<PAGE>   1
                                                                   EXHIBIT 10.42














                            ISV-900 PROJECT AGREEMENT


                                 BY AND BETWEEN


                              PHARMACIA & UPJOHN AB


                                       AND


                           INSITE VISION INCORPORATED








                                NOVEMBER 11, 1999


<PAGE>   2



                                TABLE OF CONTENTS

<TABLE>
     <S>                                                                                       <C>
     Article 1 -   Definitions.................................................................1

     Section 1.1   "Act".......................................................................1
     Section 1.2   "Affiliate".................................................................1
     Section 1.3   "Agreement".................................................................2
     Section 1.4   "Business Day"..............................................................2
     Section 1.5   "Control" or "Controlled"...................................................2
     Section 1.6   "Country Term"..............................................................2
     Section 1.7   "Development Committee......................................................2
     Section 1.8   "Effective Date"............................................................2
     Section 1.9   "Executive Committee".......................................................2
     Section 1.10  "FDA".......................................................................2
     Section 1.11  "Field".....................................................................2
     Section 1.12  "First Commercial Sale".....................................................2
     Section 1.13  "Force Majeure".............................................................2
     Section 1.14  "Improvement"...............................................................2
     Section 1.15  "InSite Know-How"...........................................................3
     Section 1.16  "ISV-900 Agreements"........................................................3
     Section 1.17  "ISV-900 Genes".............................................................3
     Section 1.18  "ISV-900 Know-How"..........................................................3
     Section 1.19  "ISV-900 Patents"...........................................................3
     Section 1.20  "ISV-900 Technology"........................................................3
     Section 1.21  "Know-How"..................................................................3
     Section 1.22  "Know-How Royalty"..........................................................3
     Section 1.23  "Milestone Payments"........................................................3
     Section 1.24  "NDA".......................................................................3
     Section 1.25  "Net Sales".................................................................3
     Section 1.26  "Patent Royalty"............................................................4
     Section 1.27  "Payment Period"............................................................4
     Section 1.28  "Product"...................................................................4
     Section 1.29  "Royalty"...................................................................4
     Section 1.30  "Sublicensee"...............................................................4
     Section 1.31  "Term"......................................................................4
     Section 1.32  "Territory".................................................................4
     Section 1.33  "Third Party"...............................................................4
     Section 1.34  "Trademark".................................................................4

     Article 2. -  Grants, Rights, Restrictions and Obligations................................5

     Section 2.1   Grant of Sublicense and Other Rights........................................5
     Section 2.2   Acceptance of Grant.........................................................5
     Section 2.3   Right to Sublicense; No Encumbrances........................................5
     Section 2.4   Noncompete..................................................................6
     Section 2.5   Obligations.................................................................6

     Article 3. -  Payments, Reports and Records...............................................7

     Section 3.1   Sublicense Fee..............................................................7
     Section 3.2   R&D Payments................................................................7
     Section 3.3   Milestone Payments..........................................................7
     Section 3.4   Royalty.....................................................................8
     Section 3.5   Method and Manner of  Royalty Payments......................................9
     Section 3.6   Third Party Royalties.......................................................9
</TABLE>



                                       i
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<TABLE>
     <S>                                                                                       <C>
     Section 3.7   Audit.......................................................................10
     Section 3.8   Payment Adjustments.........................................................10

     Article 4. -  Regulatory and Marketing Obligations........................................10

     Section 4.1   Development Committee.......................................................10
     Section 4.2   Executive Committee.........................................................11
     Section 4.3   ISV-900 Files...............................................................11
     Section 4.4   Government Contact..........................................................12
     Section 4.5   Marketing Efforts...........................................................12
     Section 4.6   Labeling and Packaging......................................................12
     Section 4.7   Advertising and Promotional Materials.......................................12

     Article 5. -  Stock Purchase Agreement; Credit Agreement..................................12

     Section 5.1   Stock Purchase..............................................................12
     Section 5.2   Credit Agreement............................................................12

     Article 6. -  Rights in Technology, Improvements, Patents and Trademarks..................13

     Section 6.1   Patent Prosecution..........................................................13
     Section 6.2   Improvements................................................................13
     Section 6.3   Development Information and Know-How........................................13
     Section 6.4   Trademarks..................................................................13

     Article 7. -  Infringement................................................................13

     Section 7.1   Infringement of Third Parties' Rights.......................................13
     Section 7.2   Infringement Claims Against Third Parties...................................14

     Article 8. -  Representation and Warranties...............................................15

     Section 8.1   InSite Representations......................................................15
     Section 8.2   P&U Representations and Warranties.:........................................17

     Article 9. -  Indemnification.............................................................18

     Section 9.1   Indemnification by InSite...................................................18
     Section 9.2   Indemnification by P&U......................................................18
     Section 9.3   Indemnification Procedures..................................................18

     Article 10. - Confidentiality ............................................................19

     Section 10.1  Confidential Information....................................................19
     Section 10.2  Disclosure..................................................................19
     Section 10.3  Survival....................................................................19
     Section 10.4  Obligation to Obtain Agreements.............................................19
     Section 10.5  Return of Information.......................................................20
     Section 10.6  Public Disclosure...........................................................20
     Section 10.7  Publication.................................................................20

     Article 11. - Term and Termination .......................................................20

     Section 11.1  Term........................................................................20
     Section 11.2  Early Termination...........................................................20
     Section 11.3  P&U Termination.............................................................21
</TABLE>



                                       ii
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<TABLE>
     <S>                                                                                       <C>
     Section 11.4  InSite Termination..........................................................21
     Section 11.5  Rights and Obligations upon Termination.....................................21

     Article 12. - Dispute Resolution..........................................................23

     Section 12.1  Non-Arbitrable Issues.......................................................23
     Section 12.2  Disputes....................................................................23
     Section 12.3  Attempt to Resolve..........................................................23
     Section 12.4  Binding Arbitration.........................................................23
     Section 12.5  Written Notice..............................................................23
     Section 12.6  Selection of Arbitrators....................................................23
     Section 12.7  Hearings....................................................................24
     Section 12.8  Confidential................................................................24
     Section 12.9  Costs.......................................................................24
     Section 12.10 Decision....................................................................24
     Section 12.11 Remedy......................................................................25
     Section 12.12 Final Decision within One Year..............................................25
     Section 12.13 Provisional Remedies........................................................25
     Section 12.14 Non-Jury....................................................................25
     Section 12.15 Damages.....................................................................25

     Article 13. - Miscellaneous...............................................................25

     Section 13.1  Record-keeping..............................................................25
     Section 13.2  Notice......................................................................25
     Section 13.3  Entire Agreement; Amendment.................................................26
     Section 13.4  Force Majeure...............................................................27
     Section 13.5  Assignment..................................................................27
     Section 13.6  Headings, Interpretation....................................................27
     Section 13.7  Independent Parties.........................................................27
     Section 13.8  Governing Law...............................................................27
     Section 13.9  No Waiver...................................................................27
     Section 13.10 Severability................................................................27
     Section 13.11 Limitation of Liability.....................................................28
     Section 13.12 Interpretation..............................................................28
     Section 13.13 Counterparts................................................................28
     Section 13.14 Third Party Beneficiaries...................................................28
     Section 13.15 Additional Transactions.....................................................28
     Section 13.16 Further Assurances..........................................................29
</TABLE>



                                      iii
<PAGE>   5

                            ISV-900 PROJECT AGREEMENT


        This ISV-900 PROJECT AGREEMENT is made as of November 11, 1999, by and
between PHARMACIA & UPJOHN AB, a Swedish corporation ("P&U ") and INSITE VISION
INCORPORATED, a Delaware corporation ("InSite"). InSite and P&U may be referred
to herein individually as a "Party" or collectively as the "Parties." Terms not
otherwise defined herein shall have the meanings set forth in Article I.


                                    RECITALS

        WHEREAS, InSite and P&U are pharmaceutical companies engaged in the
research, development, manufacture and commercialization of pharmaceutical
products;

        WHEREAS, InSite owns or Controls or will own or Control certain patents,
patent applications, trademarks, registrations, market applications and know-how
related to the Product, and it has or will have the right to grant certain
rights and sublicenses thereunder as set forth herein;

        WHEREAS, P&U desires to obtain licenses and sublicenses from InSite to
develop, manufacture, market, distribute, detail and sell the Product in the
Territory, and InSite desires to grant such rights and sublicenses to P&U, on
the terms and conditions contained in this Agreement; and

        NOW THEREFORE, in consideration of the covenants and promises in this
Agreement, INSITE and P&U agree as follows:


                                   ARTICLE 1.
                                   DEFINITIONS

        For purposes of this Agreement, the following initially capitalized
terms in this Agreement, whether used in the singular or plural, shall have the
following meanings:

        SECTION 1.1 "ACT" means the Federal Food, Drug and Cosmetic Act, as the
same may be amended or re-enacted from time to time.

        SECTION 1.2 "AFFILIATE" means, with respect to any party (a) any of its
respective direct or indirect ultimate parent companies as may exist from time
to time, and (b) any company, firm or other entity (i) more than fifty percent
(50%) of whose issued and voting capital, share or equity participation is now
or hereafter owned or (ii) now or hereafter controlled, in the case of either of
the foregoing clauses (i) or (ii), directly or indirectly by such party or by
its parent company. For the purpose of this definition, "control" means the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of an individual,



<PAGE>   6

corporation or other legal entity, whether through the ownership of voting
securities, by contract, or otherwise.

        SECTION 1.3 "AGREEMENT" means this ISV-900 Project Agreement and any
Schedules appended hereto, as may be amended from time to time.

        SECTION 1.4 "BUSINESS DAY" means a day, other than Saturday or Sunday,
on which banks are open for business in New York, New York.

        SECTION 1.5 "CONTROL" OR "CONTROLLED," when used in connection with
intellectual property rights, means that the Party owns or has right or license
to such intellectual property rights and has legal authority, right and ability
to grant to the other Party access, a license, or a sublicense to such
intellectual property rights or to otherwise disclose proprietary or trade
secret information to such other Party, as provided for in this Agreement,
without violating any agreement with or the rights of a Third Party.

        SECTION 1.6 "COUNTRY TERM" shall have the meaning set forth in Section
11.1.

        SECTION 1.7 "DEVELOPMENT COMMITTEE" means those representatives of P&U
and InSite appointed to oversee the development of ISV-205 pursuant to the
License Agreement, dated January 28, 1999, between the Parties (the "ISV-205
Agreement") as expanded pursuant to Section 4.1.

        SECTION 1.8 "EFFECTIVE DATE" means the date first written above.

        SECTION 1.9 "EXECUTIVE COMMITTEE" means the Chief Executive Officer of
InSite and P&U or their designees, with the responsibilities as described in
Section 4.2.

        SECTION 1.10 "FDA" means the United States Food and Drug Administration
or any successor entity thereto.

        SECTION 1.11 "FIELD" means the use in the diagnosis, prognosis and
treatment of human diseases and/or disorders based on the research, development
and/or use of the ISV 900 Genes.

        SECTION 1.12 "FIRST COMMERCIAL SALE" means the first sale for end use or
consumption of the Product in each country within the Territory.

