Document:

<PAGE>

                                                                   Exhibit 10.20

                                                                  EXECUTION COPY
                                                                  --------------

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

                                  DEVELOPMENT,

                          LICENSE AND SUPPLY AGREEMENT

                                     BETWEEN

                          INSPIRE PHARMACEUTICALS, INC.

                                       AND

                                 GENENTECH, INC.

                                   DATED AS OF

                               DECEMBER 17, 1999
<PAGE>

                               TABLE OF CONTENTS

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<S>      <C>                                                                                                        <C>
1.       DEFINITIONS.................................................................................................2

2.       REPRESENTATIONS AND WARRANTIES..............................................................................7

         2.1      Representations and Warranties of Both Parties.....................................................7

         2.2      Representations and Warranties of Inspire..........................................................7

3.       JOINT STEERING COMMITTEE....................................................................................8

         3.1      Members............................................................................................8

         3.2      Responsibilities...................................................................................8

         3.3      Officers..........................................................................................10

         3.4      Meetings..........................................................................................10

         3.5      Decision-making...................................................................................10

         3.6      Minutes...........................................................................................11

         3.7      Term..............................................................................................11

         3.8      Expenses..........................................................................................11

4.       JOINT PROJECT TEAMS........................................................................................12

         4.1      Joint Project Teams; Members......................................................................12

         4.2      Responsibilities..................................................................................12

         4.3      Meetings..........................................................................................13

         4.4      Decision-making...................................................................................13

         4.5      Term..............................................................................................13

5.       DEVELOPMENT AND JOINT DEVELOPMENT PROGRAMS.................................................................14

         5.1      Scope of Development and Joint Development Programs...............................................14

         5.2      Genentech Responsibilities under the Joint Development Program....................................14

         5.3      Genentech Responsibilities under the Development Program..........................................15

         5.4      Inspire Responsibilities under the Joint Development Program......................................16

         5.5      Inspire Responsibilities under the Development Program............................................16

         5.6      Option to Co-Fund Products in Field B.............................................................17

         5.7      Funding of Development Program....................................................................18

         5.8      Conduct of Development Program....................................................................19

         5.9      Liability.........................................................................................20
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                                TABLE OF CONTENTS

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6.       GRANT OF RIGHTS; COMMERCIALIZATION; MARKETING..............................................................20

         6.1      License Grant to Genentech........................................................................20

         6.2      License Grant to Inspire..........................................................................21

         6.3      Sublicensing......................................................................................21

         6.4      Strategic Partners of Inspire.....................................................................22

         6.5      Commercialization Obligations, Rights.............................................................22

         6.6      Right of First Offer..............................................................................22

         6.7      Future Generation Compounds.......................................................................24

         6.8      Adverse Reaction Reporting........................................................................25

         6.9      Discussions Regarding Genentech Improvements......................................................26

7.       FEES, MILESTONES AND ROYALTIES.............................................................................27

         7.1      Up-front Payments.................................................................................27

         7.2      Milestone Payments................................................................................27

         7.3      Royalties.........................................................................................29

         7.4      Obligation to Pay Royalties.......................................................................29

         7.5      Sharing of U.S. Operating Profit or Loss..........................................................30

8.       PAYMENTS AND REPORTS.......................................................................................30

         8.1      Payments..........................................................................................30

         8.2      Mode of Payment...................................................................................31

         8.3      Records Retention.................................................................................31

         8.4      Audits............................................................................................31

         8.5      Taxes.............................................................................................31

         8.6      Bartering Prohibited..............................................................................32

9.       OWNERSHIP; PATENTS.........................................................................................32

         9.1      Ownership.........................................................................................32

         9.2      Patent Prosecution and Maintenance................................................................32

         9.3      Patent Enforcement................................................................................34

         9.4      Infringement Action by Third Parties..............................................................34
</TABLE>

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                                TABLE OF CONTENTS

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10.      PUBLICATION; CONFIDENTIALITY...............................................................................35

         10.1     Notification and Review with Respect to Inspire and Genentech.....................................35

         10.2     Notification and Review with Respect to Inspire's Strategic Partners..............................36

         10.3     Confidentiality; Exceptions.......................................................................37

         10.4     Exceptions to Obligation..........................................................................37

         10.5     Limitations on Use................................................................................37

         10.6     Remedies..........................................................................................37

11.      INDEMNIFICATION............................................................................................38

         11.1     By Genentech......................................................................................38

         11.2     By Inspire........................................................................................38

         11.3     Notice............................................................................................39

         11.4     Complete Indemnification..........................................................................39

12.      TERM; TERMINATION..........................................................................................39

         12.1     Term..............................................................................................39

         12.2     Termination for Cause.............................................................................39

         12.3     Termination Without Cause.........................................................................40

         12.4     Effect of Expiration or Termination...............................................................40

         12.5     Accrued Rights; Surviving Obligations.............................................................42

13.      FORCE MAJEURE..............................................................................................42

14.      MISCELLANEOUS..............................................................................................42

         14.1     Relationship of Parties...........................................................................42

         14.2     Assignment........................................................................................42

         14.3     Books and Records.................................................................................43

         14.4     Further Actions...................................................................................43

         14.5     Notice............................................................................................43

         14.6     Use of Name.......................................................................................44

         14.7     Public Announcements..............................................................................44

         14.8     Waiver............................................................................................44

         14.9     Compliance with Law...............................................................................44
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                                TABLE OF CONTENTS

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<S>      <C>                                                                                                        <C>
         14.10    Severability......................................................................................44

         14.11    Amendment.........................................................................................44

         14.12    Governing Law.....................................................................................44

         14.13    Arbitration.......................................................................................44

         14.14    Entire Agreement..................................................................................45

         14.15    Parties in Interest...............................................................................46

         14.16    Descriptive Headings..............................................................................46

         14.17    Counterparts......................................................................................46
</TABLE>

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                               TABLE OF CONTENTS

                                    EXHIBITS
                                    --------

EXHIBIT A                  EXISTING COMPOUNDS

EXHIBIT B                  FINANCIAL APPENDIX

EXHIBIT C                  INITIAL PATENTS

EXHIBIT D                  INITIAL MEMBERS OF JOINT STEERING COMMITTEE

EXHIBIT E                  FORM OF NOTE AGREEMENT

EXHIBIT F                  PROVISIONS REQUIRED FOR AGREEMENTS
                           WITH SUBLICENSEES

                                      -v-
<PAGE>

                                                                  EXECUTION COPY
                                                                  --------------

                   DEVELOPMENT, LICENSE AND SUPPLY AGREEMENT

                               December 17, 1999

     THIS DEVELOPMENT, LICENSE AND SUPPLY AGREEMENT (this "Agreement"), dated as
of the date first written above (the "Effective Date"), is entered into by and
between Inspire Pharmaceuticals, Inc., a corporation organized and existing
under the laws of the State of Delaware, having offices located at 4222 Emperor
Boulevard, Suite 470, Durham, North Carolina 27703 ("Inspire"), and Genentech,
Inc., a corporation organized and existing under the laws of the State of
Delaware, having offices located at 1 DNA Way, South San Francisco, California
94080 ("Genentech").

                             PRELIMINARY STATEMENTS
                             ----------------------

     A.  Inspire is the owner of and has all right, title and interest in, or
has acquired the exclusive rights to, certain technology, including, without
limitation, Know-how and Patents or patent applications, relating to the
Compounds in the Fields in each of the Territories (as such capitalized terms
are defined below).

     B.  Inspire and Genentech wish to collaborate on the further development of
the Compounds for applications in the Fields.

     C.  Genentech is interested in obtaining an exclusive license to and under
Inspire's technology, to develop, make, have made, use, sell, have sold, offer
to sell, import, distribute and otherwise exploit products containing the
Compounds, and Inspire wishes to grant such license to Genentech, pursuant to
the terms and conditions of this Agreement.

     D.  Genentech wishes to purchase from Inspire, and Inspire wishes to
provide to Genentech, bulk active material for Compounds to meet Genentech's
requirements for its use to complete clinical and pre-clinical trials through
the end of Phase II clinical trials of each Compound.

     E.  Simultaneously with the execution of this Agreement, the Parties are
entering in that certain Series G Stock and Warrant Purchase Agreement (together
with the Schedules and Exhibits thereto, the "Stock Purchase Agreement") and
documents ancillary thereto, all dated of even date herewith, pursuant to which
Genentech has agreed to purchase, and Inspire has agreed to issue and sell,
shares of Series G Preferred Stock and Warrants for shares of Common Stock (as
such capitalized terms are defined in the Stock Purchase Agreement).

     NOW, THEREFORE, in consideration of the foregoing Preliminary Statements
and the mutual agreements and covenants set forth herein, the Parties hereby
agree as follows:

                                      -1-
<PAGE>

1. DEFINITIONS.

     As used in this Agreement, the following terms shall have the meanings set
forth in this Section 1 unless context clearly and unambiguously dictates
otherwise:

     1.1 "Additional Applications" shall have the meaning assigned to such term
in Section 6.6.

     1.2 "Additional Product" shall have the meaning assigned to such term in
Section 6.6.

     1.3 "Affiliate," with respect to any Party, shall mean any entity
controlled by such Party. For these purposes, "control" shall refer to (i) the
possession, directly or indirectly, of the power to direct the management or
policies of an entity, whether through the ownership of voting securities, by
contract or otherwise, or (ii) the ownership, directly or indirectly, of at
least 50% of the voting securities or other ownership interest of an entity.
With respect to Genentech, "Affiliate" shall not include Roche.

      1.4 "Annual Development Plan" shall have the meaning assigned to such term
in Section 5.1.

      1.5 "Audited Party" shall have the meaning assigned to such term in
Section 8.4.

      1.6 "Auditing Party" shall have the meaning assigned to such term in
Section 8.4.

      1.7 "Auditor" shall have the meaning assigned to such term in Section
6.3(c).

      1.8 "Bulk Materials" shall mean the Compounds, in bulk form.

      1.9 "Cannibalization" shall have the meaning assigned to such term in
Section 6.6.

      1.10 "cGMP" shall mean current Good Manufacturing Practice as defined in
Parts 210 and 211 of Title 21 of the Code of Federal Regulations, as may be
amended from time to time, or any successor thereto.

      1.11 "Co-Development Option" shall mean Inspire's option to co-fund a
Product in Field B pursuant to Section 5.6.

      1.12 "Co-Promotion Option" shall mean Inspire's option to co-promote a
Product in Field B pursuant to Section 6.5(b).

      1.13 "Compete", "Competing" and "Competition" shall have the meanings
assigned to such terms in Section 7.4(d).

      1.14 "Commercial Sale" shall mean, with respect to any Product, a sale for
which payment has been received for use or consumption by the general public of
such Product in the Field in the applicable Territory after all required
Registrations, including pricing approvals (if applicable), have been granted by
the Regulatory Authority in such Territory.

      1.15 "Compounds" shall mean, collectively, (i) INS365, (ii) INS37217 (iii)
Existing Compounds, and (iv) Future Generation Compounds.

                                      -2-
<PAGE>

      1.16 "Confidential Information" shall have the meaning assigned to such
term in Section 10.3.

      1.17 "Cost of Bulk Materials" shall have the meaning assigned to such term
in the Financial Appendix.

      1.18 "Development Costs" shall have the meaning assigned to such term in
the Financial Appendix.

      1.19 "Development Program" shall mean the Joint Development Program and
the other research and development activities of either or both Parties for
developing Products from the Compounds. The Development Program commences on the
Effective Date and expires with expiration or termination of this Agreement, as
a whole or with respect to any Product, pursuant to Section 12.

      1.20 "[CONFIDENTIAL TREATMENT REQUESTED] P2Y2 Agonist" shall mean
[CONFIDENTIAL TREATMENT REQUESTED]

      1.21 "Effective Date" shall have the meaning assigned to such term in the
introductory paragraph of this Agreement.

      1.22 "Executive Officers" shall have the meaning assigned to such term in
Section 3.5(b).

      1.23 "Existing Compounds" shall mean any [CONFIDENTIAL TREATMENT
REQUESTED] P2Y2 Agonists that are owned or controlled or synthesized by Inspire
prior to the Effective Date. Such Existing Compounds are listed on Exhibit A
                                                                   ---------

      1.24 "FDA" shall mean the United States Food and Drug Administration.

      1.25 "Field A" shall mean all human therapeutic uses for the treatment
(but not the diagnosis) of chronic bronchitis.

      1.26 "Field B" shall mean all human therapeutic uses for the treatment
(but not the diagnosis) of cystic fibrosis.

      1.27 "Field C" shall mean all human therapeutic uses for the treatment
(but not the diagnosis) of respiratory tract disorders, collectively, not
included in any of Field A, Field B, Field D and Field E.

      1.28 "Field D" shall mean all human therapeutic uses for the treatment
(but not the diagnosis) of sinusitis.

      1.29 "Field E" shall mean all human therapeutic uses for the treatment
(but not the diagnosis) of otitis media.

      1.30 "Fields" shall mean Field A, Field B, Field C, Field D and Field E,
collectively.

      1.31 "Financial Appendix" shall mean Exhibit B hereto.
                                           ---------

                                      -3-
<PAGE>

      1.32 "First Commercial Sale" shall mean, with respect to any Product, the
first sale for which payment has been received for use or consumption by the
general public of such Product in the Field in the applicable Territory after
all required Registrations, including pricing approvals (if applicable), have
been granted by the Regulatory Authority in the Territory.

      1.33 "First-Filed Patent Application" shall have the meaning assigned to
such
term in Section 7.4(b).

      1.34 "Fully Burdened Manufacturing Costs" shall have the meaning assigned
to such term in the Financial Appendix.

      1.35 "Future Generation Compounds" shall mean any [CONFIDENTIAL TREATMENT
REQUESTED] P2Y2 Agonists synthesized or patented or otherwise acquired by
Inspire during the term of this Agreement.

      1.36 "GAAP" shall mean generally accepted accounting principles in the
United States, consistently applied by the Party at issue.

      1.37 "Genentech" shall have the meaning assigned to such term in the
introductory paragraph of this Agreement.

      1.38 "Genentech Improvements" shall have the meaning assigned to such term
in Section 6.9.

      1.39 "IND" shall mean an effective Notice of a Claimed Investigational New
Drug Exemption, as defined in Title 21 of the Code of Federal Regulations, on
file with the FDA before the commencement of clinical trials of a Product in
humans.

      1.40 "INS365" shall mean [CONFIDENTIAL TREATMENT REQUESTED].

      1.41 "INS37217" shall mean [CONFIDENTIAL TREATMENT REQUESTED].

      1.42 "Inspire" shall have the meaning assigned to such term in the
introductory paragraph of this Agreement.

