commission Expires: [stamp]

11/2/95

(NOTARIAL SEAL OR STAMP)

16

EXHIBIT A-1

FLOOR PLAN

Royal Center I
4222 Emperor Boulevard
Imperial Center

[ F L O O R P L A N ]

17

EXHIBIT A-2

BUILDING SITE PLAN

[ BUILDING SITE PLAN ]

18

EXHIBIT A-3

LEGAL DESCRIPTION OF REAL PROPERTY

Being all of lot S20 of Imperial Center located in Triangle Township, Durham County, North Carolina, containing 15.367 acres, as shown on that plat entitled "Lot S20 - Imperial Center" dated May 4, 1988, prepared by Kenneth Close, Inc., and recorded in Plat Book 117, Page 166, Durham County Registry.

19

EXHIBIT A-4

PARK SITE PLAN
Imperial Center Business Park

[Imperial Center Business Park]

The Imperial Center
Master Plan

20

EXHIBIT B

SPACE PLAN

TENANT IMPROVEMENTS, PLANS AND SPECIFICATIONS

Tenant to occupy space in an "as is" condition (see existing space plan below). The Landlord shall provide an improvement allowance to Inspire Pharmaceuticals, Inc. of $22,500.00. An additional improvement allowance of seventy-five thousand and No/100 Dollars ($75,000.00) shall be amortized over the original lease term at an interest rate of eleven percent (11%) per annum. Amortization of the amount indicated above adds $3.01 per square foot to a base rental rate of $7.25 per square foot, resulting in a rentable rate of $10.26 per square foot for the leased premises. All Additional improvements shall be at Tenant's sole expense.

The Landlord will provide an architectural allowance of $3,200.00. Tenant shall be responsible for paying any additional architectural/engineering fees above the allowance provided directly to the architectural/engineering firm retained.

[SPACE PLAN]

21

EXHIBIT C

RULES AND REGULATIONS

The following rules and regulations have been adopted by the Landlord for the care, protection and benefit of the building and the park and for the general comfort and welfare of the tenants.

1. The sidewalks, entrances, halls, passage, elevators, and stairways shall not be obstructed by the Tenant or used by him for any other purpose than for ingress and egress.

2. Toilet rooms and other water apparatus shall not be used for any purpose other than those for which they are constructed.

3. The Tenant shall not do anything in the Premises, or bring or keep anything therein, which shall in any way conflict with any law, ordinance, rule or regulation affecting the occupancy and use of the Premises, which are or may hereafter be enacted or promulgated by any public authority or by the Board of Fire Underwriters.

4. In order to insure proper use and care of the Premises, neither the Tenant nor agent nor employee of the Tenant shall:

(a) Allow any furniture, packages or articles of any kind to remain in corridors except for short periods incidental to moving same in or out of building or to cleaning or rearranging occupancy of leased space.
(b) Maintain or utilize bicycles or other vehicles in the building.
(c) Mark or defile elevators, toilet rooms, walls, windows doors or any part of the building.
(d) Keep animals or birds on the Premises except to the extent used in Tenant's business operations.
(e) Deposit waste paper, dirt or other substances in corridors, stairways, elevators, toilets, restrooms, or any other part of the building not leased to him.
(f) Fasten any article, drill holes, drive nails or screws into walls, floors, doors, or partitions, or otherwise mar or deface any of them by paint, papers or otherwise, unless written consent is first obtained from the Landlord.
(g) Operate any machinery within the building except customary office equipment, such as dictaphones, calculators, electric typewriters, and the like. Special equipment or machinery used in the trade or profession of the Tenant may be operated only with the prior written consent of the Landlord.
(h) Tamper or interfere in any way with windows, doors, locks, air conditioning controls, heating, lighting, electric or plumbing fixtures.
(i) Premises unoccupied without locking all doors, extinguishing lights and turning off all water outlets.
(j) Install or operate vending machines of any kind in the Premises without written consent of Landlord.

5. The Landlord shall have the right to prohibit any advertising by the Tenant which, in their opinion, tends to damage the reputation of the building or its desirability, and upon written notice from Landlord, the Tenant shall discontinue any such advertising.

6. The Landlord reserves the right to designate the time when and method whereby freight, furniture, safes, goods, merchandise and other articles may be brought into, moved or taken from the building and the Premises leased by the Tenant; and workmen employed, designated or approved by the Landlord must be employed by Tenants for repairs, painting, material moving and other similar work that may be done on the Premises.

7. The Tenant will reimburse the Landlord for the cost of repairing any damage to the Premises or other parts of the building caused by the Tenant or the agents or employees of the Tenant, including replacing any glass broken.

22

8. The Landlord shall furnish a reasonable number of door keys for the needs of the Tenant, which shall be surrendered on termination of the lease, and reserves the right to require a deposit to insure their return at termination of the Lease. The Tenant shall obtain keys only from the Landlord, shall not obtain duplicate keys from any outside source, and shall not alter the locks or effect any substitution.

9. The Tenant shall not install in the Premises any metal safes or permit any concentration of excessive weight in any portion thereof without first having obtained the written permission of Landlord.

10. The Landlord reserves the right at all times to exclude newsboys, loiterers, vendors, solicitors and peddlers, from the building and to require registration, satisfactory identification and credentials from all persons seeking access to any part of the building outside of ordinary business hours. Ordinary business hours shall mean Monday through Friday, 8:00 a.m. to 6:00
p.m., except on legal holidays. The Landlord will exercise its best judgment in the execution of such control but shall not be held liable for the granting or refusal of such access. The Landlord reserves the right to exclude the general public from the building after ordinary business hours and on weekends and holidays.

11. The attaching of wires to the outside of the building is absolutely prohibited, and no wires shall be run or installed in and part of the building without the Landlord's permission and direction.

12. Request for services of janitors or other building employees must be made to the Landlord. Agents or employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord.

13. Signs or any other Tenant identification shall be in accordance with building standard signage. No signs of any nature shall be placed in the windows so as to be visible from the exterior of the building. All signs not approved in writing by the Landlord shall be subject to removal without notice.

14. Any improvements or alterations to the Premises by Tenant shall be approved in advance by the Landlord and all such work, if approved, shall be done at the Tenant's sole expense under the supervision of the Landlord.

15. Tenant shall have a non-exclusive right to use of all driveways and parking areas adjoining said premises. Landlord shall have the authority to assign parking areas for Tenant and Tenant's employees, if deemed necessary by Landlord.

16. If additional drapes or window decorations are desired by Tenant, they shall be approved by Landlord and installed at the Tenant's expense under the direction of the Landlord.

17. The Tenant shall, at its sole cost and expense and on at least a quarterly basis, employ professional exterminators to treat and control pests within the Premises and supply Landlord with a copy of the contract therefor and evidence of treatment.

The Landlord shall have the right to make such other and further reasonable rules and regulations as, in the judgement of the Landlord, may from time to time be necessary for the safety, care and cleanliness of the Premises, the building or the park, and for the preservation of good order therein, effective five (5) days after all tenants have been given written notice thereof.

23

EXHIBIT D

Contract Standards for HVAC
Inspection, Maintenance and Repair

Pursuant to Section 8 of the Lease, Tenant is obligated to enter into and maintain a maintenance contract for heating and air conditioning systems and equipment at the Premises, for the term of the Lease, and any renewal or extension hereof. The following sets forth minimum standards in connection with the services contract so as to accomplish a preventive maintenance inspection and service program for the HVAC systems and equipment at the Premises. At minimum, contract services shall include four (4) scheduled inspections and routine preventative maintenance service calls per year. The contract shall further provide that emergency call service shall be available on a twenty-four
(24) hour a day on call basis. The services contract shall include, without limitation, the following types of services:

(1) Regular preventative maintenance to heating, ventilation and air conditioning equipment as follows:

A. Compressors

1. Check suction and head pressures
2. Electrical amperes
3. All electrical connections

B. Condenser Coil

1. Clean coil (if needed) and check fan condition
2. Check oil level and condition
3. Check for refrigerant leaks

C. Air Handling Side

1. Volts and amperes of motor
2. Electrical connections
3. Adjust belts and pulleys
4. Check and lube bearings and motors
5. Clean coil (if needed) and check fan condition
6. Change filters
7. Check for condensate leaks

D. Boiler (if applicable)

1. Check fire
2. Pressures
3. Oil and check pumps
4. Burners
5. Water temperature
6. Safety controls

E. Check out heating side of units as well as cooling side.

F. Check to make sure thermostats are operating properly.

(2) Emergency call service as needed (beyond routine preventative service) due to mechanical failure of HVAC equipment.

24

EXHIBIT E

RIGHT OF FIRST OFFER

Tenant shall have a right of first offer throughout the initial Term of this Lease and any renewal Term hereof, for the space currently occupied by ICAgen, Inc. Prior to entering into negotiations with any other prospective Tenant for any such space, the Landlord will provide Tenant with a written notice specifying the amount of space that will be available, the date of availability, and the then prevailing terms. Tenant must respond in writing within ten (10) days of Landlord's notice if it wishes to Lease said space. For the twelve (12) months of either the initial Term of this Lease or any extension term, Landlord's obligation to extend Tenant any right of first offer is contingent upon either (i) Tenant having previously elected to extend this Lease or enter into a new Lease for the Premises, or (ii) Tenant electing, upon receiving notice of the availability of said space, to extend the Lease or enter into a new Lease for the Premises. Landlord represents to Tenant that to the best of Landlord's knowledge no other party has a right of first offer or right of first refusal on said ICAgen, Inc. space. In addition to the right of first offer Tenant shall lease from Landlord the space presently occupied by Kelly Green 'Scapes at the Building, consisting of 3,280 useable square feet, which space may be available to Tenant on or before November 1, 1995 subject to the conditions of the following sentence. This right of Tenant to said space is subject to Landlord receiving from ICAgen, Inc. a waiver of its right of first offer on the Kelley Green 'Scapes' space, and is further subject to Landlord's ability to relocate Kelley Green 'Scapes' within the Business Park. Landlord further represents that it shall use all reasonable efforts to relocate Kelly Green 'Scapes on or before November 1, 1995. Upon occupancy of the Kelly Green 'Scapes space by Tenant, Tenant shall pay rent for such space in the amount of five and 50/100 Dollars ($5.50) per square foot and all of the terms and conditions of this Lease shall apply to Tenant's use and occupancy of said space. Landlord represents to the best of its knowledge that no other party other than ICAgen, Inc. has right of first offer or first refusal on the Kelly Green 'Scapes' space.

25

EXHIBIT F

RIGHT OF CANCELLATION

Tenant shall have the right to cancel this lease following thirty-six (36) months occupancy and with six (6) months prior written notice. The cancellation penalty, paid at the time cancellation notice is given, shall be the unamortized portion of the interior improvement allowance, architectural fees and brokerage fees (which is being amortized at eleven percent (11%) per annum) previously paid by the Landlord. The parties agree that such charge shall be only the unamortized portion of the principle and shall not include any future interest charges. [past the thirty-six month occupancy period]

26

EXHIBIT G

MEMORANDUM OF LEASE

[TO BE ADDED AT COMMENCEMENT]

27

EXHIBIT H.

RENEWAL OPTION

Tenant may, at its sole discretion, elect to renew this Lease for a period of between two (2) and four (4) years (the "Extension Period"), the number of years of such extension to be in Tenant's discretion, by giving Landlord written notice of Tenant's intention to exercise this renewal option (the "Extension Option") not later than five (5) months prior to the expiration of the initial term. The Extension Period shall be subject to the same terms and conditions as contained in this Lease, except that rent, as described in Section 3 of the Lease, shall be nine and No/100 Dollars ($9.00) per square foot for a two (2) year term and nine and 50/100 Dollars ($9.50) per square foot for a term of three (3) years or greater.

In the event that Tenant agrees to exercise its extension option for an extension period of three (3) years or greater, then Landlord shall provide a refurbishment allowance equal to one dollar ($1.00) per square foot for each year of the renewal term.

28

AMENDMENT TO LEASE

THIS AMENDMENT TO LEASE ("Amendment") is executed this 30 day of August, 1995 by and between INSPIRE PHARMACEUTICALS, INC. ("Tenant") and IMPERIAL CENTER, LIMITED PARTNERSHIP ("Landlord").

W I T N E S S E T H:

THAT WHEREAS, Landlord and Tenant entered into a lease for certain space at the Royal Center I, 4222 Emperor Boulevard, Morrisville, North Carolina, dated May 17, 1995, as amended August 30 , 1995 (the "Lease"); and

WHEREAS, the Lease grants Tenant certain rights to space currently occupied by Kelly Green 'Scapes (the "Kelly Green 'Scapes Space"); and

WHEREAS, Landlord and Tenant have agreed to modify the Lease as set forth herein, primarily in order to modify Tenant's rights with respect to the Kelly Green 'Scapes Space.

NOW THEREFORE, for the mutual covenants and premises herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby mutually acknowledged, the parties, intending to be bound, hereby agree as follows.

1. Delivery of Kelly Green 'Scapes Space: Landlord warrants and agrees that it shall deliver the Kelly Green 'Scapes space to Tenant on or before December 1, 1995. It is understood that the Kelly Green 'Scapes Space shall be in a "shell condition." If Landlord cannot deliver possession to Tenant of the Kelly Green 'Scapes Space on or before December 1, 1995, the Lease shall not be void or voidable, provided, however, that in such event, no obligations of Tenant for rent due or other obligations for the Kelly Green 'Scapes Space shall accrue until possession of the Kelly Green 'Scapes Space shall have been delivered. If the period of actual delay of Kelly Green 'Scapes Space exceeds
(45) days, then Tenant may, at its option, terminate the Lease. Further, if Landlord will be unable to deliver possession of the Kelly Green 'Scapes Space on or before December 1, 1995, it shall provide Tenant with written notice of such anticipated delay, together with a reasonable estimate of the actual delivery date, not later than November 1, 1995, so that Tenant will not incur unnecessary costs related to its anticipated possession of the Kelly Green 'Scapes Space .

2. Obligations of Tenant Upon Delivery: Upon occupancy of the Kelly Green 'Scapes Space, Tenant shall pay rent as provided in the Lease and shall be subject to all terms and conditions of the Lease with respect to the Kelly Green 'Scapes Space.

3. Compensation to Landlord: Tenant acknowledges that in order to make the Kelly Green 'Scapes Space available not later than December 1, 1995 or within 45 day period as referenced in Section 1. Landlord and certain

of Landlord's tenants will incur costs relative to the relocation of Kelly Green 'Scapes. Tenant hereby agrees to pay Landlord a fee of Twenty Thousand and No/100 Dollars ($20,000.00) in order to contribute to the costs of the relocation, and in order to insure that the Kelly Green 'Scapes Space is available for certain on or before December 1, 1995 or within 45 day period as referenced in Section 1. This fee shall be paid by Tenant to Landlord within ten (10) days of date Landlord delivers the Kelly Green 'Scapes Space to Tenant.

4. Full Force and Effect; Time of the Essence: Except as modified herein, the Lease remains unchanged and in full force and effect. Time is of the essence hereunder.

[Signature Page Attached Hereto and Incorporated Herein by Reference]


IN WITNESS WHEREOF, the undersigned have executed this Amendment under seal the day and year first above written.

LANDLORD:
IMPERIAL CENTER, LIMITED PARTNERSHIP,
a North Carolina limited partnership (SEAL)

By:                Petula Associates, Ltd.,
                   an Iowa corporation,
                   General Partner
                                                              APPROVED
By:                /s/ Frank E. Schmitz                       BICB
                   ------------------------------------     ------------


Printed Name:      Frank E. Schmitz
                   ------------------------------------
Title:             Senior Regional Asset Manager
                   Commercial Real Estate Equities
                   ------------------------------------

President

ATTEST:

/s/ Ronald B. Franklin, Vice President
            Secretary
----------

[AFFIX CORPORATE SEAL]

TENANT:
INSPIRE PHARMACEUTICALS, INC.

By:                /s/ H. Jeff Leighton
                   ----------------------------------------

Printed Name:      H. Jeff Leighton
                   ----------------------------------------

Title:                     President
                   --------

ATTEST:

/s/ Tim R. Gupton
Assistant   Secretary
----------

[AFFIX CORPORATE SEAL]

None


August 1, 1995

Inspire Pharmaceuticals, Inc.
4222 Emperor Blvd., Suite 470
Morrisville, NC 27560
Attn.: H. Jeff Leighton, Ph. D.

Petula Associates, Ltd.
c/o Tri-Properties, Inc.
Post Office Box 13163
RTP, NC 27709
Attn.: Amy Sears

Dear Ladies and Gentlemen:

We have received a written notice from Petula Associates, Ltd. advising us of our right to exercise our right of first offer on the space now occupied by Kelly Green 'Scapes and known as Suite 490, 4222 Emperor Boulevard, Morrisville, North Carolina 27560 (the "Subject Space"): This right of first refusal is pursuant to our lease dated December 17, 1992 between ICAgen, Inc. and Imperial Center Partnership and Petula Associates, Ltd. (collectively, "Landlord"). ICAgen has agreed not to exercise its right of first offer based on the following agreement:

1. Inspire Pharmaceuticals has agreed to sign a definitive lease for the Subject Space.

2. In the event Inspire desires to assign or sublet the Subject Space or any other space occupied by it in the Royal Center I Building, ICAgen will have a right of first offer for twenty (20) calendar days on the Subject Space or such other space at a fair market rate for the Subject Space or such other space, as the case may be.

3. In the event that Inspire does not begin paying full market rent for the Subject Space on or before the earlier of (a) 45 days after Landlord makes the Subject Space available to Inspire for fit-up or (b) January 15, 1996, ICAgen would again have a right of first offer as to the Subject space for twenty (20) calendar days. In the event that ICAgen offers to take such space, assuming space is made available, it shall be available to it at the rate of Five Dollars and Fifty Cents ($5.50) per square foot and all the terms and conditions contained in ICAgen's lease with Landlord shall apply to the use and occupancy of such space and the term of such space shall be coterminate (including options to renew) with the term of ICAgen's lease with Landlord. If ICAgen exercises such right of first offer, then the lease for the Subject Space between Petula and Inspire shall terminate.


4. In the event ICAgen desires to assign or sublet any of its space in the Royal Center I Building, Inspire will have a right of first offer for twenty (20) calendar days on such space.

5. ICAgen shall have a right to renew its lease which is superior to any right of first offer or first refusal given Inspire. In the event ICAgen does not renew its lease, Inspire does have a right of first offer on ICAgen's space. Landlord agrees to negotiate in good faith for such renewal with ICAgen at the prevailing market rates for space in the Royal Center I Building.

If you are in agreement with the terms of this letter agreement, please sign one copy and return it to me and it shall constitute a binding agreement among us governed by North Carolina law.

Sincerely,

/s/ P. Kay Wagoner, Ph.D.

P. Kay Wagoner, Ph.D.
President

Agreed to and accepted this
1st day of August, 1995

PETULA ASSOCIATES, LTD.                                     INSPIRE PHARMACEUTICALS, INC.
              ----------------------------------------                ----------------------------------------
By:             /s/ Frank E. Schmitz                        By:         /s/ H. Jeff Leighton
              ----------------------------------------                ----------------------------------------


Name:           Frank E. Schmitz                            Name:       H. Jeff Leighton
                Senior Regional Asset Manager
                Commercial Real Estate Equities
              ----------------------------------------                ----------------------------------------

Title:                                                      Title:      CEO
              ----------------------------------------                ----------------------------------------




Exhibit 10.9
MASTER LEASE AGREEMENT

MASTER LEASE AGREEMENT (the "Master Lease") dated October 13, 1995 by and between COMDISCO, INC. ("Lessor") and INSPIRE PHARMACEUTICALS, INC. ("Lessee")

IN CONSIDERATION of the mutual agreements described below, the parties agree as follows (all capitalized terms are defined in Section 14.18):

1. Property Leased.

Lessor leases to Lessee all of the Equipment described on each Summary Equipment Schedule. In the event of a conflict, the terms of the applicable Schedule prevail over this Master Lease.

2. Term.

On the Commencement Date, Lessee will be deemed to accept the Equipment, will be bound to its rental obligations for each item of Equipment and the term of a Summary Equipment Schedule will begin and continue through the Initial Term and thereafter until terminated by either party upon prior written notice received during the Notice Period. No termination may be effective prior to the expiration of the Initial Term.

3. Rent and Payment.

Rent is due and payable in advance on the first day of each Rent Interval at the address specified in Lessor's invoice. Interim Rent is due and payable when invoiced. If any payment is not made when due, Lessee will pay a Late Charge on the overdue amount. Upon Lessee's execution of each Schedule, Lessee will pay Lessor the Advance specified on the Schedule. The Advance will be credited towards the final Rent payment if Lessee is not then in default. No interest will be paid on the Advance.

4. Selection; Warranty and Disclaimer of Warranties.

4.1 Selection. Lessee acknowledges that it has selected the Equipment and disclaims any reliance upon statement made by the Lessor, other than as set forth in the Schedule.

4.2 Warranty and Disclaimer of Warranties. Lessor warrants to Lessee that, so long as Lessee is not in default, Lessor will not disturb Lessee's quiet and peaceful possession, and unrestricted use of the Equipment. To the extent permitted by the manufacturer, Lessor assigns to Lessee during the term of the Summary Equipment Schedule any manufacturer's warranties for the Equipment.
LESSOR MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE MERCHANTABILITY OF THE EQUIPMENT OR ITS FITNESS FOR A PARTICULAR PURPOSE. Lessor is not responsible for any liability, claim, loss, damage or expense of any kind (including strict liability in tort) caused by the Equipment except for any loss or damage caused by the willful misconduct or negligent acts of Lessor. In no event is Lessor responsible for special incidental or consequential damages.

5. Title; Relocation or Sublease; and Assignment.

5.1 Title. Lessee holds the Equipment subject and subordinate to the rights of the Owner, Lessor, any Assignee and any Secured Party. Lessee upon Lessor's request agrees to execute precautionary Uniform Commercial Code financing statements showing the interest of the Owner, Lessor, and any Assignee or Secured Party in the Equipment and to insert serial numbers in Summary Equipment Schedules as appropriate. Lessee will, at its expense, keep the Equipment free and clear from any liens or encumbrances of any kind (except any caused by Lessor) and will indemnify and hold the Owner, Lessor, any Assignee and Secured Party harmless from and against any loss caused by Lessee's failure to do so, except where such is caused by Lessor.

5.2 Relocation or Sublease. Upon prior written notice, Lessee may relocate Equipment to any location within the continental United States provided (i) the Equipment will not be used by an entity exempt from federal income tax, and (ii) all additional costs (including any administrative fees, additional taxes and insurance coverage) are reconciled and promptly paid by Lessee.

Lessee may sublease the Equipment upon the reasonable consent of the Lessor and the Secured Party. Such consent to sublease will be granted if: (i) Lessee meets the relocation requirements set out above, (ii) the sublease is expressly subject and subordinate to the forms of the Schedule, (iii) Lessee assigns its rights in the sublease to Lessor and the Secured Party as additional collateral and security, (iv) Lessee's obligation to maintain and insure the Equipment is not altered, (v) all financing statements required to continue the Secured Party's prior perfected security interest are filed, and (vi) Lessee executes sublease documents acceptable to Lessor.

No relocation or sublease will relieve Lessee from any of its obligations under this Master Lease and the relevant Schedule.

5.3 Assignment by Lessor. The terms and conditions of each Schedule have been fixed by Lessor in order to permit Lessor to sell and/or assign or transfer its interest or grant a security interest in each Schedule and/or the Equipment to a Secured Party or

Assignee. In that event, the term Lessor will mean the Assignee and any Secured Party. However, any assignment, sale, or other transfer by Lessor will not relieve Lessor of its obligation to the Lessee and will not materially change Lessee's duties or materially increase the burdens of risks imposed on Lessee. The Lessee consents to and will acknowledge such assignments in a written notice given to Lessee. Lessee also agrees that:

(a) The Secured Party will be entitled to exercise all of Lessor's rights, but will not be obligated to perform any of the obligations of Lessor. The Secured Party will not disturb Lessee's quiet and peaceful possession and unrestricted use of the Equipment so long as Lessee is not in default and the Secured Party continues to receive all Rent payable under the Schedule; and

(b) Lessee will pay all Rent and all other amounts payable to the Secured Party, despite any defense or claim which it has against Lessor. Lessee reserves its right to have recourse directly against Lessor for any defense or claim;

(c) Subject to and without impairment of Lessee's leasehold rights in the Equipment, Lessee holds the Equipment for the Secured Party to the extent of the Secured Party's rights in that Equipment.

6. Net Lease; Taxes and Fees.

6.1 Net Lease. Each Summary Equipment Schedule constitutes a net lease. Lessee's obligation to pay Rent and all other amounts due hereunder is absolute and unconditional and is not subject to any abatement, reduction, set-off, defense, counterclaim, interruption, deferment or recoupment for any reason whatsoever.

6.2 Taxes and Fees. Lessee will pay when due or reimburse Lessor for all taxes, fees or any other charges (together with any related interest or penalties not arising from the negligence of Lessor) accrued for or arising during the term of each Summary Equipment Schedule against Lessor, Lessee or the Equipment by any governmental authority (except only Federal, state, local and franchise taxes on the capital or the net income of Lessor). Lessor will file all personal property tax returns for the equipment and pay all such property taxes due. Lessee will reimburse Lessor for property taxes within thirty (30) days of receipt of an invoice.

7. Care, Use and Maintenance; Inspection by Lessor.

7.1 Care, Use and Maintenance. Lessee will maintain the Equipment in good operating order and appearance, protect the Equipment from deterioration, other than normal wear and tear, and will not use the Equipment for any purpose other than that for which it was designed. If commercially available and considered common business practice for each item of Equipment, Lessee will maintain in force a standard maintenance contract with the manufacturer of the Equipment, or another party acceptable to Lessor, and will provide Lessor with a complete copy of that contract. If Lessee has the Equipment maintained by a party other than the manufacturer or self maintains, Lessee agrees to pay any costs necessary for the manufacturer to bring the Equipment to then current release, revision and engineering change levels, and to re-certify the Equipment as eligible for manufacturer's maintenance at the expiration of the lease term, provided re- certification is available and is required by Lessor. The lease term will continue upon the same terms and conditions until recertification has been obtained.

7.2 Inspection by Lessor. Upon reasonable advance notice, Leasee, during reasonable business hours and subject to Lessee's security requirements, will make the Equipment and its related log and maintenance records available to Lessor for Inspection.

8. Representations and Warranties of Lessee. Lessee hereby represents, warrants and covenants that with respect to the Master Lease and each Schedule executed hereunder.

(a) The Lessee is a corporation duly organized and validly existing in good standing under the laws of the jurisdiction of its Incorporation, is duly qualified to do business in each jurisdiction (including the jurisdiction where the Equipment is, or is to be, located) where its ownership or lease of property of the conduct of its business requires such qualification, except for where such lack of qualification would not have a material adverse effect on the Company's business, and has full corporate power and authority to old property under the Master Lease and each Schedule and to enter into and perform its obligations under the Master Lease and each Schedule.

(b) The execution and delivery by the Lessee of the Master Lease and each Schedule and its performance thereunder have been duly authorized by all necessary corporate action on the part of the Lessee, and the Master Lease and each Schedule

-1-

are not inconsistent with the Lessee's Articles of Incorporation or Bylaws, do not contravene any law or governmental rule, regulation or order applicable to it, do not and will not, contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Master Lease and each Schedule constitute legal, valid and binding agreements of the Lessee, enforceable in accordance with their terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally and rules of law concerning equitable remedies.

(c) There are no actions, suits, proceedings or other patent claims pending or, to the knowledge of the Lessee, threatened against or affecting the Lessee in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Lessee to perform its obligations under the Master Lease and each Schedule.

(d) The Equipment is personal property and when subjected to use by the Lessee will not be or become fixtures under applicable law.

(e) The Lessee has no material liabilities or obligations, absolute or contingent (individually or in the aggregate), except the liabilities and obligations of the Lessee as set forth in the Financial Statements and Liabilities and obligations which have occurred in the ordinary course of business, and which have not been, in any case or in the aggregate, materially adverse to Lessee's ongoing business.