        SECTION 1.13 "FORCE MAJEURE" means any act of God, acts of government,
war, fire, explosion, flood, earthquake, embargo, labor dispute or any other
similar event beyond the control of a Party.

        SECTION 1.14 "IMPROVEMENT" means any enhancement of the Product for use
in the Field, including without limitation, its use, dosage, form, indication,
presentation and/or formulation, whether or not patentable, developed by or for,
invented or acquired by, or coming under the Control of InSite prior to the
expiration or termination of this Agreement.



                                       2
<PAGE>   7

        SECTION 1.15 "INSITE KNOW-HOW" means any Know-How of InSite or its
Affiliates relating specifically to the ISV-900 Genes that is developed or owned
by InSite as of the Effective Date or that comes into existence during the Term.
InSite Know-How does not include ISV-900 Know-How or ISV-900 Patents.

        SECTION 1.16 "ISV-900 AGREEMENTS" means those agreements set forth on
Schedule 1.16 as such agreements may be amended from time to time by the
Development Committee to include other agreements related in whole or in part to
the ISV-900 Genes.

        SECTION 1.17 "ISV-900 GENES" means the TIGR gene, Apolipoprotein E gene
and CYP1B1 gene and all polymorphisms, mutations and variations thereof.

        SECTION 1.18 "ISV-900 KNOW-HOW" means all Know-How developed pursuant to
the ISV-900 Agreements. ISV-900 Know-How does not include ISV-900 Patents or
InSite Know-How.

        SECTION 1.19 "ISV-900 PATENTS" means all patents and patent applications
listed in Schedule 1.20, and all patents and patent applications that are
covered by or arise under any of the ISV-900 Agreements, and all patents issued
on any such patent applications, and all foreign counterparts, additions,
divisions, continuations, continuations-in-part, substitutions, extensions,
patent term extensions and renewals thereof, and in the case of any of the
foregoing, whether owned or Controlled by InSite prior to the Effective Date or
during the Term.

        SECTION 1.20 "ISV-900 TECHNOLOGY" means ISV-900 Patents, ISV-900
Know-How, InSite Know-How, Improvements and any associated regulatory approvals
necessary to practice the foregoing, including all NDAs.

        SECTION 1.21 "KNOW-HOW" means all information and materials, including,
without limitation, processes, techniques, formulas, vectors, data, methods,
equipment designs, know-how, show-how and trade secrets, discoveries, practices,
knowledge, ideas, skill, experience, inventions, technology, manufacturing
procedures, test procedures, purification and isolation techniques,
instructions, technical and scientific data, preclinical and clinical data, test
data and other intellectual property, patentable or otherwise, tangible or
intangible.

        SECTION 1.22 "KNOW-HOW ROYALTY" has the meaning set forth in Section
3.4(b).

        SECTION 1.23 "MILESTONE PAYMENTS" has the meaning set forth in Section
3.3.

        SECTION 1.24 "NDA" means the new drug application related to the
Product, and any amendments or supplements thereto, submitted to the FDA under
Sections 505, 507 or 512 of the Act and applicable regulations related thereto,
or its foreign equivalent.

        SECTION 1.25 "NET SALES" shall be determined using the accrual basis of
accounting in accordance with U.S. generally accepted accounting principles in
the U.S., applied in a manner consistent with P&U's customary practices, and
means the actual gross invoiced sales of Product by P&U or its Affiliates,
Sublicensees, distributors, or other agents to Third Parties, less the following
deductions to the extent included in the gross invoiced sales price for the
Product by



                                       3
<PAGE>   8

P&U, its Affiliates, or its Sublicensees with respect to the sale of such
Product and to the extent they are actually paid or allowed and are not
reimbursed by customers or any Third Party:

              (i)    any rebates, quantity, trade and cash discounts, and other
                     usual and customary discounts to customers granted in the
                     ordinary course of business;

              (ii)   amounts repaid or credited by reason of rejections or
                     returns of Product;

              (iii)  returns and retroactive price reductions affecting the
                     Product;

              (iv)   compulsory payments and rebates, actually paid or deducted;
                     and

              (v)    sales, excise, inventory, value added, and similar taxes
                     assessed on the sale of Product;

        SECTION 1.26 "PATENT ROYALTY" has the meaning set forth in Section
3.4(a).

        SECTION 1.27 "PAYMENT PERIOD" means a calendar quarter ending on March
31st, June 30th, September 30th, or December 31st.

        SECTION 1.28 "PRODUCT" means any finished product developed using the
ISV-900 Technology for use in the Field.

        SECTION 1.29 "ROYALTY" means the Patent Royalty and the Know-How
Royalty.

        SECTION 1.30 "SUBLICENSEE" means any person, corporation, unincorporated
body, or other entity that is not an Affiliate of P&U and to whom P&U grants a
sublicense of the rights granted to P&U pursuant to this Agreement.

        SECTION 1.31 "TERM" shall have the meaning set forth in Section 11.1.

        SECTION 1.32 "TERRITORY" means the world.

        SECTION 1.33 "THIRD PARTY" means any person, corporation, unincorporated
body, or other entity other than InSite and its Affiliates and P&U and its
Affiliates and Sublicensees.

        SECTION 1.34 "TRADEMARK" means those trademarks, trade names, brand
names, logos and designs whether registered or not, owned or Controlled by
InSite and used in a country in the Territory during a Country Term in
connection with the identification, promotion, marketing or sale of the Product
for use in the Field in such country.



                                       4
<PAGE>   9

                                   ARTICLE 2.
                  GRANTS, RIGHTS, RESTRICTIONS AND OBLIGATIONS

        SECTION 2.1   GRANT OF SUBLICENSE AND OTHER RIGHTS.

               (a) Subject to the terms and conditions of this Agreement, InSite
        grants to P&U an exclusive sublicense (with reversion rights and
        research rights reserved to InSite as provided herein) of all of its
        rights under the ISV-900 Agreements. InSite shall remain responsible for
        all payment obligations under the ISV-900 Agreements.

               (b) Subject to the terms and conditions of this Agreement, InSite
        assigns to P&U all of its rights, title and interest in the InSite
        Know-How.

               (c) Subject to the terms and conditions of this Agreement, InSite
        grants to P&U an exclusive right and license under the ISV-900
        Technology during the Term to develop, have developed, make, have made,
        import, have imported, distribute, have distributed, commercialize, have
        commercialized, market, have marketed, sale, and have sold the Product
        by P&U, its Affiliates or Sublicensees in the Territory.

               (d) Subject to the terms and conditions of this Agreement, InSite
        grants to P&U an exclusive right and license to use the Trademarks
        during the Term solely for the purpose of marketing, selling, having
        sold and distributing Product in the Territory.

               (e) Notwithstanding anything to the contrary in Sections 2.1(a),
        (b) and (c), InSite shall retain the right (without the right to
        sublicense or assign absent P&U's prior written consent) to use this
        ISV-900 Know-How for InSite's internal research and development purposes
        only.

        SECTION 2.2 ACCEPTANCE OF GRANT. P&U accepts the grant of the sublicense
and other rights set forth in Section 2.1 and confirms that it shall use best
appropriate, commercial efforts, consistent with accepted business practices and
legal requirements, to (i) seek any necessary regulatory approval of the Product
in those countries in the Territory in which the Development Committee, in its
discretion, has determined to seek regulatory approval and (ii) if approval is
obtained, to promote, market and sell the Product in each such country.

        SECTION 2.3 RIGHT TO SUBLICENSE; NO ENCUMBRANCES. P&U shall have the
right to grant sublicenses of its rights hereunder to any of its Affiliates,
Sublicensees or to any Third Party, with written notice to InSite. During the
Term hereof, InSite shall not directly or indirectly encumber any of the ISV-900
Technology or the ISV-900 Agreements or permit the imposition of any lien
(statutory or otherwise), encumbrance, assign, security interest, hypothecation,
deposit, charge or priority of any type whatsoever on this Agreement, any of the
ISV-900 Technology or any of the ISV-900 Agreements, provided, however, that
InSite shall have the right to assign any Royalty due to InSite hereunder;
provided further that any assignee of such Royalty shall expressly disclaim any
right in this Agreement, the ISV-900 Agreements, and the ISV-900 Technology.



                                       5
<PAGE>   10

        SECTION 2.4 NONCOMPETE. During each applicable Country Term, InSite and
its Affiliates shall not (i) directly or indirectly promote, distribute, market
or sell any product based on the ISV-900 Genes in any country in the Territory;
or (ii) with respect to any diagnostic, prescription or over-the-counter
pharmaceutical product not based on the ISV-900 Genes, promote, distribute,
market or sell, or enter into any co-promotions or license agreements in the
Territory with respect thereto, unless InSite has first complied with its
obligations to P&U under Section 13.15.

        SECTION 2.5   OBLIGATIONS.

               (a) Documents. Within five (5) Business Days of the Effective
        Date, InSite shall deliver to P&U, contemporaneously with the execution
        of this Agreement, resolutions of its Board of Directors approving the
        transactions set forth herein, all necessary regulatory approvals, and
        legal opinions of patent and corporate counsel, all as reasonably
        requested by P&U.

               (b)    ISV-900 Agreements.

                      (i) Notices to P&U. On and after the Effective Date,
               InSite agrees to include P&U as a recipient on all notices that
               InSite sends to any other party to an ISV-900 Agreement which
               relates to an ISV-900 Agreement. InSite also agrees to promptly
               provide P&U with copies of any and all notices that it receives
               under each of the ISV-900 Agreements of all events requiring
               notice to InSite under those agreements.

                      (ii) Rights of P&U. InSite agrees that (A) it will act at
               the Development Committee's direction with respect to the
               exercise of any right of InSite arising under any of the ISV-900
               Agreements, including without limitation, those rights set forth
               in Schedule 2.5, (B) upon any Event of Default by InSite
               hereunder, the Development Committee shall have the authority to
               act on InSite's behalf with respect to the ISV-900 Agreements,
               including without limitation, those matters specifically set
               forth on Schedule 2.5, (C) it will not permit or consent to an
               amendment, supplement or termination of any of the ISV-900
               Agreements without the Development Committee's prior, written
               consent, which consent shall not be unreasonably withheld, and
               (D) it will not enter into any agreement relating to the ISV-900
               Genes without the prior written consent of the Development
               Committee, which consent shall not be unreasonably withheld.

                      (iii) ISV-900 Agreement Obligations. InSite shall remain
               responsible for performing all obligations required of it under
               the ISV-900 Agreements during the Term other than as consented to
               in writing by the Development Committee.



                                       6
<PAGE>   11

                                   ARTICLE 3.
                          PAYMENTS, REPORTS AND RECORDS

        SECTION 3.1   SUBLICENSE FEE.

               (a) In consideration of the sublicenses and rights granted by
        InSite to P&U hereunder, P&U shall pay to InSite, within five (5)
        Business Days after the Effective Date, the sum of Five Million Dollars
        * ("Sublicense Fee") in United States currency by wire transfer to an
        account designated by InSite, less the sum of * that P&U shall be
        credited on account of such amount being paid by P&U to InSite upon
        execution of the letter of intent related hereto.