      1.43 "Invention" shall mean any new or useful process, compound or
composition of matter relating to the Compounds or the Products (including,
without limitation, the formulation, delivery, manufacture or use thereof) in
the Fields, whether patentable or unpatentable, or any improvement thereof, that
is conceived or first reduced to practice or demonstrated to have utility during
the term of, and in connection with, the Development Program.

      1.44 "Joint Development Program" shall mean the research and development
program for developing Products from the Compounds that includes only the
activities of either or both Parties set forth in the Annual Development Plans
approved by the Joint Steering Committee and the activities of the Joint Project
Teams to implement such Annual Develoment Plans. The Joint Development Program
commences on the Effective Date and expires with respect to each Field with the
expiration of the term of the Joint Project Team with responsibility for such
Field, as set forth in Section 4.5.

      1.45 "Joint Project Team" shall have the meaning that is assigned to such
term in Section 4.1.

                                      -4-
<PAGE>

      1.46 "Joint Steering Committee" and "JSC" shall have the meanings assigned
to such terms in Section 3.1.

      1.47 "Know-how" shall mean any and all Inventions, improvements,
discoveries, claims, formulae, processes, trade secrets, technologies and
know-how (including confidential data and Confidential Information) in the
Fields, whether or not patentable, that is generated, owned or controlled by
Inspire or to which Inspire has the power to grant licenses at any time before
or during the term of this Agreement relating to, derived from or useful for the
development, manufacture, use, sale or distribution of any of the Compounds or
any of the Products in either Territory, including, without limitation,
synthesis, preparation, recovery and purification processes and techniques,
control methods and assays, chemical data, toxicological and pharmacological
data and techniques, clinical data, medical uses, product forms and product
formulations and specifications.

      1.48 "Licensed Claim" shall mean any unexpired claim of any patent or
patent application within the Patents issued or pending in a country within a
Territory that, unless licensed, would be infringed by the manufacture, use,
importation or sale of any of the Compounds or any of the Products in such
country within such Territory, which claim has not been held invalid or
unenforceable by decision of a court or other governmental agency of competent
jurisdiction, which decision is unappealable or unappealed within the time
allowed for appeal, and which claim is not lost in an interference proceeding or
through disclaimer or otherwise not admitted by Inspire to be invalid.

      1.49 "Licensed Technology" shall mean the Licensed Claims and Know-how,
collectively.

      1.50 "Marketing Costs" shall have the meaning assigned to such term in the
Financial Appendix.

      1.51 "Net Sales" shall have the meaning assigned to such term in the
Financial Appendix.

      1.52 "Operating Profit or Loss" shall have the meaning assigned to such
term in the Financial Appendix.

      1.53 "Original Product" shall have the meaning assigned to such term in
Section 7.2(e).

      1.54 "Party" shall mean, as applicable, Inspire or Genentech and, when
used in the plural, shall mean Inspire and Genentech.

      1.55 "Patents" shall mean the patents and patent applications set forth on
Exhibit C, and any other patents or patent applications in any country in the
---------
relevant Territory owned or controlled by Inspire during the term of this
Agreement that relate to any of the Compounds or any of the Products in any of
the Fields, together with any patents that may issue therefor in any country in
the relevant Territory, including any and all extensions, renewals,
continuations, continuations-in-part, divisions, patents-of-additions, reissues,
supplementary protection certificates or foreign counterparts of any of the
foregoing and any patents based on applications that claim priority from any of
the foregoing.

                                      -5-
<PAGE>

      1.56 "Product" shall mean any pharmaceutical formulation that contains as
the sole active ingredient or as one of its active ingredients a Compound for
use in the Fields, and the manufacture, use, sale or importation of which is
covered by one or more of the Patents and, but for the license granted under
this Agreement, infringes a Licensed Claim thereof in the relevant Territory.

      1.57 "Promissory Note" shall have the meaning assigned to such term in
Section 5.6.

      1.58 "Proposed Terms" shall have the meaning assigned to such term in
Section 6.5(b).

      1.59 "Registration" shall mean, with respect to each country in the
relevant Territory, approval of the Registration Application for a Product filed
in such country, including pricing or reimbursement approvals, where applicable,
by the Regulatory Authority in such country.

      1.60 "Registration Application" shall mean any filing(s) made with the
Regulatory Authority in any country in the relevant Territory for regulatory
approval of the manufacture and sale, and pricing when applicable, of a Product
in such country.

      1.61 "Regulatory Authority" shall mean, collectively, the FDA and the
authority(ies) in each country in the relevant Territory that are comparable to
the FDA and have responsibility for granting regulatory approval for the
manufacture, use and sale of a Product in such country, including but not
limited to pricing and reimbursement approvals.

      1.62 "Replacement Product" shall have the meaning assigned to such term in
Section 7.2(e).

      1.63 "Reporting Company" shall have the meaning assigned to such term in
Section 7.4(c).

      1.64 "Roche" shall mean, individually and collectively, F. Hoffmann-La
Roche Ltd and each organization, other than Genentech, (a) fifty percent (50%)
or more of the voting stock of which is owned and/or controlled directly or
indirectly by F. Hoffmann-La Roche Ltd; (b) which directly or indirectly owns
and/or controls fifty percent (50%) or more of the voting stock of F.
Hoffmann-La Roche Ltd; or (c) which is directly or indirectly under common
control of F. Hoffmann-La Roche Ltd through common share holdings.

      1.65 "Sales Costs" shall have the meaning assigned to such term in the
Financial Appendix.

      1.66 "Specifications" shall mean the specifications for the Bulk Materials
approved by the Joint Steering Committee with respect to Genentech's
requirements through the end of Phase II in the relevant Territory, as may be
amended (as approved by the Joint Steering Committee) from time to time.

      1.67 "Stock Purchase Agreement" shall have the meaning assigned to such
term in the Preliminary Statements.

      1.68 "Strategic Partners" shall have the meaning that is assigned to such
term in Section 5.5(b).

                                      -6-
<PAGE>

      1.69 "Sublicensee" shall mean a Third Party to which Genentech has granted
a sublicense to make, have made, use, sell, have sold, offer to sell, import,
distribute or otherwise exploit any of the Products in any country in the
Territory.

      1.70 "Territory" shall mean Territory ABC and/or Territory DE, depending
upon the context of its use.

      1.71 "Territory ABC" shall mean the entire world except Japan and shall
apply to Products in Field A, Field B and Field C, but not including Products in
Field D or Field E.

      1.72 "Territory DE" shall mean the entire world and shall apply to
Products in Field D and Field E, but not including Products in Field A, Field B
or Field C. 1.73 "Third Party" shall mean any person who or which is neither a
Party nor an Affiliate of a Party.

      1.74 "Third Party Agreement" shall have the meaning assigned to such term
in Section 6.6(c).

      1.75 "Third Party Letter of Intent" shall have the meaning assigned to
such term in Section 6.6(c).

      1.76 "Third Party License" means a license granted by a Third Party to
Genentech under such Third Party's patents, technology or know-how to develop,
manufacture, have manufactured, use, sell, have sold, import, distribute or
otherwise exploit a Product.

      1.77 "UNC Agreement" shall have the meaning assigned to such term in
Section 2.2(d).

      2. REPRESENTATIONS AND WARRANTIES.

      2.1 Representations and Warranties of Both Parties. Each Party represents
and warrants to the other Party, as of the Effective Date, that:

         (a) such Party is duly organized and validly existing under the laws of
the jurisdiction of its incorporation and has full corporate power and authority
to enter into this Agreement and to carry out the provisions hereof;

         (b) such Party is free to enter into this Agreement;

         (c) in so doing, such Party will not violate any other agreement to
which it is a party; and

         (d) such Party has taken all corporate action necessary to authorize
the execution and delivery of this Agreement and the performance of its
obligations under this Agreement.

      2.2 Representations and Warranties of Inspire. In addition to the
representations and warranties set forth in Section 2.1, Inspire represents and
warrants to Genentech, as of the Effective Date, that:

                                      -7-
<PAGE>

           (a) Inspire is the owner of, or has exclusive rights to, all of the
Patents (including, without limitation, the Patents set forth on Exhibit C), and
has the exclusive right to grant the licenses granted under this Agreement
therefor;

           (b) to the best of Inspire's knowledge, after diligent inquiry,
Inspire is the owner of or has exclusive rights to all of the Know-how in
existence on the Effective Date and, with respect to Know-how that first comes
into existence after the Effective Date, Inspire will own, or have rights to,
all such Know-how, and has the exclusive right to grant the licenses granted
under this Agreement with respect thereto;

           (c) Inspire shall not provide to Genentech any know-how, materials,
data or information that infringe any rights of any third party;\

           (d) Inspire agrees to use its diligent efforts to promptly amend
Section 6.6 of the Exclusive License Agreement between Inspire and University of
North Carolina at Chapel Hill, dated as of September 1, 1998, ("UNC Agreement")
to provide that in the event of any cancellation or termination of the UNC
Agreement, Genentech shall continue to have the rights and license under this
Agreement to the Patents and Know-how owned by UNC and sublicensed to Genentech
under this Agreement;

           (e) Inspire shall not materially breach the UNC Agreement and fail to
cure such breach within the cure period provided thereunder;

           (f) Inspire has not entered into, and hereby agrees that it shall not
enter into, any agreement with any Third Party that is or with the passage of
time or otherwise could be in conflict with the rights granted to Genentech
pursuant to this Agreement; and

           (g) the Existing Compounds listed on Exhibit A are all of the
[CONFIDENTIAL TREATMENT REQUESTED] P2Y2 Agonists owned or controlled or
synthesized by Inspire prior to the Effective Date.

3.   JOINT STEERING COMMITTEE.

      3.1 Members. The Parties shall establish one joint steering committee (the
"Joint Steering Committee" or "JSC"), which shall consist of six (6) members,
three (3) members from each Party. The initial members of the JSC are set forth
on Exhibit D. Each Party may replace any or all of its representatives on the
   ---------
JSC at any time upon written notice to the other Party in accordance with
Section 14.5 of this Agreement. Such representatives shall include individuals
within the senior management of each Party, and those representatives of each
Party shall, individually or collectively, have expertise in business and
biopharmaceutical drug development and commercialization. Any member of the JSC
may designate a substitute to attend and perform the functions of that member at
any meeting of the JSC. Each Party may, in its discretion, invite non-member
representatives of such Party to attend meetings of the JSC.

      3.2 Responsibilities. The JSC shall perform the following functions:

           (a) Approve the overall strategy for the Joint Development Program
and provide direction to the Joint Project Teams as provided in this Agreement;

                                      -8-
<PAGE>

           (b) review and approve Annual Development Plans created by the Joint
Project Teams pursuant to Section 4, the division of responsibilities of each
Party as allocated by the Joint Project Teams, the annual budgets and multiyear
expense forecasts formulated by the Joint Project Teams, and the financial
results of the Joint Development Program;

           (c) review and approve activities related to manufacturing and the
identification of manufacturer(s) in connection with the Joint Development
Program;

           (d) for Field B, only if Inspire exercises its Co-Development Option,
review and approve any manufacturer(s), annual marketing and sales budgets,
annual forecasts of sales and production requirements, annual marketing plans,
broad product positioning and campaign strategies, pricing of any co- promoted
Products, managed care contract strategies, and Phase IV clinical support
(including scope and strategic direction) in such Field B; provided that, except
as set forth in Section 6.5(b), Genentech, either itself and/or by and through
its Affiliates and Sublicensees, shall be responsible for, and shall have the
exclusive right to engage in, all marketing, advertising, promotional, launch
and sales activities in connection with such efforts;

           (e) for Field B, only if Inspire exercises its Co-Promotion Option,
review and approve the appropriate role for each of Genentech and Inspire to
play in commercialization activities in Territory ABC with respect to any co-
promoted Products, provided that, except as set forth in Section 6.5(b),
Genentech, either itself and/or by and through its Affiliates and Sublicensees,
shall be responsible for, and shall have the exclusive right to engage in, all
marketing, advertising, promotional, launch and sales activities in connection
with such efforts.

           (f) review and evaluate progress of the Joint Project Teams under the
Joint Development Program, provided that the JSC shall not have authority to
make any determination that either Party is in breach of this Agreement;

           (g) review Inspire's discovery programs outside of the Joint
Development Program or otherwise outside of the collaboration under this
Agreement relating to any Additional Applications to determine if such
Additional Applications may result in off-label usage of products in any of the
Fields in which Genentech plans to develop, is developing or has developed a
Product;

           (h) designate a team, which may include members of the JSC or any
Joint Project Team, to review reports regarding Additional Applications
delivered to the JSC pursuant to Section 6.6;

           (i) review and approve "go/no-go" decisions and recommendations made
by each Joint Project Team;

           (j) in accordance with Section 3.5, resolve disputes or disagreements
unresolved by any Joint Project Team and any other disputes or disagreements
between the Parties with respect to the Development Program; and

                                      -9-
<PAGE>

          (k) have such other responsibilities as may be assigned to the JSC
pursuant to this Agreement or as may be mutually agreed upon by the Parties from
time to time.

      3.3 Officers.

          (a) The chairperson and secretary of the JSC shall serve co-terminous
one (1)- year terms, each commencing on the Effective Date or an anniversary
thereof, as the case may be. The right to name the chairperson and the secretary
of the JSC shall alternate between the Parties, and each chairperson and
secretary shall be named no later than ten (10) days after the commencement of
his or her term. The initial chairperson shall be selected by Genentech within
thirty (30) days after the Effective Date. The initial secretary shall be
selected by Inspire within thirty (30) days after the Effective Date.

          (b) The chairperson shall, if practicable, send written notice of all
meetings to all members of the JSC no less than thirty (30) days before the date
of each meeting.

      3.4 Meetings. During the term of the Joint Development Program, the
JSC shall meet in person at least once during every calendar year, and more
frequently as the Parties deem appropriate, on such dates, and at such places
and times, as the Parties shall agree.  Thereafter, the JSC shall meet, in
person or otherwise, only on an ad hoc basis as needed to perform the
responsibilities assigned to it under this Agreement.  Meetings of the JSC that
are held in person shall alternate between the offices of the Parties, or such
other place as the Parties may agree.  The members of the JSC also may convene
or be polled or consulted from time to time by means of telecommunications,
video conferences, electronic mail or correspondence, as deemed necessary or
appropriate.

      3.5 Decision-making.

          (a) The JSC may make decisions with respect to any subject matter
that is subject to the JSC's decision-making authority. Except as provided in
Section 3.5(b), each Party shall have collectively one (1) vote in all
decisions.

          (b) In the event that Inspire exercises its Co-Development Option,
then [CONFIDENTIAL TREATMENT REQUESTED].