(f) To the best of the Lessee's knowledge, the Lessee owns, possesses, has access to, or can become licensed on reasonable terms under all patents, patent applications, trademarks, trade names, inventions, franchises, licenses, permits, computer software and copyrights necessary for the operations of its business as now conducted, with no known infringement of, or conflict with, the rights of others.

(g) All material contracts, agreements and instruments to which the Lessee is a party are in full force and effect in all material respects, and are valid, binding and enforceable by the Lessee in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally, and rules of law concerning equitable remedies.

9. Delivery and Return of Equipment.

Lessee hereby assumes the full expense of transportation and in-transit insurance to Lessee's premises and installation thereat of the Equipment. Upon termination (by expiration or otherwise) of each Summary Equipment Schedule, Lessee shall, pursuant to Lessor's instructions and at Lessee's full expense (including, without limitation, expenses of transportation and in-transit insurance), return the Equipment to Lessor in the same operating order, repair, condition and appearance as when received, less normal depreciation and wear and tear. Lessee shall return the Equipment to Lessor at 6111 North River Road, Rosemont, Illinois 60018 or at such other address within the continental United States as directed by Lessor, provided, however, that Lessee's expense shall be limited to the cost of returning the equipment to Lessor's address as set forth herein. During the period subsequent to receipt of a notice under Section 2, Lessor may demonstrate the Equipment's operation in place and Lessee will supply any of its personnel as may reasonably be required to assist in the demonstrations.

10. Labeling

Upon request, Lessee will mark the equipment indicating Lessor's interest with labels provided by Lessor. Lessee will keep all Equipment free from any other marking or labeling which might be interpreted as a claim of ownership.

11. Indemnity.

With regard to bodily injury and property damage liability only, Lessee will indemnify and hold Lessor, and Assignee and any Secured Party harmless from and against any and all claims, costs, expenses, damages and liabilities, including reasonable attorneys' fees, arising out of the ownership (for strict liabilities in tort only), selection, possession, leasing, operation, control, use, maintenance, delivery, return or other disposition of the Equipment during the term of this Master Lease or until Lessee's obligations under the Master Lease terminate. However, Lessee is not responsible to a party indemnified hereunder for any claims, costs, expenses, damages and liabilities occasioned by the negligent acts of such indemnified party. Lessee agrees to carry bodily injury and property damage liability insurance during the term of the Master Lease in amounts and against risks customarily insured against by the Lessee on equipment owned by it. Any amounts received by Lessor under that insurance will be credited against Lessee's obligations under this Section.

12. Risk of Loss.

Effective upon delivery and until the Equipment is returned, Lessee relieves Lessor of responsibility for all risks of physical damage to or loss or destruction of the Equipment. Lessee will carry casualty insurance for each item of Equipment in an amount not less than the Casualty Value. All policies for such insurance will name the Lessor and any Secured party as additional insured and as loss payee, and will provide for at least thirty (30) days prior written notice to the Lessor of cancellation or expiration, and will be

primary without right of contribution from any insurance effected by Lessor. Upon the execution of any Schedule, the Lessee will furnish appropriate evidence of such insurance acceptable to Lessor.

Lessee will promptly repair any damaged item of Equipment unless such Equipment has suffered a Casualty Loss. Within fifteen (15) days of a Casualty Loss, Lessee will provide written notice of that loss to Lessor and Lessee will, at Lessee's option, either (a) replace the item of Equipment with Like Equipment and marketable title to the Like Equipment will automatically vest in Lessor or
(b) pay the Casualty Value and after that payment and the payment of all other amounts due and owing with respect to that item of Equipment, Lessee's obligation to pay further Rent for the Item of Equipment will cease.

13. Default, Remedies and Mitigation.

13.1 Default. The occurrence of any one or more of the following Events of Default constitutes a default under a Summary Equipment Schedule:

(a) Lessee's failure to pay Rent or other amounts payable by Lessee when due if that failure continues for five (5) business days after written notice; or

(b) Lessee's failure to perform any other term or condition of the Schedule or the material inaccuracy of any representation or warranty made by the Lessee in the Schedule or in any document or certificate furnished to the Lessor hereunder if that failure or inaccuracy continues for ten (10) business days after written notice; or

(c) An assignment by Lessee for the benefit of its creditors, the failure by Lessee to pay its debts when due, the insolvency of Lessee, the filing by Lessee or the filing against Lessee of any petition under any bankruptcy or insolvency law or for the appointment of a trustee or other officer with similar powers, the adjudication of Lessee as insolvent, the liquidation of Lessee, or the taking of any action for the purpose of the foregoing; or

(d) The occurrence of an Event of Default under any Schedule, Summary Equipment Schedule or other agreement between Lessee and Lessor or its Assignee or Secured Party.

13.2 Remedies. Upon the occurrence of any of the above Events of Default, Lessor, at its option, may:

(a) enforce Lessee's performance of the provisions of the applicable Schedule by appropriate court action in law or in equity;

(b) recover from Lessee any damages and or expenses, including Default Costs;

(c) with notice and demand, recover all sums due and accelerate and recover the present value of the remaining payment stream of all Rent due under the defaulted Schedule (discounted at the same rate of interest at which such defaulted Schedule was discounted with a Secured Party plus any prepayment fees charged to Lessor by the Secured Party or, if there is no Secured Party, then discounted at 6%) together with all Rent and other amounts currently due as liquidated damages and not as a penalty.

(d) with notice and process of law and in compliance with Lessee's security requirements, Lessor may enter on Lessee's premises to remove and repossess the Equipment without being liable to Lessee for damages due to the repossession, except those resulting from Lessor's, its assignees', agents' or representatives' negligence; and

(e) pursue any other remedy permitted by law or equity.

The above remedies, in Lessor's discretion and to the extent permitted by law, are cumulative and may be exercised successively or concurrently.

13.3 Mitigation. Upon return of the Equipment pursuant to the terms of Section 13.2, Lessor will use its best efforts in accordance with its normal business procedures (and without obligation to give any priority to such Equipment) to mitigate Lessor's damages as described below. EXCEPT AS SET FORTH IN THIS SECTION, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS DAMAGES OR MODIFY ANY OF LESSOR'S RIGHTS OR REMEDIES STATED HEREIN. Lessor may sell, lease or otherwise dispose of all or any part of the Equipment at a public or private sale for cash or credit with the privilege of purchasing the Equipment. The proceeds from any sale, lease or other disposition of the Equipment are defined as either:

(a) if sold or otherwise disposed of, the cash proceeds less the Fair Market Value of the Equipment at the expiration of the Initial Term less the Default Costs, or

-2-

(b) if leased, the present value (discounted at 3 percent (3%) over the U.S. Treasury Notes of comparable maturity to the term of the re-lease) of the rentals for a term not to exceed the Initial Term, less the Default Costs.

Any proceeds will be applied against liquidated damages and any other sums due to Lessor from Lessee. However, Lessee is liable to Lessor for, and Lessor may recover, the amount by which the proceeds are less than the liquidated damages and other sums due to Lessor from Lessee.

14. Additional Provisions.

14.1 Board Attendance. One representative of Lessor will have the right to attend Lessee's corporate Board of Directors meetings and Lessee will give Lessor reasonable notice in advance of any special Board of Directors meeting, which notice will provide an agenda of the subject matter to be discussed at such board meeting. Lessee will provide Lessor with a certified copy of the minutes of each Board of Directors meeting within thirty (30) days following the date of such meeting held during the term of this Master Lease.

14.2 Financial Statements. As soon as practicable at the end of each month (and in any event within thirty (30) days), Lessee will provide to Lessor the same information which Lessee provides to its Board of Directors, but which will include not less than a monthly income statement, balance sheet and statement of cash flows prepared in accordance with generally accepted accounting principles, consistently applied (the "Financial Statements"). As soon as practicable at the end of each fiscal year, Lessee will provide to Lessor audited Financial Statements setting forth in comparative form the corresponding figures for the fiscal year (and in any event within ninety (90) days), and accompanied by an audit report and opinion of the independent certified public accountants selected by Lessee, Lessee will promptly furnish to Lessor any additional information including, but not limited to, tax returns, income statements, balance sheets and names of principal creditors) as Lessor reasonably believes necessary to evaluate Lessee's continuing ability to meet financial obligations. After the effective date of the initial registration statement covering a public offering of Lessee's securities, the term "Financial Statements" will be deemed to refer to only those statements required by the Securities and Exchange Commission.

14.3 Obligation to Lease Additional Equipment. Upon notice to Lessee, Lessor will not be obligated to lease any Equipment which would have a Commencement Date after said notice if, (i) Lessee is in default under this Master Lease or any Schedule; (ii) Lessee is in default under any loan agreement, the result of which would allow the lender or any secured party, to demand immediate payment of any material indebtedness; (iii) there is a material adverse change in Lessee's credit standing; or (iv) Lessor determines (in reasonable good faith) that Lessee will be unable to perform the obligations under this Master Lease or any Schedule.

14.4 Merger and Sale Provisions. Lessee will notify Lessor of any proposed Merger at least sixty (60) days prior to the closing date. Lessor may, in its discretion, either (i) consent to the assignment of the Master Lease and all relevant Schedules to the successor entity, or (ii) terminate the Lease and all relevant Schedules. If Lessor elects to consent to the assignment, Lessee and its successor will sign the assignment documentation provided by Lessor. If Lessor elects to terminate the Master Lease and all relevant Schedules, then Lessee will pay Lessor all amounts then due and owing and a termination fee equal to the present value (discounted at 6%) of the remaining Rent for the balance of the Initial Term(s) of all Schedules, and will return the Equipment in accordance with Section 9, Lessor hereby consents to any Merger in which the acquiring entity has a Moody's Bond Rating of BA3 or better or a commercially acceptable equivalent measure of creditworthiness as reasonably determined by Lessor.

14.5 Entire Agreement. This Master Lease and associated Schedules and Summary Equipment Schedules supersede all other oral or written agreements or understandings between the parties concerning the Equipment including, for example, purchase orders. ANY AMENDMENT OF THIS MASTER LEASE OR A SCHEDULE, MAY ONLY BE ACCOMPLISHED BY A WRITING SIGNED BY THE PARTY AGAINST WHOM THE AMENDMENT IS SOUGHT TO BE ENFORCED.

14.6 No Waiver. No action taken by Lessor or Lessee will be deemed to constitute a waiver of compliance with any representation, warranty or covenant contained in this Master Lease or Schedule. The waiver by Lessor or Lessee of a breach of any provision of this Master Lease or a Schedule will not operate or be construed as a waiver of any subsequent breach.

14.7 Binding Nature. Each Schedule is binding upon, and inures to the benefit of Lessor and its assigns. LESSEE MAY NOT ASSIGN ITS RIGHT OR OBLIGATIONS.

14.8 Survival of Obligations. All agreements, obligations including, but not limited to those arising under Section 6.2, representations and warranties contained in this Master Lease, any Schedule, Summary Equipment Schedule or in any document delivered in connection with those agreements are for the benefit of Lessor and any Assignee or Secured Party and survive the execution, delivery, expiration or termination of this Master Lease.

14.9 Notices. Any notice, request or other communication to either party by the other will be given in writing and deemed received upon the earlier of actual receipt or three days after mailing if mailed postage prepaid by regular or airmail to Lessor (to the attention of "the Comdisco Venture Group") or Lessee, at the address set out in the Schedule or, one day after it is sent by courier or on the same day as sent via facsimile transmission, provided that the original is sent by personal delivery or mail by the receiving party.

14.10 Applicable Law. THIS MASTER LEASE HAS BEEN, AND EACH SCHEDULE, WILL HAVE BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF ILLINOIS AND WILL BE GOVERNED AND CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO CONFLICT OF LAW PROVISIONS. NO RIGHTS OR REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR A SCHEDULE.

14.11 Severability. If any one or more of the provisions of this Master Lease or any Schedule is for any reason held invalid, illegal or unenforceable, the remaining provisions of this Master Lease and any such Schedule will be unimpaired, and the invalid, illegal or unenforceable provision replaced by a mutually acceptable valid, legal and enforceable provision that is closest to the original intention of the parties.

14.12 Counterparts. This Master Lease and any Schedule may be executed in ay number of counterparts, each of which will be deemed an original, but all such counterparts together constitute one and the same instrument. If Lessor grants a security interest in all or any part of a Schedule, the Equipment or sums payable thereunder, only that counterpart Schedule marked "Secured Party's Original" can transfer Lessor's rights and all other counterparts will be marked "Duplicate."

14.13 Licensed Products. Lessee will obtain no title to Licensed Products which will at all times remain the property of the owner of the Licensed Products. A license from the owner may be required and it is Lessee's responsibility to obtain any required license before the use of the Licensed Products. Lessee agrees to treat the Licensed Products as confidential information of the owner, to observe all copyright restrictions, and to reproduce or sell the Licensed Products.

14.14 Secretary's Certificate. Lessee will, upon execution of this Master Lease, provide Lessor with a secretary's certificate of incumbency and authority.

14.15 Electronic Communications. Each of the parties may communicate with the other by electronic means under mutually agreeable terms.

14.16 Landlord/Mortgagee Waiver. Lessee agrees to provide Lessor with a Landlord/Mortgagee Waiver with respect to the Equipment. Such waiver shall be in a form satisfactory to Lessor.

14.17 Equipment Procurement Charges/Progress Payments. Lessee hereby agrees that Lessor shall not, by virtue of its entering into this Master Lease, be required to remit any payments to any manufacturer or other third party until Lessee accepts the Equipment subject to this Master Lease.

14.18 Definitions.

Advance - means the amount due to Lessor by Lessee upon Lessee's execution of each Schedule.

Assignee - means an entity to whom Lessor has sold or assigned its rights as owner and Lessor of Equipment.

Casualty Loss - means the irreparable loss or destruction of Equipment.

Casualty Value - means the greater of the aggregate Rent, remaining to be paid for the balance of the lease term or the Fair Market Value of the Equipment immediately prior to the Casualty Loss. However, if a Casualty Value Table is attached to the relevant Schedule its terms will control.

Commencement Date - is defined in each Schedule.

Default Costs - means reasonable attorney's fees and remarketing costs resulting from a Lessee default or Lessor's enforcement of its remedies.

Delivery Date - means date of delivery of Inventory Equipment to Lessee's address.

Equipment - means the property described on a Summary Equipment Schedule and any replacement for that property required or permitted by this Master Lease or a Schedule.

Event of Default - means the events described in Subsection 13.1.

-3-

Fair Market Value - means the aggregate amount which would be obtainable in an arm's length transaction between an informed and willing buyer/user and an informed and willing seller under no compulsion to sell.

Initial Term - means the period of time beginning on the first day of the first full Rent Interval following the Commencement Date for all items of Equipment and continuing for the number of Rent Intervals indicated on a Schedule.

Interim Rent - means the pro-rata portion of Rent due for the period from the Commencement Date through but not including the first day of the firs full Rent Interval included in the Initial Term.

Late Charge - means the lesser of five percent (5%) of the payment due or the maximum amount permitted by the law of the state where the Equipment is located.

Licensed Products - means any software or other licensed products attached to the Equipment.

Like Equipment - means replacement Equipment which is lien free and of the same model, type, configuration and manufacture as Equipment.

Merger - means any consolidate or merger of the Lessee with or into any other corporation or entity, any sale or conveyance of all or substantially all of the assets of the Leasee to any other person or entity or any stock acquisition of the Lessee by any other person or entity in which Lessee is not the surviving entity.

Notice Period - means not less than ninety (90) days nor more than twelve (12) months prior to the expiration of the lease term.

Owner - means the owner of Equipment.

Rent - means the rent Lessee will pay for each item of Equipment expressed in a

Summary Equipment Schedule either as a specific amount or an amount equal to the amount which Lessor pays for an item of Equipment multiplied by a lease rate factor plus all other amounts due to Lessor under this Master Lease or a Schedule.

Rent Interval - means a full calendar month or quarter as indicated on a Schedule.

Schedule - means either an Equipment Schedule or a Licensed Products Schedule which incorporates all of the terms and conditions of this Master Lease.

Secured Party - means an entity to whom Lessor has granted a security Interest for the purpose of securing a loan.

Summary Equipment Schedule - means a certificate provided by Lessor summarizing all of the Equipment for which Lessor has received Lessee approved vendor invoices, purchase documents and/or evidence of delivery during a calendar quarter which will incorporate all of the terms and conditions of the related Schedule and this Master Lease and will constitute a separate lease for the equipment leased thereunder.

-4-

IN WITNESS WHEREOF, the parties hereto have executed this Master Lease on or as of the day and year first above written.

INSPIRE PHARMACEUTICALS, INC.                   COMDISCO, INC.,
as Lessee                                       as Lessor

By:               /s/ Tim Gupton                By:        /s/ James P. Labe
               -------------------                       -------------------

Title:            CFO                           Title:        President
               -------------------                       -------------------

-5-

EQUIPMENT SCHEDULE VL-1
DATED AS OF October 13, 1995
TO MASTER LEASE AGREEMENT
DATED AS OF October 13, 1995 (THE "MASTER LEASE")

LESSEE:  INSPIRE PHARMACEUTICALS, INC.            LESSOR:  COMDISCO, INC.

Admin. Contact/Phone No.:                         Address for all Notices:
------------------------                          -----------------------

Dan Routhier                                      6111 North River Road
Manager, Finance & Operations                     Rosemont, Illinois 60018
(919) 941-9777                                    Attn.:  Venture Group
Address for Notices:
-------------------
4222 Emperor Blvd., Suite 470
Morrisville, NC 27560

Attn.:

Central Billing Location:                         Rent Interval:    Monthly
------------------------                          -------------
Same as Above

Attn.:

Lessee Reference No.:
                        -------------------
                        (24 digits maximum)

Location of Equipment:                            Initial Term:    48 months
---------------------                             ------------
Same as Above                                     (Number of Rent Intervals)

                                                  Lease Rate Factor:    2.481%
                                                  -----------------     ------

Attn.:

EQUIPMENT (as defined below):                     Advance:  $24,810.00
                                                  -------   ----------

Less Commitment Deposit
- 5,000.00 Due: $19,810.00

Equipment specifically approved by Lessor, which shall be delivered to and accepted by Lessee during the period October 17, 1995 through April 17, 1996 ("Equipment Delivery Period"), for which Lessor receives vendor invoices approved for payment, up to an aggregate purchase price of $1,000,000 ("Commitment Amount"); excluding custom use equipment, leasehold improvements, installation costs and delivery costs, rolling stock, special tooling, "stand-alone" software, application software bundled into computer hardware, hand held items, molds and fungible items.


1. Equipment Purchase

This Schedule contemplates Lessor's acquisition of Equipment for lease to Lessee, either by one of the first three categories listed below or by providing Lessee with Equipment from the fourth category, in a value up to the Commitment Amount referred to on the face of this Schedule. If the Equipment acquired is of category (i), (ii) or (iii) below, the effectiveness of this Schedule as it relates to those items of Equipment is contingent upon Lessee's acknowledgement at the time Lessor acquires the Equipment that Lessee has either received or approved the relevant purchase documentation between vendor and Lessor for that Equipment.

Lessor will finance only the acquisition of individual items of Equipment with a cost to Lessor of more than $500.00.

(i) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment which is specifically approved by Lessor.

(ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at Lessee's site and to which Lessee has clear title and ownership may be considered by Lessor for inclusion under this Lease (the "Sale- Leaseback Transaction"). Any request for a Sale-Leaseback Transaction must be submitted to Lessor in writing (along with accompanying evidence of Lessee's Equipment ownership satisfactory to Lessor for all Equipment submitted) no later than November 17, 1995*. Lessor will not perform a Sale-Leaseback Transaction for any request or accompanying Equipment ownership documents which arrive after the date marked above by an asterisk (*). Further, any sale- leaseback Equipment will be placed on lease subject to: (1) Lessor prior approval of the Equipment; and (2) if approved, at Lessor's actual net appraised Equipment value pursuant to the schedule below:

  ORIGINAL EQUIPMENT INVOICE                    PERCENT OF ORIGINAL
             DATE                          MANUFACTURER'S NET EQUIPMENT
                                                COST PAID BY LESSOR
----------------------------------        ------------------------------
Between 5/1/95 and 11/17/95                           100%

Between 3/1/95 and 4/30/95                             80%

Between 12/1/94 and 2/28/95                            70%

Between 9/1/94 and 11/30/94                            65%

Between 6/1/94 and 8/31/94                             60%

(iii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment which is obtained from a third party by Lessee for its use subject to Lessor's prior approval of the Equipment and at Lessor's appraised value for such used Equipment.

(iv) INVENTORY EQUIPMENT. Upon Lessee's request, Lessor may supply new or used Equipment from its inventory at rates provided by Lessor.

2. Commencement Date

The Commencement Date for each item of new on-order or used on-order Equipment will be the date Lessee approves the vendor invoice. The Commencement Date for sale-leaseback Equipment shall be the date Lessor tenders the purchase price, and the Commencement Date for inventory Equipment shall be the Delivery Date or if such inventory Equipment requires installation, the date such installation is completed. Lessor will summarize all approved invoices, purchase documentation and evidence of delivery, as applicable, received in the same calendar quarter into a Summary Equipment Schedule in the form attached to this Schedule as Exhibit 1, and the Initial Term will begin the first day of the calendar quarter thereafter. Each Summary Equipment Schedule will contain the Equipment location, description, serial number(s) and cost and will incorporate the terms and conditions of the Master Lease and this Schedule and will constitute a separate lease.


3. Option to Extend

So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term of a Summary Equipment Schedule, Lessee will have the right to extend the Initial Term of such Summary Equipment Schedule for a period of one (1) year. In such event, the rent to be paid during said extended period shall be mutually agreed upon and if the parties cannot mutually agree, then the Summary Equipment Schedule shall continue in full force and effect pursuant to the existing terms and conditions until terminated in accordance with its terms. The Summary Equipment Schedule will continue in effect following said extended period until terminated by either party upon not less than ninety (90) days prior written notice, which notice shall be effective as of the date of receipt.

4. Purchase Option

So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term or the extended term of the applicable Summary Equipment Schedule, Lessee will have the option at the expiration of the Initial Term or extended term of the Summary Equipment Schedule to purchase all, but not less than all, of the Equipment listed therein for a purchase price not to exceed 20% of Lessor's original equipment cost and upon terms and conditions to be mutually agreed upon by the parties following Lessee's written notice, plus any taxes applicable at time of purchase. Said purchase price shall be paid to Lessor at least thirty
(30) days before the expiration date of the Initial Term or extended term. Title to the Equipment shall automatically pass to Lessee upon payment in full of the purchase price but, in no event, earlier than the expiration of the fixed Initial Term or extended term, if applicable. If the parties are unable to agree on the purchase price or the terms and conditions with respect to said purchase, then the Summary Equipment Schedule with respect to this Equipment shall remain in full force and effect. Notwithstanding the exercise by Lessee of this option and payment of the purchase price, until all obligations under the applicable Summary Equipment Schedule have been fulfilled, it is agreed and understood that Lessor shall retain a purchase money security interest in the Equipment listed therein and the Summary Equipment Schedule shall constitute a Security Agreement under the Uniform Commercial Code of the state in which the Equipment is located.

5. Special Terms

The terms and conditions of the Lease as they pertain to this Schedule are hereby modified and amended as follows:

Subsection 14.2 "Financial Statements" in line 3, delete "Board of Directors" and insert "Series A Preferred stockholders".

Master Lease: This Schedule is issued pursuant to the Lease identified on page 1 of this Schedule. All of the terms and conditions of the Lease are incorporated in and made a part of this Schedule as if they were expressly set forth in this Schedule. The parties hereby reaffirm all of the terms and conditions of the Lease (including, without limitation, the representations and warranties set forth in Section 8) except as modified herein by this Schedule. This Schedule may not be amended or rescinded except by a writing signed by both parties.

INSPIRE PHARMACEUTICALS, INC. COMDISCO, INC.
as Lessee as Lessor

By:    /s/ Tim Gupton                      By:    /s/ James P. Labe
       -------------------------                  -------------------------

Title:       CFO                        Title:        President
       -------------------------                  -------------------------

Date:     10/13/95                       Date:        10/14/95
       -------------------------                  -------------------------


EXHIBIT 1

SUMMARY EQUIPMENT SCHEDULE

This Summary Equipment Schedule dated as of_____, 1995 is executed pursuant to Equipment Schedule No. VL-1 dated as of October 13, 1995 to the Master Lease Agreement dated as of October 13, 1995 between Comdisco, Inc. ("Lessor") and Inspire Pharmaceuticals, Inc. ("Lessee"). All of the terms, conditions, representations and warranties of the Master Lease Agreement and Equipment Schedule No. VL-1 are incorporated herein and made part hereof, and this Summary Equipment Schedule constitutes a Schedule for the Equipment on the attached invoices.

1.  For Period Beginning:               And Ending:
    --------------------                ----------

2.  Initial Term Starts on:             Initial Term:
    ----------------------              -------------
                                        (Number of Rent Intervals)

3.  Total Summary Equipment Cost:
    ----------------------------

4.  Lease Rate Factor:
    -----------------

5.  Rent:
--  ----

6.  Acceptance Doc Type:
    -------------------


EQUIPMENT SCHEDULE VL-2
DATED AS OF October 13, 1995
TO MASTER LEASE AGREEMENT
DATED AS OF October 13, 1995 (THE "MASTER LEASE")

LESSEE:  INSPIRE PHARMACEUTICALS, INC.         LESSOR:  COMDISCO, INC.

Admin. Contact/Phone No.:                      Address for all Notices:
------------------------                       -----------------------

Dan Routhier                                   6111 North River Road
Manager, Finance & Operations                  Rosemont, Illinois 60018

(919) 941-9777                                 Attn.:  Venture Group
Address for Notices:
-------------------
4222 Emperor Blvd., Suite 470
Morrisville, NC 27560

Attn.:

Central Billing Location:                      Rent Interval:    Monthly
------------------------                       -------------
Same as Above

Attn.:

Lessee Reference No.:
                        -------------------
                        (24 digits maximum)

Location of Equipment:                            Initial Term:   48 months
---------------------                             ------------    ---------
Same as Above                                     (Number of Rent Intervals)

                                                  Lease Rate Factor:  2.481%
                                                  -----------------   ------

Attn.:

EQUIPMENT (as defined below):                  Advance:  $6,202.50
                                                         ---------

NMR, which shall be delivered to and accepted by Lessee by April 17, 1996 ("Equipment Delivery Period"), for which Lessor receives a vendor invoice approved for payment, up to an aggregate purchase price of $250,000.00 ("Commitment Amount").


1. Equipment Purchase

This Schedule contemplates Lessor's acquisition of Equipment for lease to Lessee, either by one of the first three categories listed below or by providing Lessee with Equipment from the fourth category, in a value up to the Commitment Amount referred to on the face of this Schedule. If the Equipment acquired is of category (i), (ii) or (iii) below, the effectiveness of this Schedule as it relates to those items of Equipment is contingent upon Lessee's acknowledgement at the time Lessor acquires the Equipment that Lessee has either received or approved the relevant purchase documentation between vendor and Lessor for that Equipment.

Lessor will finance only the acquisition of individual items of Equipment with a cost to Lessor of more than $500.00.

(v) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment which is specifically approved by Lessor.