               (b) InSite has determined, in the exercise of its obligations to
        the parties to the ISV-900 Agreements, that the Sublicense Fee shall be
        allocated as follows: * for the rights related to TIGR gene and the
        Apolipoprotein E gene, * for the CYP1B1 gene, and * for all other
        sublicenses and rights granted herein.

        SECTION 3.2 R&D PAYMENTS. In further consideration of InSite's grant of
rights to P&U hereunder, including the licenses set forth in Article 2, and
subject to the terms and conditions of this Agreement, P&U will pay InSite as
follows:

               (a) * in United States currency by wire transfer to an account
        designated by InSite, on *.

               (b) * in United States currency by wire transfer to an account
        designated by InSite, on *.

               (c) * in United States currency by wire transfer to an account
        designated by InSite, on *.

               (d) Subject to Section 4.1(b), InSite shall devote and use the
        research and development payments received under this Section 3.2 solely
        for the purpose of covering internal and external costs associated with
        further developing the ISV-900 Technology.

               (e) Any additional research and development payments related to
        the commercialization of the Product shall be determined by the
        Development Committee. The failure of the Development Committee to agree
        on any additional research and development payments shall not affect or
        impair the rights granted to P&U hereunder.

        SECTION 3.3   MILESTONE PAYMENTS.

               (a) If the Development Committee or Executive Committee, pursuant
        to Section 4.1 or 4.2, as the case may be, determines within * of the
        Effective Date, that the milestone described in Schedule 3.3(a) (the
        "First Milestone") has been achieved, P&U shall pay InSite within five
        (5) Business Days of receiving written notice of such

* Indicates that material has been omitted and confidential treatment has
  been requested therefor. All such omitted material has been filed separately
  with the Commission pursuant to Rule 24b-2.


                                       7
<PAGE>   12
        determination, the sum of * in United States currency by wire transfer
        to an account designated by InSite.

               (b) If the Development Committee or Executive Committee, pursuant
        to Section 4.1 or 4.2, as the case may be, determines within * of the
        Effective Date, that the milestone described in Schedule 3.3(b) (the
        "Second Milestone") has been achieved, P&U shall pay InSite the sum of *
        in United States currency by wire transfer to an account designated by
        InSite.

        SECTION 3.4   ROYALTY.

               (a) In further consideration of the sublicensing of InSite's
        rights under the ISV-900 Agreements by InSite to P&U, P&U shall pay to
        InSite a royalty in the amount of * of Net Sales of the Product to Third
        Parties (the "Patent Royalty") in each country in the Territory wherein
        the manufacture, use, processing, importation, distribution, detailing
        or sale of the Product would infringe any filed ISV-900 Patent. In the
        event that (i) InSite (or any other party to an ISV-900 Agreement with
        obligations to pursue patent rights) abandons or fails to diligently
        pursue any filed ISV-900 Patent in a country of the Territory, (ii) any
        filed ISV-900 Patent is subsequently disallowed in a country of the
        Territory, or (iii) a product, which competes with the Product, is sold
        in a country in the Territory in which an ISV-900 Patent has been filed
        but not yet issued, and such competition results in the competing
        product obtaining a market share in excess of * of the total market for
        the Product as determined in any calendar quarter in such country, then
        P&U shall have no obligation to pay InSite a Patent Royalty in any such
        country for such quarter. Unless this Agreement is otherwise terminated
        earlier, P&U's Patent Royalty will automatically expire on a
        country-by-country basis on the expiration (or revocation) of the last
        to expire (or to be revoked) of the ISV-900 Patents in each country.
        Upon the expiration of the Country Term based upon expiration (or
        revocation) of the last to expire (or to be revoked) of the ISV-900
        Patents in such country, P&U shall have a fully paid, non-revocable,
        non-exclusive license under the ISV-900 Know-How in that country to
        promote, import, market and sell the Products for use in the Field.

               (b) In further consideration of the sublicensing of InSite's
        rights under the ISV-900 Agreements by InSite to P&U, including the
        rights to InSite Know-How, P&U shall pay to InSite a royalty in the
        amount of * of Net Sales of the Product to Third Parties (the "Know-How
        Royalty") in each country in the Territory wherein P&U is not subject to
        the Patent Royalty. Upon filing of an ISV-900 Patent in any country
        wherein P&U is paying a Know-How Royalty, P&U shall pay the Patent
        Royalty. Notwithstanding anything to the contrary in this Section
        3.4(b), in the event that a product that competes with the Product (i.e.
        a product with substantially the same diagnostic or prognostic
        capabilities or the same active ingredient and dosage strength as the
        Product) is marketed by a Third Party in any country in the Territory
        wherein P&U is subject to the Know-How Royalty, the Know-How Royalty
        shall be reduced by * of the amount that would otherwise be payable.
        Notwithstanding anything herein to the contrary, unless this Agreement
        is otherwise terminated earlier, P&U's obligation to

* Indicates that material has been omitted and confidential treatment has
  been requested therefor. All such omitted material has been filed separately
  with the Commission pursuant to Rule 24b-2.

                                       8
<PAGE>   13
        pay the Know-How Royalty in a country in which P&U is paying the
        Know-How Royalty, shall expire on the * of the First Commercial Sale of
        the Product in such country by P&U. Upon such date, P&U shall have a
        fully paid, non-revocable, non-exclusive license under the ISV-900
        Know-How in that country to promote, import, market and sell the
        Products for use in the Field.

               (c) InSite shall remain obligated for any and all payment
        obligations under the ISV-900 Agreements during the terms thereof.
        InSite shall pay all royalties arising under the ISV-900 Agreements out
        of the Patent Royalty and/or Know-How Royalty in a timely manner,
        consistent with the terms of each of the ISV-900 Agreements.

        SECTION 3.5   METHOD AND MANNER OF ROYALTY PAYMENTS.

               (a) P&U shall deliver to InSite within forty-five (45) days
        following the end of each Payment Period a written report (the "Payment
        Statement") describing (i) the Net Sales of the Product sold during such
        Payment Period in each country wherein P&U is obligated to pay InSite a
        Royalty hereunder; (ii) the calculation of Net Sales from the gross
        revenues for the Product in each such country, including without
        limitation, a breakdown of each deduction from gross sales; and (iii)
        the Royalty due on the sales of the Product for such Payment Period. P&U
        shall pay to InSite within forty-five (45) days following the end of
        each Payment Period any Royalty due and payable to InSite in accordance
        with this Article 3. Each such payment shall be accompanied by a Payment
        Statement.

               (b) All payments to be made by P&U to InSite pursuant to this
        Agreement shall be made in U.S. Dollars. Net Sales outside the U.S.
        shall be first determined in the currency of the country in which they
        are earned and shall be converted quarterly into an amount in U.S.
        Dollars based on P&U's internal exchange rates used in preparing P&U's
        consolidated earnings statements for such quarter. All such converted
        Net Sales shall be consolidated with U.S. Net Sales for the
        corresponding period and the applicable royalty payable determined
        therefrom.

               (c) Any Royalty due and payable to InSite pursuant to this
        Agreement shall be made by wire transfer, to such bank or account as
        InSite may from time to time designate in writing. All Royalties shall
        be made in United States Dollars and shall be considered to be made as
        of the day on which it is received in InSite's designated bank account.

               (d) Whenever any Royalty is due on a day which is not a Business
        Day, such payment shall be made on the immediately succeeding Business
        Day.

        SECTION 3.6 THIRD PARTY ROYALTIES. In the event that P&U, its Affiliates
and/or its Sublicensees is or are required to obtain a license from a Third
Party in order to practice the rights granted under the ISV-900 Patents or
ISV-900 Know-How in a country in the Territory (the "Third Party Licenses"),
then P&U shall be entitled to reduce the amount of the Royalty payable under
Section 3.4 by the amount of any consideration, including but not limited to
royalties, actually paid to a Third Party under such Third Party License by P&U,
its Affiliates or Sublicensees but in no event shall the Patent Royalty paid to
InSite be less than *

* Indicates that material has been omitted and confidential treatment has
  been requested therefor. All such omitted material has been filed separately
  with the Commission pursuant to Rule 24b-2.

                                       9
<PAGE>   14
* nor shall the Know-How Royalty paid to InSite be less than * in the absence of
  competition or * with competition. This provision shall not be applicable to
  arrangements or agreements which are determined to constitute ISV-900
  Agreements after the Effective Date.

        SECTION 3.7   AUDIT.

               (a) Each Party shall have the right to audit the records of the
        other Party, at its own expense; provided, however, that if any
        discrepancy exceeds five percent (5%), the cost and expenses of such
        audit shall be paid by the Party against whom the discrepancy is found,
        using a mutually acceptable nationally recognized firm of independent
        certified accountants. Such accountants will have access, on reasonable
        notice to such Party's and to its Affiliates' records, as the case may
        be, during reasonable business hours for the purpose of verifying any
        royalty payable under this Agreement or under the ISV-900 Agreements for
        the two preceding years, or verifying that InSite's use of the payments
        received under Section 3.2 were devoted and used by InSite solely to
        further develop the ISV-900 Technology. Notwithstanding the foregoing,
        this right may not be exercised more than twice in any calendar year.
        The accountant shall provide both InSite and P&U with a copy of any
        report prepared as a result of the audit.

               (b) Each Party agrees to hold confidential all information
        learned in the course of any examination of the other Party's books and
        records hereunder, except when it is necessary for such Party to reveal
        such information in order to enforce its rights under this Agreement or
        when otherwise compelled by law.

               (c) With respect to the Royalty calculations or InSite's use of
        payments received under Section 3.2, all reports and payments not
        disputed as to correctness within two (2) years after receipt thereof
        shall thereafter conclusively be deemed correct for all purposes. With
        respect to any amounts payable under any ISV-900 Agreement, all reports
        and payments not disputed as to correctness within the periods provided
        under such agreement shall thereafter conclusively be deemed correct for
        all purposes.

        SECTION 3.8 PAYMENT ADJUSTMENTS. Any adjustment (whether payment or
reimbursement, as the case may be) required as a result of an audit conducted
pursuant to Section 3.7 shall be made within ten (10) Business Days after the
date on which the accountant conducting the audit issues a written report to
InSite and P&U containing the results of the audit.

                                   ARTICLE 4.
                      REGULATORY AND MARKETING OBLIGATIONS

        SECTION 4.1   DEVELOPMENT COMMITTEE.

               (a) Within ten (10) Business Days after the Effective Date,
        InSite and P&U shall each select two additional representatives to serve
        on the Development Committee. P&U shall select one of its members on the
        Development Committee to serve as chairperson.

* Indicates that material has been omitted and confidential treatment has
  been requested therefor. All such omitted material has been filed separately
  with the Commission pursuant to Rule 24b-2.

                                       10
<PAGE>   15

               (b) The Development Committee shall, among other things, (i)
        plan, coordinate and manage the development of the Product, (ii) direct,
        in consultation with InSite, expenditure of the R&D payments made under
        Section 3.2, (iii) amend Schedule 1.16 as necessary to include
        additional agreements related to the ISV-900 Genes, (iv) determine
        whether either of the milestones described in Sections 3.3(a) and (b)
        have successfully been reached; and (v) determine whether and to what
        extent the Product should be the subject of (A) any further assessment
        or testing, or (B) any preclinical or clinical development.