          (c) Except as specifically provided in Section 3.5(b), if, with
respect to a matter that is subject to the JSC's decision-making authority, the
JSC cannot reach consensus within fifteen (15) days after it has met and
attempted to reach such consensus, the matter shall be referred on the sixteenth
(16th) day to the Chief Executive Officer of Inspire, or such other person
holding a similar position designated by Inspire from time to time, and an
Executive Vice President or Chief Executive Officer of Genentech, or such other
person holding a similar position designated by Genentech from time to time
(such officers collectively, the "Executive Officers"), for resolution. The
Executive Officers shall use reasonable efforts to resolve the matter referred
to them. If the Executive Officers cannot reach a mutually acceptable decision

                                      -10-
<PAGE>

within fifteen (15) days after the matter was referred to them, then the
Executive Officer of Genentech shall have the final authority to make decisions
in good faith that are binding on both Parties.

         (d) For all purposes under this Agreement, any decision made pursuant
to Section 3.5(b) or 3.5(c) shall be deemed to be the decision of the JSC.

      3.6 Minutes.

         (a) With the sole exception of specific items of the meeting minutes to
which the chairperson and the secretary cannot agree and which are escalated as
provided in Section 3.5(c), definitive minutes of all JSC meetings shall be
finalized no later than thirty (30) days after the meeting to which the minutes
pertain, as follows:

               (i) Within ten (10) days after each JSC meeting, the secretary
     shall prepare and distribute to all members of the JSC draft minutes of the
     meeting.  Such minutes shall provide a description, in reasonable detail,
     of the discussions at the meeting and a list of any actions, decisions or
     determinations approved by the JSC and a list of any issues to be resolved
     by the Executive Officers.

               (ii) The chairperson shall then have ten (10) days after
     receiving such draft minutes to collect comments thereon from the members
     of its Party and provide them to the secretary.

               (iii)  Upon the expiration of such second ten (10)-day period,
     the chairperson and the secretary of the JSC shall have an additional ten
     (10) days to discuss each other's comments and finalize the minutes.  The
     secretary and chairperson shall each sign and date the final minutes.  The
     signature of the chairperson and the secretary upon the final minutes shall
     indicate each Party's assent to the minutes.

         (b) If at any time during the preparation and finalization of the JSC
meeting minutes, the secretary and the chairperson do not agree on any issue
with respect to the minutes, such issue shall be resolved by the escalation
process as provided in Section 3.5(c). The decision resulting from the
escalation process shall be recorded by the secretary in amended finalized
minutes for said meeting. All other issues in the minutes that are not subject
to such escalation shall be finalized within a thirty (30)-day period as
provided in Section 3.6(a).

      3.7 Term. The JSC shall exist until the termination or expiration of the
Joint Development Program and for such longer period as necessary to perform the
remaining responsibilities assigned to it under this Agreement.

      3.8 Expenses. Each Party shall be responsible for all travel and related
costs and expenses for its members and approved invitees to attend meetings of,
and otherwise participate on, the JSC.

                                      -11-
<PAGE>

4. JOINT PROJECT TEAMS.

      4.1 Joint Project Teams; Members. The Parties shall create, at the times
set forth in this Agreement or as otherwise determined by the JSC, a joint
project team for each of Field A, Field B and Field D, and such other joint
project teams as deemed necessary by the JSC (each, a "Joint Project Team").
Each Joint Project Team shall consist of such number of members as the JSC
determines is appropriate from time to time. Such members shall be individuals
with expertise and responsibilities in the areas of preclinical development,
clinical development, process sciences, manufacturing, regulatory affairs or
product development and marketing, as applicable to the stage of development or
commercialization of the Product. At the creation of each Joint Project Team,
each Party shall designate one member of each Joint Project Team as that Party's
primary contact by written notice to the other Party, and such primary contact
shall coordinate communications to and from that Party. Each Party may replace
any or all of its members on any Joint Project Team at any time upon written
notice to the other Party. Any member of a Joint Project Team may designate a
substitute to attend and perform the functions of that member at any meeting of
the Joint Project Team.

      4.2 Responsibilities. With respect to the Field(s) that constitute its
area of responsibility, each Joint Project Team shall:

          (a) oversee and coordinate the development of Products under this
Agreement, in a manner reasonably consistent with the Annual Development Plans
and during the Joint Development Program;

          (b) evaluate data from the Joint Development Program;

          (c) manage the day-to-day activities being conducted under the Joint
Development Program, allocate responsibilities between the Parties and
coordinate the activities of the Parties;

          (d) provide a mechanism for the exchange of information between the
Parties with regard to Know-how and Inventions;

          (e) provide a mechanism for the review of data and results from any
discovery efforts Inspire may conduct from time to time with respect to Future
Generation Compounds, and recommend to Genentech the inclusion of any such
Future Generation Compounds in the Joint Development Program pursuant to Section
5.2(a) if the Joint Project Team determines that such Future Generation
Compounds show promise in any of the Fields;

          (f) review all relevant proposed publications and presentations of any
of the Parties or their respective Affiliates pursuant to Section 10;

          (g) design clinical study protocols and review and determine whether
to approve clinical study protocols, the selection of clinical investigators,
clinical study write-ups, regulatory submissions, Registration Applications and
the like relating to the Joint Development Program;

                                      -12-
<PAGE>

          (h) prepare the Annual Development Plans, as needed, and refer them to
the JSC for approval;

          (i) keep the JSC informed on the status of the Joint Development
Program and the activities conducted by the Parties thereunder;

          (j) resolve disputes and disagreements between the Parties with
respect to this Section 4.2, and refer unresolved disputes and disagreements to
the JSC for resolution in accordance with Section 3.5; and

          (k) have such other responsibilities as may be assigned to the Joint
Project Team pursuant to this Agreement or by the JSC, or as may be mutually
agreed upon by the Parties from time to time.

      4.3 Meetings. During its term, each Joint Project Team shall meet at least
once each calendar quarter, and more frequently as agreed by the Joint Project
Team, on such dates, and at such places and times, as the Joint Project Team
shall agree. Such meetings may be held in person, or the members of the Joint
Project Team may convene or be polled or consulted from time to time by means of
telecommunications, video conferences, electronic mail or correspondence, as
deemed necessary or appropriate.

      4.4 Decision-making. Each Joint Project Team shall operate by consensus,
and each Party shall have collectively one (1) vote in all decisions. If, with
respect to a matter that is subject to a Joint Project Team's decision-making
authority, the Joint Project Team cannot reach consensus within fifteen (15)
days after it has met and attempted to reach such consensus, the matter shall be
referred on the sixteenth day to the JSC, which shall resolve such matter in
accordance with Section 3.5.

      4.5 Term. Within thirty (30) days after the Effective Date, the Parties
shall create one Joint Project Team for each of Field A, Field B and Field D.
Unless otherwise determined by the JSC, the term of each Joint Project Team
shall be from its creation through the time indicated below:

      Field A..............  The completion of Phase II clinical trials with
                             respect to the first Product in Field A.

      Field B..............  The completion of Phase II clinical trials with
                             respect to the first Product in Field B if
                             Inspire does not exercise its Co-Development
                             Option and, if Inspire does exercise its
                             Co-Development Option, for as long as a Product
                             in Field B is marketed and sold in the United
                             States.

      Field C..............  The completion of joint responsibilities as
                             determined by the JSC.

                                      -13-
<PAGE>

      Field D..............  The earlier of the first filing of an IND with
                             respect to, or the first dosing of a patient
                             with, a Product in Field D.
      Field E..............  The completion of joint responsibilities as
                             determined by the JSC.

5.  DEVELOPMENT AND JOINT DEVELOPMENT PROGRAMS.

      5.1 Scope of Development and Joint Development Programs. The Development
Program begins at the Effective Date and includes the research and development
activities of either or both of the Parties to, under this Agreement, develop
Products from the Compounds. The Joint Development Program begins at the
Effective Date and includes a subset of Development Program activities, which
are those activities of the Parties pursuant to Section 5.2, Section 5.4 and, if
Inspire exercises its Co-Development Option, Section 5.6, and such other
activities under Sections 5.3 and 5.5 as necessary to implement the activities
approved by the JSC in the Annual Development Plans. Each Joint Project Team,
under the oversight of the Joint Steering Committee, shall manage the Joint
Development Program in its area of responsibility. Annually, during each Joint
Project Team's term as set forth in Section 4.5, each Joint Project Team shall
prepare a report of the development and regulatory actions to be taken during
the upcoming year with respect to the Field(s) in its area of responsibility
under the Joint Development Program, which shall include a description of the
goals and scope of such actions and the allocation of responsibilities to the
respective Parties (each, an "Annual Development Plan"). Each Joint Project Team
shall:

          (a) Commencing with the creation of the Joint Project Team, discuss
and prepare an Annual Development Plan for the first year of the term of the
Joint Development Program (or such other period as instructed by the JSC) and,
not later than ninety (90) days thereafter, submit to the JSC for approval such
Annual Development Plan for such period; and

          (b) not later than October 17 of each year during the term of the
Joint Development Program, discuss and prepare the next year's Annual
Development Plan and, at least thirty (30) days prior to each anniversary of the
Effective Date during the term of the Joint Development Program, submit to the
JSC for approval such Annual Development Plan.

      5.2 Genentech Responsibilities under the Joint Development Program.
Subject to the funding obligations of the Parties set forth in Section 5.7, as
part of the Joint Development Program, Genentech shall:

          (a) Review and approve the selection by the Joint Project Teams of
development candidate Compounds, of development decision criteria, and of
indications for which each Compound is developed.

          (b) Provide consulting services for Inspire regarding Phase IIa
clinical trials for INS365 for application in Field A.

                                      -14-
<PAGE>

          (c) Conduct all Phase IIb clinical trials, and any related long-term
toxicology studies, for INS365 for application in Field A as deemed necessary or
desirable by Genentech to, in accordance with the Annual Development Plans, as
applicable, meet the requirements of the Regulatory Authorities in Territory ABC
for Registration.

          (d) Conduct formulation development of Products consistent with the
Annual Development Plans.

          (e) Perform such other obligations with respect to the Joint
Development Program and the Annual Development Plans as the JSC may assign from
time to time.

      5.3 Genentech Responsibilities under the Development Program. Subject to
the funding obligations of the Parties set forth in Section 5.7, as part of the
Development Program, and pursuant to the Annual Development Plans under the
Joint Development Program where applicable, Genentech shall:

          (a) Conduct all Phase IIb and Phase III clinical trials and long-term
toxicology studies for INS365 to be developed for application in Field A as
deemed necessary or desirable by Genentech to, in accordance with the Annual
Development Plans, as applicable, meet the requirements of the Regulatory
Authorities in Territory ABC for Registration.

          (b) Conduct all Phase III clinical trials and long-term toxicology
studies for any Compounds approved by the JSC to be developed for application in
Field B as deemed necessary or desirable by Genentech to, in accordance with the
Annual Development Plans, as applicable, meet the requirements of the Regulatory
Authorities in Territory ABC for Registration.

          (c) Conduct all clinical trials and post-IND pre-clinical studies for
any Compounds selected by Genentech to be developed for application in Field D
as deemed necessary or desirable by Genentech to, in accordance with the Annual
Development Plans, as applicable, meet the requirements of the Regulatory
Authorities in Territory DE for Registration.

          (d) Conduct all development of any other Compounds for any indications
in the Fields as required by the Regulatory Authorities in the Territory for
Registration.

          (e) Regularly review data on all Compounds.

          (f) Use commercially reasonable efforts to proceed with the
development, Registration, marketing and sale in the relevant Territory of
Products in the Fields, in accordance with the Development Program for such
Products and the Compounds comprising such Products.

          (g) Use commercially reasonable efforts to prepare and file those
regulatory filings deemed necessary or desirable by Genentech and for which
Genentech is responsible with the appropriate Regulatory Authorities in the
applicable Territory and obtain all Registrations that Genentech deems necessary
or desirable to market and sell in such Territory Products in the Fields.

                                      -15-
<PAGE>

          (h) After the end of Phase II clinical trials with respect to any
Compound, as between Genentech and Inspire, Genentech shall assume all
responsibilities for the manufacture and supply of Bulk Materials of such
Compound for its use and that of its Affiliates and Sublicensees for all
clinical trials thereafter.

          (i) During the term of the Development Program, keep Inspire
informed, through regular, periodic written reports, which shall be brief
summaries, at least once in each calendar year, of all development progress
being made by Genentech with respect to all Compounds, provided that such
reports need not include any information with respect to any Compound(s) that
are within the area of responsibility of an established Joint Project Team.

          (j) Genentech shall own all Registration Applications, Registrations
and other regulatory filings and approvals (except INDs as provided in this
Agreement) for the Products in the Territories. (k) Except as set forth in
Section 5.4(d), Genentech shall be responsible for preparing and filing
regulatory filings for the Compounds as determined by the JSC up to and
including Registration, and thereafter shall be responsible for maintaining such
Registrations. All such filings shall be in Genentech's name.

      5.4 Inspire Responsibilities under the Joint Development Program. Subject
to the funding obligations of the Parties set forth in Section 5.7, as part of
the Joint Development Program, Inspire shall:

          (a) Conduct all Phase IIa clinical trials for INS365, in consultation
with Genentech, for application in Field A pursuant to the applicable Annual
Development Plans.

          (b) Conduct, in consultation with Genentech and in accordance with the
applicable Annual Development Plans, all preclinical and clinical trials through
the end of Phase II for the first Compound selected by Genentech for development
in Field B.

          (c) Conduct all research and preclinical trials for one (1) Compound
selected by Genentech for application in Field D through the filing of an IND in
accordance with the applicable Annual Development Plans.

          (d) Prepare and file INDs for the first Compound selected by Genentech
for development in each of Field B in Territory ABC and Field D in Territory DE
and provide Genentech with all information necessary or desirable to cross-
reference and/or assume responsibility for each of Inspire's INDs in the Fields.

      5.5 Inspire Responsibilities under the Development Program. As part
of the Development Program, and pursuant to the Annual Development Plans under
the Joint Development Program where applicable, Inspire shall:

          (a) Immediately after the Effective Date with respect to INS365 and
INS37217, and at the time requested by the relevant Joint Project Team (or by
Genentech if no such Joint Project Team exists), transfer to Genentech copies of
all pre-clinical and clinical data and studies

                                      -16-
<PAGE>

and information relevant to the Fields generated by or on behalf of Inspire
(including primary and secondary pharmacology, toxicology, formulation,
stability studies, and portable delivery device feasibility study results)
relating to the development and commercialization of Compounds, provided,
however, that Inspire shall not be required to transfer such information
generated by a Strategic Partner (as defined below in Section 5.5(b)) that
Inspire does not have the right to transfer.

          (b) Facilitate discussions between Inspire's other strategic partners
and/or licensees with respect to any of the Compounds (collectively, "Strategic
Partners") and Genentech for Genentech to obtain pre-clinical and clinical data,
INDs, Registration Applications, Registrations and other regulatory filings,
studies, information and materials relating to the development and
commercialization of Compounds.