(vi) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at Lessee's site and to which Lessee has clear title and ownership may be considered by Lessor for inclusion under this Lease (the "Sale- Leaseback Transaction"). Any request for a Sale-Leaseback Transaction must be submitted to Lessor in writing (along with accompanying evidence of Lessee's Equipment ownership satisfactory to Lessor for all Equipment submitted) no later than November 17, 1995*. Lessor will not perform a Sale-Leaseback Transaction for any request or accompanying Equipment ownership documents which arrive after the date marked above by an asterisk (*). Further, any sale- leaseback Equipment will be placed on lease subject to: (1) Lessor prior approval of the Equipment; and (2) if approved, at Lessor's actual net appraised Equipment value pursuant to the schedule below:

ORIGINAL EQUIPMENT INVOICE             PERCENT OF ORIGINAL MANUFACTURER'S NET
           DATE                             EQUIPMENT COST PAID BY LESSOR
--------------------------             ---------------------------------------

Between 5/1/95 and 11/17/95                              100%

Between 3/1/95 and 4/30/95                               80%

Between 12/1/94 and 2/28/95                              70%

Between 9/1/94 and 11/30/94                              65%

Between 6/1/94 and 8/31/94                               60%

(vii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment which is obtained from a third party by Lessee for its use subject to Lessor's prior approval of the Equipment and at Lessor's appraised value for such used Equipment.

(viii) INVENTORY EQUIPMENT. Upon Lessee's request, Lessor may supply new or used Equipment from its inventory at rates provided by Lessor.

2. Commencement Date

The Commencement Date for each item of new on-order or used on-order Equipment will be the date Lessee approves the vendor invoice. The Commencement Date for sale-leaseback Equipment shall be the date Lessor tenders the purchase price, and the Commencement Date for inventory Equipment shall be the Delivery Date or if such inventory Equipment requires installation, the date such installation is completed. Lessor will summarize all approved invoices, purchase documentation and evidence of delivery, as applicable, received in the same calendar quarter into a Summary Equipment Schedule in the form attached to this Schedule as Exhibit 1, and the Initial Term will begin the first day of the calendar quarter thereafter. Each Summary Equipment Schedule will contain the Equipment location, description, serial number(s) and cost and will incorporate the terms and conditions of the Master Lease and this Schedule and will constitute a separate lease.


3. Option to Extend

So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term of a Summary Equipment Schedule, Lessee will have the right to extend the Initial Term of such Summary Equipment Schedule for a period of one (1) year. In such event, the rent to be paid during said extended period shall be mutually agreed upon and if the parties cannot mutually agree, then the Summary Equipment Schedule shall continue in full force and effect pursuant to the existing terms and conditions until terminated in accordance with its terms. The Summary Equipment Schedule will continue in effect following said extended period until terminated by either party upon not less than ninety (90) days prior written notice, which notice shall be effective as of the date of receipt.

4. Purchase Option

So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term or the extended term of the applicableSummary Equipment Schedule, Lessee will have the option at the expiration of the Initial Term or extended term of the Summary Equipment Schedule to purchase all, but not less than all, of the Equipment listed therein for a purchase price not to exceed 20% of Lessor's original equipment cost and upon terms and conditions to be mutually agreed upon by the parties following Lessee's written notice, plus any taxes applicable at time of purchase. Said purchase price shall be paid to Lessor at least thirty (30) days before the expiration date of the Initial Term or extended term. Title to the Equipment shall automatically pass to Lessee upon payment in full of the purchase price but, in no event, earlier than the expiration of the fixed Initial Term or extended term, if applicable. If the parties are unable to agree on the purchase price or the terms and conditions with respect to said purchase, then the Summary Equipment Schedule with respect to this Equipment shall remain in full force and effect. Notwithstanding the exercise by Lessee of this option and payment of the purchase price, until all obligations under the applicable Summary Equipment Schedule have been fulfilled, it is agreed and understood that Lessor shall retain a purchase money security interest in the Equipment listed therein and the Summary Equipment Schedule shall constitute a Security Agreement under the Uniform Commercial Code of the state in which the Equipment is located.

6. Special Terms

The terms and conditions of the Lease as they pertain to this Schedule are hereby modified and amended as follows:

Subsection 14.2 "Financial Statements" in line 3, delete "Board of Directors" and insert "Series A Preferred stockholders".

Master Lease: This Schedule is issued pursuant to the Lease identified on page 1 of this Schedule. All of the terms and conditions of the Lease are incorporated in and made a part of this Schedule as if they were expressly set forth in this Schedule. The parties hereby reaffirm all of the terms and conditions of the Lease (including, without limitation, the representation and warranties set forth in Section 8) except as modified herein by this Schedule. This Schedule may not be amended or rescinded except by a writing signed by both parties.

INSPIRE PHARMACEUTICALS, INC. COMDISCO, INC.
as Lessee as Lessor

By:      /s/ Tim Gupton                         By:     /s/ James P. Labe
       --------------------------------                -----------------------

Title:   CFO                                    Title:   President
       --------------------------------                -----------------------

Date:   10/13/95                                Date:    10/14/95
       --------------------------------                -----------------------


EXHIBIT 1

SUMMARY EQUIPMENT SCHEDULE

This Summary Equipment Schedule dated as of _______, 1995 is executed pursuant to Equipment Schedule No. VL-2 dated as of October 13, 1995 to the Master Lease Agreement dated as of October 13, 1995 between Comdisco, Inc. ("Lessor") and Inspire Pharmaceuticals, Inc. ("Lessee"). All of the terms, conditions, representations and warranties of the Master Lease Agreement and Equipment Schedule No. VL-2 are incorporated herein and made part hereof, and this Summary Equipment Schedule constitutes a Schedule for the Equipment on the attached invoices.

1.  For Period Beginning:               And Ending:
    --------------------                ----------

2.  Initial Term Starts on:             Initial Term:
    ----------------------              -------------
                                        (Number of Rent Intervals)

3.  Total Summary Equipment Cost:
    ----------------------------

4.  Lease Rate Factor:
    -----------------

6.  Rent:
--  ----

6.  Acceptance Doc Type:
    -------------------


EQUIPMENT SCHEDULE VL-3
DATED AS OF October 13, 1995
TO MASTER LEASE AGREEMENT
DATED AS OF October 13, 1995 (THE "MASTER LEASE")

LESSEE:  INSPIRE PHARMACEUTICALS, INC.         LESSOR:  COMDISCO, INC.

Admin. Contact/Phone No.:                      Address for all Notices:
------------------------                       -----------------------

Dan Routhier                                   6111 North River Road
Manager, Finance & Operations                  Rosemont, Illinois 60018
(919) 941-9777                                 Attn.:  Venture Group
Address for Notices:
-------------------
4222 Emperor Blvd., Suite 470
Morrisville, NC 27560

Attn.:

Central Billing Location:                      Rent Interval:  Monthly
------------------------                       -------------
Same as Above

Attn.:

Lessee Reference No.:   -------------------
                        (24 digits maximum)

Location of Equipment:                           Initial Term:   48 months
---------------------                            ------------    ---------
Same as Above                                    (Number of Rent Intervals)

                                                 Lease Rate Factor: Annual
                                                 -----------------  ------
                                                 interest rate equal to the
                                                 --------------------------
                                                 Prime Interest Rate, as
                                                 -----------------------
                                                 reported by The Wall Street
                                                 -------------------------------
                                                 Journal at the time of Lessor's
                                                 -------------------------------
                                                 approval of this Equipment
                                                 --------------------------
                                                 Schedule VL-3, plus 1%.
                                                 -----------------------

Attn.:

EQUIPMENT (as defined below):                    Advance:  To Be Determined at
                                                           -------------------
                                                 the Time of Approval
                                                 --------------------

This Equipment Schedule VL-3 is wholly contingent upon Lessee's request and Lessor's successful review of Lessee's financial and operational status and execution by Lessee of a Warrant Agreement in form and substance satisfactory to Lessor granting Lessor the right to purchase 50,000 shares of Lessee's Series A Preferred Stock at an exercise price equal to the most recent venture capital round price per share of such Preferred Stock

Equipment specifically approved by Lessor, which shall be delivered to and accepted by Lessee during the period October 17, 1995 through April 17,

1996 ("Equipment Delivery Period"), for which Lessor receives vendor invoices approved for payment up to an aggregate purchase price of $500,000.00 ("Commitment Amount"); excluding custom use equipment, leasehold improvements, installation costs and delivery costs, rolling stock, special tooling, "stand-alone" software, application software bundled into computer hardware, hand held items, molds and fungible items.

1. Equipment Purchase

This Schedule contemplates Lessor's acquisition of Equipment for lease to Lessee, either by one of the first two categories listed below or by providing Lessee with Equipment from the third category, in a value up to the Commitment Amount referred to on the face of this Schedule. If the Equipment acquired is of category (i) or (ii) below, the effectiveness of this Schedule as it relates to those items of Equipment is contingent upon Lessee's acknowledgement at the time Lessor acquires the Equipment that Lessee has either received or approved the relevant purchase documentation between vendor and Lessor for that Equipment.

Lessor will finance only the acquisition of individual items of Equipment with a cost to Lessor of more than $500.00.

(i) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment which is specifically approved by Lessor.

(ii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment which is obtained from a third party by Lessee for its use subject to Lessor's prior approval of the Equipment and at Lessor's appraised value for such used Equipment.

(iii) INVENTORY EQUIPMENT. Upon Lessee's request, Lessor may supply new or used Equipment from its inventory at rates provided by Lessor.

3. Commencement Date

The Commencement Date for each item of new on-order or used on-order Equipment will be the date Lessee approves the vendor invoice. The Commencement Date for sale-leaseback Equipment shall be the date Lessor tenders the purchase price, and the Commencement Date for inventory Equipment shall be the Delivery Date or if such inventory Equipment requires installation, the date such installation is completed. Lessor will summarize all approved invoices, purchase documentation and evidence of delivery, as applicable, received in the same calendar quarter into a Summary Equipment Schedule in the form attached to this Schedule as Exhibit 1, and the Initial Term will begin the first day of the calendar quarter thereafter. Each Summary Equipment Schedule will contain the Equipment location, description, serial number(s) and cost and will incorporate the terms and conditions of the Master Lease and this Schedule and will constitute a separate lease.

3. Option to Extend

So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term of a Summary Equipment Schedule, Lessee will have the right to extend the Initial Term of such Summary Equipment Schedule for a period of one (1) year. In such event, the rent to be paid during said extended period shall be mutually agreed upon and if the parties cannot mutually agree, then the Summary Equipment Schedule shall continue in full force and effect pursuant to the existing terms and conditions until terminated in accordance with its terms. The Summary Equipment Schedule will continue in effect following said extended period until terminated by either party upon not less than ninety (90) days prior written notice, which notice shall be effective as of the date of receipt.

4. Purchase Option

So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term or the extended term of the applicable Summary Equipment Schedule, Lessee will have the option at the expiration of the Initial Term or extended term of the Summary Equipment Schedule to purchase all, but not less than all, of the Equipment listed therein for a purchase price not to exceed 20% of Lessor's original equipment cost and upon terms and conditions to be mutually agreed upon by the parties following Lessee's written notice, plus any taxes applicable at time of purchase. Said purchase price shall be paid to Lessor at least thirty (30) days before the expiration date of the Initial Term or


extended term. Title to the Equipment shall automatically pass to Lessee upon payment in full of the purchase price but, in no event, earlier than the expiration of the fixed Initial Term or extended term, if applicable. If the parties are unable to agree on the purchase price or the terms and conditions with respect to said purchase, then the Summary Equipment Schedule with respect to this Equipment shall remain in full force and effect. Notwithstanding the exercise by Lessee of this option and payment of the purchase price, until all obligations under the applicable Summary Equipment Schedule have been fulfilled, it is agreed and understood that Lessor shall retain a purchase money security interest in the Equipment listed therein and the Summary Equipment Schedule shall constitute a Security Agreement under the Uniform Commercial Code of the state in which the Equipment is located.

5. Special Terms

The terms and conditions of the Lease as they pertain to this Schedule are hereby modified and amended as follows:

Subsection 14.2 "Financial Statements" in line 3, delete "Board of Directors" and insert "Series A Preferred stockholders".

Master Lease: This Schedule is issued pursuant to the Lease identified on page 1 of this Schedule. All of the terms and conditions of the Lease are incorporated in and made a part of this Schedule as if they were expressly set forth in this Schedule. The parties hereby reaffirm all of the terms and conditions of the Lease (including, without limitation, the representations and warranties set forth in Section 8) except as modified herein by this Schedule. This Schedule may not be amended or rescinded except by a writing signed by both parties.

INSPIRE PHARMACEUTICALS, INC. COMDISCO, INC.

as Lessee                                              as Lessor

By:      /s/ Tim Gupton                         By:     /s/ James P. Labe
       --------------------------------                -----------------------

Title:   CFO                                    Title:   President
       --------------------------------                -----------------------

Date:   10/13/95                                Date:    10/14/95



EXHIBIT 1

SUMMARY EQUIPMENT SCHEDULE

This Summary Equipment Schedule dated as of _______, 1995 is executed pursuant to Equipment Schedule No. VL-3 dated as of October 13, 1995 to the Master Lease Agreement dated as of October 13, 1995 between Comdisco, Inc. ("Lessor") and Inspire Pharmaceuticals, Inc. ("Lessee"). All of the terms, conditions, representations and warranties of the Master Lease Agreement and Equipment Schedule No. VL-3 are incorporated herein and made part hereof, and this Summary Equipment Schedule constitutes a Schedule for the Equipment on the attached invoices.

1.  For Period Beginning:               And Ending:
    --------------------                ----------

2.  Initial Term Starts on:             Initial Term:
    ----------------------              -------------
                                        (Number of Rent Intervals)

3.  Total Summary Equipment Cost:
    ----------------------------

4.  Lease Rate Factor:
    -----------------

7.  Rent:
    ----

6.  Acceptance Doc Type:
    -------------------


EQUIPMENT SCHEDULE VL-4
DATED AS OF JUNE 18, 1998
TO MASTER LEASE AGREEMENT
DATED AS OF OCTOBER 13, 1995 (THE "MASTER LEASE")

LESSEE:  INSPIRE PHARMACEUTICALS, INC.           LESSOR:  COMDISCO, INC.

Admin. Contact/Phone No.:                        Address for all Notices:
------------------------                         -----------------------

Phone: (919) 941-9777                            6111 North River Road
Fax:      (919) 941-9797                         Rosemont, Illinois 60018
                                                 Attn.:  Venture Group
Address for Notices:
-------------------
4222 Emperor Blvd., Suite 470
Durham, NC 27560

Central Billing Location:                        Rent Interval:     Monthly
------------------------                         -------------
same as above

Attn.:

Lessee Reference No.:   -------------------
                        (24 digits maximum)

Location of Equipment:                           Initial Term:    48 months
---------------------                            ------------
same as above                                    (Number of Rent Intervals)

                                                 Lease Rate Factor:    2.418%
                                                 -----------------

Attn.:

EQUIPMENT (as defined below):                    Advance:              $8,583.90
                                                                       ---------

Laboratory Equipment specifically approved by Lessor, which shall be delivered to and accepted by Lessee during the period June 18, 1999 through November 18, 1999 ("Equipment Delivery Period"), for which Lessor receives vendor invoices approved for payment, up to an aggregate purchase price of $355,000.00 ("Commitment Amount"); excluding custom use equipment, leasehold improvements, installation costs and delivery costs, rolling stock, special tooling, "stand-alone" software, application software bundled into computer hardware, hand held items, molds and fungible items.


1. Equipment Purchase

This Schedule contemplates Lessor's acquisition of Equipment for lease to Lessee, either by one of the first three categories listed below or by providing Lessee with Equipment from the fourth category, in an aggregate value up to the Commitment Amount referred to on the face of this Schedule. If the Equipment acquired is of category (i), (ii), (iii) below, the effectiveness of this Schedule as it relates to those items of Equipment is contingent upon Lessee's acknowledgement at the time Lessor acquires the Equipment that Lessee has either received or approved the relevant purchase documentation between vendor and Lessor for that Equipment.

Lessor will finance only the acquisition of individual items of Equipment with a cost to Lessor of more than $500.00.

(i) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment which is obtained from a vendor by Lessee for its use subject to Lessor's prior approval of the Equipment.

(ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at Lessee's site and to which Lessee has clear title and ownership may be considered by Lessor for inclusion under this Lease (the "Sale- Leaseback Transaction"). Any request for a Sale-Leaseback Transaction must be submitted to Lessor in writing (along with accompanying evidence of Lessee's Equipment ownership satisfactory to Lessor for all Equipment submitted) no later than July 18, 1998*. Lessor will not perform a Sale-Leaseback Transaction for any request or accompanying Equipment ownership documents which arrive after the date marked above by an asterisk (*). Further, any sale- leaseback Equipment will be placed on lease subject to: (1) Lessor prior approval of the Equipment; and (2) if approved, at Lessor's actual net appraised Equipment value pursuant to the schedule below:

ORIGINAL EQUIPMENT INVOICE                PERCENT OF ORIGINAL MANUFACTURER'S
          DATE                            NET EQUIPMENT COST PAID BY LESSOR
--------------------------                ----------------------------------

Between 6/18/98 and 3/20/98                            100%
Between 1/18/98 and 3/19/98                            80%
Between 10/19/97 and 1/17/98                           70%

(iii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment which is obtained from a third party by Lessee for its use subject to Lessor's prior approval of the Equipment and at Lessor's appraised value for such used Equipment.

(iv) 800 NUMBER EQUIPMENT. Upon Lessee's use of Lessor's 1-800 Direct Service, Lessor will purchase new or used Equipment from a third party or Lessor will supply new or used Equipment from its inventory for use by Lessee at rates provided by Lessor.

2. Commencement Date

The Commencement Date for each item of new on-order or used on- order Equipment will be the install date as confirmed in writing by Lessee as set forth on the vendor invoice of which a facsimile transmission will constitute an original document. The Commencement Date for sale-leaseback Equipment shall be the date Lessor tenders the purchase price. The Commencement Date for 800 Number Equipment shall be fifteen (15) days from the ship date, such ship date to be set forth on the vendor invoice or if unavailable on the vendor invoice the ship date will be determined by Lessor upon other supporting shipping documentation. Lessor will summarize all approved invoices, purchase documentation and evidence of delivery, as applicable, received in the same calendar quarter into a Summary Equipment Schedule in the form attached to this Schedule as Exhibit 1, and the Initial Term will begin the first day of the calendar quarter thereafter. Each Summary Equipment Schedule will contain the Equipment location, description, serial number(s) and cost and will incorporate the terms and conditions of the Master Lease and this Schedule and will constitute a separate lease.

3. Option to Extend

So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term of a Summary Equipment Schedule, Lessee will have the right to extend the Initial Term of such Summary Equipment Schedule for a period of one (1) year. In such event, the rent to be paid during said extended period shall be mutually agreed upon and if the parties cannot mutually agree, then the Summary


Equipment Schedule shall continue in full force and effect pursuant to the existing terms and conditions until terminated in accordance with its terms. The Summary Equipment Schedule will continue in effect following said extended period until terminated by either party upon not less than ninety (90) days prior written notice, which notice shall be effective as of the date of receipt.

4. Purchase Option

So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term or the extended term of the applicable Summary Equipment Schedule, Lessee will have the option at the expiration of the Initial Term or extended term of the Summary Equipment Schedule to purchase all, but not less than all, of the Equipment listed therein for a purchase price not to exceed 20% of Lessor's original equipment cost and upon terms and conditions to be mutually agreed upon by the parties following Lessee's written notice, plus any taxes applicable at time of purchase. Said purchase price shall be paid to Lessor at least thirty (30) day s before the expiration date of the Initial Term or extended term. Title to the Equipment shall automatically pass to Lessee upon payment in full of the purchase price but, in no event, earlier than the expiration of the fixed Initial Term or extended term, if applicable. If the parties are unable to agree on the purchase price or the terms and conditions with respect to said purchase, then the Summary Equipment Schedule with respect to this Equipment shall remain in full force and effect. Notwithstanding the exercise by Lessee of this option and payment of the purchase price, until all obligations under the applicable Summary Equipment Schedule have been fulfilled, it is agreed and understood that Lessor shall retain a purchase money security interest in the Equipment listed therein and the Summary Equipment Schedule shall constitute a Security Agreement under the Uniform Commercial Code of the state in which the Equipment is located.

5. Optional Commitment Amount

So long as no Event of Default shall have occurred and is continuing hereunder, and upon written notice, Lessee will have the right to request Lessor to release an Optional Commitment Amount of $497,000.00 under the same terms and conditions as stated herein. Upon Lessor's approval of such Optional Commitment Amount, Lessee will pay to Lessor an Advance Rent in the amount of $ 12,017.46 and provide Lessor with a Warrant Agreement which contains similar terms and conditions as the Warrant Agreement between the parties dated 6/18/98 whereby Lessee shall grant Lessor the right to purchase share of Series B Preferred Stock at an Exercise Price of $1.20.

6. Special Terms

The terms and conditions of the Lease as they pertain to this Schedule are hereby modified and amended as follows:

Subsection 14.2 "Financial Statements" in line 3, delete "Board of Directors" and insert "Series B Preferred stockholders".

Master Lease: This Schedule is issued pursuant to the Lease identified on page 1 of this Schedule. All of the terms and conditions of the Lease are incorporated in and made a part of this Schedule as if they were expressly set forth in this Schedule. The parties hereby reaffirm all of the terms and conditions of the Lease (including, without limitation, the representations and warranties set forth in Section 8) except as modified herein by this Schedule. This Schedule may not be amended or rescinded except by a writing signed by both parties.

INSPIRE PHARMACEUTICALS, INC. COMDISCO, INC.
as Lessee as Lessor

By:     /s/ Christy Shaffer                By:     /s/ James P. Labe
       -------------------------                  -----------------------

Title:  VP, Development, COO               Title:   President
       -------------------------                  -----------------------

Date:   June 18, 1998                      Date:    June 19, 1998
       -------------------------                  -----------------------


EXHIBIT 1

SUMMARY EQUIPMENT SCHEDULE

This Summary Equipment Schedule dated XXXX is executed pursuant to Equipment Schedule No. X to the Master Lease Agreement dated XXXX between Comdisco, Inc. ("Lessor") XXXX ("Lessee"). All of the terms, conditions, representations and warranties of the Master Lease Agreement and Equipment Schedule No. X are incorporated herein and made part hereof, and this Summary Equipment Schedule constitutes a Schedule for the Equipment on the attached invoices.

1.   For Period Beginning:                      And Ending:
     --------------------                       ----------

2.   Initial Term Starts on:                    Initial Term:
     ----------------------                     -------------
                                                (Number of Rent Intervals)
3.   Total Summary Equipment Cost:
     ----------------------------

4.   Lease Rate Factor:
     -----------------

5.   Rent:
     ----

6.   Acceptance Doc Type:
     -------------------


EQUIPMENT SCHEDULE VL-5
DATED AS OF JUNE 18, 1998
TO MASTER LEASE AGREEMENT
DATED AS OF OCTOBER 13, 1995 (THE "MASTER LEASE")

LESSEE:  INSPIRE PHARMACEUTICALS, INC.          LESSOR:  COMDISCO, INC.

Admin. Contact/Phone No.:                       Address for all Notices:
------------------------                        -----------------------

Phone: (919) 941-9777                           6111 North River Road
Fax:      (919) 941-9797                        Rosemont, Illinois 60018
                                                Attn.:  Venture Group
Address for Notices:
-------------------
4222 Emperor Blvd., Suite 470
Durham, NC 27560

Central Billing Location:                       Rent Interval:     Monthly
------------------------                        -------------
same as above

Attn.:

Lessee Reference No.:   -------------------
                        (24 digits maximum)

Location of Equipment:                          Initial Term:    30 months
---------------------                           ------------
same as above                                   (Number of Rent Intervals)

                                                Lease Rate Factor:    3.666%
                                                -----------------

Attn.:

EQUIPMENT (as defined below):                    Advance:             $2,676.18

Computer Equipment specifically approved by Lessor, which shall be delivered to and accepted by Lessee during the period June 18, 1999 through November 18, 1999 ("Equipment Delivery Period"), for which Lessor receives vendor invoices approved for payment, up to an aggregate purchase price of $73,000.00 ("Commitment Amount"); excluding custom use equipment, leasehold improvements, installation costs and delivery costs, rolling stock, special tooling, "stand-alone" software, application software bundled into computer hardware, hand held items, molds and fungible items.


1. Equipment Purchase

This Schedule contemplates Lessor's acquisition of Equipment for lease to Lessee, either by one of the first three categories listed below or by providing Lessee with Equipment from the fourth category, in an aggregate value up to the Commitment Amount referred to on the face of this Schedule. If the Equipment acquired is of category (i), (ii), (iii) below, the effectiveness of this Schedule as it relates to those items of Equipment is contingent upon Lessee's acknowledgement at the time Lessor acquires the Equipment that Lessee has either received or approved the relevant purchase documentation between vendor and Lessor for that Equipment.

Lessor will finance only the acquisition of individual items of Equipment with a cost to Lessor of more than $500.00.

(i) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment which is obtained from a vendor by Lessee for its use subject to Lessor's prior approval of the Equipment.

(ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at Lessee's site and to which Lessee has clear title and ownership may be considered by Lessor for inclusion under this Lease (the "Sale- Leaseback Transaction"). Any request for a Sale-Leaseback Transaction must be submitted to Lessor in writing (along with accompanying evidence of Lessee's Equipment ownership satisfactory to Lessor for all Equipment submitted) no later than July 18, 1998*. Lessor will not perform a Sale-Leaseback Transaction for any request or accompanying Equipment ownership documents which arrive after the date marked above by an asterisk (*). Further, any sale- leaseback Equipment will be placed on lease subject to: (1) Lessor prior approval of the Equipment; and (2) if approved, at Lessor's actual net appraised Equipment value pursuant to the schedule below:

ORIGINAL EQUIPMENT INVOICE              PERCENT OF ORIGINAL MANUFACTURER'S
          DATE                          NET EQUIPMENT COST PAID BY LESSOR
--------------------------              ----------------------------------
Between 6/18/98 and 3/20/98                            100%
Between 1/18/98 and 3/19/98                            80%
Between 10/19/97 and 1/17/98                           70%

(iii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment which is obtained from a third party by Lessee for its use subject to Lessor's prior approval of the Equipment and at Lessor's appraised value for such used Equipment.

(iv) 800 NUMBER EQUIPMENT. Upon Lessee's use of Lessor's 1-800 Direct Service, Lessor will purchase new or used Equipment from a third party or Lessor will supply new or used Equipment from its inventory for use by Lessee at rates provided by Lessor.

2. Commencement Date

The Commencement Date for each item of new on-order or used on-order Equipment will be the install date as confirmed in writing by Lessee as set forth on the vendor invoice of which a facsimile transmission will constitute an original document. The Commencement Date for sale-leaseback Equipment shall be the date Lessor tenders the purchase price. The Commencement Date for 800 Number Equipment shall be fifteen (15) days from the ship date, such ship date to be set forth on the vendor invoice or if unavailable on the vendor invoice the ship date will be determined by Lessor upon other supporting shipping documentation. Lessor will summarize all approved invoices, purchase documentation and evidence of delivery, as applicable, received in the same calendar quarter into a Summary Equipment Schedule in the form attached to this Schedule as Exhibit 1, and the Initial Term will begin the first day of the calendar quarter thereafter. Each Summary Equipment Schedule will contain the Equipment location, description, serial number(s) and cost and will incorporate the terms and conditions of the Master Lease and this Schedule and will constitute a separate lease.

3. Option to Extend

So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term of a Summary Equipment Schedule, Lessee will have the right to extend the Initial Term of such Summary Equipment Schedule for a period of one (1) year. In such event, the rent to be paid during said extended period shall be mutually agreed upon and if the parties cannot mutually agree, then the Summary Equipment Schedule shall continue in full force and effect pursuant to the existing terms and conditions until terminated in


accordance with its terms. The Summary Equipment Schedule will continue in effect following said extended period until terminated by either party upon not less than ninety (90) days prior written notice, which notice shall be effective as of the date of receipt.