               (c) The Development Committee shall operate consistent with the
        procedures set forth (i) herein and (ii) in Sections 3.3(c) and (e) of
        the ISV-205 Agreement, which are attached as Schedule 4.1.

               (d) InSite shall, at the direction of the Development Committee,
        take any and all actions in any and all matters arising under the
        ISV-900 Agreements or involving the ISV-900 Technology.

               (e) All decisions of the Development Committee shall be made by
        majority vote. In the event of a deadlock on any matter to be decided by
        the Development Committee, the decision shall be made by the chairperson
        of the Development Committee; provided, however, that in the event of a
        deadlock solely with respect to future expenditures of R&D payments
        under Section 3.2 or whether either of the milestones described in
        Sections 3.3(a) and (b) have been reached, the chairperson of the
        Development Committee shall not have the right to cast the deciding vote
        but shall instead refer the issue to the Executive Committee.

               (f) Each Party will bear its own costs and expenses associated
        with participation in the Development Committee, and each Party may
        change its Development Committee members upon notice to the other Party.

               (g) In the event that the Development Committee is disbanded, P&U
        shall have the right and shall undertake all responsibilities of the
        Development Committee as set forth herein or as otherwise related to the
        Product.

        SECTION 4.2 EXECUTIVE COMMITTEE. The Executive Committee shall decide
any matters referred to it by the Development Committee. In the event of a
deadlock on any matter to be decided by the Executive Committee, P&U's
representative on the Executive Committee shall have the right and power to cast
the deciding vote and render a decision on the matter.

        SECTION 4.3 ISV-900 FILES. Upon the Effective Date, InSite shall
transfer to P&U copies of all files related to the ISV-900 Agreements, the
ISV-900 Technology and the Product; provided, however, that InSite will retain a
copy of such files for its use consistent with the terms of this Agreement. P&U
shall be solely responsible for preparing applications and for seeking and, if
granted, maintaining Product registrations and regulatory approval in the
Territory, including performing any and all studies required by the governing
regulatory authorities from time to time to obtain and maintain such
registration and regulatory approval for the Product.



                                       11
<PAGE>   16

P&U shall be responsible for the direct costs and expenses (e.g. filing fees)
solely associated with the filing and maintaining of Product registrations and
approvals in the Territory.

        SECTION 4.4 GOVERNMENT CONTACT. P&U shall be responsible in consultation
with the Development Committee for communicating with all government agencies
and satisfying all regulatory requirements necessary to obtain and maintain
approval to market the Product in those countries in the Territory in which the
Development Committee determines, in its discretion, to seek or maintain Product
approval.

        SECTION 4.5 MARKETING EFFORTS. P&U will use best appropriate commercial
efforts, consistent with its other brands with similar economic potential, to
commercialize the Product. P&U shall determine, in its sole discretion, (i)
whether and to what extent the Product should be the subject of any regulatory
submission seeking regulatory approval in any country in the Territory, or (ii)
whether the Product should be the subject of any manufacturing, testing, and
commercialization. InSite shall be entitled to provide comments to P&U regarding
such commercialization efforts and P&U shall reasonably consider such comments.

        SECTION 4.6 LABELING AND PACKAGING. P&U shall be responsible for
developing, packaging and labeling the Product, which shall be consistent with
the FDA approved labeling for the Product and such requirements of comparable
regulatory agencies in other countries. P&U shall also be responsible for
seeking and obtaining all necessary regulatory approvals for all labeling and
packaging of the Product. P&U shall be the designated contact with the FDA's
Division of Drug Marketing, Advertising, and Communication ("DDMAC") regarding
Product labeling and/or promotional materials.

        SECTION 4.7 ADVERTISING AND PROMOTIONAL MATERIALS. P&U shall be
responsible for (i) developing all advertising and promotional materials
relating to the Product, and (ii) for assuring that all promotional material
that it produces relating to Product is in material compliance with applicable
law and regulations for each country in the Territory where such materials are
used.

                                   ARTICLE 5.
                   STOCK PURCHASE AGREEMENT; CREDIT AGREEMENT

        SECTION 5.1 STOCK PURCHASE. P&U shall purchase shares of InSite Common
Stock with a value of Two Million Dollars ($2,000,000) pursuant to the terms of
a Stock Purchase Agreement to be executed contemporaneously herewith.

        SECTION 5.2 CREDIT AGREEMENT. Subject to the terms and conditions set
forth in a Credit Agreement to be executed contemporaneously herewith, and
subject to the conditions set forth below, P&U shall make available to InSite up
to Four Million Dollars ($4,000,000) in debt financing on the second anniversary
of the Effective Date.



                                       12
<PAGE>   17

                                   ARTICLE 6.
                              RIGHTS IN TECHNOLOGY,
                      IMPROVEMENTS, PATENTS AND TRADEMARKS

        SECTION 6.1 PATENT PROSECUTION. InSite, at the direction of the
Development Committee, subject to the terms of the ISV-900 Agreements, shall use
its best, commercial effort to prosecute and maintain the ISV-900 Patents.
InSite shall bear all expenses associated with such patent prosecution and
maintenance. Prosecution of pending patent applications shall mean through final
patent office appeal and any opposition proceedings or the like, including but
not limited to, re-issue applications and re-examination proceedings in any
country in the Territory. The prosecution of any patent applications and/or
maintenance of any ISV-900 Patents may be abandoned as directed by the
Development Committee.

        SECTION 6.2   IMPROVEMENTS.

               (a) InSite will disclose promptly to P&U any and all proposed or
        actual Improvements to the Product conceived and/or made by or for it
        during the Term.

               (b) To the extent any improvement to a Product is conceived
        and/or made by or for P&U (other than by InSite) during the Term, such
        improvement shall be owned solely by P&U.

               (c) To the extent InSite or any other Party to an ISV-900
        Agreement develops any Improvement during the Term, InSite shall
        transfer or sublicense, as the case may be, its rights therein to P&U,
        without any further consideration, including its rights to any patent
        protection obtained for such Improvements and such Improvements to the
        Product whether by InSite, P&U or any other Party to an ISV-900
        Agreement shall be subject to this Agreement. Whenever requested to do
        so by the Development Committee, InSite will execute any and all
        applications, assignments or other instruments and give testimony which
        the Development Committee shall reasonably deem necessary to apply for
        and obtain a patent in any country in the Territory it deems necessary.

        SECTION 6.3 DEVELOPMENT INFORMATION AND KNOW-HOW. Subject to the terms
of this Agreement, P&U shall own and have the exclusive right, title and
interest in all Know-How resulting or arising from any development by P&U.

        SECTION 6.4 TRADEMARKS. P&U agrees to use its good faith efforts to
continue the registration and maintenance of the Trademarks as it may be amended
from time to time by agreement of the Parties.

                                   ARTICLE 7.
                                  INFRINGEMENT

        SECTION 7.1   INFRINGEMENT OF THIRD PARTIES' RIGHTS.

               (a) If the manufacture, use, importation, marketing or sale of
        the Product results in a claim against a Party for patent infringement,
        the Party first having notice of a



                                       13
<PAGE>   18

        claim by a Third Party of infringement shall promptly notify the other
        Party in writing. The notice shall set forth the facts of the claim (to
        the extent known by the Party having notice) in reasonable detail.

               (b) If the manufacture, use, importation, marketing or sale of
        the Product in a country in the Territory results in a claim against a
        Party for patent infringement or trade secret misappropriation related
        to the ISV-900 Agreements, ISV-900 Patents and/or ISV-900 Know-How (the
        "Claim"), the Parties agree to respond to and/or defend against the
        Claim as provided in this Section 7.1(b).

                      (i) The provisions of this Section 7.1(b) shall be subject
               to the preexisting rights of any party, other than InSite, to an
               ISV-900 Agreement.

                      (ii) * shall have the initial right to manage solely the
               defense of the Parties against the Claim. If * elects to exercise
               such right as to the Claim, * shall cooperate with * at * request
               and shall have the right to be represented by counsel selected by
               *. If * elects not to exercise such right as to the Claim, *
               shall have the right to manage solely the defense of the Parties
               against the Claim, and * shall cooperate with * at * request and
               shall have the right to be represented by counsel selected by *.

                      (iii) The Party that manages the defense of the Parties
               against any Claim shall have the right to negotiate a settlement
               provided, however, that (a) such Party shall consult with the
               other Party concerning the Terms of any settlement before
               entering into settlement agreement, and (b) neither Party shall
               settle any Claim without the prior written consent of the other
               Party, which consent shall not be unreasonably withheld.

                      (iv) Each Party shall be responsible for its own fees and
               costs of attorneys and consultants, together with the court
               costs, incurred in defending against the Claim.

                      (v) If * is required by a final court order or a
               settlement agreement entered into in good faith to pay damages
               and/or make royalty or other payments to a Third Party in
               connection with the disposition of the Claim, * shall make or
               reimburse to * all such damages and/or payments, net of royalties
               paid by Third Parties to *.

               (c) Neither this Article 7, nor any exercise of rights or
        fulfillment of obligations under this Article 7, shall affect by itself
        any indemnification or contribution rights of either Party against any
        Third Party.

        SECTION 7.2 INFRINGEMENT CLAIMS AGAINST THIRD PARTIES. InSite and P&U
each agree to take reasonable actions, consistent with efforts used by each
Party to protect its confidential material, to protect the ISV-900 Patents from
infringement and the ISV-900 Technology from unauthorized disclosure, possession
or use.

* Indicates that material has been omitted and confidential treatment has
  been requested therefor. All such omitted material has been filed separately
  with the Commission pursuant to Rule 24b-2.

                                       14
<PAGE>   19

               (a) If ISV-900 Patents are infringed or ISV-900 Technology is
        misappropriated, as the case may be, by a Third Party, the Party to this
        Agreement first having knowledge of such infringement or
        misappropriation, or knowledge of a reasonable probability of such
        infringement or misappropriation, shall promptly notify the other in
        writing. The notice shall set forth the facts of such infringement or
        misappropriation in reasonable detail.

               (b) InSite shall have the initial right to institute, prosecute,
        and control, with its own counsel and at its own expense, any action or
        proceeding with respect to infringement or misappropriation of such
        ISV-900 Patents or ISV-900 Know-How, and P&U shall have the right, at
        its own expense, to be represented in such action by its own counsel.

               (c) If InSite determines not to institute, prosecute or control
        any action or proceeding with respect to infringement or
        misappropriation of ISV-900 Patents or ISV-900 Know How, then P&U,
        standing in the stead of InSite under the ISV-900 Agreements, shall have
        the right, at its own expense to institute, prosecute and control such
        action or proceeding, provided that P&U shall keep InSite reasonably
        informed of the status of such proceeding.

               (d) Subject to any payments to be made to any Third Party under
        the ISV-900 Agreements, (i) the reasonable costs and expenses of InSite
        and/or P&U under this Section 7.2 shall first be reimbursed to such
        Party out of any damages or other monetary awards recovered in favor of
        InSite and/or P&U, and (ii) P&U shall be entitled to retain for its sole
        and exclusive benefit *.

               (e) The provisions of this Section 7.2 shall be subject to the
        rights of any party, other than InSite, to an ISV-900 Agreement.