          (c) Supply Genentech and its designee(s), if any, with Genentech's
requirements of all Bulk Materials to complete all pre-clinical and clinical
trials until the completion of Phase II clinical trials of each Compound. Such
Bulk Materials shall be supplied in accordance with the Specifications, in
accordance with cGMP, and in accordance with quarterly forecasts therefor
provided by Genentech at least ninety (90) days for INS365, and one hundred and
fifty (150) days for all other Compounds, prior to the anticipated delivery date
for each shipment thereof, provided, however, in the event that Genentech
requires Bulk Materials in fewer than ninety (90) days for INS365, and one
hundred and fifty (150) days for all other Compounds, Genentech shall notify
Inspire of such need, which notice need not be in writing, and Inspire shall use
all diligent efforts to meet Genentech's delivery request.

          (d) Provide the appropriate Joint Project Team (or provide Genentech
if the term of such Joint Project Team has expired) with data and results from
any discovery efforts Inspire may conduct from time to time with respect to each
Future Generation Compound.

          (e) At all times during the term of this Agreement, keep Genentech
informed, through regular, periodic written reports, which may be brief
summaries, at least once in each calendar year, of all development progress
being made by Inspire with respect to all Compounds, both in and outside the
Fields.

          (f) In order to assist Genentech in the performance of its obligations
under this Section 5.5, Inspire, to the extent its rights to do so are not
limited by contractual obligations, shall provide Genentech or its designee(s)
with complete copies (or copies of relevant portions) of, and shall grant
Genentech or its designee(s), free of charge, the right to cross-reference any
INDs, Registration Applications, Registrations or other regulatory filings made
or held in any country outside the Fields and/or the relevant Territory for the
Products. Inspire shall execute, acknowledge and deliver such further
instruments, and shall do all such other acts, all as promptly as possible after
Genentech's request therefor, that may be necessary or appropriate to effectuate
such right in each such country.

      5.6 Option to Co-Fund Products in Field B. (a) Within ninety (90)
days after the completion of Phase II clinical trials (including the receipt of
all results therefrom) relating to the first Compound selected by Genentech for
application in Field B, Inspire shall notify Genentech in writing if Inspire
elects to exercise its Co-Development Option [CONFIDENTIAL TREATMENT REQUESTED].
In the event that Inspire

                                      -17-
<PAGE>

makes such election, Inspire shall reimburse Genentech for [CONFIDENTIAL
TREATMENT REQUESTED] as provided in the Financial Appendix; provided, however,
that in the event [CONFIDENTIAL TREATMENT REQUESTED].

      5.7 Funding of Development Program.

          (a) Pursuant to the Financial Appendix, each of the Parties shall pay
those Development Costs listed below its name in the following table:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Field                       Inspire                                       Genentech
--------------------------------------------------------------------------------------------------------
<S>          <C>                                     <C>
Field A      Development Costs for INS365 through    Development Costs for INS365 beginning with the
             the completion of Phase IIa clinical    Phase IIb clinical trials for such Product, plus
             trials for such Product, as provided    any Phase IIa development costs in excess of
             in Section 5.7(b).                      [CONFIDENTIAL TREATMENT REQUESTED] pursuant to
                                                     Section 5.7(b).
--------------------------------------------------------------------------------------------------------
Field B      Development Costs through the           Development Costs for all Products beginning with
             completion of Phase II clinical         the Phase III clinical trials for the first
             trials for the first Product.  If       Product; provided, however, that if Inspire
             Inspire exercises its Co-Development    exercises its Co-Development Option, Genentech
             Option, Inspire shall also pay          shall pay[CONFIDENTIAL TREATMENT REQUESTED] for
             [CONFIDENTIAL TREATMENT REQUESTED]      the first Product beginning with Phase III
             for the first Product beginning with    clinical trials for that Product and [CONFIDENTIAL
             Phase III clinical trials for that      TREATMENT REQUESTED] for each subsequent Product;
             Product and [CONFIDENTIAL TREATMENT     and, provided further, Genentech shall pay
             REQUESTED]for each subsequent Product.  [CONFIDENTIAL TREATMENT REQUESTED] for all
                                                     Products.
--------------------------------------------------------------------------------------------------------
Field C      None.                                   All.
--------------------------------------------------------------------------------------------------------
</TABLE>

                                      -18-
<PAGE>

<TABLE>
<S>          <C>                                     <C>
--------------------------------------------------------------------------------------------------------
Field D      Development Costs for one Product        Development Costs for all Products after the
             through the filing of the first IND      filing of the first IND for the first such Product.
             for the first such Product.
--------------------------------------------------------------------------------------------------------
Field E      None.                                    All.
--------------------------------------------------------------------------------------------------------
</TABLE>

          (b) Pursuant to the Financial Appendix, Inspire shall apply
[CONFIDENTIAL TREATMENT REQUIRED] in proceeds from the issuance and sale to
Genentech of Inspire's Series G Preferred Stock as provided in Section 7.1(a) as
follows:

               (i) Inspire shall pay [CONFIDENTIAL TREATMENT REQUESTED]
     including but not limited to Phase IIa clinical trials for the first
     Product in Field A.  [CONFIDENTIAL TREATMENT REQUESTED].

               (ii) After the completion of the first Phase IIa clinical trials
     in Field A, Inspire shall apply any portion of the [CONFIDENTIAL TREATMENT
     REQUESTED] not yet invoiced and paid or spent on internal Inspire resources
     pursuant to Section 5.7(b)(i) toward additional development costs in the
     Fields as determined by the JSC.

               (iii)  Any amounts payable to Genentech under this Section 5.7(b)
     shall be paid by Inspire to Genentech within forty-five (45) days after
     Inspire receives an invoice therefor from Genentech.

          (c) Pursuant to the Financial Appendix, Genentech shall pay
[CONFIDENTIAL TREATMENT REQUESTED] for the manufacture and supply of Bulk
Materials for development programs that are funded by Genentech pursuant to
Section 5.7(a) through the end of Phase II. Inspire shall be entitled to invoice
Genentech therefor following shipment of such Bulk Materials from time to time.
Payment shall be made by Genentech as provided in the Financial Appendix.

      5.8 Conduct of Development Program. The Parties, acting in accordance with
this Section 5 and the relevant Annual Development Plans, when applicable, shall
use commercially reasonable efforts to develop the Products in the Fields.
Genentech, acting in accordance with this Section 5 and the relevant Annual
Development Plans, when applicable, shall use commercially reasonable efforts to
obtain Registrations that Genentech deems necessary to market and sell the
Products in the applicable Territory. Without limiting the generality of the
foregoing, during the term of the Development Program, each Party shall:

          (a) cooperate with the other Party to implement the Annual Development
Plans, and such other activities that, from time to time, the JSC decides are
necessary for the commercial success of the Joint Development Program;

                                      -19-
<PAGE>

          (b) use commercially reasonable efforts to perform the work set out
for such Party to perform in the Annual Development Plans;

          (c) conduct the Development Program in good scientific manner, and in
compliance in all material respects with all requirements of applicable laws,
rules and regulations, and all other requirements of any applicable cGMP, good
laboratory practice and current good clinical practice to attempt to achieve the
objectives of the Development Program efficiently and expeditiously;

          (d) maintain records, in sufficient detail and in good scientific
manner, which shall be complete and accurate and shall fully and properly
reflect all work done and results achieved in connection with the Joint
Development Program in the form required under all applicable laws and
regulations. The other Party shall have the right, during normal business hours
and upon reasonable prior written notice, to inspect and copy all such records
at its own expense, so long as doing so is not unreasonably disruptive. The
other Party shall maintain such records and information contained therein in
confidence in accordance with Section 10 and shall not use such records or
information except to the extent otherwise permitted by this Agreement; and

          (e) allow representatives of the other Party, upon reasonable prior
written notice and during normal business hours, to visit such Party's
facilities where the Joint Development Program is being conducted, and consult,
during such visits and by telephone, with such Party's personnel performing work
on the Joint Development Program, so long as such visits and consultations are
not unreasonably disruptive. The other Party shall maintain any information
received (whether by observation or otherwise) during such visit in confidence
in accordance with Section 10 and shall not use such information except to the
extent otherwise permitted by this Agreement.

      5.9 Liability. Each Party shall be responsible for, and hereby assumes,
any and all risks of personal injury or property damage attributable to the
negligent or willful acts or omissions, during the term of the Development
Program, of such Party or its Affiliates, and their respective directors,
officers, employees and agents.

      6. GRANT OF RIGHTS; COMMERCIALIZATION; MARKETING.

      6.1 License Grant to Genentech.

          (a) Subject to the terms and conditions of this Agreement, Inspire
hereby grants to Genentech during the term of this Agreement an exclusive (even
as to Inspire except as expressly set forth in Section 6.1(b)) license, with the
right to grant sublicenses, under the Licensed Technology to develop, make, have
made, use, market, sell, have sold, offer to sell, import, distribute and
otherwise exploit Products in the Fields throughout the relevant Territory.

          (b) Inspire shall retain the right to practice or use the Licensed
Technology itself solely as necessary to (i) perform its research and
development obligations under the Joint Development Program and (ii) to
co-promote certain Products in Field B in Territory ABC, as expressly described
in Section 6.5(b), if Inspire exercises its Co-Promotion Option.

                                      -20-
<PAGE>

      6.2 License Grant to Inspire.

          (a) Subject to the terms and conditions of this Agreement, Genentech
hereby grants to Inspire during the term of the Joint Development Program a non-
exclusive, non-transferable, paid-up license, with no right to grant
sublicenses, under Genentech's rights in any Inventions solely to perform its
research and development obligations under the Joint Development Program in the
Fields in the relevant Territory.

          (b) Notwithstanding anything else in this Agreement, no license is
granted by Genentech under its rights in any patents or know-how whatsoever for
any activities by Inspire that are outside the Fields or outside the applicable
Territory or outside the scope of Inspire's responsibilities under the Joint
Development Program and, if Inspire has exercised its Co-Promotion Option,
Inspire's co-promotion rights as expressly described in Section 6.5(b).

      6.3 Sublicensing.

          (a) Genentech shall have the right to grant sublicenses of the license
granted to Genentech under Section 6.1 for any purposes.

          (b) Inspire shall have the right to grant sublicenses of the license
granted to it under Section 6.2 only to the extent necessary as approved in
writing in advance by Genentech.

          (c) Each of Genentech and Inspire agrees that if either of them
sublicenses any rights hereunder to a Third Party, and if at any time either of
them conducts or engages a certified public accountant or other person (an
"Auditor") to conduct an audit or other examination of the books and records of
any such Sublicensee in order to determine the correctness of any royalty
payments made pursuant to such sublicense, then it will instruct such Auditor
to, as soon as reasonably practicable after the conclusion of such audit or
other examination, prepare and provide to the other Party (at such other Party's
expense) a brief, summary report of the results thereof; provided, however, that
such Auditor, in its summary report or otherwise, shall not disclose to the
other Party any information, including but not limited to the royalty percentage
payable under such sublicense and any other financial terms of such sublicense,
except that such Auditor may disclose to the other Party the fact of a
deficiency in royalty payments, and the degree thereof, including the dollar
amount. Except as provided under this Section 6.3(c), each Party agrees that
nothing in the terms of this Agreement entitles it to review or receive a copy
of any sublicense agreement that sublicenses rights hereunder.

          (d) In addition, each of Genentech and Inspire agree that neither of
them will sublicense to any Third Party any rights covered by this Agreement
except pursuant to a sublicense agreement that includes provisions substantially
similar, taking into account the facts and circumstances of the particular
sublicense, as those set forth on Exhibit F hereto.
                                  ---------

          (e) Each Party agrees to make the other Party a third-party
beneficiary of each sublicense agreement regarding any rights covered by this
Agreement; provided, however, that the Party shall be a third-party beneficiary
only with respect to those provisions enumerated on Exhibit F.
                                                    ---------

                                      -21-
<PAGE>

          (f) Sections 6.3(c), 6.3(d) and 6.3(e) shall not apply to any
sublicenses by Genentech to Roche.

      6.4 Strategic Partners of Inspire.

          (a) Inspire hereby covenants and agrees that each of its future
Strategic Partners, upon becoming a Strategic Partner, shall be bound by an
agreement with Inspire, enforceable in accordance with its terms, that includes
provisions substantially similar, taking into account the facts and
circumstances of the particular transaction, as Sections 6.8 (Adverse Reaction
Reporting) and 10 (Publication; Confidentiality). In addition, Inspire hereby
covenants and agrees that it shall not amend or modify any of its agreements
existing as of the Effective Date with any Strategic Partner with respect to
adverse reaction reporting, publication or confidentiality without Genentech's
prior written consent.

          (b) Inspire agrees to make Genentech a third-party beneficiary of its
agreements with future Strategic Partners and will use its diligent efforts to
make Genentech a third-party beneficiary of all of its agreements with Strategic
Partners existing as of the Effective Date; provided, however, that Genentech
shall be a third-party beneficiary only with respect to those provisions
enumerated above in Section 6.4(a).

      6.5 Commercialization Obligations, Rights.

          (a) Genentech shall use commercially reasonable efforts to develop
Products, obtain Registrations as deemed necessary by Genentech to market and
sell Products in the Fields in the relevant Territory, and market and sell the
Products in the relevant Territory. Except as provided in Section 6.5(b),
Genentech, either itself and/or by and through its Affiliates and Sublicensees,
shall be responsible for, and shall have the exclusive right to engage in, all
marketing, advertising, promotional, launch and sales activities in connection
with such efforts. All Products shall be marketed and sold in the relevant
Territory under trademarks, trade names and logos, if any, selected and solely
owned by Genentech.

          (b) In the event that Inspire exercises its Co-Development Option,
Inspire shall have the right, at its election and at its sole expense (which
expense shall not be included in the calculation of Operating Profit or Loss),
to exercise its Co-Promotion Option to co-promote Products in Field B throughout
the United States with [CONFIDENTIAL TREATMENT REQUESTED]. Genentech shall have
sole discretion to determine the size, structure and configuration of the sales
force that will be responsible for such Products, and the roles and assignments
of Inspire's sales representatives within such sales force. In order to exercise
its Co-Promotion Option, Inspire must give Genentech written notice of such
exercise before Genentech initiates pre-launch activities for the first Product
in Field B.