4. Purchase Option

So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term or the extended term of the applicable Summary Equipment Schedule, Lessee will have the option at the expiration of the Initial Term of the Summary Equipment Schedule to purchase all, but not less than all, of the Equipment listed therein for a purchase price not to exceed 20% of the Equipment cost and upon terms and conditions to be mutually agreed upon by the parties following Lessee's written notice, plus any taxes applicable at time of purchase. Said purchase price shall be paid to Lessor at least thirty (30) day s before the expiration date of the Initial Term or extended term. Title to the Equipment shall automatically pass to Lessee upon payment in full of the purchase price but, in no event, earlier than the expiration of the fixed Initial Term or extended term, if applicable. If the parties are unable to agree on the purchase price or the terms and conditions with respect to said purchase, then the Summary Equipment Schedule with respect to this Equipment shall remain in full force and effect. Notwithstanding the exercise by Lessee of this option and payment of the purchase price, until all obligations under the applicable Summary Equipment Schedule have been fulfilled, it is agreed and understood that Lessor shall retain a purchase money security interest in the Equipment listed therein and the Summary Equipment Schedule shall constitute a Security Agreement under the Uniform Commercial Code of the state in which the Equipment is located.

5. Technology Exchange Option

If Lessee is not in default, and there is no material adverse change in Lessee's credit, on or after the expiration of the 12th month of any Summary Equipment Schedule, Lessee shall have the option to replace any of the Equipment subject to such summary Equipment Schedule with new technology equipment ("New Technology Equipment") utilizing the following guidelines:

A. Equipment being replaced with New Technology Equipment shall have an aggregate original cost equal to or greater than $20,000 and be comprised of full configurations of equipment.

B. This technology Exchange Option shall be limited to a maximum in the aggregate of fifty percent (50%) of the original equipment cost and shall not apply to software.

C. The cost of the New Technology Equipment must be equal to or greater than the original equipment cost of the replaced equipment, but in no event shall exceed 150% of the original equipment cost.

D. The remaining lease payments applicable to the equipment being replaced by the New Technology Equipment will be discounted to present value at 6%.

The wholesale market value of the equipment being replaced will be established by Lessor based upon then current market conditions. Upon the return of the replaced equipment, the wholesale price will be deducted from the present value of the remaining rentals and the differential will be added to the cost of the New Technology Equipment in calculating the new rental. The lease for the New Technology Equipment will contain terms and conditions substantially similar to those for the replaced equipment and will have an Initial Term not less than the balance of the remaining Initial Term for the replaced equipment.

6. Optional Commitment Amount

So long as no Event of Default shall have occurred and is continuing hereunder, and upon written notice, Lessee will have the right to request Lessor to release an Optional Commitment Amount of $102,200.00 under the same terms and conditions as stated herein. Upon Lessor's approval of such Optional Commitment Amount, Lessee will pay to Lessor an Advance Rent in the amount of $ 3,746.65 and provide Lessor with a Warrant Agreement which contains similar terms and conditions as the Warrant Agreement between the parties dated 6/18/98 whereby Lessee shall grant Lessor the right to purchase shares of Series B Preferred Stock at an Exercise Price of $1.20.

7. Special Terms

The terms and conditions of the Lease as they pertain to this Schedule are hereby modified and amended as follows:

Subsection 14.2 "Financial Statements" in line 3, delete "Board of Directors" and insert "Series B Preferred stockholders".

Master Lease: This Schedule is issued pursuant to the Lease identified on page 1 of this Schedule. All of the terms and conditions of the Lease are incorporated in and made a part of this Schedule as if they were expressly set forth in this Schedule. The parties hereby reaffirm all of the terms and conditions of the Lease (including, without limitation, the representations and warranties set forth in Section 8) except as modified herein by this Schedule. This Schedule may not be amended or rescinded except by a writing signed by both parties.

INSPIRE PHARMACEUTICALS, INC. COMDISCO, INC.
as Lessee as Lessor

By:     /s/ Christy Shaffer                By:      /s/ James P. Labe
       -------------------------                  -------------------------

Title:  VP, Development, COO               Title:   President
       -------------------------                  -------------------------

Date:   June 18, 1998                      Date:    June 19, 1998
       -------------------------                   -------------------------


EXHIBIT 1

SUMMARY EQUIPMENT SCHEDULE

This Summary Equipment Schedule dated XXXX is executed pursuant to Equipment Schedule No. X to the Master Lease Agreement dated XXXX between Comdisco, Inc. ("Lessor") and XXXX ("Lessee"). All of the terms, conditions, representations and warranties of the Master Lease Agreement and Equipment Schedule No. X are incorporated herein and made part hereof, and this Summary Equipment Schedule constitutes a Schedule for the Equipment on the attached invoices.

1.    For Period Beginning:                     And Ending:
      --------------------                      ----------

2.    Initial Term Starts on:                   Initial Term:
      ----------------------                    -------------
                                                (Number of Rent Intervals)
3.    Total Summary Equipment Cost:
      ----------------------------

4.    Lease Rate Factor:
      -----------------

5     Rent:
      ----

6.    Acceptance Doc Type:
      -------------------


EQUIPMENT SCHEDULE VL-6
DATED AS OF JUNE 18, 1998
TO MASTER LEASE AGREEMENT
DATED AS OF OCTOBER 13, 1995 (THE "MASTER LEASE")

LESSEE:  INSPIRE PHARMACEUTICALS, INC.            LESSOR:  COMDISCO, INC.

Admin. Contact/Phone No.:                         Address for all Notices:
------------------------                          -----------------------

Phone: (919) 941-9777                             6111 North River Road
Fax:   (919) 941-9797                             Rosemont, Illinois 60018
                                                  Attn.:  Venture Group
Address for Notices:
-------------------
4222 Emperor Blvd., Suite 470
Durham, NC 27560

Central Billing Location:                         Rent Interval:      Monthly
------------------------                          -------------
same as above

Attn.:

Lessee Reference No.:   -------------------
                        (24 digits maximum)

Location of Equipment:                            Initial Term:    30 months
---------------------                             ------------
same as above                                     (Number of Rent Intervals)

                                                  Lease Rate Factor:  3.712%
                                                  -----------------

Attn.:

EQUIPMENT (as defined below):                     Advance:  $2,672.64
                                                            ---------

Software and tenant improvements specifically approved by Lessor, which shall be delivered to and accepted by Lessee during the period June 18, 1998 through November 18, 1999 ("Equipment Delivery Period") for which Lessor receives vendor invoices approved for payment, up to an aggregate purchase price of $72,000.00 ("Commitment Amount"); excluding custom use equipment, delivery costs, rolling stock, special tooling, hand held items, molds and fungible items.


1. Equipment Purchase

This Schedule contemplates Lessor's acquisition of Equipment for lease to Lessee, either by one of the first three categories listed below or by providing Lessee with Equipment from the fourth category, in an aggregate value up to the Commitment Amount referred to on the face of this Schedule. If the Equipment acquired is of category (i), (ii), (iii) below, the effectiveness of this Schedule as it relates to those items of Equipment is contingent upon Lessee's acknowledgement at the time Lessor acquires the Equipment that Lessee has either received or approved the relevant purchase documentation between vendor and Lessor for that Equipment.

(ix) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment which is obtained from a vendor by Lessee for its use subject to Lessor's prior approval of the Equipment.

(x) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at Lessee's site and to which Lessee has clear title and ownership may be considered by Lessor for inclusion under this Lease (the "Sale- Leaseback Transaction"). Any request for a Sale-Leaseback Transaction must be submitted to Lessor in writing (along with accompanying evidence of Lessee's Equipment ownership satisfactory to Lessor for all Equipment submitted) no later than July 18, 1998*. Lessor will not perform a Sale-Leaseback Transaction for any request or accompanying Equipment ownership documents which arrive after the date marked above by an asterisk (*). Further, any sale- leaseback Equipment will be placed on lease subject to: (1) Lessor prior approval of the Equipment; and (2) if approved, at Lessor's actual net appraised Equipment value pursuant to the schedule below:

ORIGINAL EQUIPMENT INVOICE                   PERCENT OF ORIGINAL MANUFACTURER'S
           DATE                              NET EQUIPMENT COST PAID BY LESSOR
--------------------------                   ----------------------------------

Between 6/18/98 and 3/20/98 (90 days)                        100%
Between 1/18/98 and 3/19/98 (60 days)                        80%
Between 10/19/97 and 1/17/98 (90 days)                       70%

(xi) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment which is obtained from a third party by Lessee for its use subject to Lessor's prior approval of the Equipment and at Lessor's appraised value for such used Equipment.

(xii) 800 NUMBER EQUIPMENT. Upon Lessee's use of Lessor's 1-800 Direct Service, Lessor will purchase new or used Equipment from a third party or Lessor will supply new or used Equipment from its inventory for use by Lessee at rates provided by Lessor.

2. Commencement Date

The Commencement Date for each item of new on-order or used on-order Equipment will be the install date as confirmed in writing by Lessee as set forth on the vendor invoice of which a facsimile transmission will constitute an original document. The Commencement Date for sale-leaseback Equipment shall be the date Lessor tenders the purchase price. The Commencement Date for 800 Number Equipment shall be fifteen (15) days from the ship date, such ship date to be set forth on the vendor invoice or if unavailable on the vendor invoice the ship date will be determined by Lessor upon other supporting shipping documentation. Lessor will summarize all approved invoices, purchase documentation and evidence of delivery, as applicable, received in the same calendar quarter into a Summary Equipment Schedule in the form attached to this Schedule as Exhibit 1, and the Initial Term will begin the first day of the calendar quarter thereafter. Each Summary Equipment Schedule will contain the Equipment location, description, serial number(s) and cost and will incorporate the term and conditions of the Master Lease and this Schedule and will constitute a separate lease.

3. Miscellaneous

In consideration of Lessor financing software and tenant improvements hereunder, Lessee agrees in addition to its last Monthly Rent Payment to remit to Lessor an amount equal to 15% of Lessor's aggregate cost of software and tenant improvements provided hereunder.


4. Optional Commitment Amount

So long as no Event of Default shall have occurred and is continuing hereunder, and upon written notice, Lessee will have the right to request Lessor to release an Optional Commitment Amount of $100,800.00 under the same terms and conditions as stated herein. Upon Lessor's approval of such Optional Commitment Amount, Lessee will pay to Lessor an Advance Rent in the amount of $3,741.70 and provide Lessor with a Warrant Agreement which contains similar terms and conditions as the Warrant Agreement between the parties dated 6/18/98 whereby Lessee shall grant Lessor the right to purchase shares of Series B Preferred Stock at an Exercise Price of $1.20.

5. Special Terms

The terms and conditions of the Lease as they pertain to this Schedule are hereby modified and amended as follows:

(a) Section 9, Delivery and Return of Equipment

Delete second, third and fourth sentences in their entirety.

Master Lease: This Schedule is issued pursuant to the Lease identified on page 1 of this Schedule. All of the terms and conditions of the Lease are incorporated in and made a part of this Schedule as if they were expressly set forth in this Schedule. The parties hereby reaffirm all of the terms and conditions of the Lease (including, without limitation, the representations and warranties set forth in Section 8) except as modified herein by this Schedule. This Schedule may not be amended or rescinded except by a writing signed by both parties.

INSPIRE PHARMACEUTICALS, INC. COMDISCO, INC.
as Lessee as Lessor

By:     /s/ Christy Shaffer                By:     /s/ James P. Labe
       -------------------------                  -------------------------

Title:  VP, Development, COO               Title:  President
       -------------------------                  -------------------------

Date:   June 18, 1998                      Date:   June 19, 1998
       -------------------------                  -------------------------


EXHIBIT 1

SUMMARY EQUIPMENT SCHEDULE

This Summary Equipment Schedule dated XXXX is executed pursuant to Equipment Schedule No. X to the Master Lease Agreement dated XXXX between Comdisco, Inc. ("Lessor") and XXXX ("Lessee"). All of the terms, conditions, representations and warranties of the Master Lease Agreement and Equipment Schedule No. X are incorporated herein and made part hereof, and this Summary Equipment Schedule constitutes a Schedule for the Equipment on the attached invoices.

1.    For Period Beginning:                     And Ending:
      --------------------                      ----------

2.    Initial Term Starts on:                   Initial Term:
      ----------------------                    -------------
                                                (Number of Rent Intervals)

3.    Total Summary Equipment Cost:
      ----------------------------

4.    Lease Rate Factor:
      -----------------

5.    Rent:
       ----

6. Acceptance Doc Type:



EXHIBIT 10.10
LEASE AGREEMENT

BY AND BETWEEN

PETULA ASSOCIATES, LTD.
(AS LANDLORD)

AND

INSPIRE PHARMACEUTICALS, INC.
(AS TENANT)


TABLE OF CONTENTS

Page

1. DESCRIPTION OF PREMISES............................................... 1

2. TERM.................................................................. 1

3. RENTAL................................................................ 2

4. DELIVERY AND UPFITTING OF PREMISES.................................... 5

5. ALTERATIONS AND IMPROVEMENTS BY TENANT................................ 7

6. USE OF PREMISES....................................................... 7

7. TAXES ON LEASE AND TENANT'S PROPERTY.................................. 9

8. FIRE AND EXTENDED COVERAGE INSURANCE.................................. 9

9. LANDLORD'S COVENANT TO REPAIR AND REPLACE............................. 10

10. TENANT'S COVENANT TO REPAIR........................................... 11

11. TRADE FIXTURES AND EQUIPMENT.......................................... 11

12. UTILITIES............................................................. 12

13. DAMAGE OR DESTRUCTION OF PREMISES..................................... 12

14. GOVERNMENTAL ORDERS................................................... 13

15. MUTUAL WAIVER OF SUBROGATION.......................................... 14

16. SIGNS AND ADVERTISING................................................. 14

17. INDEMNIFICATION AND LIABILITY INSURANCE............................... 14

18. LANDLORD'S RIGHT OF ENTRY............................................. 15

19. EMINENT DOMAIN........................................................ 15

20. EVENTS OF DEFAULT AND REMEDIES........................................ 16

21. SUBORDINATION......................................................... 17

22. ASSIGNING AND SUBLETTING.............................................. 18

23. TRANSFER OF LANDLORD'S INTEREST....................................... 19

24. COVENANT OF QUIET ENJOYMENT........................................... 19

25. ESTOPPEL CERTIFICATES................................................. 19

26. PROTECTION AGAINST LIENS.............................................. 19

27. MEMORANDUM OF LEASE................................................... 20

28. FORCE MAJEURE......................................................... 20

29. REMEDIES CUMULATIVE - NONWAIVER....................................... 20

30. HOLDING OVER.......................................................... 20

31. NOTICES............................................................... 20

32. LEASING COMMISSION.................................................... 21

33. MISCELLANEOUS......................................................... 22

34. SEVERABILITY.......................................................... 24

35. REVIEW OF DOCUMENTS................................................... 24

LEASE AGREEMENT

THIS LEASE AGREEMENT (the "Lease") made and entered into as of the 30th day of December, 1997, by and between PETULA ASSOCIATES, LTD., an Iowa corporation, hereinafter called "Landlord"; and INSPIRE PHARMACEUTICALS, INC., a Delaware corporation, hereinafter called "Tenant":

W I T N E S S E T H:

In consideration of the mutual covenants and agreements contained herein, the parties hereto agree for themselves, their successors and assigns, as follows:

1. DESCRIPTION OF PREMISES.

Landlord hereby leases to Tenant, and Tenant hereby accepts and rents from Landlord, that certain office/warehouse space (the "Premises") containing approximately 5,400 rentable square feet known as Suite 225 and more particularly described in Exhibit "B", located in the building known as Royal Center II (the "Building") on a tract of land located at 4222 Emperor Boulevard, Durham, North Carolina, in Imperial Center Business Park (the "Business Park"), more particularly described on Exhibit "A" attached hereto; together with the nonexclusive right to use all parking areas, driveways, sidewalks and other common facilities furnished by Landlord from time to time. Landlord may, at any time prior to, or during the first six (6) months of the first Lease Year (as hereinafter defined), have its architect or engineer measure the actual total square footage of the Premises. In the event the Premises shall contain an amount of square footage which exceeds the amount of square feet referenced above by more than two percent (2%) of such amount, the square footage of the Premises shall be adjusted to reflect the actual square footage and the Annual Rental (as hereinafter defined) shall be proportionately adjusted based on actual square footage multiplied by the applicable square foot rental rate (and such adjustment shall relate back to the Commencement Date if there is a variance). The reasonable cost of such measure shall be borne by Landlord.

2. TERM.

Unless otherwise adjusted as hereinbelow provided, the term of this Lease (the "Term") shall commence on the earlier of: (a) the date Tenant, or any person occupying any portion of the Premises with Tenant's permission, commences business operations from the Premises, or (b) December 1, 1997 (the "Commencement Date") and shall end at midnight on the date (the "Expiration Date") which is six (6) full years from the Commencement Date (as same may be adjusted as hereinbelow provided); provided, however, for purposes hereof, Tenant's installation or storage of furniture, fixtures and equipment within the Premises shall not be deemed the commencement of business operations. Tenant shall have the option to extend the Term in accordance with Exhibit "E" attached hereto and incorporated herein by reference. As used herein, the term "Lease Year" shall mean each consecutive twelve-month period of the Term, beginning with the Commencement Date (as same may be adjusted as hereinbelow provided) or any anniversary thereof.


3. RENTAL.

During the term, Tenant shall pay to Landlord, without notice, demand, reduction (except as may be applicable pursuant to the paragraphs of this Lease entitled "Damage or Destruction of Premises" or the paragraph entitled "Eminent Domain" of this Lease), setoff or any defense, a total rental (the "Annual Rental") consisting of the sum total of the following:

(a) Minimum Rental.

(i) Beginning with the Commencement Date and continuing through the earlier to occur of: (i) December 1, 1998, or (ii) the date upon which the Tenant Improvements (as hereinafter defined) are substantially completed and a permanent Certificate of Occupancy is issued for the Premises (the "Adjustment Date"), Tenant shall pay a minimum annual rental (the "Minimum Rental") of Thirty-One Thousand Fifty and No/100 Dollars ($31,050.00) [which represents a rate of $5.75 per rentable square foot of the Premises], payable in equal monthly installment of Two Thousand Five Hundred Eighty-Seven and 50/100 Dollars ($2,587.50) each in advance on or before the first day of each month.

(ii) Beginning with the Adjustment Date and continuing through the Expiration Date or earlier termination of this Lease, Tenant shall pay Minimum Rental of Fifty-One Thousand Three Hundred and No/100 Dollars ($51,300.00)
[which represents a rate of $9.50 per rentable square foot of the Premises], payable in equal monthly installments of Four Thousand Two Hundred Seventy-Five and No/100 dollars ($4,275.00) each in advance on or before the first day of each month. In addition, Minimum Rental shall be increased annually, beginning on the first anniversary of the Adjustment Date and continuing on each anniversary of same thereafter, by an amount equal to three percent (3%) of the Minimum Rental for the immediately preceding twelve (12) month period. For purposes hereof, if the Commencement Date is a date other than the first day of a calendar month, the Minimum Rental shall be prorated daily from such date to the first day of the next calendar month and paid on the Commencement Date.

(b) Additional Rental. [Intentionally Deleted]

(c) Tenant's Share of Taxes.

Tenant shall pay an amount equal to Tenant's "proportionate share" of any ad valorem taxes (or any tax hereafter imposed in lieu thereof) imposed upon the Building and the Premises. Tenant's "proportionate share" of the taxes, the insurance premiums and common area maintenance costs, as described below, shall be a fraction, the numerator of which shall be the number of rentable square feet within the Premises and the denominator of which shall be the number of rentable square feet within the Building, which is currently estimated to be 32,713 rentable square feet. Tenant's proportionate share of taxes shall be paid as provided in subparagraph (f) below. Provided, any increase in ad valorem taxes on the Premises as a result of alterations, addition or improvements made by, for or on account of Tenant shall be


reimbursed by Tenant to Landlord within thirty (30) days after receipt of written demand therefor.

(d) Tenant's Share of Insurance Premiums.

Tenant shall pay an amount equal to Tenant's "proportionate share" of any premiums charged for fire and extended coverage and liability insurance with all endorsements carried by Landlord on the Building payable for any calendar year (including any applicable partial calendar year), provided such premiums are not a direct result of another tenant's use of its premises in the Building. Tenant's proportionate share of premiums shall be paid as provided in subparagraph (f) below.

(e) Tenant's Share of Common Area Operating and Maintenance Costs.

Tenant shall pay an amount equal to Tenant's "proportionate share" of the reasonable costs for operating and maintaining the Building's common areas, including, but not limited to, building management (such management fees to be consistent with customary fees in the Raleigh/Durham area), the cost of grass mowing, shrub care and general landscaping, irrigation systems, maintenance and repair to parking and loading areas, driveways, sidewalks, exterior lighting, garbage collection and disposal, common water and sewer, common plumbing, common signs and other facilities shared by the various tenants in the Building, and of the Building's share of the common area operating and maintenance costs for the entire Business Park (including without limitation a general Business Park fee). Landlord shall use good faith efforts to keep the operating and maintenance costs in line with costs for other similarly situated buildings in the Raleigh/Durham market, taking into account rent and other relevant factors. Tenant's proportionate share shall be paid as provided in subparagraph (f) below. For purposes hereof, the expenses identified in subparagraphs (c), (d) and (e) of this Section shall be deemed the "Tenant Expenses."

(f) Payment of Proportionate Shares.

Tenant shall pay to Landlord each month, along with Tenant's installments of Minimum Rental (and Additional Rental, if applicable) a sum equal to one-twelfth (1/12) of the amount estimated by Landlord (in its reasonable discretion) as Tenant's proportionate share of the taxes, insurance premiums and common area maintenance costs (including the Business Park fee) for each calendar year. For the first calendar year beginning with January 1, 1998, the amount of Tenant's estimated proportionate share of all Tenant Expenses shall be Eight Thousand One Hundred and No/100 Dollars ($8,100.00) [which represents $1.50 per rentable square foot of the Premises], payable in advance in equal monthly installments of Six Hundred Seventy-Five and No/100 Dollars ($675.00). Landlord will make reasonable efforts to provide Tenant with Landlord's estimate of Tenant's proportionate share of Tenant Expenses for the upcoming calendar year on or before December 15 of each calendar year during the term hereof. If Landlord fails to notify Tenant of Tenant's revised proportionate share of Tenant Expenses by such date, Tenant shall continue to pay the monthly installments of the proportionate share amount, if any, last payable by Tenant until notified by Landlord of such new estimated amount.


No later than May 1 of each calendar year from the Term, Landlord shall deliver to Tenant a reasonably detailed written statement setting forth the actual amount of Tenant's proportionate shares for taxes, insurance premiums and all common area maintenance costs for the preceding calendar year. Tenant shall pay the total amount of any balance due shown on such statement within thirty (30) days after its delivery. In the event such annual costs decrease for any such year, Landlord shall, within thirty (30) days after delivery of such written statement, reimburse Tenant for any overage paid and the monthly rental installments for the next period shall be reduced accordingly, but not below the Minimum Rental. For the calendar year in which this Lease commences, the proportionate shares of such amounts shall be prorated from the Commencement Date through December 31 of such year. Further, Tenant shall be responsible for payment of its proportionate share of Tenant Expenses for the calendar year in which the Term expires, prorated from January 1 thereof through the Expiration Date. Tenant shall pay any unpaid estimated proportionate shares within thirty
(30) days after the Expiration Date, which estimate shall be made by Landlord based upon actual and estimated costs for such year. After the exact amount payable for such proportionate shares shall have been determined, Landlord shall return any excess security deposit to Tenant or Tenant shall promptly pay any deficiency.

Tenant may audit Landlord's records and all information pertaining to Tenant Expenses in order to verify the accuracy of Landlord's determination of Tenant's proportionate share of same provided that:

(i) Tenant must give notice to Landlord of its election to undertake said audit within one hundred twenty (120 days after receipt of the statement of the actual amount of Tenant's proportionate share for the preceding calendar year from Landlord;

(ii) Such audit will be conducted only during regular business hours at the office where Landlord maintains records of Tenant Expenses and only after Tenant gives Landlord fourteen (14) days' advance written notice;

(iii) Tenant shall deliver to Landlord a copy of the results of such audit within fifteen (15) days of its receipt by Tenant and no such audit shall be conducted if any other tenant of the Building has conducted an independent audit for the time period Tenant intends to audit and Landlord furnishes to Tenant a copy of the results of such audit;

(iv) No audit shall be conducted at any time that Tenant is in default of any of the terms of this Lease;

(v) No subtenant shall have any right to conduct an audit and no assignee shall conduct an audit for any period during which such assignee was not in possession of the Premises; and

(vi) Such audit review by Tenant shall not postpone or alter the liability and obligation of Tenant to pay any amounts due under the terms of this Lease.


Within thirty (30) days after Tenant's receipt of such audit, Tenant must give notice to Landlord of any disputed amounts and identify all items being contested in Landlord's statement of Tenant's proportionate share of Tenant Expenses. If Landlord and Tenant cannot agree upon any such item as to which Tenant shall have given such notice, the dispute shall be resolved by an audit by a major accounting firm mutually acceptable to Landlord and Tenant and the cost of said audit shall be paid by the non-prevailing party; provided however, Tenant will not be considered the "prevailing party" for purposes of this paragraph unless the accounting firm's audit reveals an overcharge by Landlord in excess of five percent (5%) of Tenant's proportionate share of Tenant Expenses for the particular calendar year in question.

Any adjustment required as a result of any audit shall be made by adjustment to Tenant's proportionate share of Tenant Expenses so that said adjustment is fully made (or recovered) in equal installments over the twelve
(12) month period immediately following the final resolution of said audit.

(g) Documentary Tax.

Landlord represents that there is currently no documentary stamp tax, sales tax or any other tax or similar charge (exclusive of any income tax payable by Landlord as a result hereof) which will be levied on the rental, leasing or letting of the Premises, however, in the event that any such charge or tax, whether local, state or federal, becomes applicable to the rental, leasing or letting of the Premises and is required to be paid due to the execution hereof or otherwise with respect to this Lease or the payments due hereunder, the cost thereof shall be borne by Tenant and shall be paid promptly and prior to same becoming past due. Tenant shall provide Landlord with copies of all paid receipts respecting such tax or charge promptly after payment of same.

(h) Late Payment.

If any monthly installment of Minimum Rental, Additional Rental (if any) or any other sum due and payable pursuant to this Lease remains due and unpaid ten (10) days after said amount becomes due, Tenant shall pay as additional rent hereunder a late payment charge equal to the greater of (i) Five Hundred and No/100 Dollars (500.00) or (ii) a sum equal to three percent (3%) of the unpaid rent or other payment; provided, however, subject to Tenant's not being in default hereunder, Tenant shall be entitled to one (1) additional ten
(10) day grace period per Lease Year during which Tenant may make such payment without paying the late charge as hereinabove described. All unpaid rent and other sums of whatever nature owed by Tenant to Landlord under this Lease shall bear interest from the tenth (10th) day after the due date thereof until paid at the lesser of two percent (2%) per annum above the "prime rate" as published in the Wall Street Journal from time to time (the "Prime Rate"). Acceptance by Landlord of any payment from Tenant hereunder in an amount less than that which is currently due shall in no way affect Landlord's rights under this Lease and shall in no way constitute an accord and satisfaction.

4. DELIVERY AND UPFITTING OF PREMISES.


Landlord shall deliver the Premises to Tenant in its base building condition on or before December 1, 1997. Tenant agrees that it is accepting the Premises in its "as is" base building condition without any further improvements thereto by Landlord. Tenant agrees to deliver the final plans and specifications for the design and upfitting of the Premises (the "Plans") to Landlord for Landlord's approval. Landlord shall not unreasonably withhold or delay its approval of such of the Plans and agrees to provide Tenant with notice of any objections to the Plans within twenty (20) days after Landlord's receipt of same. At such time as Landlord approves the Plans, Landlord shall identify those improvements described in the Plans which must be removed from the Premises upon the expiration or earlier termination of this Lease as herein described; provided, however, Landlord reserves the right to subsequently direct Tenant to leave certain items previously designated for removal in the Premises. Upon approval by Landlord of the Plans, they shall be attached as Exhibit C to this Lease and made a part hereof. Once the Plans have been approved by Landlord, tenant shall be responsible for the installation of the Tenant Improvements (as hereinafter defined) in the Premises in accordance with the Plans. The general contractor retained by Tenant to install the Tenant Improvements shall be subject to Landlord's prior written approval, such approval not to be unreasonably withheld, conditioned or delayed; provided further, Landlord and Tenant shall mutually designate up to five (5) general contractors which shall be deemed approved by Landlord.