                                   ARTICLE 8.
                         REPRESENTATIONS AND WARRANTIES

        SECTION 8.1 INSITE REPRESENTATIONS. InSite represents and warrants to
P&U that as of the Effective Date:

               (a) (i) InSite has all rights to the ISV-900 Patents and ISV-900
        Know-How throughout the Territory set forth in the ISV-900 Agreements to
        develop, have developed, manufacture, have manufactured, distribute,
        have distributed, promote, have promoted, market, have marketed, sale
        and have sold the Product; (ii) InSite has the right under the ISV-900
        Agreements to sublicense all of its rights thereunder to P&U; (iii) to
        InSite's knowledge after due and commercially reasonable inquiry, no
        person is challenging, infringing, misappropriating, diluting or
        otherwise violating in a material way any right, under the ISV-900
        Agreements, of InSite or any party to an ISV-900 Agreement; (iv) InSite
        has disclosed to P&U each and every license, research, option and other

* Indicates that material has been omitted and confidential treatment has
  been requested therefor. All such omitted material has been filed separately
  with the Commission pursuant to Rule 24b-2.

                                       15
<PAGE>   20

        agreement between it and any Third Party that is related in any way, in
        whole or in part, to the subject matter of this Agreement and/or the
        ISV-900 Patents.

               (b) The ISV-900 Agreements and ISV-900 Technology are free and
        clear of all encumbrances and, other than this Agreement (subject to any
        reversion rights contained in the ISV-900 Agreements), there are no
        existing agreements, options, commitments or rights with or to any
        person to acquire any of InSite's rights or interests therein;

               (c) No litigation, including any arbitration, investigation or
        other proceeding of or before any court, arbitrator or governmental or
        regulatory official, body or authority is pending or threatened against
        InSite or to InSite's knowledge any other party to an ISV Agreement
        which relates to the ISV-900 Technology or the transaction contemplated
        by this Agreement, nor does InSite know of any basis for any such
        litigation, arbitration, investigation or proceeding.

               (d) The execution, delivery and performance of this Agreement by
        InSite does not conflict with any agreement, instrument or
        understanding, oral or written, to which it is a party or by which it
        may be bound, and does not violate any law or regulation of any court,
        governmental body or administrative or other agency having authority
        over it; InSite is not currently a party to, and during the term of this
        Agreement will not enter into, any agreements, oral or written, that
        would breach its obligations under this Agreement.

               (e) InSite is validly existing and in good standing under the
        laws of the state of its incorporation and has the corporate power and
        authority to enter into this Agreement. This Agreement has been duly
        executed and delivered by InSite and constitutes the valid and binding
        obligation of InSite, enforceable against it in accordance with its
        terms except as enforceability may be limited by bankruptcy, fraudulent
        conveyance, insolvency, reorganization, moratorium and other laws
        relating to or affecting creditors' rights generally and by general
        equitable principles. The execution, delivery and performance of this
        Agreement have been duly authorized by all necessary action on the part
        of InSite, its officers and directors.

               (f) To InSite's knowledge after due and commercially reasonable
        inquiry, (i) no owner of any of the ISV-900 Patents has previously
        assigned, transferred, conveyed or otherwise encumbered its right, title
        and interest in any ISV-900 Patents, and (ii) there does not exist any
        patent, trademark, or other intellectual property right owned or
        Controlled by a Third Party that will prevent P&U from developing,
        manufacturing, importing, distributing, marketing, or selling, and
        distributing Product in any country in the Territory.

               (g) To InSite's knowledge after due and commercially reasonable
        inquiry, there are no claims, judgments or settlements against, pending
        or threatened with respect to the ISV-900 Technology.



                                       16
<PAGE>   21

               (h) Within ninety (90) days following the Effective Date, InSite
        shall obtain amendments to each of those ISV-900 Agreements listed as
        numbers 1, 2 and 5 on 1.16 to provide that the parties to such
        agreements have agreed to assign their respective rights to P&U, at
        P&U's election, upon any default thereunder by InSite.

               (i) InSite has instituted a Year 2000 compliance program.
        InSite's ability to comply with its obligations hereunder will not be
        materially and adversely affected by any issues arising from the date
        change from December 31, 1999 to January 1, 2000 and any related issues.
        To the extent InSite learns or becomes aware of any Year 2000 problem
        relating to Product, it shall notify P&U promptly and take immediate
        measures to remedy any such problem at no additional cost to P&U.

               (j) All of InSite's employees, officers, relevant subcontractors
        and relevant consultants have executed agreements requiring assignment
        to it of all inventions made during the course of and as a result of
        their association with it and obligating the individual to maintain as
        confidential the confidential information of it as well as the
        confidential information of a third party which it may receive.

               (k) To its knowledge, neither InSite, nor any of its employees,
        officers, subcontractors or consultants who has rendered services
        relating to the Product(s) (i) has ever been debarred or, to its actual
        knowledge, convicted of a crime for which an entity or person could be
        debarred under 21 USC Section 335a or (ii) is the subject of a debarment
        proceeding or under indictment for a crime for which a person or entity
        could be debarred under that Section.

        SECTION 8.2 P&U REPRESENTATIONS AND WARRANTIES. P&U represents and
warrants to InSite that:

               (a) The execution, delivery and performance of this Agreement and
        the agreements contemplated hereby by P&U does not conflict with any
        agreement, instrument or understanding, oral or written, to which it is
        a party or by which it may be bound, and does not violate any law or
        regulation of any court, governmental body or administrative or other
        agency having authority over it. P&U is not currently a party to, and
        during the term of this Agreement will not enter into, any agreements,
        oral or written, that are inconsistent with its obligations under this
        Agreement.

               (b) P&U is validly existing and in good standing under the laws
        of the state of its incorporation and has the corporate power and
        authority to enter into this Agreement. This Agreement has been duly
        executed and delivered by P&U and constitutes the valid and binding
        obligation of P&U, enforceable against it in accordance with its terms
        except as enforceability may be limited by bankruptcy, fraudulent
        conveyance, insolvency, reorganization, moratorium and other laws
        relating to or affecting creditors' rights generally and by general
        equitable principles. The execution, delivery and performance of this
        Agreement have been duly authorized by all necessary action on the part
        of P&U, its officers and directors.



                                       17
<PAGE>   22

               (c) P&U has instituted a Year 2000 compliance program. P&U's
        ability to comply with its obligations hereunder will not be materially
        and adversely affected by any issues arising from the date change from
        December 31, 1999 to January 1, 2000 and any related issues. To the
        extent P&U learns or becomes aware of any Year 2000 problem relating to
        Product, it shall notify InSite promptly and take immediate measures to
        remedy any such problem at no additional cost to InSite.

               (d) All of P&U's employees, officers, relevant subcontractors and
        relevant consultants have executed agreements requiring assignment to it
        of all inventions made during the course of and as a result of their
        association with it and obligating the individual to maintain as
        confidential the confidential information of it as well as the
        confidential information of a third party which it may receive.

               (e) To its knowledge, neither P&U, nor any of its employees,
        officers, subcontractors or consultants who will render services
        relating to the Product(s) (i) has ever been debarred or, to its actual
        knowledge, convicted of a crime for which an entity or person could be
        debarred under 21 USC Section 335a or (ii) is the subject of a debarment
        proceeding or under indictment for a crime for which a person or entity
        could be debarred under that Section.

                                   ARTICLE 9.
                                 INDEMNIFICATION

        SECTION 9.1 INDEMNIFICATION BY INSITE. Except as otherwise specifically
provided herein, InSite shall indemnify and hold harmless P&U and its officers,
directors, agents, employees, Affiliates, and Sublicensees against all claims,
actions, losses, damages, costs, expenses (including court costs and legal fees
on a full indemnity basis) or other liabilities net of any tax benefit
("Liabilities") whatsoever in respect of the breach by InSite of its
representations, warranties or default of any of its obligations contained in
this Agreement.

        SECTION 9.2 INDEMNIFICATION BY P&U. Except as otherwise specifically
provided herein, P&U shall indemnify and hold harmless InSite and its officers,
directors, agents, employees and Affiliates from all Liabilities whatsoever in
respect of the breach by P&U of its representations, warranties or default of
any of its obligations contained in this Agreement, or which are based on the
labeling of the Product or marketing and commercialization activities undertaken
to promote the Product, including safety, dosage, manufacturing, processing,
testing, packaging, sale (other than intellectual property claims), warehousing,
distributing, detailing, or promotion.

        SECTION 9.3   INDEMNIFICATION PROCEDURES.

               (a) A party entitled to indemnification hereunder for third party
        claims (the "Indemnitee") that intends to claim indemnification under
        this Article 9 shall: (i) notify the other Party (the "Indemnitor") of
        any Liability with respect to which the Indemnitee intends to claim
        indemnification as soon as practicable after the Indemnitee becomes
        aware of any such Liability; (ii) permit the Indemnitor to assume the
        defense thereof with



                                       18
<PAGE>   23

        counsel mutually satisfactory to the Indemnitee and Indemnitor; and
        (iii) cooperate with the Indemnitor, at the Indemnitor's expense, in the
        defense thereof.

               (b) With respect to any matter for which the Indemnitor may have
        an obligation to indemnify the Indemnitee under this Agreement, the
        Indemnitee shall have the right to participate and be represented (at
        the Indemnitor's expense) by legal counsel of the Indemnitee's choice in
        all proceedings and negotiations, if representation by counsel retained
        by Indemnitor would be inappropriate due to actual or potential
        differing interests between the Indemnitee and any other Party
        represented by such counsel in such proceedings.

               (c) The indemnity agreement in this Article 9 shall not apply to
        amounts paid in settlement of any Liability if such settlement is
        effected without the consent of the Indemnitor, which consent shall not
        be unreasonably withheld.

               (d) Failure of the Indemnitee to deliver notice to the Indemnitor
        within a reasonable time after becoming aware of a Liability shall
        relieve the Indemnitor of any liability to the Indemnitee pursuant to
        this Article 9 in the event, but only to the extent, such delay is
        prejudicial to the Indemnitor's ability to defend such action.

                                   ARTICLE 10.
                                 CONFIDENTIALITY

        SECTION 10.1 CONFIDENTIAL INFORMATION. All data, information, documents
and materials transmitted by one Party to the other Party in conjunction with
this Agreement, including, but not limited to, all clinical data, information
reports, financial or business records, summaries and information gathered,
generated or transferred between the Parties during the course of this Agreement
is considered confidential and proprietary information (hereinafter
"Confidential Information"). The Parties shall use the Confidential Information
only for the purpose of fulfilling its obligations under this Agreement.

        SECTION 10.2 DISCLOSURE. Neither Party shall disclose, without prior
written consent of the other Party, any Confidential Information to any Third
Party other than officers, directors, Affiliates and representatives of the
receiving Party, except as necessary to carry out its obligations under this
Agreement. When a Party does disclose information it will only be on a need to
know basis, including, without limitation, fulfillment of corporate reporting
required by law or regulation, hospital authorities, regulatory authorities and
others who have agreed in writing to observe the confidentiality of Confidential
Information in the same manner and to the same extent as provided in this
Article 10.

        SECTION 10.3 SURVIVAL. The obligations of the Parties with regard to
Confidential Information shall be in effect throughout the Territory and shall
continue in full force and effect for a period of five (5) years from expiration
or early termination of the Term.