      6.6 Right of First Offer. The Parties recognize that Inspire may conduct
research from time to time resulting in the discovery that certain Compounds
demonstrate utility outside the Fields ("Additional Applications"). Inspire
shall provide a written report of any such Additional Application to the JSC
from time to time, but at least once each calendar year; provided, however, that
such report for any particular Additional Application shall in any event be
provided to the JSC prior to the commencement of the first Phase II clinical
trial with respect

                                      -22-
<PAGE>

to such Additional Application.  Such report may be a brief or detailed summary,
at Inspire's election, but in any event such report shall not fail to include
all material facts necessary for the JSC to make each determination set forth in
the following sentence.  The JSC shall review each such report and determine,
within sixty (60) days after its receipt of such report, whether (i) any such
Additional Application could lead to development of a product comprised of a
Compound as an active ingredient (an "Additional Product"), and (ii) there could
be a reasonable risk of off-label usage of such Additional Product in the Fields
in which Genentech is developing, or has developed, a Product
("Cannibalization").  If the JSC determines in good faith that such Additional
Application could lead to an Additional Product and that there is a reasonable
risk of Cannibalization, then Genentech shall have a right of first offer to
obtain the exclusive rights and license to such Additional Application, as
follows:

          (a) At such time as Inspire is interested in developing and/or
commercializing any such Additional Application for such Compounds (whether
itself or by granting a license or other rights to a Third Party), but in no
event later than the completion of Phase II clinical trials with respect to any
such Additional Application, Inspire shall give written notice thereof to
Genentech, together with any and all additional relevant information and data
regarding such Additional Application that Inspire has in its possession or
control. Genentech shall have forty-five (45) days after receipt of such written
notice and all such information and data to decide whether or not it is
interested in obtaining an exclusive license from Inspire for any such
Additional Application.

          (b) If Genentech notifies Inspire in writing within such forty-five
(45)-day period that it is interested in obtaining such exclusive license,
Inspire shall promptly provide Genentech with written notice of its proposed
material terms and conditions of such exclusive license ("Proposed Terms"). The
Proposed Terms shall include all material terms and conditions of such exclusive
license, including, without limitation, the scope of the proposed license and
the financial terms. The Parties shall promptly commence good faith
negotiations, for a period of up to one hundred twenty (120) days after
Genentech receives such Proposed Terms from Inspire, in an effort to reach
mutually acceptable material terms and conditions for such exclusive license,
which material terms and conditions shall be set forth in a written letter of
intent ("Letter of Intent"). During such one hundred twenty (120)-day period,
Inspire shall not negotiate or discuss with any Third Party, or make any Third
Party aware of, the existence or availability of such Additional Application.

          (c) If, despite each Party's good faith efforts, Inspire and Genentech
are not able to agree on such material terms and conditions and do not execute a
Letter of Intent within such one hundred twenty (120)-day period, Inspire may
enter into negotiations with any Third Party regarding any such Additional
Application, provided, however, that (i) Inspire shall have a period of two
hundred and seventy (270) days, commencing at the end of the such one hundered
twenty (120)-day period, to negotiate the material terms and conditions of such
excluisve license with any such Third Party and enter into a binding letter of
intent containing such material terms and conditions signed by Inpsire and such
Third Party ("Third Party Letter of Intent"), (ii) if a Third Party Letter of
Intent is entered into by Inspire and such Third Party within such two hundred
and seventy (270) day period, Inspire and such Third Party shall have a period
of three hundred sixty- five (365) days, commencing at the end the 120-day
period and inclusive of the 270-day period, within which to complete and enter
into a definitive agreement for such exclusive license signed by Inspire and
such Third Party ("Third Party Agreement"), and (iii) the terms and conditions
of any Third Party Term Sheet and/or Third Party Agreement shall be no

                                      -23-
<PAGE>

more favorable to such Third Party than the terms and conditions of such
exclusive license for the same Additional Application that were last offered by
Genentech to Inspire in writing, and declined by Inspire, under this Section
6.6.

          (d) If Inspire has not entered into a Third Party Letter of Intent
within the two hundred seventy (270)-day period set forth in Section 6.6(c) or
has not entered into a Third Party Agreement within the three hundred sixty-five
(365)-day period set forth in Section 6.6(c), then Inspire shall promptly give
written notice thereof to Genentech, together with any and all additional
relevant information and data regarding such Additional Application that Inspire
has in its possession or control that Inspire did not previously provide to
Genentech, and the Parties shall enter into a subsequent round of good faith
negotiations with respect to such Additional Application on a non-exclusive
basis, provided, however, that Inspire shall not enter into any term sheet,
letter of intent, definitive agreement or other commitment with any Third Party
for such Additional Application on terms and conditions more favorable to such
Third Party than the terms and conditions for such Additional Application last
offered by Genentech to Inspire in writing and declined by Inspire.

          (e) Inspire acknowledges and agrees that, notwithstanding any
confidentiality obligations Inspire may have to such Third Party, any Third
Party Letter of Intent, Third Party Agreement or other commitment with such
Third Party regarding any such Additional Application will be subject to the
audit provisions set forth as follows to enable Genentech to verify Inspire's
compliance with this Section 6.6. At the request and expense of Genentech,
Inspire shall permit legal counsel or an independent, certified public
accountant appointed by Genentech and reasonably acceptable to Inspire, at
reasonable times and upon reasonable written notice, to examine such records as
may be necessary to verify Inspire's compliance with this Section 6.6; provided,
however, that such an examination shall not be permitted more than once with
respect to any particular Third Party Letter of Intent or Third Party Agreement.
Inspire shall reimburse Genentech for the reasonable cost of such examination if
such legal counsel or accountant determines that Inspire has not complied with
this Section 6.6. Said legal counsel or accountant shall not disclose to
Genentech any information other than the fact of such compliance (or the lack
thereof) and the material discrepancies in the case of noncompliance.

      6.7 Future Generation Compounds. Inspire shall not develop internally or
license any rights to any Third Party for any Future Generation Compound for use
in the Fields within the relevant Territory during the term of this Agreement.

          (a) At Genentech's request, Inspire will provide to Genentech
documentation, to Genentech's reasonable satisfaction, regarding Inspire's
discovery and development costs (including allocable overhead) calculated in
good faith by Inspire using its best efforts to estimate the actual resources
required [CONFIDENTIAL TREATMENT REQUESTED] for any Future Generation Compound.

          (b) Genentech agrees that it shall not exercise the license rights
granted by Inspire to Genentech under Section 6.1 with respect to any Future
Generation Compound unless and until such time that Genentech reimburses Inspire
for such discovery and development costs in an amount mutually agreed upon by
both Parties in writing after conferring with each other in good faith and
reviewing the relevant discovery and development cost documentation provided by
Inspire, such agreement not to be unreasonably withheld or delayed by either
Party.

                                      -24-
<PAGE>

      6.8 Adverse Reaction Reporting.

          (a) Each Party responsible for clinical trials shall, with respect to
such trials, record, evaluate, summarize and review all adverse drug experiences
associated with the Compounds and the Products. In addition, supplemental
information must be provided regarding Compounds at periodic intervals and
adverse drug experiences must be reported at more frequent intervals depending
upon the severity of the experience. Consequently, each Party agrees to:

               (i)  in a timely manner, provide to the other Party for initial
     and/or periodic submission to government agencies significant information
     on the drug from preclinical laboratory, animal toxicology and pharmacology
     studies, as well as adverse drug experience reports from clinical trials
     and commercial experiences with each Compounds;

               (ii) in connection with investigational drugs, promptly report to
     the other Party the receipt of a report of any unexpected serious adverse
     experience with the drug, if required for either Party to comply with
     regulatory requirements; and

               (iii) in connection with marketed drugs, promptly report to the
     other Party any serious adverse experience with the drug that is
     unexpected.

          (b) For purposes of this Agreement, "serious adverse drug experience"
means any adverse drug experience occurring at any dose that results in any of
the following outcomes: death, a life-threatening adverse drug experience,
inpatient hospitalization or prolongation of existing hospitalization, a
persistent or significant disability/incapacity, or a congenital anomaly/birth
defect. Important medical events that may not result in death, be
life-threatening, or require hospitalization may be considered a serious adverse
drug experience when, based upon appropriate medical judgment, they may
jeopardize the patient or subject and may require medical or surgical
intervention to prevent one of the outcomes listed in this definition. An
unexpected adverse drug experience is one that is not listed in the current
labeling for the drug product. This includes events that may be symptomatically
and pathophysiologically related to an event listed in the labeling, but differ
from the event because of greater severity or specificity.

          (c) Each Party shall promptly report to the other Party the
information set forth above affecting any of the Compounds or any of the
Products in any country, whether or not in the applicable Territory.

          (d) Each Party agrees that it if contracts with a Third Party,
including but not limited to any Strategic Partner of Inspire, for research to
be performed by such Third Party on the drug, that Party agrees to require such
Third Party to report to the contracting Party the information set forth above.

          (e) The details of adverse reaction reporting during development stage
and thereafter, including all Strategic Partners of Inspire, shall be stipulated
in separate agreements to be entered into by the Parties, and such Strategic
Partners as appropriate, in due course.

                                      -25-
<PAGE>

          (f) Any information required pursuant to this Section 6.8 shall be
deemed to have been sufficiently given if in writing and personally delivered or
sent by certified mail (return receipt requested), facsimile transmission
(receipt verified), or overnight express courier service (signature required),
prepaid, to the Party for which such notice is intended, at the address set
forth for such Party below:

               (i)  In the case of Inspire, to:

                    Inspire Pharmaceuticals, Inc.
                    4222 Emperor Boulevard, Suite 470
                    Durham, North Carolina  27703
                    Attention: Regulatory Affairs
                    Facsimile No.: (919) 941-9798
                    Telephone No.: (919) 941-9777

               (ii) In the case of Genentech, to:

                    Genentech Inc.
                    1 DNA Way
                    South San Francisco, California  94080
                    Attention:  Jim Nickas, Drug Safety Department
                    Facsimile No.:  (650) 225-4683
                    Telephone No.:  (650) 225-5591

or to such other address for such Party as it shall have specified by like
notice to the other Party, provided that notices of a change of address shall be
effective only upon receipt thereof.  If delivered personally or by facsimile
transmission, the date of delivery shall be deemed to be the date on which such
notice or request was given.  If sent by overnight express courier service, the
date of delivery shall be deemed to be the next business day after such notice
or request was deposited with such service.  If sent by certified mail, the date
of delivery shall be deemed to be the third (3rd) business day after such notice
or request was deposited with the U.S. Postal Service.

          6.9 Discussions Regarding Genentech Improvements. If Inspire provides
written notice to Genentech that Inspire is interested in licensing from
Genentech any unpatented know-how that embodies or relates to, or any patents or
patent applications that embody or relate to, Inventions that are owned or
controlled by Genentech or its Affiliates ("Genentech Improvements"), which
written notice includes a summary of the terms and conditions (including royalty
payments and/or other financial terms) pursuant to which Inspire would be
interested in obtaining such a license, then Genentech agrees to enter into good
faith discussions with Inspire regarding Inspire's interest; provided, however,
that notwithstanding the foregoing, nothing in this Section 6.9 shall (i) in any
way obligate Genentech to enter into any license or other agreement with
Inspire, (ii) at any time prevent Genentech from negotiating with, or entering
into any license or other agreement with, any Third Party regarding any or all
Genentech Improvements, or (iii) in any way obligate Genentech to disclose to
Inspire the existence of any discussions or negotiations between Genentech and
any Third Party or the substance thereof.

                                      -26-
<PAGE>

7.  FEES, MILESTONES AND ROYALTIES.

      7.1 Up-front Payments.

           (a) As partial consideration to Inspire for the license and other
rights granted to Genentech under this Agreement, pursuant to the Stock Purchase
Agreement and simultaneously with the execution of this Agreement, Genentech is
purchasing one million (1,000,000) shares of Series G Preferred Stock for $10.00
per share, or an aggregate purchase price of $10,000,000, and Inspire shall
apply [CONFIDENTIAL TREATMENT REQUESTED] of such proceeds as set forth in
Section 5.7(b).

           (b) Pursuant to the Stock Purchase Agreement, Genentech will also
purchase Warrants as provided in the Stock Purchase Agreement.

           (c) Genentech shall pay a non-refundable, non-creditable up-front
payment of $5,000,000 to Inspire upon the execution of this Agreement by both
Parties as reimbursement for prior amounts expensed by Inspire for certain
development efforts with respect to the Compounds.

      7.2 Milestone Payments. As further consideration to Inspire for the
license and other rights granted to Genentech under this Agreement, and subject
to Section 7.2(e), Genentech shall, upon the first occurrence of each event set
forth below with respect to the first Product in the specified Field, (i) pay to
Inspire the following milestone payments or (ii) within three (3) business days
after the date of the milestone event, with respect to those items in this
Section 7.2 marked with an asterisk (*), purchase from Inspire, and Inspire
shall issue and sell to Genentech equity of Inspire as provided in the Stock
Purchase Agreement:

          (a) With respect to Field A:
              ------------------------

          Milestone Event                                      Milestone Payment
          ---------------                                      -----------------

          [CONFIDENTIAL TREATMENT REQUESTED]

                                      -27-
<PAGE>

         (b)  With respect to Field B:
              -----------------------

       Milestone Event                                         Milestone Payment
       ---------------                                         -----------------

       [CONFIDENTIAL TREATMENT REQUESTED]

         (c)  With respect to Field D:
              -----------------------

       Milestone Event                                         Milestone Payment
       ---------------                                         -----------------

       [CONFIDENTIAL TREATMENT REQUESTED]

          (d) With respect to Future Generation Compounds, if Genentech decides
to undertake the development of a Product that is a Future Generation Compound,
and if Genentech has not yet contributed to the funding of Inspire's discovery
efforts for generating such Future Generation Compound either through a separate
research agreement agreed upon by both Parties or by retroactively reimbursing
Inspire for its fully-allocated discovery costs relating to such

                                      -28-
<PAGE>

Future Generation Compound, then at the time Genentech begins the development of
such Product, it shall make such reimbursement.  Such reimbursement shall be
made only once, regardless of how many indications such Product may be suited
for.  Notwithstanding this Section 7.2(d), all other milestone payments required
by Sections 7.2(a), 7.2(b) and 7.2(c) shall remain payable as provided in such
sections.  Such reimbursement shall be made in accordance with the Financial
Appendix.

          (e) In the event that Genentech's development of a Product in a
particular Field (an "Original Product") terminates and, at or after the time of
such termination, Genentech is engaged, or subsequently becomes engaged in
clinical development of any other Product in such Field (a "Replacement
Product"), then Genentech shall be entitled to a credit against milestone
payments due pursuant to Section 7.2 with respect to the Replacement Product in
the amount equal to all milestone payments actually paid by Genentech to Inspire
with respect to the Original Product.

      7.3 Royalties.

          (a) Subject to Sections 7.4 and 7.5, Genentech shall pay Inspire a
royalty for each Product in the Fields equal to [CONFIDENTIAL TREATMENT
REQUESTED] of Net Sales on a country-by-country basis, of all Products, the
manufacture, use, sale, offer for sale or importation of which would, but for
this Agreement, constitute an infringement of a Licensed Claim.

          (b) Genentech may offset royalties paid to any Third Party for any
Products under any Third Party Licenses against the royalties due to Inspire on
such Product in such country; provided that such royalties to Inspire shall not
be reduced to less than [CONFIDENTIAL TREATMENT REQUESTED]. This Section 7.3(b)
shall not apply to any Third Party Licenses for delivery technology to be used
in any Product.