Tenant will supervise the design, construction and installation of the initial improvements in the Premises (the "Tenant Improvements") in accordance with the Plans at Tenant's sole cost and expense. Landlord agrees to pay Tenant at the time and in the manner set forth below an allowance (the "Tenant Improvement Allowance") in the amount of Twenty-Two and No/100 Dollars ($22.00) per rentable square foot of the Premises to cover the costs associated with the design, construction and installation of the Tenant Improvements in the Premises. Upon receipt of evidence from Tenant that such amounts have been expended in connection with the design, construction and installation of the Tenant Improvements (together with such other information as Landlord may reasonably request from Tenant), Landlord shall, within twenty (20) days of Landlord's receipt of such documentation, pay to Tenant the amount of all cost and expenses shown thereby less the amount of any such payment or payments previously made by Landlord to Tenant; provided, however, such disbursements of the Tenant Improvement Allowance shall occur not more frequently than monthly and the aggregate amount of all sums to be paid by Landlord to Tenant hereunder with respect to the Premises shall not in any event exceed the sum of One Hundred Eighteen Thousand Eight Hundred and No/100 Dollars ($118,800.00); provided further, that Landlord shall have no obligation hereunder to make any payment with respect to any such improvement which, when made, shall not be a fixture and thus part of the Building to be surrendered to Landlord upon the expiration of or earlier termination of this Lease (for purposes of this Paragraph 4, all telephone, telecommunications and computer wiring equipment shall be deemed a fixture). All savings or unused portions of the Tenant Improvement Allowance shall be retained by Landlord.

In connection with the upfitting of the Premises, Tenant agrees to pay Landlord a construction management fee equal to four percent (4%) of the total cost of constructing the Tenant Improvements. In addition to the Tenant Improvements, Tenant shall be solely responsible for the cost of constructing any demising wall(s) required by Landlord and any


required suite entrances or at Landlord's election, Landlord may proceed to construct such demising wall(s) and reduce the Tenant Improvement Allowance by the reasonable cost of same.

Notwithstanding anything contained herein to the contrary, upon the expiration or earlier termination of the Term or Tenant's vacating the Premises, Tenant shall, at its sole cost and expense, restore the Premises to its "base building condition," which for purposes hereof, shall be defined as the condition of the Premises as it existed when received by Tenant together with such other Tenant Improvements as Landlord has approved as hereinabove provided (ordinary wear and tear, damage by fire and other casualty, condemnation and acts of God above excepted), or otherwise directs be left at the Premises; provided, however, Tenant's restoration obligations with respect to the slab floor in the Premises shall be limited to restoring the floor to a level slab of commercially reasonable tolerances (i.e. one-eighth of an inch per ten feet). Within ten (10) business days after Tenant's request for same (such request to be made no earlier than sixty (60) days prior to the expiration or earlier termination of the Term), Landlord shall provide Tenant with a list of those Tenant Improvements which Landlord directs be left at the Premises upon the expiration of the Term.

5. ALTERATIONS AND IMPROVEMENTS BY TENANT.

Tenant shall make no structural changes respecting the Premises or the Building and shall make no changes of any kind respecting the Premises or the Building that are visible from the exterior of the Premises without Landlord's consent, to be granted or withheld in Landlord's sole discretion. Except for the initial upfitting of the Premises in accordance with the Plans, any other nonstructural changes or other alterations, additions, or improvements to the Premises shall be made by or on behalf of Tenant only with the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. All alterations, additions or improvements, including without limitation all partitions, walls, railings, carpeting, floor and wall coverings and other fixtures (excluding, however, Tenant's trade fixtures as described in the paragraph entitled "Trade Fixtures and Equipment" below) made by, for, or at the direction of Tenant shall, when made, become the property of Landlord, at Landlord's sole election, and shall, unless otherwise specified by Landlord at the time Landlord gives its consent thereto, remain upon the Premises at the expiration or earlier termination of this Lease.

Notwithstanding anything contained herein to the contrary, all alterations and improvements undertaken by Tenant shall be consistent with the then-existing quality, color scheme (where appropriate), general aesthetic appearance and tenor of the balance of the Building and, in any event, Landlord may withhold its consent to any proposed alteration or improvement by Tenant unless Tenant agrees to remove said improvement at the end of the Term and/or restore the Premises to the condition in which it existed prior to the undertaking of the proposed alteration or improvement.

6. USE OF PREMISES

(a) Tenant shall use the Premises only for office, warehouse, storage and light assembly and or laboratory purposes, all of which shall be consistent with the pharmaceutical


industry or similar scientific, research or technical industry and for no other purposes. Tenant shall comply with all laws, ordinances, orders, regulations or zoning classifications or any lawful governmental authority, agency or other public or private regulatory authority (including insurance underwriters or rating bureaus) having jurisdiction over the Premises. Tenant shall not do any act or follow any practice relating to the Premises which shall constitute a nuisance or detract in any way from the reputation of the Building as a real estate development comparable to other comparable buildings in the Raleigh/Durham market taking into account rent and other relevant factors. Tenant's duties in this regard shall include allowing no noxious or offensive odors, fumes, gases, smoke, dust, steam or vapors, or any loud or disturbing noise or vibrations to originate in or emit from the Premises.

(b) Without limiting the generality of (a) above, and excepting only
(i) office supplies and cleaning materials used by Tenant in its ordinary day to day business operations (but not held for sale, storage or distribution) and customarily used in facilities such as the Building, and (ii) certain Hazardous Materials (as herein defined) used in the ordinary course of Tenant's business, and then only to the extent used, stored (but not any bulk storage), transported, and disposed of strictly in accordance with all applicable laws, regulations and manufacturer's recommendations and in a manner consistent with commercially reasonable standards for comparable first-class flex-space buildings, the Premises shall not be used for the treatment, storage, transportation to or from, use or disposal of toxic or hazardous wastes, materials, or substances, or any other substance that is prohibited, limited or regulated by any governmental or quasi-governmental authority or that, even if not so regulated, could or does pose a hazard to health and safety of the occupants of the Building or surrounding property (collectively "Hazardous Substances"). Prior to its occupancy of the Premises, Tenant shall provide Landlord with a list of any Hazardous Substances which it plans to introduce to the Premises and thereafter, on each anniversary of the Commencement Date, Tenant shall update said list and identify which Hazardous Substances have been used within the Premises and which Hazardous Substances may be used within the Premises in the future. In addition, prior to Tenant's occupancy of the Premises, Tenant shall submit a plan detailing the method of disposal, storage and treatment of such Hazardous Substances to Landlord for Landlord's approval. Tenant shall be liable for, and shall indemnify and hold Landlord harmless from, all costs, damages and expenses (including reasonable attorney's fees) incurred in connection with the use, storage, discharge or disposal of any Hazardous Substances by Tenant or Tenant's Invitees.

(c) Except for possible restrictions with respect to signage (which Tenant agrees to abide by in connection with its use of the Premises), there are currently no restrictive covenants relating to the Building.

(d) Tenant shall exercise due care in its use and occupancy of the Premises and shall not commit or allow waste to be committed on any portion of the Premises; and at the expiration or earlier termination of this Lease, Tenant shall deliver the Premises to Landlord in as good condition on the date of completion of the Tenant Improvements in the Premises, ordinary wear and tear, fire or other casualty, condemnation and acts of God alone excepted.


(e) Tenant shall save Landlord harmless from any claims, liabilities, penalties, fines, costs, expenses or damages resulting from the failure of Tenant to comply with the provisions of this paragraph 6. This indemnification shall survive the termination or expiration of this Lease.

7. TAXES ON LEASE AND TENANT'S PROPERTY.

(a) Landlord represents that there are currently no taxes, documentary stamps or assessments of any nature which will be imposed or assessed upon this Lease, Tenant's occupancy of the Premises or Tenant's trade fixtures, equipment, machinery, inventory, merchandise or other personal property located on the Premises and owned by or in the custody of Tenant; provided, however, in the event any such charge or tax becomes applicable to this Lease, Tenant's occupancy of the Premises or Tenant's equipment, Tenant shall be fully responsible for the payment of same and shall pay such amount as promptly as all such taxes or assessments may become due and payable without any delinquency.

(b) Landlord shall pay, subject to reimbursement from Tenant as provided in the paragraph entitled "Rental" of this Lease, all ad valorem property taxes which are now or hereafter assessed upon the Building and the Premises, except as otherwise expressly provided in this Lease.

8. FIRE AND EXTENDED COVERAGE INSURANCE.

Landlord shall maintain and pay for fire and casualty special form "all risk" insurance, with extended coverage, covering the Building equal to at least eighty percent (80%) of the replacement cost thereof. Tenant shall not do or cause to be done or permit on the Premises or in the Building anything deemed extra hazardous on account of fire and Tenant shall not use the Premises or the Building in any manner which will cause an increase in the premium rate for any insurance in effect on the Building or a part thereof. If, because of anything done, caused to be done, permitted or omitted by Tenant or Tenant's Invitees, the premium rate for any kind of insurance in effect on the Building or any part thereof shall be raised, Tenant shall pay Landlord on demand the amount of any such increase in premium which Landlord shall pay for such insurance and if Landlord shall demand that Tenant remedy the condition which caused any such increase in an insurance premium rate, Tenant shall remedy such condition within five (5) days after receipt of such demand or such reasonable time thereafter as is possible, provided Tenant has commenced such cure and is diligently pursuing the completion of same. Tenant shall maintain and pay for all fire and extended coverage insurance on its contents in the Premises, including trade fixtures, equipment, machinery, merchandise or other personal property belonging to or in the custody of Tenant.

Notwithstanding anything herein to the contrary, Landlord reserves the right for itself, successors and assigns to self-insure against any risk required hereunder to be insured or otherwise assumed by Landlord so long as any such program of self-insurance affords the same coverage of risks and benefits which would be afforded in the event Landlord procured insurance from a third-party insurer.


9. LANDLORD'S COVENANT TO REPAIR AND REPLACE.

(a) During the Term, Landlord shall be responsible only for repairs or replacements to the roof, exterior walls (including downspouts and gutters), structural members (including foundation and subflooring of the Premises) and for the central plumbing and electrical systems serving the entire Building up to the respective applicable points of entry of same into the Premises except for repairs or replacements caused by the negligent acts or omissions or misconduct of Tenant or Tenant's Invitees unless such amounts are paid to Landlord pursuant to an insurance policy. Landlord shall maintain such items in compliance with applicable laws, regulations, ordinances and codes or alternatively, any non-compliance shall not materially impair Tenant's use and enjoyment of the Premises or constitute a threat or danger to the health or safety of Tenant or Tenant's Invitees. Landlord's repairs and replacements shall be made as soon as reasonably possible using due diligence and reasonable efforts, taking into account in each instance all circumstances surrounding the repair or replacement including without limitation, the materiality of the repair or replacement to Tenants use and operation of its business within the Premises and the relation thereof to the enjoyment of same. If Landlord cannot, using due diligence, complete its repairs within one hundred eighty (180) days after written notice from Tenant, then (unless the need for such repairs or replacements is the result of the negligent acts or omissions or misconduct of Tenant or Tenant's Invitees, in which event Tenant shall not be entitled to terminate this Lease) either party may terminate this Lease effective upon thirty (30) days' prior written notice, without prejudice to Landlord's rights to receive payment from Tenant for uninsured damages caused directly or indirectly by Tenant or Tenant's Invitees. If the need for such repairs or replacements is the result of the negligent acts or omissions or misconduct of Tenant or Tenant's Invitees, and the expense of such repairs or replacements are not fully covered and paid by Landlord's insurance, then Tenant shall pay Landlord the full amount of expenses not covered. Landlord's duty to repair or replace as prescribed in this paragraph shall be Tenant's sole remedy and shall be in lieu of all other warranties or guaranties of Landlord, express or implied; provided, however, in the event Landlord fails to fulfill its obligations under this Paragraph 9(a) with respect to a leak in the roof of the Premises within thirty (30) days (or such longer period as may be required in the exercise of due diligence) following receipt of written notice of such failure to perform from Tenant, Tenant shall be entitled to hire a contractor reasonably acceptable to Landlord to make the necessary repair or replacement to the roof of the Premises, provided such activities shall not in any way void or negatively impact Landlord's warranty on the roof of the Premises or the Building, and thereafter, to the extent not reimbursed to Tenant within fifteen
(15) days after demand therefor, Tenant may pursue an action against Landlord for collection of the actual costs of such repair or replacement to the extent same is an obligation of Landlord hereunder.

(b) Landlord shall not be liable for any failure to make any repairs or to perform any maintenance required of Landlord hereunder unless such failure shall persist for an unreasonable period of time after written notice from Tenant setting forth the need for such repair(s) or replacement(s) in reasonable detail has been received by Landlord. Except as set forth in the paragraph of this Lease, entitled "Damage or Destruction of Premises", there shall be no abatement of rent. Except to the extent of the negligent acts or omissions or misconduct of Landlord or Landlords Invitees, there shall be no liability of Landlord by reason of any injury to


or interference with Tenant's business arising from the making of any repairs, replacements, alterations or improvements to any portion of the Building or the Premises, or to fixtures, appurtenances and equipment therein. To the extent permitted under applicable law, Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect.

10. TENANT'S COVENANT TO REPAIR.

Tenant shall be responsible for the repair, replacement and maintenance in good order and condition of all parts and components of the Premises (other than those specified for repair, replacement and maintenance by Landlord above), including without limitation the plumbing, wiring, electrical systems, HVAC system, glass and plate glass, equipment and machinery constituting fixtures, unless such repairs or replacements are required as a result of the negligence, misconduct or intentional acts or omissions of Landlord, its agent(s) , employee(s) or invitee(s) in which event Landlord shall be responsible for such repairs. At the end of the Term, Tenant shall return the Premises to Landlord in as good condition as they were when received, excepting only normal wear and tear, acts of God, repairs required to be made by Landlord hereunder and damage by fire and other casualty and condemnation (but only to the extent any casualty proceeds applicable to the Tenant Improvements are paid over to Landlord). Tenant's duty to maintain the HVAC system shall specifically include the duty to enter into and maintain at Tenant's sole expense during the entire term of this Lease a contract for the routine and periodic maintenance and regular inspection of such HVAC system, the replacement of filters as recommended and the performance of other recommended periodic servicing in accordance with applicable manufacturer's standards and recommendations. Such contract: (a) shall be with a reputable contractor reasonably satisfactory to Landlord; (b) shall satisfy the requirements for routine and periodic maintenance, if any, necessary to keep all applicable manufacturer's warranties in full force and effect; and (c) shall provide that in the event this Lease expires or is earlier terminated for any reason whatsoever that said contract shall be immediately terminable by Landlord or Tenant without any cost, expense or other liability on the part of Landlord.

11. TRADE FIXTURES AND EQUIPMENT.

Prior to installation, Tenant shall furnish to Landlord notice of all trade fixtures and equipment of a permanent nature which it intends to install within the Premises and the installation of same shall be subject to Landlord's consent which shall not be unreasonably withheld, condition or delayed. Any trade fixtures and equipment installed in the Premises at Tenant's expense and identified by Tenant in notice to Landlord shall remain Tenant's personal property and Tenant shall have the right at any time during the Term to remove such trade fixtures and equipment. Upon removal of any trade fixtures or equipment, Tenant shall immediately restore the Premises to substantially the same condition in which it existed when received by Tenant, ordinary wear and tear, condemnation damage by fire and other casualty and acts of God alone excepted. Any trade fixtures not removed by Tenant at the expiration or an earlier termination of the Lease shall, at Landlord's sole election, either (i) become the property of Landlord, in which event Landlord shall be entitled to handle and dispose of same in any manner Landlord deems fit without any liability or obligation to Tenant or any other third party


with respect thereto, or (ii) be subject to Landlord's removing such property from the Premises and storing same, all at Tenant's expense and without any recourse against Landlord with respect thereto. Without limiting the generality of the foregoing, the following property shall in no event be deemed to be "trade fixtures" and Tenant shall not remove any such property from the Premises under any circumstances, regardless of whether installed by Landlord or Tenant:
(a) any air conditioning, air ventilating or heating fixtures or equipment; (b) any lighting fixtures or equipment; (c) any carpeting or other permanent floor coverings; (d) any paneling or other wall covering; (e) plumbing fixtures and equipment; or (f) permanent shelving. Landlord hereby waives any lien interest which it may have in Tenant's personal property; provided, however, and notwithstanding anything contained herein to the contrary, in no event may Tenant encumber or otherwise impair Landlord's title to the Premises, the Building or the Building's common areas through the financing or any personal property within the Premises of any other activities.

12. UTILITIES.

Tenant shall pay for all utilities or services related to its use of the Premises including without limitation electricity, gas, heat, water, sewer, telephone and janitorial services. To the extent that water and/or sewer usage are not separately metered for the Premises, Tenant shall pay its proportionate share of the applicable charges therefor, with such proportionate share being as defined in subparagraph 3(c), and the manner for payment thereof shall be as set forth in subparagraph 3(f). Landlord shall not be responsible for the stoppage or interruption of utilities services other than as required by its limited covenant to repair and replace set forth above, nor shall Landlord be liable for any damages caused by or from the plumbing and sewer systems.

13. DAMAGE OR DESTRUCTION OF PREMISES.

If the Premises are damaged by fire or other casualty, but are not rendered untenantable for Tenant's business, either in whole or in part, Landlord shall cause such damage to be repaired without unreasonable delay and the Annual Rental shall not abate. If by reason of such casualty the Premises are rendered untenantable for Tenant's business, either in whole or in part, Landlord shall cause the damage to be repaired or replaced without unreasonable delay, and, in the interim, the Annual Rental shall be proportionately reduced as to such portion of the Premises as is rendered untenantable. Any such abatement of rent shall not, however, create an extension of the Terms. Provided, however, if by reason of such casualty, the premises are rendered untenantable in some material portion, and Landlord, in its reasonable estimation, determines that the amount of time required to repair the damage using due diligence is in excess of two hundred ten (210) days, then either party shall have the right to terminate this Lease by giving written notice of termination within thirty (30) days after the date of casualty, and the Annual Rental shall abate as of the date of such casualty in proportion to the part of the Premises rendered untenantable. Notwithstanding the foregoing, in the event the casualty giving rise to an election to terminate is caused by the negligence, misconduct or acts of omissions of Tenant or Tenant's Invitees, Tenant shall have no right to terminate this Lease. Notwithstanding the other provisions of this paragraph, in the event there should be a casualty loss to the Premises to the extent of fifty percent (50%) or more of the replacement value of the Premises or if the Premises is rendered


untenantable for the conduct of Tenant's business operations during the last Lease year of the Term or any extended term, as determined by Landlord in the exercise of its reasonable discretion, either party may, at its option, terminate this Lease by giving written notice within thirty (30) days after the date of the casualty and the Annual Rental shall abate as of the date of such notice. Except as provided herein, Landlord shall have no obligation to rebuild or repair in case of fire or other casualty, and no termination under this paragraph shall affect any rights of Landlord or Tenant hereunder because of prior defaults of the other party. Tenant shall give Landlord immediate notice of any fire or other casualty in the Premises.

14. GOVERNMENTAL ORDERS.

Except as hereinbelow set forth regarding compliance of the physical structure of the Premises with applicable governmental regulations including without limitation, compliance with the applicable requirements of the Americans with Disabilities Act and the implementing regulations (the "ADA") as of the Commencement Date, Tenant agrees, at its own expense, to comply promptly with all requirements of any legally constituted public authority that may be in effect from time to time made necessary be reason of Tenant's use or occupancy of the Premises. Landlord agrees to comply promptly with any such requirements if not made necessary by reason of Tenant's use or occupancy. With regard to the physical structure of the Premises, Landlord agrees to use good faith and due diligence to undertake those actions that are "readily achievable" (as such term is defined in the ADA) in order to attempt to bring the physical structure of the Premises in compliance with the applicable requirements of the ADA in effect as of the Commencement Date. If it is determined that for any reason Landlord shall have failed to cause the physical structure of the Premises to be brought into compliance with the ADA as of the Commencement Date (to at least the minimum extent required under applicable regulations then in effect), then Landlord, as its sole obligation, will take the action(s) necessary to cause the physical structure of the Premises to so comply, and Tenant acknowledges and agrees that Landlord has and shall have no other obligation or liability whatsoever to Tenant, or to anyone claiming by or through Tenant, regarding any failure of the Premises or the activities therein to comply with the applicable requirements of the ADA. Landlord and Tenant agree, however, that if in order to comply with any of the above requirements, the cost to Landlord or Tenant, as the case may be, shall exceed a sum equal to one (1) year's rent, then the party who is obligated to comply with such requirements is privileged to terminate this Lease by giving written notice of termination to the other party, which termination shall become effective sixty (60) days after receipt of such notice, and which notice shall eliminate the necessity of compliance with such requirement by the party giving such notice, unless the party receiving such notice of termination shall, before termination becomes effective, pay to the party giving notice all costs of compliance in excess of one (1) year's rent, or secure payment of said sum in a manner satisfactory to the party giving notice. Notwithstanding anything contained herein to the contrary, it is agreed that:
(a) Tenant is exclusively responsible for all compliance with all requirements of any legally constituted public authority in the event non-compliance relates to Tenant's use of, or operations from, the Premises and (b) in the event of non-compliance for which Landlord is responsible, Landlord shall not be deemed in breach of this Lease if such non-compliance does not materially impair Tenant's use of the Premises or threaten or endanger the health or safety of Tenant or Tenant's Invitees.


15. MUTUAL WAIVER OF SUBROGATION.

For the purpose of waiver of subrogation, the parties mutually release and waive unto the other all rights to claim damages, costs or expenses for any injury to property caused by a casualty or any other matter whatsoever in, on or about the Premises to the extent that such damage, cost or expense has been paid to such damaged party under the terms of any policy of insurance. All insurance policies carried with respect to this Lease, if permitted under applicable law, shall contain a provision whereby the insurer waives, prior to loss, all rights of subrogation against either Landlord or Tenant.

16. SIGNS AND ADVERTISING.

(a) Tenant may install, in Tenant's sole discretion and at Tenant's sole cost and expense, a tenant identification sign in accordance with Building standards, such sign to be located at or near the Tenant's front entrance to the Premises within the Building; provided, however, Tenant shall install, at a minimum, the suite numerals of the Premises in accordance with Building standards at or near the front entrance to the Premises within the Building. The Tenant Improvement Allowance shall be reduced by an amount equal to any costs incurred by Landlord in preparing or installing Tenant identification signage or graphics on or within the Building or the Premises.

(b) In order to provide architectural control for the Building and Business Park, Tenant shall not install any exterior signs, marquees, billboards, outside lighting fixtures and/or other decorations on the Premises. Landlord shall have the right to remove any such sign or other decoration and restore fully the Premises at the cost and expense of Tenant if any such exterior work is done without Landlord's prior written approval, which approval Landlord shall be entitled to withhold or deny in its sole discretion. Tenant shall not permit, allow or cause to be used in, on or about the Premises any sound production devices, mechanical or moving display devices, bright lights, or other advertising media, the effect of which would be visible or audible from the exterior of the Premises.

17. INDEMNIFICATION AND LIABILITY INSURANCE.

(a) Except to the extent of the negligent acts or omissions or misconduct of Landlord or Landlord's Invitees, Tenant shall indemnify and save Landlord harmless against any and all claims, suits, demands, actions, fines, damages, and liabilities, and all costs and expenses thereof (including without limitation reasonable attorneys' fees) arising out of injury to persons (including death) or tangible property occurring in, on or about, or arising out of the Premises or other areas in the Building if caused or occasioned wholly or in part by any act(s) or omission(s) of Tenant or Tenant's Invitees, except if caused by any act(s) or omission(s) on the part of Landlord. The non-prevailing party shall also pay all costs, expenses and reasonable attorneys' fees that may be incurred by the prevailing party in enforcing the agreements of this Lease,


whether incurred as a result of litigation or otherwise. Tenant shall give Landlord immediate notice of any such happening causing injury to persons or tangible property.

(b) At all times during the term of this Lease, Tenant shall at its own expense keep in force adequate public liability insurance under the terms of a commercial general liability policy (occurrence coverage) in the amount of not less than Two Million and No/100Dollars ($2,000,000.00) single limit with such company(ies) as shall from time to time be reasonably acceptable to Landlord (and to any lender having a mortgage interest in the Premises) and naming Landlord and Landlord's agent as an additional insured (and, if requested by Landlord from time to time, naming Landlord's mortgagee as an additional insured). Such insurance shall include, without limitation, personal injury and contractual liability coverage for the performance by Tenant of the Indemnity agreements set forth in this Lease. Tenant shall first furnish to Landlord certificates of insurance evidencing the required coverage prior to the Commence Date and thereafter prior to each policy renewal date. All policies required of Tenant hereunder shall contain a provision whereby the insurer is not allowed to cancel or change materially the coverage without first giving thirty (30) days' written notice to Landlord.

(c) Landlord shall keep in force during the Term insurance in such amounts and coverages as Landlord deems appropriate or is otherwise required of Landlord by a third party such as its lender.

18. LANDLORD'S RIGHT OF ENTRY.

Landlord, and those persons authorized by it, shall have the right to enter the Premises at all reasonable times and upon reasonable notice for the purposes of making repairs, making connections, installing utilities, providing services to the Premises or for any other tenant, making inspections or showing the same to prospective purchasers and/or lenders (at any time during the Term hereof), or prospective tenants (during the last nine (9) months of the Term) as well as at any time in the event of emergency involving possible injury to property or persons in or around the Premise or the Building.

19. EMINENT DOMAIN.

If any substantial portion of the Premises is taken under the power of eminent domain (including any conveyance made in lieu thereof) or if such taking shall materially impair the normal operation of Tenant's business, then either party shall have the right to terminate this Lease by giving written notice of such termination within thirty (30) days after such taking. If neither party elects to terminate this lease, Landlord shall repair and restore the Premises to the best possible tenantable condition and the Annual Rental shall be proportionately and equitably reduced as of the date of the taking. All compensation awarded for any taking (or the proceeds of a private sale in lieu thereof) shall be the property of Landlord whether such award is for compensation for damages to the Landlord's or Tenant's interest in the Premises, and Tenant hereby assigns all of its interest in any such award to Landlord; provided, however, Landlord shall not have any interest in any separate award made to Tenant for loss of business, moving


expense or the taking of Tenant's trade fixtures or equipment if a separate award for such items is made to Tenant and if such separate award does not reduce the award to Landlord.

20. EVENTS OF DEFAULT AND REMEDIES

(a) Upon the occurrence of any one or more of the following events (the "Events of Default," any one an "Event of Default"), the party not in default shall have the right to exercise any rights or remedies available in this Lease, at law or in equity. Events of Default shall be:

(i) Tenant's failure to pay an Annual Rental payable hereunder within five (5) days after same becomes due; provided, however, Tenant shall be entitled to written notice and a five (5) day cure period with respect to its failure to pay any Annual Rent once during each Lease Year;

(ii) Tenant's failure to pay any other sum of money payable hereunder within ten (10) days after written notice thereof from Landlord of a deficiency in such payment;

(iii) Failure by either party to perform any other of the terms, covenants or conditions contained in this Lease if not remedied within thirty (30) days after receipt of written notice thereof, or if such default cannot be remedied within such period, such party does not within thirty (30) days after written notice thereof commence such act or acts as shall be necessary to remedy the default and shall not thereafter diligently prosecute such cure and complete such act or acts within ninety (90) days after written notice thereof;

(iv) Tenant shall become bankrupt or insolvent, or file any debtor proceedings, or file pursuant to any statute a petition in bankruptcy or insolvency or for reorganization, or file a petition for the appointment of a receiver or trustee for all or substantially all of Tenant's assets and such petition or appointment shall not have been set aside within sixty (60) days from the date of such petition or appointment, or if Tenant makes an assignment for the benefit of creditors, or petitions for or enters into an arrangement; or

(v) Tenant allows its leasehold estate to be taken under any writ of execution and such writ is not vacated or set aside within thirty (30) days.