        SECTION 10.4 OBLIGATION TO OBTAIN AGREEMENTS. The obligations of the
Parties regarding the confidentiality and nondisclosure of Confidential
Information shall extend to and



                                       19
<PAGE>   24

be binding upon all employees or agents of the Parties who have access to
Confidential Information pursuant to this Agreement as if such employees or
agents were parties hereto.

        SECTION 10.5 RETURN OF INFORMATION. Upon the early termination of this
Agreement due to a breach by a defaulting Party, the non-defaulting Party shall
be entitled to the prompt return of all of its Confidential Information in the
defaulting Party's possession, as well as all written information and materials
which incorporate Confidential Information.

        SECTION 10.6 PUBLIC DISCLOSURE. Neither InSite nor P&U shall issue a
press release or in any other way announce to the public the existence, terms,
conditions of, or performance under this Agreement without the prior written
consent of the other Party, which consent shall not be unreasonably withheld or
delayed.

        SECTION 10.7 PUBLICATION. The Development Committee will discuss and
review proposed publications describing any scientific results concerning the
Product. Subject to the rights of any party other than InSite, to the ISV-900
Agreements, the Development Committee may, in its sole discretion, decide not to
permit publication of any scientific results related to the ISV-900 Technology
or the Product.

                                   ARTICLE 11.
                              TERM AND TERMINATION

        SECTION 11.1 TERM. The term of this Agreement shall begin on the
Effective Date and end on the first date on which all of P&U's obligations to
pay any Royalty to InSite on account of sales of the Product hereunder has
expired, unless earlier terminated as provided herein (the "Term"). With respect
to each specific country in the Territory, P&U's obligation to pay a Royalty to
InSite hereunder shall begin on the Effective Date and end on the first date on
which all of P&U's obligations to pay any Royalty to InSite on account of sales
of the Product in each such country in the Territory has expired or been
terminated (the "Country Terms").

        SECTION 11.2 EARLY TERMINATION. Notwithstanding Section 11.1, either
Party may, in addition to exercising any other available legal or equitable
rights or remedies, terminate this Agreement, effective immediately upon the
expiration of any applicable cure period, upon the occurrence of an Event of
Default (as defined below) with respect to the other Party. The term "Event of
Default" with respect to a Party means the occurrence of any of the following
events:

               (a) Except as provided in Section 11.2(b) or (c) below, the
        failure of a Party to comply with or perform any material provision of
        this Agreement, and such failure remains uncured for sixty (60) days
        following written notice of such failure (if such default is cured
        within the cure period, such written notice shall be null and void),
        provided that, if the defaulting Party can establish to the reasonable
        satisfaction of the other Party that it is diligently and actively
        pursuing a cure at the expiration of the cure period, and that the
        default is reasonably capable of being cured, then the cure period shall
        be extended for so long as a cure is being diligently and actively
        pursued, not to exceed 120 days in the aggregate. Notwithstanding the
        foregoing, in the event any of the material ISV-900 Agreements are
        terminated other than as consented to in writing by the



                                       20
<PAGE>   25

        Development Committee or P&U, P&U shall have the right to immediately
        terminate this Agreement.

               (b) Any of the representations or warranties of a Party are
        discovered to have been untrue when made, resulting in a material,
        adverse impact on the Product, the ISV-900 Technology, or a material
        ISV-900 Agreement.

               (c) A Party (i) becomes unable to pay its debts as they mature,
        (ii) is the subject of a voluntary or involuntary petition in bankruptcy
        or of any other proceeding under bankruptcy, insolvency or similar laws
        which, if involuntary, is not dismissed within ninety (90) days of the
        date filed, (iii) makes an assignment for the benefit of creditors, (iv)
        is named in, or its property is subject to, a suit for the appointment
        of a receiver which is not dismissed within ninety (90) days of the date
        filed, or (v) is dissolved or liquidated.

        SECTION 11.3 P&U TERMINATION.

               (a) Notwithstanding Section 11.1, P&U shall have the right, in
        its sole discretion, to terminate this Agreement in the event the
        Development Committee, or the Executive Committee, as the case may be,
        determines that the First Milestone described in Schedule 3.3(a) has not
        been met by the * of the Effective Date. P&U shall make such election to
        terminate this Agreement within thirty (30) days after the * of the
        Effective Date by sending written notice to InSite electing such
        termination.

               (b) Notwithstanding Section 11.1, P&U shall have the right to
        terminate this Agreement, in its sole discretion, in the event that the
        Development Committee determines that (i) the Mt-1 mutation of the TIGR
        gene is not suitable for development as a Product and (ii) the Second
        Milestone has not been achieved by * of the Effective Date. P&U shall
        make such election to terminate this Agreement within sixty (60) days
        after * of the Effective Date by sending written notice to InSite
        electing such termination.

        SECTION 11.4 INSITE TERMINATION. If, at any time after * of the
Effective Date, the Product is not commercialized in a country in the Territory,
InSite shall have the right to terminate this Agreement with respect to that
country.

        SECTION 11.5  RIGHTS AND OBLIGATIONS UPON TERMINATION.

               (a) Other Penalties. Termination of this Agreement by either
        Party shall not prejudice the rights of such Party under this Agreement,
        at law or in equity or otherwise, to seek damages or injunctive relief
        for any breach of this Agreement by the other Party hereto and all
        payment obligations accruing under this Agreement prior to the effective
        date of termination.

               (b) Accrued Rights. Subject to Section 11.3, termination of this
        Agreement for whatever reason shall not affect the accrued rights of
        either InSite or P&U arising

* Indicates that material has been omitted and confidential treatment has
  been requested therefor. All such omitted material has been filed separately
  with the Commission pursuant to Rule 24b-2.

                                       21
<PAGE>   26

        under or out of this Agreement. The obligations under any other
        provision which expressly or by implication is intended to survive
        expiration or termination shall survive expiration or termination of
        this Agreement.

               (c) Step-in Rights. Upon the termination of this Agreement by
        P&U, pursuant to Section 11.2, InSite shall assign, transfer and convey
        to P&U all of InSite's rights under the ISV-900 Agreements. Upon
        acceptance of such assignment by P&U, P&U shall become responsible for
        all obligations, including fees and royalties, under the ISV-900
        Agreements accruing after the effective time of such assignment. InSite
        shall take all action reasonably requested by P&U to effectuate such
        assignment, including, among other things, the amendment of any ISV-900
        Agreement necessary to permit P&U such step-in rights.

               (d) Reversion Rights. Upon the termination of this Agreement by
        InSite pursuant to Sections 11.2 or 11.4 or by P&U pursuant to Section
        11.3, all rights granted to P&U under the ISV-900 Agreements and in the
        ISV 900 Technology shall revert to InSite on a country by country basis
        in the Territory where InSite or P&U, as the case may be, has terminated
        this Agreement, provided, however, that with respect to (i) any
        termination by InSite under Section 11.4, (ii) any termination by InSite
        under Section 11.2 that occurs after the * of the Effective Date, or
        (iii) any termination by P&U under Section 11.3, P&U shall be entitled
        to * royalty on all net sales of Product to Third Parties by InSite, its
        Affiliates, sublicensees, distributors or other agents in any such
        country or countries in the Territory in which (x) the Product is
        ultimately marketed or commercialized and (z) wherein the manufacture,
        use, processing, importation, distribution, detailing or sale of the
        Product would infringe any filed ISV-900 Patent. InSite's obligation to
        pay P&U any royalty under this Section 11.5(d) shall expire on a country
        by country basis on the expiration of the last to expire of such ISV-900
        Patents or earlier upon the revocation of such Patents or if such
        Patents are held unenforceable or invalid by decision of a court or
        government agency of competent jurisdiction. Notwithstanding anything in
        this Section 11.5(d) to the contrary, in the event that InSite (or any
        other party to an ISV-900 Agreement with patent filing obligations) has
        not filed any ISV-900 Patent in any country in the Territory in which
        this Agreement has been terminated as referenced in (i) through (iii)
        above and in which the Product is being marketed or commercialized, then
        InSite shall be obligated to pay P&U a royalty under this Section
        11.5(d) in the amount of * of net sales of the Product in any such
        country or countries in the Territory, provided that such obligations
        shall expire on the * of the First Commercial Sale of Product in such
        country or countries and, provided further, that upon the filing of an
        ISV-900 Patent in any such country wherein InSite is paying P&U a *
        royalty, then InSite shall pay P&U a * royalty as otherwise provided for
        in this Section 11.5(d). For purposes of this Section 11.5, "net sales"
        shall have the meaning set forth in Section 1.26 except that all
        references to P&U shall be changed to InSite. Nothing in this agreement
        shall entitle P&U to any royalty in the event InSite terminates this
        agreement pursuant to Section 11.2 prior to the * of the Effective Date
        or gives notice of such termination prior thereto, provided that
        termination pursuant to such notice later becomes effective and final
        prior to the * of the Effective Date.

* Indicates that material has been omitted and confidential treatment has
  been requested therefor. All such omitted material has been filed separately
  with the Commission pursuant to Rule 24b-2.

                                       22
<PAGE>   27

                                   ARTICLE 12.
                               DISPUTE RESOLUTION

        SECTION 12.1 NON-ARBITRABLE ISSUES. The Parties acknowledge that matters
to be decided by the Development Committee or the Executive Committee shall not
be submitted to arbitration pursuant to this Article 12 hereof but instead shall
be resolved in accordance with the provisions setting forth the scope of their
rights and obligations. The Parties also acknowledge that matters regarding the
validity or enforceability of ISV-900 Patents shall not be submitted to
arbitration pursuant to this Article 12 but instead shall be resolved in an
appropriate judicial forum.

        SECTION 12.2 DISPUTES. Subject to Section 12.1, the Parties recognize
that disputes as to certain matters may from time to time arise that relate to
either Party's rights and/or obligations under this Agreement. It is the
objective of the Parties to establish procedures to facilitate the resolution of
such disputes in an expedient manner by mutual cooperation and without resort to
litigation.

        SECTION 12.3 ATTEMPT TO RESOLVE. The Parties agree to take all
reasonable efforts to resolve in an amicable manner any dispute between them
concerning diligence obligations and/or questions of material breach and default
in connection with this Agreement. If any material dispute between the Parties
cannot be resolved by the senior management of the Parties, either Party may
seek to have the issue resolved as otherwise provided herein.

        SECTION 12.4 BINDING ARBITRATION. Except in the event of alleged breach,
default or lack of diligence by a bankrupt or insolvent Party, the Parties agree
that any material dispute that arises from or is related to this Agreement or
the interpretation, application, breach, termination or validity thereof, and
which cannot be amicably resolved by the Parties, shall be resolved by binding
arbitration (except as provided for in Section 12.1 and 12.13) pursuant in this
Article 12 conducted in accordance with the Commercial Arbitration Rules of the
American Arbitration Association (AAA) by three (3) arbitrators.

        SECTION 12.5 WRITTEN NOTICE. If a Party intends to begin an arbitration
to resolve a dispute, such Party shall provide written notice to the other
Party, informing the other Party of such intention and the issues to be
resolved. Within twenty (20) business days after its receipt of such notice, the
other Party may, by written notice to the Party initiating arbitration, add
additional issues to be resolved.