      7.4 Obligation to Pay Royalties.

          (a) The obligation to pay royalties to Inspire under this Section 7 is
imposed only once with respect to the same unit of Product regardless of the
number of Patents pertaining thereto. There shall be no obligation to pay
royalties to Inspire under this Section 7 on sales of Products between Genentech
and its Affiliates or Sublicensees, but only in such instances the obligation to
pay royalties shall arise upon the sale by Genentech or its Affiliates or
Sublicensees to unrelated Third Parties. Payments due under this Section 7 shall
be deemed to accrue when Products are billed.

          (b) The obligation to pay royalties to Inspire under this Section 7
with respect to any Licensed Claim of a patent application within the Patents
shall be as follows. Genentech shall pay royalties to Inspire as set forth in
this Section 7 only on the first patent application filed by Inspire in a
country within the Territory covering a Compound in the Fields ("First- Filed
Patent Application") for a period of three (3) years. After such three (3) year
period, Genentech shall have no obligation to pay any royalties under
this Agreement with respect to such First-Filed Patent Application unless and
until such time that a patent is actually issued on such First-Filed Patent
Application. In the event such a patent is actually issued on such First-Filed
Patent Application, Genentech's obligation to pay royalties under this Section 7
shall resume as of the date of issuance of such patent. Genentech shall have no
obligation to pay any royalties under

                                      -29-
<PAGE>

this Agreement for any Licensed Claim of any patent application filed subsequent
to a First-Filed Patent Application in the same country covering the same
Compound in the Fields as such First-Filed Patent Application; provided,
however, that the foregoing shall not limit Genentech's obligation to pay
royalties under this Agreement for a Licensed Claim of an issued Patent as
provided in this Agreement.

          (c) With respect to each Product, in the event that Genentech, any of
its Affiliates or any Sublicensee shall fail to enjoy de facto exclusivity for
sales of such Product in any country in the applicable Territory for any
calendar quarter, the royalty rates otherwise applicable to sales of such
Product in such country with respect to a patent application within the Patents,
shall be reduced by [CONFIDENTIAL TREATMENT REQUESTED]. Genentech, any of its
Affiliates or any Sublicensee shall be deemed to have failed to enjoy de facto
exclusivity with respect to a Product if:

                       [CONFIDENTIAL TREATMENT REQUESTED]

          (d) For purposes of Section 7.4(c), a product will be deemed to
"Compete," be "Competing" or be "Competitive" with a Product if its primary use
is to treat the same patient population for a given disease and that is a
[CONFIDENTIAL TREATMENT REQUESTED] P2Y2 Agonist.

      7.5 Sharing of U.S. Operating Profit or Loss. In the event that Inspire
elects to co-fund the U.S. Development Costs pursuant to Section 5.6, in lieu of
receiving the royalties provided in Section 7.3 on Net Sales of Products in
Field B in the United States, Inspire and Genentech shall share, in accordance
with the Financial Appendix, the U.S. Operating Profit or Loss associated with
commercial sales of such Products in the United States.

8. PAYMENTS AND REPORTS.

      8.1 Payments. Payments between the Parties shall be made in accordance
with the Financial Appendix.

                                      -30-
<PAGE>

      8.2 Mode of Payment. Each Party shall make all payments required under
this Agreement in U.S. dollars, via wire transfer of immediately available funds
as directed by the other Party from time to time, net of any out-of-pocket
transfer costs or fees, in accordance with the Financial Appendix.

      8.3 Records Retention. Genentech and Inspire, if it exercises its Co-
Development Option, shall keep complete and accurate records pertaining to the
development or the sale of Products and, if relevant to the calculation of U.S.
Operating Profit or Loss, for a period of three (3) calendar years after the
year in which such sales or costs occurred, and in sufficient detail to permit
the other Party to confirm the accuracy of the aggregate royalty and/or U.S.
Operating Profit or Loss calculations hereunder.

      8.4 Audits.

          (a) At the request and expense of either Party ("Auditing Party"), the
other Party ("Audited Party") shall permit an independent, certified public
accountant appointed by the Auditing Party and reasonably acceptable to the
Audited Party, at reasonable times and upon reasonable written notice, to
examine such records as may be necessary to: (i) determine the correctness of
any report or payment made under this Agreement; (ii) obtain information as to
the aggregate U.S. Operating Profit or Loss and/or royalties payable for any
calendar quarter in the case of either Party's failure to report or pay pursuant
to this Agreement; or (iii) determine the correctness of the application of the
proceeds under Section 5.7(b); provided, however, that such accountant shall
sign a confidentiality agreement in a form reasonably satisfactory to the
Audited Party, and, provided further, that such examination shall not be
permitted more than once in any twelve (12)-month period. Said accountant shall
not disclose to the Auditing Party or any other person any information, except
that such accountant may disclose to the Auditing Party the fact of a
deficiency, the lack of a deficiency or any overpayment, and the degree thereof,
including the dollar amount. All results of any such examination shall be made
available to the Audited Party.

          (b) In the event that any audit reveals a deficiency in the amount
that should have been paid by Genentech to Inspire, then Genentech shall pay the
underpaid amount to Inspire within forty-five (45) days after Inspire makes a
demand therefor, plus interest thereon if such deficiency is in excess of the
greater of $100,000 or five percent (5%) of the amount that actually should have
been paid by Genentech. Such interest shall be calculated from the date such
underpaid amount was due until the date such underpaid amount is actually paid,
at the rate of one percent (1%) over the prime rate of interest reported in The
Wall Street Journal for the date such amount was due. In addition, if such
underpaid amount is in excess of the greater of $100,000 or five percent (5%) of
the amount that actually should have been paid by Genentech, then Genentech
shall reimburse Inspire for the reasonable cost of such audit. In the event of
an overpayment, such amounts shall be deducted from Inspire's royalties. If such
overpaid amounts have not been settled by such royalty deductions three (3)
years from the date originally overpaid, Genentech shall invoice Inspire for
such amounts.

          8.5 Taxes. In the event that Genentech is required to withhold any tax
to the tax or revenue authorities in any country in the Territories regarding
any payment to Inspire due to the laws of such country, such amount shall be
deducted from the payment to be made by Genentech, and Genentech shall notify
Inspire in writing and promptly furnish Inspire with copies of any tax
certificate or other documentation evidencing such withholding as necessary to

                                      -31-
<PAGE>

satisfy the requirements of the United States Internal Revenue Service related
to any application by Inspire for foreign tax credit for such payment.  Each
Party agrees to cooperate with the other Party in claiming exemptions from such
deductions or withholdings under any agreement or treaty from time to time in
effect.

      8.6 Bartering Prohibited. Without the prior written consent of
Inspire, Genentech and its Affiliates and Sublicensees shall not accept or
solicit any bartered goods or services for the sale of the Products.

      9. OWNERSHIP; PATENTS.

      9.1 Ownership.

          (a) Subject to the license granted to Genentech pursuant to Section
6.1, Inspire shall retain all right, title and interest in and to all Patents
and Know-how that exist as of the Effective Date, regardless of which Party may
prepare or prosecute the patent applications associated therewith, or maintain
the patents or other intellectual property rights related thereto.

          (b) Subject to the license granted to Inspire pursuant to Section 6.2,
Genentech shall retain all right, title and interest in and to all patent
applications, patents, inventions, improvements, discoveries, claims, ideas,
formulae, processes, trade secrets, technologies and know-how, whether or not
patentable, that are owned or controlled by Genentech as of the Effective Date,
regardless of which Party may prepare or prosecute the patent applications
associated therewith, or maintain the patents or other intellectual property
rights related thereto.

          (c) Inventions made solely by employees or contractors of Inspire, or
acquired solely by Inspire, shall be owned solely by Inspire. Inventions made
solely by employees or contractors of Genentech, or acquired solely by
Genentech, shall be owned solely by Genentech. Inventions made jointly by
employees or contractors of Inspire and by employees or contractors of Genentech
shall be owned jointly by Inspire and Genentech. All of Inspire's interest in
and to such joint Inventions shall be deemed Licensed Technology and shall be
subject to the terms and conditions of this Agreement.

          (d) Inspire shall not own any right, title or interest in any
trademark, trade name or logo selected by Genentech or the JSC for or in
connection with any Product or component part thereof.

      9.2 Patent Prosecution and Maintenance.

          (a) Inspire shall have full responsibility for, and shall control the
preparation and prosecution of, all patent applications and the maintenance of
all patents relating to the Licensed Technology (including the Patents)
throughout the Territory. Inspire shall pay all costs and expenses of filing,
prosecuting and maintaining such patent applications and patents relating to
Licensed Technology.

                                      -32-
<PAGE>

          (b) Each Party agrees promptly to provide to the other Party with a
complete written disclosure of any Invention made by such Party. Inspire shall
determine whether any Invention owned solely by Inspire or owned jointly by
Inspire and Genentech is patentable, and if so, shall proceed with the
preparation and prosecution of a patent application covering any such Invention.
Genentech shall determine whether any Invention owned solely by Genentech is
patentable, and if so, shall proceed with the preparation and prosecution of a
patent application covering any such Invention.

          (c) Inspire shall have full responsibility for, and shall control the
preparation and prosecution of, all patent applications and the maintenance of
all patents relating to Inventions that are owned solely by Inspire or owned
jointly by Inspire and Genentech, throughout the Territory.

          (d) Inspire shall select Howry & Simon or such other qualified
independent patent counsel reasonably acceptable to Genentech to prepare and
file and prosecute all patent applications pursuant to Sections 9.2(a) and
9.2(c). Inspire shall promptly provide copies to Genentech of any filings made
to, and any written communications received from, any patent office relating, in
whole or in part, to such patent applications or patents granted thereon
reasonably in advance of the relevant proposed filing or response date. Inspire
and the independent patent counsel shall give reasonable consideration to any
comments that may be made by Genentech reasonably in advance of the relevant
proposed filing or response date relating to the filing and prosecution of such
patent applications or the maintenance of patents granted thereon.

          (e) Inspire shall pay all costs and expenses of filing, prosecuting
and maintaining patent applications and patents relating to Inventions that are
owned solely by Inspire.

          (f) Inspire and Genentech shall together determine whether any
Invention jointly owned by Inspire and Genentech is patentable. Inspire and
Genentech shall share equally all costs and expenses of preparing, filing,
prosecuting and maintaining patent applications and patents relating to
Inventions that are owned jointly by Genentech and Inspire. If either Party
elects not to pay for: (i) the filing of a patent application in any country in
the Territory on any Invention that the other Party reasonably believes is
patentable, or (ii) the further prosecution or maintenance of any patent
application or patent on any Invention in any country in the Territory, or (iii)
the filing of any divisional or continuing patent application (based on a prior
patent application or patent) on an Invention in any country in the Territory,
such Party shall notify the other Party in writing in a timely manner and the
other Party may do so at its own expense. In the event that the other Party
elects to proceed with any such filing or further prosecution or maintenance,
the Party electing not to pay shall assign its rights in and to such patent or
patent application in such country to the other Party, and all of such assigning
Party's rights in such patent or patent application in such country shall cease.
In the case where Genentech is the assigning Party, the license granted to
Genentech under Section 6.1 with respect to such assigned patent or patent
application (and any associated sublicense(s)) shall terminate. In the case
where Inspire is the assigning Party, the license granted to Inspire under
Section 6.2 with respect to such assigned patent or patent application (and any
associated sublicense(s)) shall terminate.

                                      -33-
<PAGE>

          (g) Genentech shall have full responsibility for, and shall control
the preparation and prosecution of, all patent applications and the maintenance
of all patents relating to Inventions that are owned solely by Genentech,
throughout the Territory.

          (h) Genentech shall pay all costs and expenses of filing, prosecuting
and maintaining patent applications and patents relating to Inventions that are
owned solely by Genentech.

          (i) Each Party agrees to cooperate with the other Party to execute all
lawful papers and instruments, to make all rightful oaths and declarations, and
to provide consultation and assistance as may be necessary in the preparation,
prosecution, maintenance and enforcement of all such patents.

      9.3 Patent Enforcement.

          (a) If either Party learns of an infringement, unauthorized use,
misappropriation or ownership claim or threatened infringement or other such
claim (an "infringement") by a Third Party with respect to any Licensed
Technology within the Territory, such Party shall promptly notify the other
Party in writing and shall promptly provide such other Party with available
evidence of such infringement. In addition, Inspire shall promptly notify
Genentech in writing when Inspire becomes aware of any infringement action
involving any Product in any country outside the Territory.

          (b) Genentech shall have the first right, but not the duty, to
institute patent infringement actions against Third Parties based on any
Licensed Technology in the Territory. If Genentech does not secure actual
cessation of such infringement or institute an infringement proceeding against
an offending Third Party within one hundred eighty (180) days of learning of
such infringement, Inspire shall have the right, but not the duty, to institute
such an action with respect to any infringement by such Third Party. The costs
and expenses of any such action (including fees of attorneys and other
professionals) shall be borne by the Party instituting the action, or, if the
Parties elect to cooperate in instituting and maintaining such action, such
costs and expenses shall be borne by the Parties in such proportions as they may
agree in writing. Each Party shall execute all necessary and proper documents
and take such actions as shall be appropriate to allow the other Party to
institute and prosecute such infringement actions. Any award paid by Third
Parties as a result of such an infringement action (whether by way of settlement
or otherwise) shall be applied first to reimburse both Parties for all costs and
expenses incurred by the Parties with respect to such action on a pro rata basis
and, if after such reimbursement any funds shall remain from such award,
[CONFIDENTIAL TREATMENT REQUESTED].

      9.4 Infringement Action by Third Parties. In the event of the institution
or threatened institution of any suit by a Third Party against Genentech for
patent infringement involving the sale, distribution or marketing of any
Products in the Territory where such infringement claim is a result of the use
of the Licensed Technology, Genentech shall promptly notify Inspire in writing
of such suit. Unless otherwise covered by Section 11.2(c), Genentech shall have
the right to defend such suit at its own expense, and Inspire hereby agrees to
assist and cooperate

                                      -34-
<PAGE>

with Genentech, at Inspire's own expense, to the extent necessary in the defense
of such suit.  During the pendency of such action and thereafter, Genentech
shall continue to make all payments due under this Agreement.  If Genentech
finally prevails and receives an award from such Third Party as a result of such
action (whether by way of judgment, award, decree, settlement or otherwise),
such award [CONFIDENTIAL TREATMENT REQUESTED]

10. PUBLICATION; CONFIDENTIALITY.

      10.1 Notification and Review with Respect to Inspire and Genentech.

          (a) Both Parties recognize that each may wish to publish the results
of their work relating to the subject matter of this Agreement. However, both
Parties also recognize the importance of acquiring patent protection.
Consequently, any proposed publication, by either Party (including its
Affiliates), that includes information related to the Compounds or Products, or
which otherwise includes proprietary information of the other Party or
Confidential Information, shall comply with this Section 10. At least forty-five
(45) days before a manuscript is to be submitted to a publisher, the publishing
Party shall provide the nonpublishing Party with a copy of the manuscript. If
the publishing Party wishes to make an oral presentation, it shall provide the
nonpublishing Party with a summary of such presentation at least fifteen (15)
business days before such oral presentation and, if an abstract is to be
published, three (3) business days before such abstract is to be submitted. Any
oral presentation, including any question period, shall not include any
Confidential Information unless both Parties otherwise mutually agree in writing
in advance of such oral presentation.