(b) In addition to its other remedies, Landlord, upon an Event of Default by Tenant, shall have the immediate right, after any applicable grace period expressed herein, to terminate and cancel this Lease and/or terminate Tenant's right of possession, and, in accordance with applicable laws, to reenter and remove all persons and properties from the Premises and dispose of such property as it deems fit, all without being guilty of trespass or being liable for any damages caused thereby. If Landlord reenters the Premises, it may either terminate this Lease or, from time to time without terminating this Lease, terminate Tenant's right of possession and make such alterations and repairs as may be necessary or appropriate to relet the Premises and


relet the Premises upon such commercially reasonable terms and conditions as Landlord deems advisable without any responsibility on Landlord whatsoever to account to Tenant for any surplus rents collected. No retaking of possession of the Premises by Landlord shall be deemed as an election to terminate this Lease unless a written notice of such intention is given by Landlord to Tenant at the time of reentry; but, notwithstanding any such reentry or reletting without termination, Landlord may at any time thereafter elect to terminate for such previous default. In the event of an elected termination by Landlord, whether before or after reentry, Landlord may recover from Tenant damages, including the costs of recovering the Premises and any costs incurred in reletting the Premises, and Tenant shall remain liable to Landlord for the total Annual Rental (which may at Landlord's election be accelerated to be due and payable in full as of the Event of Default and recoverable as damages in a lump sum) as would have been payable by Tenant hereunder for the remainder of the term less the rentals actually received from any reletting or, at Landlord's election, less the reasonable rental value of the Premises for the remainder of the term. In determining the Annual Rental which would be payable by Tenant subsequent to default, the Annual Rental for each Lease Year of the unexpired term shall be equal to the Annual Rental payable by Tenant for the last Lease Year prior to the default. If any rent owing under this Lease is collected by or through an attorney, Tenant agrees to pay Landlord's reasonable attorneys' fees to the extent allowed by applicable law. Landlord shall be required to reasonably mitigate its damages.

21. SUBORDINATION.

This Lease is subject and subordinate to any and all mortgages or deeds of trust currently existing on the property of which the Premises is a part, and this clause shall be self-operative without any further instrument necessary to effect such subordination; however, if requested by Landlord, Tenant shall promptly execute and deliver to Landlord any such certificate(s) in a commercially reasonable form as Landlord may reasonably request evidencing the subordination of this Lease to or the assignment of this Lease as additional security for such mortgages or deeds of trust; provided, further, upon Tenant's request, Landlord shall use reasonable efforts to obtain a non-disturbance agreement in a commercially reasonable form from any such mortgagee, trustee or beneficiary currently having an interest in all or any portion of the Premises. Subject to the condition precedent that Landlord provide Tenant with a non-disturbance agreement in a commercially reasonable form in favor of Tenant from any mortgagee, trustee or beneficiary this Lease shall be subject and subordinate to any mortgage or deed of trust which may hereafter encumber the property of which the Premises is a part. Tenant's obligations under this Lease shall continue in full force and effect notwithstanding any such default proceedings under a mortgage or deed of trust and shall attorn to the mortgagee, trustee or beneficiary of such mortgage or deed of trust, and their successors or assigns, and to the transferee under any foreclosure or default proceedings and subject to the terms of the non-disturbance agreement, the mortgagee, trustee or beneficiary or their successors or assigns shall be bound by all of the obligations of Landlord under this Lease which accrue after such foreclosure or default proceeding. Tenant will, upon request by Landlord, execute and deliver to Landlord or to any other person designated by Landlord, any instrument or instruments in a commercially reasonable form required to give effect to the provisions of this paragraph.


22. ASSIGNING AND SUBLETTING.

Tenant shall not assign, sublet, mortgage, pledge or encumber this Lease, the Premises, or any interest in the whole or in any portion thereof, directly or indirectly, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. In the event of any assignment, sublease, mortgage, pledge or encumbrance, Tenant shall: (i) remain primarily liable for the performance of all terms of this Lease, (ii) pay all reasonable costs, including without limitation, attorney's fees, incurred by Landlord in connection with such assignment, sublease or mortgage, and (iii) pay to Landlord fifty percent (50%) of any rental or any fees or charges received by Tenant (less the actual, reasonable expenses incurred by Tenant in connection with such reletting as evidenced by written receipts thereof) in excess of the Annual Rental payable to Landlord hereunder as further rental under this Lease. Landlord's consent to one assignment or sublease will not waive the requirement of its consent to any subsequent assignment or sublease as required herein. Upon notice to Landlord of a proposed sublease or assignment of all or any portion of the Premises for the balance of the Term (the "Proposed Space"), Landlord shall have the option within fifteen (15) days after its receipt of such notice, to terminate this Lease with respect to the Proposed Space, whereupon the parties hereto shall have no further rights or liabilities with respect to the Proposed Space except as otherwise expressly set forth herein. Tenant may assign or sublet all or any portion of the Premises upon ten (10) days advance written notice to Landlord (but without Landlord's consent), to an entity controlled by Tenant or which controls Tenant or in connection with a merger, consolidation, corporate reorganization, or a sale of all or substantially all of its assets, provided that the new controlling entity has a consolidated net worth greater than or equal to Tenant's consolidated net worth at the time of the proposed transfer.

In the event of a proposed assignment of this Lease or subletting of all or a part of the Premises, Tenant shall submit to Landlord, in writing, (i) the name of the proposed assignee or sublessee, (ii) current financial statements, if any, available to Tenant disclosing the financial condition of the proposed assignee or subtenant, (iii) the nature of the business of the proposed assignee or sublessee, and its proposed use of the Premises (any assignment or subletting being subject to restrictions on use contained in this Lease, the violation of which by the proposed assignee or sublessee shall constitute absolute grounds for Landlord's denial of the requested assignment or subletting, such grounds not being the exclusive grounds for denial under clause
(iii)) and (iv) the proposed commencement date of the assignment or subletting, together with a copy of the proposed assignment or sublease. Within fifteen (15) days after its receipt of such notice, Landlord shall either approve or disapprove such proposed assignment or sublease in writing or give Tenant notice of its election to terminate this Lease with respect to the Proposed Space (as hereinabove described).

Notwithstanding anything in this Lease to the contrary, Tenant further agrees that any assignment or sublease shall be subject to the following additional limitations: (i) in no event may Tenant assign this Lease or sublet all or any portion of the Premises to an existing Tenant of the Business Park or its subtenant or assignee (unless Landlord consents to such assignment or sublease); (ii) in no event shall the proposed subtenant or assignee be a person or entity with whom Landlord or its agent is negotiating and to or from whom Landlord, or its agent, has given


or received any written oral proposal within the past six (6) months regarding a lease of space in the Business Park; and (iii) Tenant shall not publicly advertise the rate for which Tenant is willing to sublet the Premises, and all public advertisements of the assignment of the Lease or sublet of the Premises; and all public advertisements of the assignment of the Lease or sublet of the Premises, or any portion thereof, shall be subject to prior written approval by Landlord, such approval not to be unreasonably withheld or delayed. Said public advertisement shall include, but not be limited to, the placement or display or any signs or lettering on the exterior of the Premises or on the glass or any window or door of the Premises or in the interior of the Premises if it is visible from the exterior.

23. TRANSFER OF LANDLORD'S INTEREST.

If Landlord shall sell, assign or transfer all or any part of its interest in the Premises or in this Lease to a successor in interest which expressly assumes the obligations of Landlord hereunder, the Landlord shall thereupon be released or discharged from all covenants and obligations hereunder, and Tenant shall look solely to such successor in interest for performance of all of Landlord's obligations and such successor shall be obligated to perform all of Landlord's obligations under this Lease which accrue after the date of such transfer. Tenant's obligations under this Lease shall in no manner be affected by Landlord's sale, assignment, or transfer of all or any part of such interest(s) of Landlord, and Tenant shall thereafter attorn and look solely to such successor in interest as the Landlord hereunder.

24. COVENANT OF QUIET ENJOYMENT.

Landlord represents that it has full right and authority to lease the Premises and Tenant shall peacefully and quietly hold and enjoy the Premises for the full Term hereof, and any extensions or renewals terms, so long as no Event of Default occurs hereunder.

25. ESTOPPEL CERTIFICATES.

Within twenty (20) days after a request by Landlord, Tenant shall deliver a written estoppel certificate, in form supplied by or acceptable to Landlord, certifying any facts that, to the best of Tenant's knowledge, are then true with respect to this Lease, including without limitation that this Lease is in full force and effect, that no Event of Default exists on the part of Landlord or Tenant, that Tenant is in possession, that Tenant has commenced the payment of rent, and that Tenant claims no defenses or offsets with respect to payment of rentals under this Lease. Likewise, within ten (10) days after a request by Tenant, Landlord shall deliver to Tenant a similar estoppel certificate covering such matters as are reasonably required by Tenant.

26. PROTECTION AGAINST LIENS.

Tenant shall do all things necessary to prevent the filing of any mechanics', materialmen's or other types of liens whatsoever, against all or any part of the Premises by reason of any claims made by, against, through or under Tenant. If any such lien is filed against the Premises, Tenant shall either cause the same to be discharged of records within thirty (30) days after filing or, if Tenant in its discretion and in good faith determines that such lien should be contested, it shall


furnish such security as may be necessary to prevent any foreclosure proceedings against the Premises during the pendency of such contest. If Tenant shall fail to discharge such lien within said time period or fail to furnish such security, then Landlord may at its election, in addition to any other right or remedy available to it, discharge the lien by paying the amount claimed to be due or by procuring the discharge by giving security or in such other manner as may be allowed by law. If Landlord acts to discharge or secure the lien then Tenant shall immediately reimburse Landlord for all sums paid and all costs and expenses (including reasonable attorneys' fees) incurred by Landlord involving such lien together with interest on the total expenses and costs at an interest rate equal to the Prime Rate plus two percent (2%).

27. MEMORANDUM OF LEASE.

If requested by Tenant, Landlord shall execute a recordable Memorandum or Short Form Lease, prepared at Tenant's expense, specifying the exact term of this Lease and such other terms as the parties shall mutually determine.

28. FORCE MAJEURE.

In the event Landlord or Tenant shall be delayed, hindered or prevented from the performance of any act required hereunder, by reason of governmental restrictions, scarcity of labor or materials, strikes, fire, or any other reasons beyond its reasonable control, the performance of such act shall be excused for the period of delay, and the period for performance of any such act shall be extended as necessary to complete performance after the delay period. However, the provisions of this paragraph shall in no way be applicable to Tenant's obligations to pay Annual Rental or any other sums, monies, costs, charges or expenses required by this Lease.

29. REMEDIES CUMULATIVE -- NONWAIVER.

Unless otherwise specified in this Lease, no remedy of Landlord or Tenant shall be considered exclusive of any other remedy, but each shall be distinct, separate and cumulative with other available remedies. Each remedy available under this Lease or at law or in equity may be exercised by Landlord or Tenant from time to time as often as the need may arise. No course of dealing between Landlord and Tenant or any delay or omission of Landlord or Tenant in exercise any right arising from the other party's default shall impair such right or be construed to be a waiver of a default.

30. HOLDING OVER.

If Tenant remains in possession of the Premises or any part thereof after the expiration of the Term, whether with or without Landlord's acquiescence, Tenant shall be deemed only a tenant at will and there shall be no renewal of this Lease without a written agreement signed by both parties specifying such renewal. The "monthly" rental payable by Tenant during any such tenancy at will period shall be one hundred fifty percent (150%) of the monthly installments of Minimum Rental and one hundred percent (100%) of the monthly installments of any Additional


Rent and other pass-through changes payable during the final Lease Year immediately preceding such expiration. Tenant shall also remain liable for any and all damages, direct and consequential, suffered by Landlord as a result of any holdover without Landlord's unequivocal written acquiescence.

31. NOTICES.

Any notice allowed or required by this Lease shall be deemed to have been sufficiently served if the same shall be in writing and placed in the United States mail, via certified mail or registered mail, return receipt requested, with proper postage prepaid or delivered by a nationally recognized overnight courier, and addressed as follows:

AS TO LANDLORD:   Petula Associates, Ltd.
                  Commercial Real Estate Equities
                  711 High Street
                  Des Moines, IA  50392

Attention:        Bruce K. Bruene

WITH A COPY TO:   Tri Properties
                  Royal Center Property Manager
                  1009 Slater Road, Suite 110
                  Durham, NC  27703

Attention:        David M. Adams

AS TO TENANT:     Inspire Pharmaceuticals, Inc.
                  4222 Emperor Boulevard, Suite 470
                  Durham, NC  27703

Attention:        Geoff Grisham

WITH A COPY TO:   Wyrick, Robbins, Yates & Ponton LLP
                  4101 Lake Boone Trail
                  Raleigh, NC  27607

Attention:        Jeffrey J. Johnson

The addresses of Landlord and Tenant and the party, if any, to whose attention a notice or copy of same shall be directed may be changed or added from time to time by either party giving notice to the other in the prescribed manner.

32. LEASING COMMISSION.


Landlord and Tenant represent and warrant each to the other that they have not dealt with any broker(s) or any other person claiming any entitlement to any commission in connection with this transaction except Corporate Realty Advisors (the "Broker"). Landlord and Tenant agree to indemnify and save each other harmless from and against any and all claims, suits, liabilities, costs, judgments and expenses, including reasonable attorneys' fees, for any leasing commissions or other commissions, fees, charges or payments resulting from or arising out of their respective actions in connection with this Lease. Landlord agrees to be responsible for the leasing commission due Broker pursuant to a separate written agreement between Landlord and Broker, and to hold Tenant harmless respecting same.

33. MISCELLANEOUS.

(a) Rules and Regulations.

Landlord shall have the right from time to time to prescribe reasonable rules and regulations (the "Rules and Regulations") for Tenant's use of the Premises and the Building. A copy of Landlord's current Rules and Regulations respecting the Premises and the Building is attached hereto as Exhibit "D". Tenant shall abide by and actively enforce on all its employees, agents, invitees and licensees such regulations including without limitation rules governing parking of vehicles in designated areas, provided Tenant has received written copies of such regulations and any amendments or revisions thereto. The Rules and Regulations shall be applied uniformly to all tenants in the Building.

(b) Evidence of Authority.

If requested by Landlord, Tenant shall furnish reasonable legal documentation evidencing the valid existence and good standing of Tenant and the authority of any parties signing this Lease to act for Tenant.

(c) Limitation of Landlord's Liability.

If Landlord shall fail to perform any covenant, term or condition of this Lease upon Landlord's part to be performed within thirty (30) days after written notice from Tenant (unless such condition is incapable of being cured within said thirty (30) day period, in which event it shall not be deemed a default so long as Landlord is diligently pursuing the completion of same), and, as a consequence of such default, Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied solely out of the proceeds of sale received upon execution of such judgment levied thereon against the right, title and interest of Landlord in the Building as the same may then be encumbered (including without limitation Landlord's interest in the rents and profits arising out of Landlord's interest in the Building); and neither Landlord nor, if Landlord be a partnership, any of the partners comprising Landlord shall have any personal liability for any deficiency. It is understood and agreed that in no event shall Tenant or any person claiming by or through Tenant have the right to levy execution against any property of Landlord other than its interest in the Building as hereinbefore expressly provided.


(d) Nature and Extent of Agreement.

This Lease, together with all exhibits hereto, contains the complete agreement of the parties concerning the subject matter, and there are no oral or written understandings, representations, or agreements pertaining thereto which have not been incorporated herein. This Lease creates only the relationship of landlord and tenant between the parties, and nothing herein shall impose upon either party any powers, obligations or restrictions not expressed herein. This Lease shall be construed and governed by the laws of the state in which the Premises are located.

(e) Binding Effect.

This Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns. This Lease shall not be binding on Landlord until executed by a Vice President of Landlord and delivered to Tenant. No amendment or modification to this Lease shall be binding upon Landlord unless same is in writing and executed by a Vice President of Landlord.

(f) Captions and Headings.

The captions and headings in this Lease are for convenience and reference only, and they shall in no way be held to explain, modify, or construe the meaning of the terms of this Lease.

(g) Security Deposit.

Tenant has paid to Landlord upon signing this Lease Ten Thousand and No/100 Dollars ($10,000.00) (the "Deposit") as security for Tenant's performance of all obligations hereunder. The Deposit may be held by Landlord in such manner as it shall elect and Landlord shall be entitled to any interest which accrues on the Deposit. In the event of a default by Tenant, Landlord may, at its option, apply all or any part of the Deposit to cure the default, and thereupon Tenant shall immediately redeposit with Landlord the amount so applied in order that Landlord will always have the full Deposit on hand during the term of this Lease. Upon the termination of this Lease, provided that Tenant is not in default hereunder, Landlord shall refund to Tenant any of the remaining balance of the Deposit subject to final adjustments for payment of any rental required by this Lease. If the Premises is sold, Landlord shall have the right to transfer the Deposit to the new owner, and upon the new owner's express assumption of the obligations for the Deposit required by this Lease, Landlord shall thereupon be released from all liability for such Deposit, and Tenant thereafter shall look only to the new owner for such Deposit provided that such new owner has provided notice to Tenant of its assumption of such obligations. The terms hereof shall apply to every transfer of the Deposit.

(h) Right to Relocate. [Intentionally Deleted]

(i) Lease Review.


The submission of this Lease to Tenant for review does not constitute a reservation of or option for the Premises, and this Lease shall become effective as a contract only upon execution and delivery by Landlord and Tenant.

(j) Attorney's Fees. If either party places in the hands of an attorney the enforcement of this Lease or any part thereof, for the collection of any rent due or to become due hereunder, or recovery of the possession of the Premises, or otherwise files suit hereunder, the non-prevailing (or defaulting) party shall pay the other party's reasonable attorneys' fees and court costs.

(k) Principal Mutual Approval. This Lease is subject to approval by the Principal Mutual Life Insurance Company Investment Committee and the Board of Directors of Petula Associates, Ltd., such approval to be granted or denied within ten (10) days after the full execution of this Lease.

34. SEVERABILITY.

If any term or provision of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law notwithstanding the invalidity of any other term of provision hereof.

35. REVIEW OF DOCUMENTS.

If, following the execution of this Lease, either party hereto requests that the other party execute any document or instrument that is other than (i) a document or instrument the form of which is attached hereto as an exhibit, or
(ii) a document that solely sets forth facts or circumstances that are then existing and reasonably ascertainable by the requested party with respect to the Lease, then the party making such request shall be responsible for paying the reasonable out-of-pocket costs and expenses (within thirty (30) days of such parties receipt of reasonably detailed evidence supporting such expenses), including without limitation, the attorneys fees, incurred by the requested party in connection with the review (and, if applicable, the negotiations) related to such document(s) or instrument(s), regardless of whether such document(s) or instrument(s) is (are) ever executed by the requested party. In the event the requesting party is Tenant, all such costs and expenses incurred by Landlord in connection with its review and negotiation of any such document(s) instrument(s) shall be deemed to be additional rental due hereunder and shall be payable by Tenant as provided above.


IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed and sealed pursuant to authority duly given as of the day and year first above written.

"LANDLORD"

PETULA ASSOCIATES, LTD.

ATTEST:

/s/ Joyce N. Hottman               By: /s/ Timothy E. Minton
---------------------                  ----------------------
                                         President

[CORPORATE SEAL]

"TENANT"

INSPIRE PHARMACEUTICALS, INC.

ATTEST:

/s/ Michael Lytton                 By: /s/ David Doutz
---------------------                  ----------------------
    Secretary                              President

[CORPORATE SEAL]

STATE OF IOWA

COUNTY OF POLK

This 30th day of December, 1997, personally came before me Timothy E. Minton, who being by me duly sworn, says that he is Vice President of Petula Associates, Ltd., an Iowa corporation, and that said writing was signed by him, in behalf of said corporation by its authority duly given, and acknowledged the said writing to be the act and deed of said corporation.

  /s/ Rachel J. Mischike
---------------------------
        Notary Public

[NOTARIAL SEAL]

My Commission expires:
May 19, 2000

STATE OF NC

COUNTY OF Durham

This 5th day of December, 1997, personally came before me David L. Drutz, M.D., who being by me duly sworn, says that he is _____ President of Inspire Pharmaceuticals, Inc. a Delaware corporation, and that said writing was signed by him, in behalf of said corporation,by its authority duly given, and acknowledged the said writing to be the act and deed of said corporation.

     /s/ Jean W. Lutes
---------------------------
        Notary Public

[NOTARIAL SEAL]

My Commission expires:

August 5, 2001


Exhibit A

DRAWING


Exhibit B

DRAWING


EXHIBIT "C"

FINAL PLANS

[To be attached upon approval by Landlord]


EXHIBIT "D"

RULES AND REGULATIONS

The following rules and regulations have been adopted by the Landlord for the care, protection and benefit of the Building and for the general comfort and welfare of the tenants. These Rules and Regulations shall remain in full force and effect until Tenant is notified in writing by Landlord of any changes and amendments. To the extent any of the Rules and Regulations set forth herein are inconsistent with the provisions of the Lease, the terms and conditions of the Lease shall prevail.

1. The sidewalks, entrances, halls, passages, elevators and stairways shall not be obstructed or used by Tenant for any other purpose than for ingress and egress. All loading and unloading of goods, furniture, fixtures, equipment and supplies shall be done only in areas and through entrances designated for such purposes.

2. Toilet rooms and other plumbing facilities shall not be used for any purpose other than those for which they are constructed and no foreign substance of any kind shall be disposed of therein. All repairs required due to breakage, stoppage or damage resulting from a violation of this provision shall be at Tenant's sole expense.

3. Tenant shall not do anything in the Premises, or bring or keep anything therein, which shall in any way conflict with any law, ordinance, rule or regulation affecting the occupancy and use of the Premises, which are or may hereafter be enacted or promulgated by any public authority or by the Board of Fire Underwriters.

4. Tenant shall at all times maintain an adequate number of suitable fire extinguishers on the Premises for use in case of local fires, including electrical fires.

5. Tenant shall keep the Premises heated at a temperature sufficiently high to prevent freezing of water in pipes and fixtures.

6. Trucks shall not be allowed to remain overnight in the common area whether loaded, unloaded or otherwise, without Landlord's prior written consent.

7. All garbage and refuse shall be placed for collection in containers specified by Landlord outside the Premises or Building. Tenant shall pay the cost of removal of any of Tenant's refuse or rubbish.

8. Tenant shall, at Tenant's expense, provide for regular pest extermination within the Premises, as necessary, and shall provide Landlord with a copy of such extermination contract.

9. In order to insure proper use and care of the Premises, neither the Tenant nor agent nor employee of Tenant shall:


(a) Allow any furniture, packages or articles of any kind to remain in corridors except for short periods incidental to moving same in or out of Building or to cleaning or rearranging occupancy of leased space.

(b) Mark or defile elevators, toilet rooms, walls, windows, doors or any part of the Building.

(c) Except for "seeing-eye" dogs, keep animals or birds on the Premises.

(d) Deposit waster paper, dirt or other substances in corridors, stairways, elevators, toilets, restrooms, or any other part of the Building not leased by Tenant.

(e) Except for pictures, wall hangings and other customary decorations and items which would not cause permanent damage to the structural elements of the Building, fasten any article, drill holes, drive nails or screws into walls, floors, doors, or partitions or otherwise mar or deface them by paint, papers or otherwise, without Landlord's prior written consent.

(f) Operate any machinery within the Building except customary warehouse, training and office equipment, such as computers, dictaphones, calculators, electric typewriters, televisions, video cassette records and the like. Special equipment or machinery used in the trade or profession of the Tenant may be operated only with Landlord's prior written consent.

(g) Leave Premises unoccupied without locking all exterior doors and turning off all water outlets

(h) Burn any trash, refuse, debris or garbage of any kind in or about the Premises or Building.

(i) Attach awnings, air-conditioning units or other fixtures to the outside walls or window sills, or otherwise affix such so as to project from the Premises or Building without Landlord's prior written consent..

(j) Except for Tenant's installation of a key card security system, install additional locks or bolts of any kind on any doors or windows of the Premises without Landlord's prior written consent. On the termination of Tenant's tenancy, Tenant shall deliver to Landlord all keys to the Premises, either furnished to or otherwise procured by Tenant.

(k) Install or operate any engine, boiler, machinery, or stove, or use oil or any burning fluid (other than gas) for heating, warming or lighting, or use any lighting other than incandescent or fluorescent electric lights, on the Premises without Landlord's prior written consent. All stoves permitted in the Premises shall be placed and installed. according to city ordinances. No articles deemed extra hazardous on account of fire, and no explosives, shall be brought into the Premises.


(l) Use loudspeakers, televisions, radios or other devices in such a manner as to be heard outside the Premises, or make, or permit to be made, any unseeming or disturbing noises, nuisance or other activity objectionable to other tenants.

(m) Use the Premises for the purpose of lodging or sleeping rooms, or for any illegal purposes.

(n) Install any aerial, antenna, satellite dish or other equipment or structure on the roof or exterior walls of the Premises, or on the grounds without, in each instance, the prior written consent of Landlord. Any installation so made without such prior written consent shall be subject to removal without notice at any time, at Tenant's expense.

10. Landlord shall have the right to prohibit any advertising by Tenant which, in its opinion, shall damage the reputation of the Building or its desirability, and upon written notice from Landlord, Tenant shall discontinue any such advertising.

11. Except for deliveries in the ordinary course of Tenant's business, Landlord reserves the right to designate the time when and method whereby freight, furniture, safes, goods, merchandise and other articles may be brought into, moved or taken from the Building and the Premises leased by Tenant; and workmen employed, designated or approved by Landlord must be employed by Tenants for repairs, painting, material moving and other similar work that may be done on the Premises.

12. Tenant will reimburse Landlord for the cost of repairing any damage to the Premises or other parts of the Building caused by Tenant or the agents or employees of Tenant, including replacing any glass broken.

13. Tenant shall not install in the Premises any metal safes or permit any concentration of excessive weight in any portion thereof without first having obtained the written permission of Landlord.

14. Landlord reserves the right at all times to exclude newsboys, loiterers, vendors, solicitors and peddlers, from the Building or common area and to require registration, satisfactory identification and credentials from all person seeking access to any part of the Building or common area outside of ordinary business hours. Ordinary business hours shall mean Monday through Friday, 8:00 a.m. to 6:00 p.m., except on legal holidays. Landlord shall exercise its best judgment in the execution of such control but shall not be held liable for the granting or refusal of such access. Landlord reserves the right to exclude the general public from the building after ordinary business hours and on weekends and holidays.


15. The attaching of wires to the outside of the Building is absolutely prohibited, and no wires shall be run or installed in any part of the Building without the Landlord's permission and direction.

16. Requests for services of janitors or other Bulding employees must be made to the Landlord. Agents or employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord.

17. Signs or any other Tenant identification shall be in accordance with building standard signage. No signs of any nature shall be placed in the windows so as to be visible from the exterior of the Building. All signs not approved in writing by Landlord shall be subject to removal without notice.

18. Except as otherwise set forth in the Lease, any improvements or alterations to the Premises by Tenant shall be approved in advance by Landlord and all such work, if approved, shall be done at Tenant's sole expense under the supervision of Landlord.

19. Tenant shall have a non-exclusive right to use of all driveways and parking areas designated for Tenant and Tenant's employees, if deemed necessary by Landlord.

20. If additional drapes or window decorations are desired by Tenant, they shall be approved by Landlord and installed at Tenant's expense under the direction of Landlord. Lining on drapes visible from the exterior shall be of a color approved by Landlord.

21. The possession of weapons, including concealed handguns, is strictly forbidden on the Premises and Building.

22. Tenant shall not use nor permit the use of the common area by its employees, agents or invitees for the purpose of displaying or selling personal property, automobiles, equipment, furniture, fixtures, merchandise or any other item whether owned by Tenant or its employees, agents or invitees.