        SECTION 12.6 SELECTION OF ARBITRATORS. Within forty-five (45) days
following the receipt of the notice of arbitration, the Party referring the
matter to arbitration shall appoint an arbitrator and promptly notifying the
other Party of such appointment. The other Party shall, upon receiving such
notice, appoint a second arbitrator within twenty one (21) days, and the two (2)
arbitrators shall, within fifteen (15) days of the appointment of the second
arbitrator, agree on the appointment of a third arbitrator who will act with
them and be chairperson of the arbitration panel. In the event that either Party
shall fail to appoint an arbitrator within thirty (30) days after the
commencement of the arbitration proceeding, the arbitrator shall be appointed by
the AAA in accordance with the AAA's Rules. In the event of the failure of the
two (2) arbitrators to agree



                                       23
<PAGE>   28

within sixty (60) days after the commencement of the arbitration proceeding upon
to appoint the chairperson, the chairperson shall also be appointed by the AAA
in accordance with its Rules. The arbitrators shall not be employees, directors
or shareholders of either Party or of their Affiliates. Where applicable, the
arbitrators shall be independent experts in pharmaceutical marketing and
promotion in the U.S. Notwithstanding anything to the contrary herein, in the
event the aggregate damages sought by the claimant are stated to be less than $1
million, and the aggregate damages sought by the counterclaimant are stated to
be less than $1 million, and neither side seeks equitable relief, then a single
arbitrator shall be chosen, having the same qualifications and experience
specified above.

        SECTION 12.7 HEARINGS. The arbitrators shall conduct one or more
hearings to allow the Parties to present their positions regarding the dispute.

               (a) The arbitrators shall determine what discovery will be
        permitted, consistent with the goal of limiting the cost and time that
        the Parties must expend for discovery; provided the arbitrators shall
        permit such discovery as they deem necessary to permit an equitable
        resolution of the dispute. The arbitrators shall have sole discretion
        with regard to the admissibility of any evidence.

               (b) At least ten (10) business days prior to a hearing, each
        Party must submit to the arbitrators and serve on the other Party a
        proposed ruling on each issue to be resolved. Such writings shall be
        limited to not more than fifty (50) pages.

               (c) Each Party shall be entitled to no more than eight (8) days
        of hearing to present testimony or documentary evidence. Such time
        limitation shall include any direct, cross or rebuttal testimony, but
        such time limitation shall only be charged against the Party conducting
        such direct, cross or rebuttal testimony. It shall be the responsibility
        of the arbitrators to determine whether the Parties have had the eight
        (8) days to which each is entitled.

                (d) Each Party shall have the right to be represented by
        counsel.

               (e)    The arbitration shall take place in New York, NY.

        SECTION 12.8 CONFIDENTIAL. To the extent possible, the arbitration
hearings and award will be maintained in confidence.

        SECTION 12.9 COSTS. The costs of the arbitration, including
administrative and arbitrators' fees, shall be shared equally by the Parties.
Each Party shall bear its own costs and attorneys' and witness' fees.

        SECTION 12.10 DECISION. In any arbitration pursuant to this Agreement,
the award or decision shall be rendered by a majority of the members of the
panel provided for herein, with each member having one (1) vote. The arbitrators
shall render a written decision with their resolution of the dispute. The
decision of the arbitrators shall be final and non-appealable and binding on the
Parties.



                                       24
<PAGE>   29

        SECTION 12.11 REMEDY. A disputed performance or suspended performances
pending the resolution of the arbitration must be completed within thirty (30)
days following the final decision of the arbitrators or such other reasonable
period as the arbitrators determine in a written opinion.

        SECTION 12.12 FINAL DECISION WITHIN ONE YEAR. Any arbitration subject to
this Article 12 shall be completed within one (1) year from the filing of notice
of a request for such arbitration.

        SECTION 12.13 PROVISIONAL REMEDIES. Each party has the right before or
during the arbitration to seek and obtain from the appropriate court provisional
remedies such as attachment, preliminary injunction, replevin, etc. to avoid
irreparable harm, maintain the status quo, or preserve the subject matter of the
arbitration.

        SECTION 12.14 NON-JURY. Each party hereto waives its right to trial of
any issue by jury.

        SECTION 12.15 DAMAGES. Each party hereto waives any claim to punitive,
consequential, indirect, incidental or exemplary damages from the other.

                                   ARTICLE 13.
                                  MISCELLANEOUS

        SECTION 13.1 RECORD-KEEPING. InSite and P&U shall keep complete and
accurate records pertaining to the development, manufacture, use and
commercialization of Product in sufficient detail to permit the other Party to
confirm, in the case of InSite, its relationships with the other parties to the
ISV-900 Agreements and the payments of royalties thereto, and in the case of
P&U, its development and commercialization efforts, sale of Product as well as
the accuracy of calculations of Net Sales and Royalties and any and all payments
required to be made under this Agreement. All records and information required
under this Agreement shall be maintained for the longer of (a) three (3) years
following the year in which any such efforts or payments were made under this
Agreement; or (b) such longer period as may be required by law.

        SECTION 13.2 NOTICE. Except as otherwise specifically provided herein,
any notice or other documents to be given under this Agreement shall be in
writing and shall be deemed to have been duly given if sent by registered post,
nationally recognized overnight courier or facsimile transmission to a Party or
delivered in person to a Party at the address or facsimile number set out below
for such Party or such other address as the Party may from time to time
designate by written notice to the other:

               If to P&U:

               Pharmacia & Upjohn Company
               100 Route 206 North
               Peapack, New Jersey 07977
               Attn:  Vice President, Licensing
               Telefax:  908-901-1813



                                       25
<PAGE>   30

               With required copy to:

               Pharmacia & Upjohn Company
               100 Route 206 North
               Peapack, New Jersey 07977
               Attn:  Vice President, Corporate Law
               Telefax:  908-901-1862

               Pharmacia & Upjohn AB
               Lindhagensgatan 133
               112 87 Stockholm, Sweden
               Attn:  VP and Associate General Counsel, Europe & International
               Telefax:  011-46-8-695-4708

               If to InSite:

               InSite Vision Incorporated
               965 Atlantic Avenue
               Alameda, California 94501
               Attn:  Chief Executive Officer
               Telefax:  510-865-7830

               With required copy to:

               Brobeck Phleger & Harrison
               Two Embarcadero Place
               2200 Geng Road
               Palo Alto, California  94303
               Attn:  Timothy R. Curry

Any such notice or other document shall be deemed to have been received by the
addressee three (3) Business Days following the date of dispatch of the notice
or other document by post or, where the notice or other document is sent by
overnight courier, by hand or is given by facsimile, simultaneously with the
transmission or delivery. To prove the giving of a notice or other document it
shall be sufficient to show that it was dispatched.

        SECTION 13.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement, together with
the Schedules and Exhibits attached hereto, embodies and sets forth the entire
agreement and understanding of the Parties with respect to the subject matter
herein. There are no promises, terms, conditions or obligations, oral or
written, expressed or implied, other than those contained in this Agreement with
respect to the subject matter herein. The terms of this Agreement shall
supersede all previous oral or written agreements which may exist or have
existed between the Parties, including the letter of intent dated August 19,
1999, relating to the subject matter of this Agreement. Neither Party shall be
entitled to rely on any agreement, understanding or arrangement which is not
expressly set forth in this Agreement with respect to the subject matter herein.
This Agreement shall not be amended, modified, varied or supplemented except in
writing signed by duly authorized representatives of the Parties.



                                       26
<PAGE>   31

        SECTION 13.4 FORCE MAJEURE. Neither Party shall lose any rights
hereunder or be liable to the other Party for damages or losses on account of
failure of performance by the defaulting Party if the failure is caused by Force
Majeure or any other similar cause beyond the control of the defaulting Party;
provided, however, that the Party claiming Force Majeure has exerted all
reasonable efforts to avoid such Force Majeure and has given prompt notice to
the other Party of any such Force Majeure. The Party giving such notice shall be
excused from such of its obligations hereunder as it is disabled from performing
for so long as it is disabled; provided, however, that Party commences and
continues to take reasonable and diligent actions to cure and remedy such Force
Majeure. In the event of any such Force Majeure event, the Parties shall meet
promptly to determine an equitable solution to the effects of such event. Force
Majeure shall not include a Party's failure to perform any obligation to this
Agreement as a result of that Party's Year 2000 problem. The term of this
Agreement shall not be extended by any Force Majeure event.

        SECTION 13.5 ASSIGNMENT. Neither Party shall be entitled to assign its
rights and obligations hereunder without the prior written consent of the other;
provided, however, P&U shall be entitled, without the prior written consent of
InSite, to assign its rights and obligations hereunder to an Affiliate or in
connection with the sale of all or substantially all of its pharmaceutical
business. Any successor of InSite pursuant to a merger or otherwise shall be
bound by all of the obligations of InSite as contained herein.

        SECTION 13.6 HEADINGS, INTERPRETATION. The headings used in this
Agreement are for convenience only and are not a part of this Agreement nor
affect the interpretation of any of its provisions.

        SECTION 13.7 INDEPENDENT PARTIES. This Agreement shall not be deemed to
create any partnership, joint venture, or agency relationship between the
Parties. Each Party shall act hereunder as an independent contractor.

        SECTION 13.8 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of New York, excluding its conflict of
laws principles. Subject to the arbitration provisions hereof, the parties agree
to submit to the exclusive jurisdiction of New York courts to resolve any
controversy.

        SECTION 13.9 NO WAIVER. Neither the failure nor delay on the part of
either Party to require the strict performance of any term, covenant or
condition of this Agreement or to exercise any right or remedy available on a
breach thereof shall constitute a waiver of any such breach or of any such term
or condition. The consent to, or the waiver of, any breach, or the failure to
require on any single occasion the performance or timely performance of any
term, covenant, or condition of this Agreement shall not be construed as
authorizing any subsequent or additional breach and shall not prevent a
subsequent enforcement of such term, covenant, or condition.

        SECTION 13.10 SEVERABILITY. In the event that any provision of this
Agreement or the application thereof to any Party or circumstance shall be
finally determined by a court of proper jurisdiction to be invalid or
unenforceable to any extent, then (i) a suitable and equitable



                                       27
<PAGE>   32

provision shall be substituted therefore in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid and unenforceable
provision and (ii) the remainder of this Agreement and the application of such
provision to the Parties or circumstances other than those to which it is held
invalid or unenforceable shall not be affected thereby.

        SECTION 13.11 LIMITATION OF LIABILITY. Except with respect to the
Parties' respective indemnification obligations for Third Party claims pursuant
to Sections 9.1 and 9.2, the Parties expressly agree that, with respect to any
claim by either InSite or P&U against the other arising out of any breach of
this Agreement, the liability of the breaching Party to the non-breaching Party
for such breach shall be limited under this Agreement or otherwise at law or
equity to direct money damages only, and in no event shall a Party be liable to
the other for indirect, incidental, punitive, exemplary or consequential
damages, even if advised of the possibility of the same.