          (b) The nonpublishing Party shall review the manuscript, abstract,
text or any other material provided under Section 10.1(a) to determine whether
patentable subject matter is or may be disclosed. The nonpublishing Party shall
notify the publishing Party in writing within thirty (30) days (or two (2)
business days in the case of abstracts) of receipt of the proposed publication
if it, in good faith, determines that patentable subject matter is or may be
disclosed, or if the Joint Project Team, in good faith, believes Confidential
Information (as defined in Section 10.3) is or may be disclosed. To the extent
solely determined by the JSC, after consulting with the nonpublishing Party,
that patent applications should be filed, the publishing Party shall delay its
publication or presentation for a period not to exceed one hundred twenty (120)
days from the nonpublishing Party's receipt of the proposed publication or
presentation to allow time for the filing of patent applications covering
patentable subject matter. In the event that the delay needed to complete the
filing of any necessary patent application will exceed the one hundred twenty
(120)-day period, the nonpublishing Party will discuss with the publishing Party
the need for obtaining an extension of the publication delay beyond the one
hundred twenty (120)-day period. If the nonpublishing Party determines in good
faith that Confidential Information or proprietary information is or may be
disclosed, the Parties will consult in good faith to arrive at an agreement on
mutually acceptable modifications to the proposed publication or presentation to
avoid such disclosure.

                                      -35-
<PAGE>

          (c) In the case where Genentech is the nonpublishing Party, any
failure by Genentech to prevent the publication by Inspire of any Confidential
Information shall not relieve Inspire of its obligations under Section 9.2.

          (d) Except as expressly provided in this Section 10, each Party agrees
not to make any public announcement or disclosure (including, without
limitation, any press release, summary or Q&A) of the terms of this Agreement,
the Stock Purchase Agreement or the documents ancillary thereto, or the identity
or potential applications of any Compound, without first obtaining the written
approval of the other Party and agreement upon the nature and text of such
public announcement or disclosure. On and after the Effective Date, either Party
may issue a press release, the content of which will be agreed upon in advance
by the Parties, with respect to the execution of this Agreement, the Stock
Purchase Agreement and the documents ancillary thereto. The Party desiring to
make any such public announcement shall provide the other Party with a copy of
the proposed announcement for review and comment in reasonably sufficient time
prior to public release.

          (e) Each Party agrees that it shall cooperate fully with the other
with respect to all disclosures regarding this Agreement, the Stock Purchase
Agreement and the documents ancillary thereto required under applicable laws and
regulations to the United States Securities and Exchange Commission (the "SEC")
and any other governmental or regulatory agencies, including by way of example
only but not limited to, (i) disclosures relating to the filing of a
registration statement by Inspire regarding an initial public offering of its
common stock and (ii) requests for confidential treatment of proprietary
information of either Party included in any such governmental disclosure.

          (f) In addition, each Party agrees not to disclose, under any
circumstances except as set forth in this Section 10 or as otherwise required by
law, the terms of this Agreement, the Stock Purchase Agreement or the documents
ancillary thereto, or the identity or potential applications of any Compound, to
any Third Party other than to professional advisors and financing sources, and
in that case, only under confidentiality terms at least as stringent in material
respects as this Section 10. Genentech shall have the right to review and
comment on registration statements and applications for confidential treatment
insofar as they pertain to this Agreement, the Stock Purchase Agreement and the
documents ancillary thereto, prior to being filed with the SEC, and Inspire
shall not unreasonably refuse to accommodate such comments. Genentech shall
provide its comments, if any, on such registration statement or application as
soon as practicable, and in no event later than the fourth (4th) business day
after the day such registration statement or application is received by
Genentech.

      10.2 Notification and Review with Respect to Inspire's Strategic Partners.

          (a) Inspire shall review every proposed publication of any of its
Strategic Partners that includes information related to the Compounds or
Products, or which otherwise includes Confidential Information, to determine
whether patentable subject matter is or may be disclosed, and Inspire shall
cause the publication of such information to be delayed for a period of time
sufficient to allow for the filing of patent applications covering patentable
subject matter. In addition, Inspire will consult in good faith with the
publishing Strategic Partner to arrive at an agreement on mutually acceptable
modifications to the proposed publication or presentation to avoid disclosure of
such proprietary information or Confidential Information.

                                      -36-
<PAGE>

          (b) Inspire shall provide Genentech with a copy of any publications
relating to any of the Compounds or Products published by any of Inspire's
Strategic Partners promptly after such publication.

      10.3 Confidentiality; Exceptions. Except to the extent expressly
authorized by this Agreement or otherwise agreed in writing, the Parties agree
that, during the term of this Agreement and for five (5) years thereafter, the
receiving Party shall keep, and shall ensure that its employees, officers and
directors keep, completely confidential and shall not publish or otherwise
disclose and shall not use for any purpose any information furnished to it by
the other Party or developed under or in connection with this Agreement or the
Stock Purchase Agreement, except to the extent that it can be established by the
receiving Party by competent proof that such information: (i) was already known
to the receiving Party, other than under an obligation of confidentiality, at
the time of disclosure by the other Party; (ii) was generally available to the
public or otherwise part of the public domain at the time of its disclosure to
the receiving Party; (iii) became generally available to the public or was
otherwise part of the public domain after its disclosure and other than through
any act or omission of the receiving Party in breach of this Agreement; or (iv)
was disclosed to the receiving Party, other than under an obligation of
confidentiality, by a Third Party who had no obligation to the disclosing Party
not to disclose such information to others (all such information to which none
of the foregoing exceptions applies, "Confidential Information").

      10.4 Exceptions to Obligation. The restrictions contained in Section 10.3
shall not apply to Confidential Information that: (i) is submitted by the
recipient to governmental authorities to facilitate the issuance of
Registrations for the Products, provided that reasonable measures shall be taken
to assure confidential treatment of such information; (ii) is provided by the
recipient to Third Parties under confidentiality agreements having provisions at
least as stringent as those in this Agreement, for consulting, manufacturing
development, manufacturing, external testing, marketing trials and, with respect
to Genentech, to Third Parties who are Sublicensees or other
development/marketing partners of Genentech with respect to any of the subject
matter of this Agreement; (iii) is otherwise required to be disclosed in
compliance with applicable laws or regulations or order by a court or other
regulatory body having competent jurisdiction; provided that if a Party is
required to make any such disclosure of the other Party's Confidential
Information such Party will give reasonable advance written notice to the other
Party of such disclosure requirement and, except to the extent inappropriate in
the case of patent applications, will use its best efforts to secure
confidential treatment of such Confidential Information required to be
disclosed; or (iv) was developed by the receiving Party independent of any
disclosure received under this Agreement.

      10.5 Limitations on Use. Each Party shall use any Confidential Information
obtained by such Party from the other Party, its Affiliates, its licensees or
its sublicensees, pursuant to this Agreement or otherwise, solely in connection
with the activities or transactions contemplated hereby.

      10.6 Remedies. Each Party shall be entitled, in addition to any other
right or remedy it may have, at law or in equity, to an injunction, without the
posting of any bond or other security, enjoining or restraining the other Party
from any violation or threatened violation of this Section 10.

                                      -37-
<PAGE>

11.   INDEMNIFICATION.

      11.1 By Genentech. Genentech shall indemnify, defend and hold harmless
Inspire and its Affiliates, and their respective directors, officers, employees
and agents, from and against any and all liabilities, damages, losses, costs and
expenses (including the reasonable fees of attorneys and other professionals)
arising out of or resulting from:

          (a) gross negligence, recklessness or wrongful intentional acts or
omissions of Genentech, and its directors, officers, employees and agents, in
connection with the work performed by Genentech under the Development Program;

          (b) any warranty claims, Products recalls or any tort claims of
personal injury (including death) or property damage relating to or arising out
of any manufacture, use, sale, offer for sale or importation of any Products by
Genentech due to any negligence, recklessness or wrongful intentional acts or
omissions by, or strict liability of, Genentech, and its directors, officers,
employees and agents, except, in each case, to the comparative extent such claim
arose out of or resulted from the gross negligence, recklessness or wrongful
intentional acts or omissions of Inspire and its Affiliates, and its directors,
officers, employees and agents; or

          (c) any breach of any representation or warranty made by Genentech
pursuant to Section 2.

      11.2 By Inspire. Inspire shall indemnify, defend and hold harmless
Genentech, its Affiliates and its Sublicensees, and their respective directors,
officers, employees and agents, from and against any and all liabilities,
damages, losses, costs and expenses (including the reasonable fees of attorneys
and other professionals) arising out of or resulting from:

          (a) gross negligence, recklessness or wrongful intentional acts or
omissions of Inspire or its Affiliates or Strategic Partners, and their
respective directors, officers, employees and agents, in connection with the
work performed by Inspire under the Development Program;

          (b) any warranty claims, Products recalls or any tort claims of
personal injury (including death) or property damage relating to or arising out
of any manufacture, use, distribution or sale of any Products by Inspire or
Genentech or any of their respective Affiliates or Inspire's Strategic Partners
or Genentech's Sublicensees due to any gross negligence, recklessness or
wrongful intentional acts or omissions by, or strict liability of, Inspire or
its Affiliates or Strategic Partners, and their respective directors, officers,
employees and agents, except, in each case, to the comparative extent such claim
arose out of or resulted from the gross negligence, recklessness or wrongful
intentional acts or omissions of Genentech, its Affiliates or its Sublicensees,
and their respective directors, officers, employees and agents; or

          (c) any breach of any representation or warranty made by Inspire
pursuant to Section 2.

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<PAGE>

      11.3 Notice. In the event that any person (an "Indemnitee") entitled to
indemnification under Section 11.1 or 11.2 is seeking such indemnification, such
Indemnitee shall inform the indemnifying Party of the claim as soon as
reasonably practicable after such Indemnitee receives notice of such claim,
shall permit the indemnifying Party to assume direction and control of the
defense of the claim (including the sole right to settle it at the sole
discretion of the indemnifying Party, provided that such settlement does not
impose any obligation on the Indemnitee or the other Party) and shall cooperate
as requested (at the expense of the indemnifying Party) in the defense of the
claim.

      11.4 Complete Indemnification. As the Parties intend complete
indemnification, all costs and expenses, including without limitation, legal
fees and expenses, incurred by an Indemnitee in connection with enforcement of
this Section 11 shall also be reimbursed by the indemnifying Party.

12.   TERM; TERMINATION.

      12.1 Term. This Agreement shall become effective as of the Effective Date
and, unless earlier terminated pursuant to the other provisions of this Section
12, shall expire as follows:

          (a) With respect to the Products in Field B in the United States:

               (i) if Inspire has exercised its Co-Development Option, when no
     such Products continue to be marketed by either or both of the Parties; or

               (ii) if Inspire has not exercised its Co-Development Option, as
     to each Product on a Product-by-Product basis, upon the expiration of the
     last to expire of all Licensed Claims covering such Product in the United
     States.

          (b) With respect to Fields A, C, D and E, and Field B outside the
United States, as to each Product in each country in the Territory, on a Product
by Product and country-by-country basis, upon the expiration of the last to
expire of all Licensed Claims covering such Product in such country.

          (c) In any event, this Agreement shall expire in its entirety upon the
expiration of all Licensed Claims with respect to all Products in all countries
in Territory ABC and Territory DE.

12.2 Termination for Cause.  Either Party (the "Non-breaching Party") may,
without prejudice to any other remedies available to it at law or in equity,
terminate this Agreement in its entirety or with respect to any Product, in the
event the other Party (the "Breaching Party") shall have materially breached or
defaulted in the performance of any of its material obligations hereunder or,
with respect to such Product, so materially breached or defaulted with respect
to that Product, and such default shall have continued for sixty (60) days after
written notice thereof was provided to the Breaching Party by the Non-breaching
Party (or, if such default cannot be cured within such sixty (60)-day period, if
the Breaching Party does not commence and diligently continue actions to cure
such default during such sixty (60)-day period).  Any such termination shall
become effective at the end of such sixty (60)-day period unless the Breaching

                                      -39-
<PAGE>

Party has cured any such breach or default prior to the expiration of such sixty
(60)-day period (or, if such default cannot be cured within such sixty (60)-day
period, if the Breaching Party has commenced and diligently continued actions to
cure such default). The right of either party to terminate this Agreement as
provided in this Section 12.2 shall not be affected in any way by its waiver or
failure to take action with respect to any previous default.

      12.3 Termination Without Cause. Genentech may terminate this Agreement in
its entirety or with respect to any Product upon one hundred fifty (150) days
prior written notice to Inspire. Genentech shall not be liable for any costs or
other payments incurred after the date on which notice of such termination is
given, except for reasonable noncancelable costs to which Inspire already became
obligated prior to delivery of such notice that were included in the budget
approved by the JSC as part of the current Annual Development Plan, and, as
provided in the Financial Appendix, the allocation of Profit and Loss and any
royalties for sales made during the one hundred fifty (150) day period.

      12.4 Effect of Expiration or Termination.

          (a) Following the expiration of the term of this Agreement with
respect to a Product in any country in a Territory pursuant to Section 12.1(a)
or 12.1(b), Genentech shall have a royalty-free, paid-up, perpetual, irrevocable
and sublicenseable right and license, exclusive for [CONFIDENTIAL TREATMENT
REQUESTED] and nonexclusive thereafter, to continue to develop, make, have made,
use, market, sell, have sold, offer to sell, import, distribute and otherwise
exploit such Product in such country, and the exclusive, perpetual, irrevocable,
sublicenseable, royalty-free and paid-up right and license to use the Licensed
Technology in connection therewith. To that end, Genentech may continue to hold
and use all data, reports, records, information and materials that relate to or
are prepared in the course of the Development Program, and may hold all INDs,
Registration Applications, Registrations and other regulatory filings made or
filed by Genentech for such Products pursuant to this Agreement, and may in its
sole discretion continue any sublicense granted by Genentech under this
Agreement.