23. So long as such rescissions or amendments do not materially interfere with Tenant's standard business operations within the Premises, Landlord reserves the right to rescind, amend, alter or waive any of the foregoing rules and regulations at any time in a reasonable and nondiscriminatory manner, or make such other reasonable and non-discriminatory rules and regulations as, in its sole judgment it deems necessary, desirable or proper for its best interest and for the best interests of the tenants, or as may from time to time be necessary for the safety, care and cleanliness of the Premises, the Building or adjacent areas, and for the preservation of good order therein. Any such rescission, amendment, alteration or waiver of any rules or regulations or creation of any such new rules or regulations shall be effective five (5) days after all tenants have been given written notice thereof. Landlord shall not be responsible to any tenant for the non-observance or violation by any other tenant of any of these rules and regulations at any time.


EXHIBIT "E"

OPTION TO EXTEND

1. Notice and Exercise. Provided no Event of Default has occurred and is continuing under this Lease, Tenant is hereby granted the option to extend the Term once for an additional period of five (5) years (the "Renewal Term") commencing upon the expiration of the initial Term on the same terms and conditions (except as provided in this Section) as contained in the other provisions of this Lease. This option shall be exercised only by delivery of written notice (the "Renewal Notice") to Landlord no later than nine (9) months prior to the scheduled Expiration Date referred to in Paragraph 2 of this Lease. The Minimum Rental for the Premises shall be the then fair market rental ("Market Rate") applicable to the Premises. Upon Landlord's receipt of Tenant's election to extend the Term as herein provided, Landlord shall notify Tenant in writing of Landlord's determination of the Market Rate for the Renewal Term. If Tenant disagrees with the Market Rate specified by Landlord for the Renewal Term, and Landlord and Tenant cannot, using good faith reasonable efforts, agree upon a mutually acceptable Market Rate for the Renewal Term, Tenant may, as Tenant's sole right and remedy, revoke its election to extend the Term by so notifying Landlord in writing within thirty (30) days following Landlord's receipt of the Renewal Notice (the "Tenant Review Period"). In the event Landlord and Tenant cannot agree upon a mutually acceptable Market Rate for the Extension Term and Tenant fails to revoke its election to extend the Term prior to the expiration of the Tenant Review Period, the Market Rate for the Renewal Term shall be determined in accordance with
Section 2 hereunder and such determination shall be final and binding upon both Landlord and Tenant. Notwithstanding anything contained herein to the contrary, upon the expiration of the Tenant Review Period, Tenant shall have no right to rescind or otherwise revoke its election to extend the Term. Tenant's occupancy of the Premises during any renewal period shall be subject to all other terms and conditions of this Lease, expressly including without limitation, the obligation to pay Tenant's proportionate share of the taxes, insurance premiums and common area maintenance costs; provided, however, Landlord shall have no obligation to provide any upfitting allowance for the Renewal Term and Tenant agrees to continue leasing the Premises in its "as-is" condition.

2. Determination of Market Rate. For purposes of this Exhibit "E", the term "Market Rate" shall mean the annual amount per rentable square foot that comparable landlords of comparable buildings have accepted in then-current transactions between non-affiliated parties from new, non-expansion, non-renewal (unless the lease involved a procedure invoked by landlord and tenant for a 100% determination of "fair market rental") and non-equity tenants of comparable credit-worthiness, for comparable space, for a comparable use, for a comparable period of time ("Comparable Transactions"). In any determination of Comparable Transactions appropriate consideration shall be given to the annual rental rates per rentable square foot, the standard of measurement by which the


rentable square footage is measured, the ratio of rentable square feet to usable square feet, the type of escalation clause implemented, the extent of tenant's liability under the lease, abatement provisions reflecting free rent and/or no rent during the period of construction or subsequent to the commencement date as to the space in question, parking considerations, length of the lease term, size and location of premises being leased, building standard work letter and/or tenant improvement allowances, if any, or any other tenant concessions and other generally applicable conditions of tenancy for such Comparable Transactions. The intent is that Tenant will obtain the same rent and other economic benefits that Landlord would otherwise give in Comparable Transactions and that Landlord will make, and receive the same economic payments and concessions that Landlord would otherwise make, and receive in Comparable Transactions.

Upon expiration of the Tenant Review Period, Landlord and Tenant shall each place in a separate sealed envelope their final proposal as to Market Rate and such determination shall be submitted to arbitration in accordance with subsections (a) through (e) below.

(a) Landlord and Tenant (together with or through their designated representatives) shall meet with each other within five (5) business days of the Outside Agreement Date and exchange the sealed envelopes and then open such envelopes in each other's presence. If Landlord and Tenant do not mutually agree upon the Market Rate with one (1) business day of the exchange and opening of envelopes, then, within ten (10) business days of exchange and opening of envelopes Landlord and Tenant shall agree upon and jointly appoint a single arbitrator who shall by profession be a real estate appraiser, lawyer or broker who shall have been active over the five (5) year period ending on the date of such appointment in the leasing of comparable commercial properties in the vicinity of the Building (the "Arbitrator"). Neither Landlord nor Tenant shall consult with such Arbitrator as to his or her opinion as to Market Rate prior to the appointment. The determination of the Arbitrator shall be limited solely to the issue of whether Landlord's or Tenant's submitted Market Rate for the Premises is the closer to the actual Market Rate for the Premises as determined by the Arbitrator, taking into account the requirements of this Section 2. Such Arbitrator may hold such hearings and require such briefs as the Arbitrator, in his or her sole discretion, determines as necessary. In addition, Landlord or Tenant (together with or through their designated representatives) may submit to the Arbitrator with a copy to the other party within five (5) business days after the appointment of the Arbitrator any market data and additional information that such party deems relevant to the determination of Market Rate
("MR Data") and the other party may submit a reply in writing within five (5) business days after receipt of such MR Data.

(b) The Arbitrator shall, within thirty (30) days of his or her appointment, reach a decision as to whether the parties shall use Landlord's or Tenant's submitted Market Rate, and shall notify Landlord and Tenant of such determination.

(c) The decision of the Arbitrator shall be binding upon Landlord and Tenant.


(d) If Landlord and Tenant fail to agree upon and appoint an Arbitrator, then the appointment of the Arbitrator shall be made by the Presiding Judge of the Superior Court, or, if he or she refuses to act, by any judge having jurisdiction over the parties.

(e) The cost of arbitration shall be paid by Landlord and Tenants equally.

Immediately after the base rent for the applicable Extension Period is determined pursuant to this Exhibit, Landlord and Tenant shall execute an

amendment to the Lease stating the new base rent in effect.


EXHIBIT 10.11

SUBLEASE AGREEMENT

This Sublease Agreement ("Sublease") dated this 22 day of September 1997, by and between ICAgen, Inc., as sublessor ("Sublessor") and Inspire Pharmaceuticals, Inc., as sublessee ("Sublessee").

WITNESETH:

WHEREAS, pursuant to a Lease Agreement dated December 17, 1992, and amended by First Amendment of Lease dated August 26, 1996 between Sublessor as Tenant, and Imperial Center Partnership and Petula Associates, Ltd., as tenants in common operating as a joint venture, as Landlord, (the "Lease"), attached hereto as Exhibit A and made a part hereof, Sublessor has leased from Landlord certain building space located at 4222 Emperor Boulevard, Suite 500, Durham, North Carolina containing approximately 2,372 square feet, such premises being shown on the floor plan attached hereto as Exhibit B (the "Premises"); and

WHEREAS, Sublessee desires to sublease from Sublessor the Premises on the terms and conditions set forth herein; and

WHEREAS, Landlord has consented to the sublease of the Premises and all of the terms and conditions of this Sublease as indicated by Landlord's Certificate to be delivered within ten (10) days of the execution of this Sublease.

NOW THEREFORE, for and in consideration of the payments referenced herein, and other mutual good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Sublease Term: Sublessor hereby subleases the Premises to Sublessee for a period of approximately three (3) years commencing Sept 22, 1997 and terminating on the Sublessor's initial lease termination date of August 31, 2000. Sublessee may extend this Sublease for one (1) additional term of three (3) years (the "Renewal Term") pursuant to the provisions of this
Section 1. Sublessee shall give Sublessor written notice ("Sublessee's Notice") of its desire to extend to Sublease at least one hundred and eighty (180) days prior to the expiration of the original term, provided Sublessee is not in default beyond any applicable cure period set forth in this Sublease on the date of such notice. Within 30 days from the receipt of the Sublessee's Notice, Sublessor shall give Sublessee written ("Sublessor's Notice") of the amount of the increase, if any, as determined by the Landlord under paragraph 36A of the Lease, to the base Rent as defined herein for such Renewal Term. Any such increase shall represent Sublessor's increased costs under the Lease associated with the Premises. Within 10 days from the receipt of Sublessor's Notice, Sublessee shall give Sublessor written notice of its intention to extend the Sublease. In the event Sublessee does not respond within 10 days to Sublessor's Notice, the Sublease shall extend on the terms of the Sublessor's Notice. Such Renewal Term

1

shall be upon all of the terms and conditions hereof. The parties agree that this Sublease shall terminate upon the termination of the Lease, for whatever reason. As used herein, the "Term" of this Sublease shall include the original term and any Renewal Term.

2. Base Rent: During the Term of this Sublease, Sublessee shall pay to Sublessor as Base Rent the monthly sum of $1,680.17 for the rent of the Premises, which amount may be increased during any Renewal Term, provided, however, that Base Rent for any partial month shall be prorated. East installment of Base Rent shall be due and payable for each month during the Term of this Sublease on or before the twentieth day of the previous month, at the address shown for Sublessor in Article 12 hereof, or at such other address as Sublessor may direct in writing.

3. Additional Rent: In addition to the Base Rent, Sublessee shall pay to Sublessor, at the same time as monthly installment payments to rent are made, a sum which represents Sublessor's proportionate share of insurance costs, taxes and operating expense charges owed by Sublessor under the terms of the Lease for the Premises. For the purposes of this Sublease, the Sublessor's proportionate share of such pass through expenses paid by the Sublessor under the Lease for the Premises is 5.77% (2,372 square feet of the Premises divided by 41,094 square feet of the Building) and the initial monthly estimated amount of such payment shall be $398.02. The actual amount of additional rent due from Sublessee shall be adjusted when the actual amount of Sublessor's proportionate share of insurance costs, taxes and operating expense charges are determined under the Lease for the Premises. Upon request of Sublessee, Sublessor shall provide Sublessee evidence supporting any and all amounts allocated to the Premises.

4. Compliance with Lease: With respect to the Premises, Sublessee shall comply with all of the provisions of the Lease, except those provisions which conflict with or are different from the terms of this Sublease in which event the terms of this Sublease shall control, and all rules and regulations of Landlord or Sublessor therein promulgated thereunder. Notwithstanding anything to the contrary in this Sublease, Sublessee shall not take any action or omit to take any action which would cause Sublessor to be in default under the Lease.

5. Utilities: During the Term, Sublessee shall establish its own account and shall pay for all Utilities for the Premises. For purpose of this Section 5, "Utilities" shall mean costs with respect to the Premises for water, electricity, gas, sewage and any other utilities used by the Sublessee at the Premises.

6. Indemnity and Insurance: Sublessee agrees to indemnify and hold harmless Sublessor, from any liability for damages to any person or property in, on or about the Premises from any cause, unless caused by the negligence or willful act of Sublessor or it agents. If such damages are caused by the negligence or willful act of Sublessor or its agents, Sublessor shall indemnify and hold harmless Sublessee from any resulting liability.

2

Sublessee shall procure and keep in effect during the Term public liability and property damage insurance coverage of at least $1,000,000 per occurrence, $2,000,000 aggregate limit with excess $2,000,000 and workers' compensation insurance of at least $100,000 per employee and $500,000 per occurrence with the Sublessor named as an additional insured thereunder. Such policies shall contain language that the policies may not be canceled or changed except after thirty (30) days notice to Sublessor. Sublessee shall deliver copies of original policies or satisfactory certificates thereof.

7. Condition of Premises: Sublessee acknowledges it has examined the Premises and accepts the same "as is". All improvements or alterations proposed for the Premises must be approved by the Sublessor and the Landlord prior to construction and shall be Sublessee's sole expense.

8. Assignment or Subletting: Sublessee may not assign its interest in the Sublease or sublet the Premises.

9. Management Fee: Sublessee shall pay Sublessor an annual management fee of $1,000 on the commencement of the Term and on each anniversary date of the Term to reimburse the Sublessor for management of the Sublease.

10. Default: If at any time there shall occur any of the following events:
a. If Sublessee shall default a payment of rent or any other sum of money becoming due hereunder and such default shall continue for fifteen
(15) days after the due date; or

b. If Sublessee shall default on the performance of any other agreement, covenant or stipulation set forth in this Sublease and such default shall continue for thirty (30) days after a written notice thereof; or

c. If sublessee shall be adjudicated bankrupt or insolvent under any federal or state law; or

d. If Sublessee shall file or have against it a petition for the appointment of a receiver or trustee for all or essentially all of the assets of Sublessee and such appointment shall not be vacated or set aside within thirty (60) days

then and in any such event after the expiration of any applicable cure periods, Sublessor, without excluding other rights or remedies that it may have, shall have the right of reentry and may remove all persons and property from the Premises and dispose of such property pursuant to summary or other legal process and without being deemed guilty of trespass or becoming liable for any loss or damage which may be occasioned hereby. If Sublessor should elect to reenter as herein provided and take possession pursuant to legal proceedings, it may either terminate this Sublease, or it may from time to time without terminating this Sublease make such alterations or

3

repairs as may be necessary in order to relet the Premises and relet the Premises for any such term and at such rentals and upon such other terms and conditions as Sublessor may deem advisable. No such reentry or taking possession of the Premises by Sublessor shall be construed as an election to terminate this Sublease unless a written notice of intention be given to Sublessee by Sublessor at the time of such reentry, but, notwithstanding such reentry and reletting without termination, Sublessor may at any time thereafter elect to terminate this Sublease for such previous breach. In the event of any termination by Sublessor, whether before or after reentry, Sublessee shall remain obliged through the term of the Lease to continue to make monthly payments of Base Rent and any additional rent pursuant to Section 3 hereof (except that the amount of such continuing payments shall be reduced by the amount of any rental payments received by Sublessor from a new subtenant in connection with the reletting of the Premises), and Sublessor may recover from Sublessee damages incurred by reason of such breach. Notwithstanding the foregoing, such damages shall not include the cost of any upfitting of the Premises required to relet the Premises to the extent that such costs are paid by the new subtenant. Sublessor agrees to use its reasonable and good faith efforts to have such costs of upfitting paid by such new subtenant. As a remedy upon occurrence of any default only in the event that Sublessee fails to make timely and continued monthly payments, Sublessor may accelerate the Base Rent to accrue during the remainder of the Term and declare the same immediately due and payable. No remedy herein or otherwise conferred upon or reserved to Sublessor shall be considered exclusive of any other remedy but the same shall be distinct, separate and commutative and shall be in addition to any other remedy given by Sublessor by this Sublease and may be exercised from time to time as often as occasion may arise or may be deemed expedient. No delay or omission of Sublessor to exercise any right or power arising from any delay on the part of Sublessee shall impair any right or power or shall be construed to be a waiver of any such default or any acquisition thereto. Sublessee shall pay all costs, expenses and reasonable attorney"s fees that may be incurred or paid by Sublessor in enforcing the covenants, conditions and agreements of this Sublease with the remedies provided hereunder whether incurred as a result of litigation or otherwise.

11. Authorization and Warranty: The parties warrant that they are fully authorized and empowered to enter into this Agreement. Sublessor further warrants that the Lease is not currently in default and will not be in default at any time prior to the date of delivery of the Premises to Sublessee. In the event Sublessor becomes aware or receives notice from the Landlord of a default by Sublessor under the Lease, Sublessor shall promptly notify Sublessee of the same, and Sublessee shall have such rights as Sublessor has under the Lease to cure such default and sublessor indemnifies Sublessee from and against the losses, costs and damages arising out of Sublessee's curing such default.

12. Covenant of Quiet Enjoyment: Sublessor covenants that, provided Sublessee is not in default hereunder beyond any applicable cure periods, Sublessee shall have and enjoy the quiet and peaceful possession of the Premises without interference from Sublessor.

13. Miscellaneous:

4

(a) The headings of the various articles of this Agreement are intended only for convenience and are not intended to limit, define or construe the scope of any article of this Agreement, nor offset the provisions thereof.
(b) Neither the method of computation of rent nor any other provision of this Agreement shall be deemed to create any relationship between the parties hereto other than that of Sublessor and Sublessee.
(c) This Agreement shall be governed by and construed in accordance with the laws of North Carolina.
(d) This Agreement may be modified or amended only by written agreement of both parties hereto.
(e) If any provision of this Agreement shall be deemed to be in contravention of any law, then the court rendering such determination shall have the authority to strike the contravening provision from this Agreement, with the remaining provisions of this Agreement remaining in full force and effect.
(f) This Agreement, and the covenants, conditions, warranties and agreements made and entered into by the parties hereto are declared binding on their respective heirs, successors, representatives and assigns.
(g) Whenever under this Agreement a provision is made for notice of any kind, it shall be deemed sufficient service thereof if such notice is in writing addressed to the respective parties at the address shown below and delivered via hand delivery or overnight courier, with proof of delivery thereof.
(h) Sublessor and Sublessee respectively represent and warrant to each other that neither of them has consulted or negotiated with any broker or finder with regard to the Premises or otherwise in connection with this transaction. Each such party shall indemnify the other against and hold the other harmless from and against all liabilities, costs and expenses (including reasonable attorneys' fees) for any claims for fees or commissions from anyone arising out of their respective actions in connection with this Sublease.
(i) If requested by Sublessee, Sublessor shall execute a recordable Memorandum of Sublease, prepared by and at Sublessee's expense, specifying the exact term of this Sublease and such other terms as the parties shall mutually determine and agree.

14. Landlord's Consent: The execution and delivery, within ten (10) days of the execution of this Sublease, of a Landlord's Certificate in form reasonably acceptable to both Sublessor and Sublessee shall be a condition precedent to the effectiveness of this Sublease.

5

If to Sublessor:

ICAgen, Inc.
4222 Emperor Boulevard, Suite 460 Durham, NC 27703

If to Sublessee:

Inspire Pharmaceuticals, Inc.
4222 Emperor Boulevard, Suite 480
Durham, NC 27703

[Signature Page Attached and Incorporated herein by Reference]

6

IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals as of the day and year first written above.

SUBLESSOR:

ICAgen, Inc.

                                    By:   /s/ P. Kay Wagoner
                                       -------------------------------

                                    Its:   President and CEO
                                         -----------------------------


ATTEST:


    /s/
 --------------------------------
Secretary/Assistant Secretary

[CORPORATE SEAL]

SUBLESSEE:

Inspire Pharmaceuticals, Inc.

                                    By:   /s/ David Drutz
                                       -------------------------------

                                    Its:   President and CEO
                                         -----------------------------


ATTEST:


Secretary/Assistant Secretary

[CORPORATE SEAL]

7

INSPIRE
PHARMACEUTICALS, INC.

February 14, 2000

ICAgen, Inc.
4222 Emperor Boulevard, Suite 460
Durham, NC 27703

RE: Extension of Sublease Agreement

This letter serves as notice that, in accordance with Section 1. Sublease Term of the Sublease Agreement ("Sublease") between ICAgen, Inc. ("Sublessor") and Inspire Pharmaceuticals, Inc. ("Subleasee") dated September 22, 1997, Inspire Pharmaceuticals, Inc. wishes to extend the Sublease for one (1) additional term of three (3) years.

Please contact our Director of Finance, Roger Francis, should you have any questions or need additional information.

Best Regards

/s/ Christy L. Shaffer

Christy L. Shaffer
President and CEO


4222 Emperor Boulevard, Suite 470 Durham, North Carolina 27703

Telephone 919.941.9777 Fax 919.941.9797


Exhibit 10.12

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

EXCLUSIVE LICENSE AGREEMENT

THIS LICENSE AGREEMENT is made and entered into this 1st day of September, 1998 (the "Effective Date" between THE UNIVERSITY of NORTH CAROLINA AT CHAPEL HILL, having an address at 308 Bynum Hall, Chapel Hill, N.C. (hereinafter referred to as "University") and Inspire Pharmaceuticals, Inc., a corporation organized and existing under the laws of Delaware and having an address at 4222 Emperor Boulevard, Suite 470, Durham, NC 27703 (hereinafter referred to as "Licensee").

WITNESSETH

WHEREAS, University owns and controls the inventions described in and encompassed by University invention disclosure number OTD 95-24 and U.S. Patent No. 5,635,160, corresponding foreign applications entering national phase from PCT/US96/09190 and U.S. Continuation-In-Part application 08/853,056, all entitled "Dinucleotides Useful for the Treatment of Cystic Fibrosis and for Hydrating Mucus Secretions", disclosure number OTD 96-83 and U.S. patent application No. 08/624,914 entitled "Method of Treating Bronchitis with Uridine Triphosphates and Related Compounds", and disclosure number OTD 99-13 and U.S. patent application No. 08/744,267 entitled "Method of Treating Ciliary Dyskinesia with Uridine Triphosphates and Related Compounds" (collectively, "Inventions");

WHEREAS, the Inventions were developed by Drs. M. Jackson Stutts and Richard C. Boucher, Eduardo R Lazarowski and Cara A. Geary (collectively, the "Inventors"), of the University; and

WHEREAS, Licensee is desirous of producing, using and selling products which include the use of the Inventions and is willing to expend best efforts to do so if it can obtain a license to use the Inventions under the terms and conditions set forth herein; and

WHEREAS, University desires to facilitate a timely transfer of its information and technology concerning the Inventions for the ultimate benefit of the public and this transfer is best accomplished by the grant of this license; and

WHEREAS, in the opinion of the University, this transfer can best be accomplished consistent with its mission by affiliation with Licensee;

NOW, THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between the parties as follows:

1. Definitions

1.1. "University Technology" means any unpublished research and development information, unpatented inventions, clinical data, and technical data developed by the Inventors while employees of the University and in the possession of the University prior to the Effective Date of this Agreement, which relates to and is necessary for the practice of the Inventions and which University has the right to provide to Licensee.


1.2. "Licensed Products" means any method, procedure, product, or component part thereof whose manufacture, sale, or use includes any use of University Technology that is covered by any Valid Claim included in the Patent Rights.

1.3. "Patent Rights" means any unexpired U.S. patents and/or pending patent applications covering the Inventions owned or controlled by University prior to or during the term of this Agreement and which University has the right to provide to Licensee, as well as any continuations, continuations in part, divisions, substitutions, continued patent applications, patents issued thereon, or reissues thereof, and any foreign counterpart of any of the foregoing. University's current U.S. and foreign patents and patent applications which are included in Patent Rights and which exist on the Effective Date of this Agreement are set forth on Exhibit A. Upon either party's request, the parties shall cooperate in reviewing and updating Exhibit A from time to time (but not more frequently than once during any twelve (12) month period).

1.4. "Net Sales" means the gross amount invoiced for all Licensed Products sold by or for Licensee and/or its sublicensees in arm's length sales to unrelated third parties (excluding sales by Licensee to its sublicensees for their resale) less deductions for (i) trade, quantity and cash discounts or rebates actually allowed, (ii) credits or allowances actually given for rejections or returns or because of rebates or retroactive reductions, (iii) sales, use and value added taxes, and (iv) freight, shipping or other costs of transportation charged to a customer. Such amounts shall be determined from the books and records of Licensee or its sublicensees, maintained in accordance with the accounting principles used by such entity, consistently applied. Licensed Products will be considered sold when billed out, or when delivered or paid for before delivery, whichever first occurs.

1.5. "Licensed Territory" means the entire world.

1.6. "Valid Claim" means a claim of an issued patent which has not lapsed or become abandoned or been declared invalid or unenforceable by a court of competent jurisdiction or an administrative agency for which there is no right of appeal or for which the right of appeal is waived.

2. Grant of License and Term

2.1. University grants to Licensee to the extent of the Licensed Territory, an exclusive license (with the right to grant sublicenses pursuant to Article 5) under the Patent Rights to make, have made, use and sell, and have sold Licensed Products, upon the terms and conditions set forth herein.

2.2 University grants to Licensee to the extent of the Licensed Territory a nonexclusive license with the right to grant non-exclusive sublicenses pursuant to Article 5) to use University Technology, subject to all the terms and conditions of this Agreement.

2.3. Any license granted herein is exclusive for a term beginning on the Effective Date of this Agreement and, unless terminated sooner as herein provided, ending at the expiration of the last to expire Valid Claim of any patent included in the Patent Rights.

2

2.4. Licensee shall not disclose any unpublished University Technology furnished by University pursuant to Article 2.2 above, nor shall University disclose any of Licensee's confidential information received under Articles 4.3, 5.2 or 18.1 below, to third parties during the term of this Agreement or any time thereafter, provided, however, that disclosure may be made by the receiving party of any such information it has received from the disclosing party at any time: (1) with the prior written consent of the disclosing party, (2) after the same shall have become public through no fault of the disclosing party, (3) as demonstrated by documentary evidence, if the same was independently developed or discovered by the disclosing party prior to the time of its disclosure, (4) the same is or was disclosed to the disclosing party at any time, whether prior to or after the time of its disclosure under this Agreement, by a third party having no fiduciary relationship with the disclosing party and having no obligation of confidentiality with respect to such University Technology, (5) the same is required to be disclosed to comply with applicable laws or governmental regulations, including disclosures made in connection with securities regulation filings, provided the disclosing party receives prior written notice of such disclosure and that Licensee takes all reasonable and lawful actions to minimize the extent of such disclosure and, if possible, to avoid such disclosure, or (6) where the same is provided by the receiving party to third parties under substantially the same terms and conditions, including confidentiality provisions to those in this Agreement, for consulting, process and formulation development, manufacturing, external testing and marketing trials; provided, further, that disclosure may be made when it is necessary to disclose information in order to conduct clinical trials as in the case of investigators' brochures, clinical protocols, other regulatory filings or documents and due diligence processes.

2.5. Notwithstanding the foregoing, any and all licenses granted hereunder are subject to the rights of the United States Government which arise out of its sponsorship of the research which led to the Inventions.

3. License Fee, Milestone Payments and Royalties

3.1 Licensee shall pay to University the following fees:

(a) Upon execution of this Agreement, a license issue fee of
[CONFIDENTIAL TREATMENT REQUESTED] for Inventions described in U.S. Patent No. 5,635,160, entitled "Dinucleotides Useful for the Treatment of Cystic Fibrosis and for Hydrating Mucus Secretions", University file OTD 95-24, U.S. patent applications No. 08/624,914 entitled "Method of Treating Bronchitis with Uridine Triphosphates and Related Compounds", University File OTD 96-83, and U.S. patent application No. 08/744,267 entitled "Method of Treating Ciliary Dyskinesia with Uridine Triphosphates and Related Compounds", University File OTD 99-13;

(b) Licensee will continue to reimburse the University for properly documented costs (including attorney's fees) arising out of the patenting of the Inventions pursuant to Article 10 of this Agreement;

(c) Licensee shall pay to University the following milestone payments within sixty (60) days after each milestone is achieved:

3

Payment Milestone

[CONFIDENTIAL TREATMENT REQUESTED]

(d) In partial consideration of the license granted under Article 2.1 of this Agreement, Licensee shall issue to the University a total of Fifty Thousand (50,000) shares of Common Stock of the Company upon execution of this Agreement;

(e) All fees and the reimbursement of patenting costs shall be non-refundable and shall not be a credit against any other amounts due hereunder except as may be provided for elsewhere in this Agreement;

(f) Milestone payments are payable only one time hereunder and for all milestones accomplished in connection with this Agreement the aggregate cash payments shall not exceed [CONFIDENTIAL TREATMENT REQUESTED].