        SECTION 13.12 INTERPRETATION. The Parties hereto acknowledge and agree
that (i) each Party and its representatives has reviewed and negotiated the
terms and provisions of this Agreement and have contributed to its revision,
(ii) the rule of construction to the effect that any ambiguities are resolved
against the drafting Party shall not be employed in the interpretation of this
Agreement and (iii) the terms and provisions of this Agreement shall be
construed fairly as to each Party hereto and not in favor of or against either
Party regardless of which Party was generally responsible for the preparation of
this Agreement.

        SECTION 13.13 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute a single agreement.

        SECTION 13.14 THIRD PARTY BENEFICIARIES. Except as specifically provided
herein, this Agreement is not intended to confer upon any non-Party rights or
remedies hereunder.

        SECTION 13.15  ADDITIONAL TRANSACTIONS.

               (a) *. It is the current intention of the Parties that P&U and
        InSite will continue good faith discussions after the Effective Date to
        jointly develop * using InSite's Durasite technology.

               (b) *. * grants to * to purchase, license, and/or sublicense, as
        the case may be, *, any and all rights and assets associated with * and
        that are conceived of, put into practice, designed, developed, or
        manufactured by *. * shall promptly notify * in writing of *, and *. *
        shall have * from the date of its receipt of such notice to give written
        notice to * intent to enter into * with respect to *. * gives such
        notice, but * and * fail to * with respect to *,

* Indicates that material has been omitted and confidential treatment has
  been requested therefor. All such omitted material has been filed separately
  with the Commission pursuant to Rule 24b-2.

                                       28
<PAGE>   33
        * within * following * notice to *, * shall then be free to * with *;
        provided, however, that the terms of any * shall not be * than *.

        SECTION 13.16 FURTHER ASSURANCES. Each Party shall execute and deliver
such additional instruments and other documents and use all commercially
reasonable efforts to take or cause to be taken, all actions and to do, or cause
to be done, all things necessary under applicable law to consummate the
transactions contemplated hereby.

        IN WITNESS WHEREOF, the parties hereto have each caused this Agreement
to be duly executed as of the date first above written.

* Indicates that material has been omitted and confidential treatment has
  been requested therefor. All such omitted material has been filed separately
  with the Commission pursuant to Rule 24b-2.

                                       29
<PAGE>   34

INSITE VISION INCORPORATED



By: S. KUMAR CHANDRASEKARAN
   ------------------------
Name: S. Kumar Chandrasekaran
Title: CEO


PHARMACIA & UPJOHN AB



By: HAKAN ASTROM
   -------------
Name: Hakan Astrom
Title: Sr. VP Corp. Strategy & Investor Relations



By: MATS PETTERSSON
   ----------------
Name: Mats Pettersson
Title: SENIOR VICE PRESIDENT



                                       30
<PAGE>   35

                                  SCHEDULE 1.16

                               ISV-900 AGREEMENTS


1.      Exclusive License Agreement dated August 4, 1994 between University of
        California ("UCal") and InSite Vision Incorporated ("InSite"), as
        amended.

2.      Option Agreement dated April 20, 1999 between UCal and InSite.

3.      Research Agreement dated April 27, 1999, by and between UCal, on behalf
        of the University of California at San Francisco, and InSite.

4.      Research Agreement dated October 25, 1996 between the University of
        Connecticut ("UConn") and InSite.

5.      License Agreement dated July 1, 1997 between the University of
        Connecticut ("UConn") and InSite.

6.      Research Agreement dated May 5, 1998 between InSite and Centre de
        l'Association Claude Bernard.

7.      Research Agreement dated August 16, 1999 between InSite and Uppsala
        University University Hospital.

8.      Research Agreement dated July 1, 1999 between UCal and InSite.



                                       36
<PAGE>   36



                                  SCHEDULE 1.20

                             ISV-900 PATENT SUMMARY

<TABLE>
<CAPTION>

           INSITE LICENSED PATENTS**                               PATENT/APPLICATION        DATE
<S>                                                      <C>       <C>                     <C>
1.   J. Polansky Methods for the Diagnosis of                            5,606,043          2/25/96
     Glaucoma                                                            5,789,169          8/04/98
                                                                         5,849,879          12/15/98
                                                                         5,854,415          12/29/98
                                                                         5,861,497          1/19/99
                                                                                 *          10/20/95
                                                                                 *          12/24/98

2.   J.  Polansky,   Diagnosis  &  Prognosis  of                                 *          5/07/99
     Glaucoma                                             CIP of                 *          1/11/99
                                                          CIP of                 *          9/26/97
                                                          CIP of                 *          1/28/97

3.   M. Safarazi, Diagnosis and Treatment of                             5,830,661          11/03/98
     Glaucoma                                                            5,962,230          11/05/99
                                                                                 *          5/07/99
                                                  Divisionals of                 *          3/26/98
                                                          CIP of                 *          2/13/97

4.   H. Garchon, Diagnosis of Glaucoma                                           *          5/7/99
</TABLE>


**ISV-900 patents also include foreign filings based on the above U.S. patents
and applications.
-------------------------------------------------------------------------------

* Indicates that material has been omitted and confidential treatment has been
requested therefor. All such omitted material has been filed separately with
the Commission pursuant to Rule 24b-2.



                                       37
<PAGE>   37


                                  SCHEDULE 2.5

1.      Exclusive License Agreement dated August 4, 1994 between University of
        California ("UCal") and InSite Vision Incorporated ("InSite"), as
        amended.

               All rights of InSite under the agreement shall be exercised at
               the direction of the Development Committee, or in the absence
               thereof, by Pharmacia & Upjohn Company or its designees ("P&U")

2.      Option Agreement dated April 20, 1999 between UCal and InSite.

               All rights of InSite under the agreement shall be exercised at
               the direction of the Development Committee or, in the absence
               thereof, by P&U, including the right to negotiate a separate
               license agreement thereunder on such terms and conditions as they
               shall determine in their sole discretion. Any such license
               agreement or other arrangement shall be deemed to be an ISV 900
               Agreement and any amounts payable thereunder, including royalties
               shall be borne by InSite.

3.      Research Agreement dated April 27, 1999, by and between UCal, on behalf
        of the University of California at San Francisco, and InSite.

               All rights of InSite under the agreement shall be exercised at
               the direction of the Development Committee or, in the absence
               thereof, by P&U, including the right to negotiate a separate
               license agreement thereunder on such terms and conditions as they
               shall determine in their sole discretion. Any such license
               agreement or other arrangement shall be deemed to be an ISV 900
               Agreement and any amounts payable thereunder, including royalties
               shall be borne by InSite.

4.      Research Agreement dated October 25, 1996 between the University of
        Connecticut ("UConn") and InSite.

               All rights of InSite under the agreement shall be exercised at
               the direction of the Development Committee or, in the absence
               thereof by P&U, including the right to negotiate a separate
               license agreement thereunder on such terms and conditions as they
               shall determine in their sole discretion. Any such license
               agreement or other arrangement shall be deemed to be an ISV 900
               Agreement and any amounts payable thereunder, including royalties
               shall be borne by InSite.

5.      License Agreement dated July 1, 1997 between the University of
        Connecticut ("UConn") and InSite.

               All rights of InSite under the agreement shall be exercised at
               the direction of the Development Committee or, in the absence
               thereof by P&U, including the right to negotiate a separate
               license agreement thereunder on such terms and conditions as they
               shall determine in their sole discretion. Any such license
               agreement or other arrangement shall be deemed to be an ISV 900
               Agreement and any amounts payable thereunder, including royalties
               shall be borne by InSite.


                                       38
<PAGE>   38

6.      Research Agreement dated May 5, 1998 between InSite and Centre de
        l'Association Claude Bernard.

               All rights of InSite under the agreement shall be exercised at
               the direction of the Development Committee or, in the absence
               thereof by P&U, including the right to negotiate a separate
               license agreement thereunder on such terms and conditions as they
               shall determine in their sole discretion. Any such license
               agreement or other arrangement shall be deemed to be an ISV 900
               Agreement and any amounts payable thereunder, including royalties
               shall be borne by InSite.

7.      Research Agreement dated August 16, 1999 between InSite and Uppsala
        University University Hospital.

               All rights of InSite under the agreement shall be exercised at
               the direction of the Development Committee or, in the absence
               thereof by P&U, including the right to negotiate a separate
               license agreement thereunder on such terms and conditions as they
               shall determine in their sole discretion. Any such license
               agreement or other arrangement shall be deemed to be an ISV 900
               Agreement and any amounts payable thereunder, including royalties
               shall be borne by InSite.

8.      Research Agreement dated July 1, 1999 between UCal and InSite.

               All rights of InSite under the agreement shall be exercised at
               the direction of the Development Committee or, in the absence
               thereof by P&U, including the right to negotiate a separate
               license agreement thereunder on such terms and conditions as they
               shall determine in their sole discretion. Any such license
               agreement or other arrangement shall be deemed to be an ISV 900
               Agreement and any amounts payable thereunder, including royalties
               shall be borne by InSite.


                                       39
<PAGE>   39

                                 SCHEDULE 3.3(a)

                               THE FIRST MILESTONE


As of the Effective Date, InSite has documented, *, a correlation between * and
a polymorphism of the * of the * by showing a clinically significant * in
patients with the * polymorphism than in those patients *. A similar correlation
* for the *. Accordingly, the First Milestone shall be the documentation of (1)
a similar correlation between * and a polymorphism of the * of the * for a
similar sized * population of patients *, and (2) the * an investigation, for *
population of patients with *, designed to examine a correlation between * and a
polymorphism of * of the *.









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

* Indicates that material has been omitted and confidential treatment has been
requested therefor. All such omitted material has been filed separately with
the Commission pursuant to Rule 24b-2.



                                       40
<PAGE>   40



                                 SCHEDULE 3.3(b)

                              THE SECOND MILESTONE


The Second Milestone shall be the documentation of * or a combination of *,
other than as described in the First Milestone (Schedule 3.3(a)), showing either
(i) a * and * for * in the * population and/or * patients, or (ii) a * and * for
*.










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

* Indicates that material has been omitted and confidential treatment has been
requested therefor. All such omitted material has been filed separately with
the Commission pursuant to Rule 24b-2.



                                       41
<PAGE>   41


                                  SCHEDULE 4.1

                 SECTION 3.3(c) AND (e) OF THE ISV-205 AGREEMENT



3.3     DEVELOPMENT COMMITTEE; WORK PLAN.


                                   * * * * * *


               (c) The DC will operate by consensus, and all decisions shall be
        made by a majority vote of the members. In the event of a deadlock on
        any matter to be decided by the DC, the chairperson shall cast the
        deciding vote.


                                   * * * * * *


               (e) The DC shall operate consistent with the following
        procedures, which the DC can modify from time to time:

                   (i) The chairperson shall be responsible for the timing,
               agenda, and minutes of each DC meeting.

                   (ii) The location of the DC meeting will alternate between
               InSite's facility and one of P&U's facilities.

                   (iii) The DC will meet no fewer than four times annually.

                   (iv) Non-members of the DC are welcome to attend provided
               reasonable prior notice is given to and approved by the DC.

                   (v) Minutes of each DC meeting will be summarized within two
               weeks after the meeting and will not be official until the
               chairperson has agreed to them.



                                       42