[CONFIDENTIAL TREATMENT REQUESTED]

3.2. Beginning on the Effective Date of this Agreement and continuing for the term of this Agreement, Licensee will pay University a running royalty of [CONFIDENTIAL TREATMENT REQUESTED] of all Net Sales of the Licensed Products(s). The obligation to pay royalties to University under this Article 3.2 is imposed only once with respect to the same unit of Licensed Product regardless of the number of Patent Rights pertaining thereto.

3.3. After the first commercial sale of a Licensed Product, Licensee agrees to make quarterly written reports to University within sixty
(60) days after the first days of each January, April, July, and October during the term of this Agreement and as of such dates, stating in each such report the amount, description, and aggregate Net Sales of Licensed Products sold or otherwise disposed of during the preceding three calendar months and upon which royalty is payable as provided in Article 3.2 hereof. The first such report shall include all such Licensed Products so sold or otherwise disposed of prior to the date of such report.

3.4. Concurrently with the making of each such report, Licensee shall pay to the University royalties at the rate specified in Article 3.2 of this Agreement on the Licensed Products included therein.

4

3.5

(a) [CONFIDENTIAL TREATMENT REQUESTED]

(b) [CONFIDENTIAL TREATMENT REQUESTED]

3.6. University may, by sixty (60) days advance written notice to Licensee, terminate this Agreement during any April subsequent to the second anniversary of the first commercial sale of a Licensed Product if Licensee, together with its sublicensees, have not practiced the Invention during each calendar year which precedes each such April to the extent of generating earned payments to University under Articles 3.2 of this Agreement in an amount no less than [CONFIDENTIAL TREATMENT REQUESTED] provided, however, any such termination shall not be effective if Licensee can demonstrate reasonable efforts by Licensee or Licensee's sublicensee(s) toward first commercial sale of Licensed Product during each such calendar year. Should there be a dispute as to whether Licensee has, during such sixty (60) day period, demonstrated such reasonable efforts, the parties shall conduct good faith discussions directed toward resolution of the dispute. If, following such sixty (60) day period, there is a dispute as to whether Licensee has demonstrated such reasonable efforts, then such sixty (60) day period automatically shall be extended for thirty (30) days, during which time the parties shall hold good faith discussions in order to resolve such dispute. If, following such thirty (30) day extension, such dispute has not been resolved, the original sixty (60) day period shall be extended for an additional thirty (30) days, during which time the Director of the Office of Technology Development at University and the Vice President and Chief Operating Officer of Licensee shall use good faith, reasonable efforts to resolve such dispute.

3.7. Should this Agreement become effective or terminate or expire during a calendar year, the minimum annual royalty or maintenance fee (whichever applicable) for such portion of a year shall be determined by multiplying the minimum annual royalty or maintenance fee (whichever applicable) set forth for the year in which this Agreement becomes effective, terminates or expires, by a fraction, the numerator of which shall be the number of days during such calendar year for which this Agreement shall be in effect and the denominator of which shall be 365.

3.8. In the event of default in payment of any payment owing to University under the terms of this Agreement, and if it becomes necessary for University to undertake legal action to collect said payment, Licensee shall pay all legal fees and costs incurred by University in connection therewith.

5

3.9. In the event that Licensee is legally required to pay royalties to one or more third parties for the license of technology other than the Patent Rights or University Technology in order to make, use or sell a Licensed Product, then Licensee shall be entitled to pay University a pro-rata share of total royalties due on Net Sales of that Licensed Product, where the reduction in royalties due to University under Article 3.2 above is
[CONFIDENTIAL TREATMENT REQUESTED]. By example, and for purpose of clarity, if a Licensed Product requires Licensee to pay royalties of [CONFIDENTIAL TREATMENT REQUESTED] of Net Sales to third parties under license of technologies other than the Patent Rights or University Technology, the royalties payable to University by Licensee would be calculated as follows:

royalties due University = [CONFIDENTIAL TREATMENT REQUESTED]

where: r\i\ = the royalty rate payable by Licnsee for the ith third party license N = total number of third party licenses


(N less than or equal to 4)

[CONFIDENTIAL TREATMENT REQUESTED]

3.10. Licensee shall make all royalty payments required under this Agreement in the United States in United States Dollars. The royalty payments due shall be translated at the rate of exchange at which United States Dollars are listed in The Wall Street Journal for the currency of the country in which the royalty is accrued on the last business day of the calendar quarter in which such sales were made, or with respect to the sublicensees of the Licensee, at the rate of exchange used by such sublicensees.

3.11. Licensee shall pay interest on any payment under this Agreement that is not made by the date due hereunder at a rate equal to the prime rate plus 2% obtained from The Wall Street Journal, Eastern U.S. edition, on the business day next preceding the date such payment was due, from such date until payment in full has been made.

4. Diligence Requirements

4.1. Licensee shall use its best efforts to proceed diligently with the manufacture and sale of Licensed Products and shall earnestly and diligently offer and continue to offer for sale such Licensed Products, both under reasonable conditions and including the ability of the Licensee to exercise its discretion with respect to commercial, financial and regulatory variables affecting the commercialization of Licensed Products during the term of this Agreement. Licensee shall be deemed to have used its best efforts in a given country(ies) with respect to the foregoing

6

obligations if Licensee grants a sublicense to a pharmaceutical company with a market cap in excess of [CONFIDENTIAL TREATMENT REQUESTED] (a "Major Pharmaceutical Company") who has agreed to use reasonable commercial efforts to develop, market and sell Licensed Products in such country(ies), provided that any such sublicense contains, for each sublicensed Licensed Product, performance milestones analogous to those in Article 4.2 below.

4.2. In particular, Licensee shall use diligent efforts to meet the performance milestones set forth below:

Date Milestone

[CONFIDENTIAL TREATMENT REQUESTED]

The parties acknowledge that the first milestone relating to the submission of the IND has been accomplished by Licensee.

4.3. On each anniversary date of the Effective Date of this Agreement, and until the time of first commercial sale of a Licensed Product, Licensee shall provide University with a report describing progress toward developmental milestones listed in Article 4.2 unless and until Licensee and/or its sublicensee are no longer developing additional Licensed Products.

4.4.

(a) Following the first commercial sale of the first Licensed Product pursuant to this Agreement, each party shall notify the other within thirty (30) days after such party receives a Bona Fide Inquiry from a prospective sublicensee that wishes to obtain a sublicense in a Field in which Licensee is not developing or selling any Licensed Products at the time such Bona Fide Inquiry is made. For purposes of this Article 4.4, "Bona Fide Inquiry" shall mean an inquiry to obtain such sublicense on terms that are scientifically, technologically and commercially reasonable, that is made by a third party having or having reasonable access to reasonably sufficient scientific knowledge, technology, drug development experience, personnel, facilities and capital to support the development, commercialization and launch of a product in such Field.

(b) Except as provided in Article 4.4(c), within ninety (90) days after sending or receiving such a notice, as the case may be, Licensee shall:

(i) Commence good faith negotiations with such prospective sublicensee;

(ii) Agree, via a notice sent to University, to grant back to University the right to license the University's rights in the Patent Rights in such Field in connection with and simultaneously with University's execution of a license agreement with such prospective sublicensee. In such case, University shall have no further obligation to Licensee with respect to any revenue resulting from such a license. In the event a prospective sublicensee wishes to acquire

7

an exclusive license under this Article 4.4(b)(ii) to any Patent Rights that are jointly owned by University and Licensee, Licensee agrees, via a notice sent to University, to grant back to University the right to license both Licensee's and University's rights in the Patient Rights in such Field in connection with and simultaneously with University's execution of a license agreement with such prospective sublicensee. In such case, University agrees to pay Licensee
[CONFIDENTIAL TREATMENT REQUESTED] of all revenue generated from such license agreement, after deducting [CONFIDENTIAL TREATMENT REQUESTED] from any such revenue to cover University's costs associated with establishing and maintaining each such license;

(iii) Provide University with a reasonable written development plan that Licensee has initiated, or intends to initiate, to develop a Licensed Product in such Field; or

(iv) [CONFIDENTIAL TREATMENT REQUESTED].

(c) Article 4.4(b) shall not apply with respect to any Bona Fide Inquiry if, at the time such Bona Fide Inquiry is made or Licensee receives notice thereof from University, as the case may be: (i) Licensee is undertaking any actions under Articles 4.4(b), (iii) or (iv) with respect to any other Bona Fide Inquiry in the same field; (ii) Licensee, either alone or in conjunction with its collaborative partner(s), is already developing or selling a Licensed Product having a formulation and/or delivery method substantially similar to the product sought to be developed by such prospective sublicensee; or (iii) Licensee, either alone or in conjunction with its collaborative partner(s), is already developing an additional Licensed Product in any Field (i.e., until development of such additional Licensed Product is abandoned or commercially launched.

5. Sublicenses

5.1. Subject to this Article, Licensee may grant sublicenses under its rights under Article 2.1 above and in connection therewith, Licensee may grant non-exclusive sublicenses under its rights under Article 2.2 above, provided that each sublicense (other than an sublicense to a Major Pharmaceutical Company as defined in Article 4.1) contains a provision that such sublicense and the rights thereby granted are personal to the sublicensee thereunder and such sublicense cannot be further sublicensed.

5.2. Any sublicense granted pursuant to this Article shall be in accordance with the terms and conditions of this Agreement. Licensee will provide to University a copy of each sublicense agreement within thirty (30) days of execution of the sublicense agreement. Each sublicense agreement provided by Licensee to University shall be treated as confidential by University in accordance with Article 2.4 herein. It is understood that Licensee will not provide to University the financial terms of any sublicense agreement.

6. Cancellation

6.1. It is expressly agreed that, notwithstanding the provisions of any other paragraph of this contract, if Licensee should fail to deliver to University any royalty at the time or

8

times that the same should be due to University or if either party should in any material respect violate or fail to keep or perform any covenant, condition, or undertaking of this Agreement on its part to be kept or performed hereunder, then and in such event the affected party shall have the right to cancel and terminate this Agreement, and the license herein provided for, by written notice to the other party if such party has failed to cure any such breach within 30 days of receipt of written notice from the affected party describing such breach. Notwithstanding the foregoing, a party shall be afforded an opportunity to cure a material breach of an obligation to pay money under this Agreement only twice within any period of eighteen (18) consecutive months. In the event a party materially breaches an obligation to pay money more than twice during any eighteen (18) month period, the non-breaching party shall have the right to terminate this Agreement upon thirty (30) days written notice. For purposes of this Article 6.1, a breach of an obligation to pay money under this Agreement shall be material if such payment, as calculated under the terms of this Agreement, is not made in full within sixty (60) days after such payment is due hereunder.

6.2. In the event that, for any reason whatsoever, Licensee does not achieve any part of the performance milestones set forth in Article 4.2, Licensee will provide to University a revised development plan with a proposed extension date within thirty (30) days following the missed milestone date. Within thirty (30) days of receipt of the second revised development plan, University shall notify Licensee whether University approves an extension of the milestone date as requested in the said plan; such approval shall not be unreasonably withheld. If Licensee fails to meet the same performance milestone a second time, Licensee will provide to University a revised development plan with a proposed extension date and an extension fee of [CONFIDENTIAL TREATMENT REQUESTED] within thirty (30) days following the missed milestone date. Payment made by Licensee under this Article 6.2 shall not be creditable against payments otherwise due under the Agreement. Within thirty (30) days of receipt of the second revised development plan, University shall notify Licensee whether University approves a second extension of the milestone date as requested in the said plan; such approval shall not be unreasonably withheld. If, after securing two such extensions, Licensee fails to meet the performance milestone by the extended due date, University shall be free to terminate this Agreement according to the terms of Article 6.1 of this Agreement upon thirty (30) days written notice to Licensee. For the avoidance of doubt, University shall be free to terminate this Agreement according to the terms of Article 6.1 of this Agreement and upon thirty (30) days written notice to Licensee, if Licensee fails to provide either an acceptable revised development plan or the extension fee (if applicable) within thirty (30) days following the missed milestone date.

6.3. If Licensee should be adjudged bankrupt or enter into a composition with or assignment to its creditors, then, subject to applicable bankruptcy laws, in such event University shall have the right to cancel and terminate this Agreement, and the license herein provided for, by written notice to Licensee.

6.4. Licensee shall have the right to terminate this Agreement, in whole or as to any Licensed Product in any country in the Territory, at any time, and from time to time, by giving notice in writing to University. Such termination shall be effective ninety (90) days from the date such notice is given, and all Licensee's rights associated therewith shall cease as of that date.

9

6.5. Any termination or cancellation under any provision of this Agreement shall not relieve Licensee of its obligation to pay any royalty or other fees (including attorney's fees pursuant to Article 3.1 hereof) due or owing at the time of such cancellation or termination.

6.6. Upon termination of this Agreement for any reason, all sublicenses granted by Licensee under this Agreement shall be assigned to University.

7. Disposition of Licensed Products on Hand Upon Cancellation or Termination

7.1. Upon cancellation of this Agreement or upon termination in whole or in part, Licensee shall provide University with a written inventory of all Licensed Products in process of manufacture, in use or in stock. Except with respect to termination by University for nonpayment of royalties pursuant to Article 6.1, Licensee shall have the privilege of disposing of the inventory of such Licensed Products within a period of one hundred and eighty (180) days of such termination and royalties shall be paid to University with respect to such Licensed Product as though this Agreement had not terminated. Licensee will also have the right to complete performance of all contracts executed by Licensee prior to cancellation or termination by University and requiring use of the University Technology, Patent Rights (except in the case of termination by University for nonpayment of royalties pursuant to Article 6.1) or Licensed Products within and beyond said 180-day period provided that the remaining term of any such contract does not exceed one year.

8. Use of University's Name

8.1. The use of the name of University, or any contraction thereof, in any manner in connection with the exercise of this Agreement is expressly prohibited except with prior written consent of University. The foregoing notwithstanding Licensee shall have the right to identify the University and to disclose the terms of this Agreement in any prospectus, offering memorandum, or other document or filing required by applicable securities laws or other applicable law or regulation, or where the use of the name of the University is in the ordinary course of business and used for identification purposes and not for marketing or promotional purposes.

9. University Use

9.1. It is expressly agreed that, notwithstanding any provisions herein, University is free to make noncommercial use of University Technology, Patent Rights and Licensed Products for its own research, public service, clinical, teaching and educational purposes without payment of royalties. Furthermore, University shall be free to publish University Technology, as it sees fit, except that Licensee shall have the right to review any proposed disclosure of University Technology at least sixty (60) days prior to such disclosure to determine whether filing of a patent application covering such disclosure is warranted. If it is determined by Licensee that a patent application should be filed, University shall delay its publication or disclosure for a period not to exceed thirty (30) days thereafter to allow time for the filing of such patent application covering patentable subject matter. All expenses associated with any such patent application are to be borne by Licensee in accordance with Article 10 herein. Such delay, however, shall not be imposed on the filing of any student thesis or dissertation. In addition, if it is determined in good faith by Licensee that confidential or proprietary information is being disclosed, the parties will

10

consult in good faith to arrive at an agreement on mutually acceptable modifications to the proposed disclosure to avoid such disclosure; provided that University shall not be required to make any modification that are not reasonably acceptable to University.

10. Patents and Infringements

10.1. Licensee shall continue to reimburse University for any properly documented costs incurred in relation to patenting the Inventions. As of the Effective Date of this Agreement, Licensee shall bear the cost of filing and prosecuting U.S. Patent applications and maintenance of issued patents included within the Patent Rights. Such filings and prosecution shall be by counsel of University's choosing but shall be reasonably acceptable to Licensee. University shall keep Licensee advised as to the prosecution of such applications by forwarding to Licensee copies of all official correspondence,
(including, but not limited to, Applications, Office Actions, responses, etc.) relating thereto. Licensee shall have the right to advise University as to such prosecution, and further, shall have the right to make reasonable requests as to the conduct of such prosecution.

10.2. As regards filing of foreign patent applications and maintenance of issued patents corresponding to the U.S. application described in Article 10.1 above, Licensee shall designate that country or those countries, if any, in which Licensee desires such corresponding patent application(s) to be filed. Licensee shall pay all costs and legal fees associated with the preparation and filing of such designated foreign patent applications and maintenance of issued patents, and such applications shall be in the University's name and by counsel of the University's choosing and reasonably acceptable to Licensee. University may elect to file corresponding patent applications in countries other than those designated by Licensee, but in that event University shall be responsible for all costs associated with such non-designated filings. In such event, Licensee shall forfeit its rights under this Agreement in the country or countries where University exercises its option to file such corresponding patent applications and remains responsible for the costs relating thereto. In those countries where Licensee pays the costs and legal fees associated with foreign patent applications, University shall keep Licensee advised as to the prosecution of such applications by forwarding to Licensee copies of all official correspondence, (including, but not limited to, Applications, Office Actions, responses, etc.) relating thereto. Licensee shall have the right to advise University as to such prosecution, and further, shall have the right to make reasonable requests as to the conduct of such prosecution.

10.3. If the production, sale or use of Licensed Products under this Agreement by Licensee results in any claim for patent infringement against Licensee or its sublicensees, Licensee shall promptly notify the University thereof in writing, setting forth the facts of such claim in reasonable detail. As between the parties to this Agreement, Licensee shall have the first and primary right and responsibility at its own expense to defend and control the defense of any such claim against Licensee, by counsel of its own choice. Licensee may settle any such claim in its sole discretion provided that such settlement does not impose any obligation on University or adversely affect University's rights in or to any Patent Rights or University Technology. It is understood that any other settlement of such actions must be approved by University. Such approval shall not be unreasonably withheld. University agrees to cooperate with Licensee in any reasonable manner deemed by Licensee to be necessary in defending any such action. Licensee shall reimburse University for any out of pocket expenses incurred in providing such assistance.

11

10.4. In the event that any Patent Rights licensed to Licensee are infringed by a third party, Licensee shall have the primary right, but not the obligation, to institute, prosecute and control any action or proceeding with respect to such infringement, by counsel of its choice, including any declaratory judgment action arising from such infringement. University agrees to cooperate with Licensee in any reasonable manner deemed by Licensee to be necessary in defending any such action, including joining such action if the University is an indispensable party, provided that Licensee shall reimburse University for its out-of-pocket expenses incurred in providing such assistance. -Any recovery or reimbursement received by Licensee from such action shall be allocated first to reimburse Licensee for all costs and expenses incurred in connection with any such action. Any remainder shall be allocated between the parties as follows: [CONFIDENTIAL TREATMENT REQUESTED]

10.5. If an action is brought against Licensee as described in Article 10.3, Licensee may offset the royalty paid to the University in each quarterly royalty period by [CONFIDENTIAL TREATMENT REQUESTED] of the amount of the expenses incurred in that royalty period as a result of such action, said expenses to include costs, attorney's fees, judgments, and all other expenses incident to the infringement action, to a maximum of [CONFIDENTIAL TREATMENT REQUESTED] of the amount otherwise payable University in that royalty period. Expenses in excess of the amounts due in any royalty period may be carried over into subsequent royalty periods and deducted or offset in accordance with the terms of this Agreement; provided, however if by settlement or court order Licensee receives from the other side amount to cover some or all of its legal defense costs, attorneys' fees or liability incurred in such infringement suit(s), Licensee shall promptly remit to University its pro-rata share of such amounts.

10.6. Notwithstanding the foregoing, and in University's sole discretion, University shall be entitled to participate through counsel of its own choosing in any legal action involving the Inventions. Nothing in the foregoing sections shall be construed in any way which would limit the authority of the Attorney General of North Carolina.

10.7 If University brings an action against its patent counsel for malpractice or other breach of fiduciary duty as a result of the loss or abandonment of any of Patent Rights caused by the negligent or intentional actions or failure to act of the University's patent counsel, University shall divide equally any recovery or reimbursement from such action with Licensee, after deduction of University's expenses associated with bringing and prosecuting the action.

12

11. Waiver

11.1. It is agreed that no waiver by either party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent and/or similar breach or default.

12. License Restrictions

12.1. It is agreed that the rights and privileges granted to Licensee are each and all expressly conditions upon the faithful performance on the part of the Licensee of every requirement herein contained, and that each of such conditions and requirements may be and the same are specific license restrictions.

13. Assignments

13.1. This Agreement is binding upon and shall inure to the benefit of the University, its successors and assigns. This Agreement shall not be assignable or otherwise transferable by either party without the prior written consent of the other, which consent shall not be unreasonably withheld, except that Licensee may assign or otherwise transfer its rights under this Agreement to the following parties without obtaining consent: (1) a successor to Licensee's business, or a successor to that portion of Licensee's business that pertains to the subject matter of the Patent Rights or any University Technology, and (2) any entities controlled by, controlling, or under common control with Licensee.

14. Indemnity

14.1. Licensee agrees to indemnify, hold harmless and defend University, its officers, employees, and agents, against any and all claims, suits, losses, damage, costs, fees, and expenses asserted by third parties, both government and private, resulting from or arising out of the exercise of this Agreement.

15. Insurance

15.1. Licensee is required to maintain in force at its sole cost and expense, with reputable insurance companies, general liability insurance and products liability insurance coverage in an amount reasonably sufficient to protect against liability under Article 14.1, above. The University shall have the right to ascertain from time to time that such coverage exists, such right to be exercised in a reasonable manner.

16. Independent Contractor Status

16.1. Neither party hereto is an agent of the other for any purpose.

17. Representations and Warranties

17.1. University represents that as of the Effective Date the entire right, title, and interest in the patent application comprising the Patent Rights have been assigned to it and

13

that University has the authority to issue licenses under said Patent Rights. University also represents that it has received no notification that the Patent Rights are invalid nor that the exercise by Licensee of the rights granted hereunder will infringe on any patent or other proprietary right of any third party. University makes no warranties that any patent will issue on University Technology or Inventions. University further makes no warranties, express or implied as to any matter whatsoever, including, without limitation, the condition of any invention(s) or product(s), that are the subject of this Agreement; or the merchantability or fitness for a particular purpose of any such invention or product. University shall not be liable for any direct, consequential, or other damages suffered by Licensee or any others resulting from the use of the Inventions of Licensed Products.

17.2. The transfer of Common Stock pursuant to Article 3.1(d) of this Agreement is made with the University in reliance upon the University's representation to the Licensee, which the University hereby confirms by execution of this Agreement, except to the extent the University distributes part of its Common Stock to the Inventors pursuant to University policy (which does not require the Inventors to pay any consideration to University for such Common Stock) that the Common Stock to be received by the University (the "Securities") will be acquired for investment for University's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the University has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the University further represents that it does not have any contract, undertaking, agreement, or arrangement with any person to sell, transfer, or grant participation to such person or to any third person, with respect to any of the Securities.

17.3. The University has received all the information that it considers necessary or appropriate for deciding whether to acquire the Securities. The University further represents that it has had sufficient opportunity to ask questions and receive answers from the Licensee regarding the terms and conditions of the offering of the Securities.

17.4. The University acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities.

17.5. The University understands that the Securities are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from Licensee in a transaction not involving a public offering and that under such laws and applicable regulations such Securities may be resold without registration under the Securities Act of 1933, as amended (the "Act"), only in certain limited circumstances. Further, University understands that Licensee is under no obligation to register the securities, in whole or in part, under the Act. In this regard, the University represents that it is familiar with SEC Rule 144, as currently in effect, and understands the resale limitations imposed thereby and by the Act. In addition, prior to the distribution of Securities to any Inventor, as contemplated by Article 17.1, University shall cause such Inventor to execute an acknowledgment substantially in the form attached as Exhibit B.

14

18. Accounting and Records

18.1. Licensee will keep complete, true and accurate books of account and records for the purpose of showing the derivation of all amounts payable to University under this Agreement. Such books and records will be kept at Licensee's principal place of business for at least three (3) years following the end of the calendar quarter to which they pertain, and will be open at all reasonable times for inspection by a representative of University for the purpose of verifying Licensee's royalty statements, or Licensee's compliance in other respects with this Agreement. The representative and the University will be obliged to treat as confidential all relevant matters except information relating to the accuracy of such reports and payments or except as required by law. Results of any such examination shall be made available to Licensee.

18.2. Such inspections shall be at the expense of University, unless a variation or error in excess of five percent (5%) is discovered in the course of any such inspection, whereupon all costs relating thereto shall be paid by Licensee.

18.3. Licensee will pay to University within thirty (30) days of receiving notice from University the full amount of any underpayment, together with interest pursuant to Article 3.12.

19. Compliance with Laws

19.1. In exercising its rights under this Agreement, Licensee shall fully comply with the requirements of any and all applicable laws, regulations, rules and orders of any governmental body having jurisdiction over the exercise of rights under this Agreement. Licensee further agrees to indemnify and hold University harmless from and against any costs, expenses, attorney's fees, citation, fine, penalty and liability of every kind and nature which might be imposed by reason of any asserted or established violation of any such laws, order, rules and/or regulations.

20. U.S. Manufacture

20.1. It is agreed that any Licensed Products sold in the United States shall be substantially manufactured in the United States unless Licensee has received a waiver from the United States Government, whose sponsorship of the research led to the Invention. University shall use reasonable efforts to support Licensee's effort to obtain such a waiver. Licensee shall promptly inform University in the event it receives such a waiver.

21. Notices

21.1. Any notice required or permitted to be given to the parties hereto shall be deemed to have been properly given when received by means of confirmed facsimile transmission, recognized national overnight courier, or first-class certified mail to the other party at the appropriate address or facsimile number as set forth below or to such other addresses or facsimile numbers as may be designated in writing by the parties from time to time during the term of this Agreement.

15

UNIVERSITY                                    LICENSEE

Dr. Francis J. Meyer                          Dr. Christy Shaffer
Director, Office of Technology Development    Vice President & COO
CB #4105, 308 Bynum Hall                      Inspire Pharmaceuticals, Inc.
University of North Carolina at Chapel Hill   4222 Emperor Boulevard, Suite 470,
Chapel Hill, NC 27599-4105                    Durham, NC 27703
Ph: (919) 966 3929                            Ph: (919) 941 9777
Fax: (919) 962 0646                           Fax: (919) 941 9797

22. Governing Laws

22.1. This Agreement shall be interpreted and construed in accordance with the laws of the State of North Carolina.

23. Complete Agreement

23.1. It is understood and agreed between University and Licensee that this Agreement constitutes the entire Agreement, both written and oral, between the parties, and that all prior agreements respecting Patent Rights and University Technology as defined herein, either written or oral, expressed or implied, shall be abrogated, canceled, and are null and void and of no effect.

24. Force Majeure

24.1. Neither party will be responsible for delays resulting from acts beyond the control of such party, provided that the non-performing party uses reasonable commercial efforts to avoid or remove such causes of nonperformance and continues performance hereunder with reasonable dispatch whenever such causes are removed.

25. Amendment

25.1. 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.

26. Descriptive Headings

26.1. 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.

27. Counterparts

27.1. This Agreement may be executed simultaneously in any number of counterparts, any of which need not contain the signature of more than one party but all such counterparts taken together shall constitute one and the same agreement.

16

28. Survival of Terms

28. The provisions of Articles 6.6, 7, 8, 9,10, 14, 15, 18, 19, 21, 22 and 28 shall survive the expiration or termination of this Agreement.

IN WITNESS WHEREOF, both University and Licensee have executed this Agreement, in duplicate originals, by their respective officers hereunto duly authorized, the day and year first above written. The Inventors have likewise indicated their acceptance of the terms hereof by signing below.

UNIVERSITY OF NORTH CAROLINA AT              INSPIRE PHARMACEUTICALS, INC.
CHAPEL HILL


/s/ Francis J. Meyer                         /s/ Christy Shaffer
----------------------------------           ----------------------------------
Francis J. Meyer                             Christy Shaffer
Director, Office of Technology Development   Vice President & Development & COO
Date: Sept. 1, 1998                          Date: August 12, 1998
      -------------                                ---------------

Read and accepted:

INVENTORS:

/s/ M. Jackson Stutts
-------------------------
M. Jackson Stutts

/s/  Richard C. Boucher
-------------------------
Richard C. Boucher

/s/ Eduardo R. Lazarowski
-------------------------
Eduardo R. Lazarowski

/s/ Cara A. Geary
-------------------------
Cara A. Geary

17

EXHIBIT A