          (b) Following expiration of the term of this Agreement in its entirety
pursuant to Section 12.1(c), Genentech shall have a royalty-free, paid-up,
perpetual, irrevocable and sublicenseable right and license, exclusive for
[CONFIDENTIAL TREATMENT REQUESTED] and nonexclusive thereafter, to continue to
develop, make, have made, use, market, sell, have sold, offer to sell, import,
distribute and otherwise exploit all Products in the Territory, and the
exclusive, perpetual, irrevocable, sublicenseable, royalty-free and paid-up
right and license to use the Licensed Technology in connection therewith. To
that end, Genentech may continue to hold and use all data, reports, records and
materials that relate to or are prepared in the course of the Development
Program, and may hold all INDs, Registration Applications, Registrations and
other regulatory filings made or filed by Genentech for all Products, pursuant
to this Agreement, and may in its sole discretion continue any sublicense
granted by Genentech under this Agreement.

          (c) If this Agreement is terminated by Inspire with respect to a
particular Product pursuant to Section 12.2 by reason of a material breach or
default by Genentech, or terminated by Genentech with respect to a particular
Product pursuant to Section 12.3, in addition to any other remedies available to
the Parties at law or in equity: (i) at Genentech's expense, Genentech shall
promptly transfer to Inspire copies of all relevant data, reports, records and
materials in Genentech's possession or control that relate to the Product and
return to Inspire all relevant

                                      -40-
<PAGE>

records and materials in Genentech's possession or control containing
Confidential Information of Inspire with respect to such Product (provided that
Genentech may keep one (1) copy of such Confidential Information of Inspire for
archival purposes only); (ii) Genentech shall, upon Inspire's request and at
Genentech's expense, provide Inspire with all information necessary or desirable
to cross-reference and/or assume responsibility for any of Genentech's INDs,
Registrations Applications, Registrations and other regulatory filings in the
Fields with respect to such Product; (iii) the license granted by Inspire to
Genentech under Section 6.1 shall terminate; and (iv) all sublicenses granted by
Genentech under this Agreement shall continue in full force and effect in
accordance with the terms and conditions of the respective sublicense
agreements, and Genentech will assign such sublicense agreements to Inspire;
provided, however, that this Section 12.4(c) shall not apply to any Confidential
Information, licenses and sublicenses relating to any Products for which there
has not been a termination.

          (d) If this Agreement is terminated by Inspire pursuant to Section
12.2 by reason of a material breach or default by Genentech, or terminated by
Genentech pursuant to Section 12.3, in addition to any other remedies available
to the Parties at law or in equity: (i) Genentech shall promptly transfer to
Inspire copies of all data, reports, records and materials in Genentech's
possession or control that relate to the Development Program and return to
Inspire all relevant records and materials in Genentech's possession or control
containing Confidential Information of Inspire (provided that Genentech may keep
one (1) copy of such Confidential Information of Inspire for archival purposes
only); (ii) Genentech shall, upon Inspire's request and at Genentech's expense,
provide Inspire with all information necessary or desirable to cross-reference
and/or assume responsibility for any of Genentech's INDs, Registrations
Applications, Registrations and other regulatory filings in the Fields with
respect to all Products; (iii) the license granted by Inspire to Genentech under
Section 6.1 shall terminate; and (iv) all sublicenses granted by Genentech under
this Agreement shall continue in full force and effect in accordance with the
terms and conditions of the respective sublicense agreements, and Genentech
shall assign such sublicense agreements to Inspire.

          (e) If this Agreement is terminated by Genentech pursuant to Section
12.2 by reason of a material breach or default by Inspire, in addition to any
other remedies available to Genentech at law or in equity: (i) the license
granted to Inspire by Genentech under Section 6.2 shall terminate; (ii)
Genentech shall have an exclusive, royalty-free, paid-up, perpetual, irrevocable
and sublicenseable right to continue to develop, make, have made, use, market,
sell, have sold, offer to sell, import, distribute and otherwise exploit any
Products in the Territory, and the exclusive, perpetual, irrevocable,
sublicenseable, royalty-free and paid-up right and license to use the Licensed
Technology in connection therewith. To that end, Genentech may continue to hold
and use all data, reports, records, information and materials that relate to or
are prepared in the course of the Development Program, and may hold all INDs,
Registration Applications, Registrations and other regulatory filings made or
filed by Genentech for the Products, pursuant to this Agreement, and may in its
sole discretion continue any sublicenses granted by Genentech under this
Agreement.

          (f) At the expiration or any termination of this Agreement, all of
Genentech's payment obligations under this Agreement shall terminate as of the
effective date of such expiration or termination, except for payments to Inspire
for any royalties or Operating Profit or Loss percentage under Section 7 that
accrued prior to the effective date of such expiration or termination and are
due and payable by Genentech to Inspire pursuant to this Agreement.

                                      -41-
<PAGE>

      12.5 Accrued Rights; Surviving Obligations.

          (a) Termination, relinquishment or expiration of this Agreement for
any reason shall be without prejudice to any rights that shall have accrued to
the benefit of either Party prior to such termination, relinquishment or
expiration. Such termination, relinquishment or expiration shall not relieve
either Party from obligations that are expressly indicated to survive
termination or expiration of this Agreement.

          (b) All of the Parties' rights and obligations under Sections 1
(Definitions), 2 (Representations and Warranties), 3.8 (Expenses) (solely with
respect to actions commenced before the effective date of termination of this
Agreement), 5.9 (Liability), 6.2(b) (Limitation on License Grants to Inspire),
6.6 (Right of First Offer), 8.3 (Records Retention), 8.4 (Audits), 9 (Ownership;
Patents), 10 (Publication; Confidentiality), 11 (Indemnification), 12.4 (Effect
of Expiration or Termination), this 12.5 (Accrued Rights; Surviving
Obligations), 13 (Force Majeure), and 14 (Miscellaneous) shall survive
termination, relinquishment or expiration of this Agreement.

13.   FORCE MAJEURE.

      Neither Party shall be held liable or responsible to the other Party nor
be deemed to be in default under, or in breach of any provision of, this
Agreement for failure or delay in fulfilling or performing any obligation of
this Agreement when such failure or delay is due to force majeure, and without
the fault or negligence of the Party so failing or delaying. For purposes of
this Agreement, force majeure is defined as causes beyond the control of the
Party, including, without limitation, acts of God; acts, regulations, or laws of
any government; war; civil commotion; destruction of production facilities or
materials by fire, flood, earthquake, explosion or storm; labor disturbances;
epidemic; and failure of public utilities or common carriers. In such event
Inspire or Genentech, as the case may be, shall immediately notify the other
Party, with written notice to follow, of such inability and of the period for
which such inability is expected to continue. The Party giving such notice shall
thereupon be excused from such of its obligations under this Agreement as it is
thereby disabled from performing for so long as it is so disabled and for
forty-five (45) days thereafter. To the extent possible, each Party shall use
reasonable efforts to minimize the duration of any force majeure.

14.   MISCELLANEOUS.

      14.1 Relationship of Parties. Nothing in this Agreement is intended or
shall be deemed to constitute a partnership, agency, employer-employee or joint
venture relationship between the Parties. No Party shall incur any debts or make
any commitments for the other, except to the extent, if at all, specifically
provided herein.

      14.2 Assignment. Except pursuant to a sublicense permitted under this
Agreement and as provided in Section 12.4(c), neither Party shall be entitled to
assign its rights or delegate its obligations hereunder without the express
written consent of the other Party hereto, except that each Party may assign its
rights and transfer its duties hereunder to any assignee of all or substantially
all of its business (or that portion thereof to which this Agreement relates) or
in the event of such Party's merger, consolidation or involvement in a similar
transaction. No assignment and transfer shall be valid or effective unless done
in accordance with this Section

                                      -42-
<PAGE>

14.2 and unless and until the assignee/transferee shall agree in writing to be
bound by the provisions of this Agreement.

      14.3 Books and Records. Any books and records to be maintained under this
Agreement by a Party shall be maintained in accordance with GAAP.

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

      14.5 Notice.

          (a) Except for notices given pursuant to Section 6.8, any notice or
request required or permitted to be given under or in connection with this
Agreement shall be deemed to have been sufficiently given if in writing and
personally delivered or sent by certified mail (return receipt requested),
facsimile transmission (receipt verified), or overnight express courier service
(signature required), prepaid, to the Party for which such notice is intended,
at the address set forth for such Party below:

               in the case of Inspire, to:

                    Inspire Pharmaceuticals, Inc.
                    4222 Emperor Boulevard, Suite 470
                    Durham, North Carolina  27703
                    Attention: Christy L. Shaffer, Ph.D.
                    Facsimile No.:  (919) 941-9797

               in the case of Genentech, to:

                    Genentech, Inc.
                    1 DNA Way, Mailstop 49
                    South San Francisco, California  94080
                    Attention: Corporate Secretary
                    Facsimile No.: (650) 952-9882

or to such other address for such Party as it shall have specified by like
notice to the other Party, provided that notices of a change of address shall be
effective only upon receipt thereof.  With respect to notices given pursuant to
Section 6.8 or this Section 14.5, (i) if delivered personally or by facsimile
transmission, the date of delivery shall be deemed to be the date on which such
notice or request was given; (ii) if sent by overnight express courier service,
the date of delivery shall be deemed to be the next business day after such
notice or request was deposited with such service; and (iii) if sent by
certified mail, the date of delivery shall be deemed to be the third (3rd)
business day after such notice or request was deposited with the U.S. Postal
Service.

          (b) All correspondence, notices and other communications shall be
promptly provided to the other Party.

                                      -43-
<PAGE>

      14.6 Use of Name. Except as otherwise provided herein, neither Party shall
have any right, express or implied, to use in any manner the name or other
designation of the other Party or any other trade name, trademark or logo of the
other Party for any purpose in connection with the performance of this
Agreement.

      14.7 Public Announcements. Except as required by law (including, without
limitation, disclosure requirements of the U.S. Securities and Exchange
Commission, Nasdaq or any other stock exchange on which securities issued by a
Party are traded) and as permitted by Section 10.3 or 10.4, neither Party shall
make any public announcement concerning this Agreement or the subject matter
hereof without the prior written consent of the other, which shall not be
unreasonably withheld, provided that it shall not be unreasonable for a Party to
withhold consent with respect to any public announcement containing any
financial terms or any of such Party's Confidential Information. In the event of
a required public announcement, to the extent practicable under the
circumstances, the Party making such announcement shall provide the other Party
with a copy of the proposed text prior to such announcement and with financial
terms sufficiently in advance of the scheduled release of such announcement to
afford such other Party a reasonable opportunity to review and comment upon the
proposed text.

      14.8 Waiver. A waiver by either Party of any of the terms and conditions
of this Agreement in any instance shall not be deemed or construed to be a
waiver of such term or condition for the future, or of any subsequent breach
hereof. All rights, remedies, undertakings, obligations and agreements contained
in this Agreement shall be cumulative and none of them shall be in limitation of
any other remedy, right, undertaking, obligation or agreement of either Party.

      14.9 Compliance with Law. Nothing in this Agreement shall be deemed to
permit a Party to export, reexport or otherwise transfer any Products sold under
this Agreement without compliance with applicable laws.

      14.10 Severability. When possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.

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

      14.12 Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of Delaware without regard to its choice of law
principles.

      14.13 Arbitration.

          (a) All disputes between the Parties arising from or relating to this
Agreement or the breach hereof, other than alleged patent infringement or as set
forth in Section 10.6 or otherwise expressly provided in this Agreement, that
are not subject to Section 3.5 or cannot otherwise be resolved informally, shall
be finally resolved by arbitration in accordance with the then existing Rules of
the American Arbitration Association (the "AAA"), as supplemented by the further
requirements of this Section 14.13. Such arbitration shall be conducted by three
(3)

                                      -44-
<PAGE>

arbitrators, one appointed by each of Genentech and Inspire and the third
selected by the first two appointed arbitrators.

          (b) Within thirty (30) days after filing its request for arbitration
with the AAA, the Party requesting arbitration of a dispute (the "claimant")
shall provide the other Party (the "respondent") with a statement explaining the
basis of its request for arbitration, including a listing all of the specific
facts the claimant contends support its claims, all acts or omissions by the
respondent that the claimant believes constitute a breach of this Agreement, all
of the terms and provisions of this Agreement that the claimant believes have
been breached, the names and addresses of each person the claimant believes has
knowledge supporting its claim, and a concise statement of damages, including
the means by which the claimed damages were calculated and the facts upon which
the calculation(s) were based. The claimant also shall provide with such
statement a copy of all documents in its possession or control that it contends
support its claim.

          (c) Within one hundred twenty (120) days of receipt of the above
statement, the respondent shall provide a written reply statement to the
claimant, setting forth a brief description of each of the defenses known to it
at that time and the facts upon which the defenses are based, and the names and
last known addresses of each witness supporting any such defenses. The
respondent also shall provide with such reply statement a copy of all documents
in its possession or control that it contends support its defenses.

          (d) The requirements of paragraphs (b) and (c) of this Section 14.13
are intended to supplement, and therefore are in addition to, the Rules and
procedural requirements of the AAA. In particular, the exchanges of documents
and information required by such paragraphs shall be in addition to any
discovery that is permitted under the Rules of the AAA or that the arbitrators
may otherwise authorize in the arbitration.

          (e) The arbitrators shall be required to render a reasoned written
opinion in support of their final decision, setting forth findings of fact,
legal analysis and award. The decision rendered by the arbitrators shall be
final and binding upon the Parties. Judgment upon the decision and any award
made by the arbitrators may be entered in any court of competent jurisdiction.
Each Party shall pay its own expenses of arbitration and shall share equally in
the fees and expenses of the arbitrators, unless the arbitrators assess against
one Party the expenses of the other Party (including the other Party's
reasonable attorneys' fees and expenses) in their award.

          (f) To the extent permitted by law, the Parties agree to keep
confidential any documents exchanged between them pursuant to the arbitration
and, the content of any testimony or written documents submitted pursuant to the
arbitration.

          (g) The place of arbitration of any dispute (i) initiated by Inspire
shall be San Francisco, California and (ii) initiated by Genentech shall be
Boston, Massachusetts.

14.14  Entire Agreement.  This Agreement, together with the Exhibits hereto and
every Annual Development Plan approved by the Joint Steering Committee, sets
forth the entire agreement and understanding between the Parties as to the
subject matter hereof and merges all prior discussions and negotiations between
them, and neither of the Parties shall be bound by any conditions, definitions,
warranties, understandings or representations with respect to such subject

                                      -45-
<PAGE>

matter other than as expressly provided herein or as duly set forth on or
subsequent to the date hereof in writing and signed by a proper and duly
authorized officer or representative of the Party to be bound thereby.

      14.15 Parties in Interest. All of the terms and provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the Parties hereto and their respective permitted successors and assigns.

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

      14.17 Counterparts. This Agreement may be executed simultaneously in any
number of identical counterparts, any one of which need not contain the
signature of more than one Party, but all such counterparts taken together shall
constitute one and the same agreement.

                                      * * *

                           [ signature page follows ]

                                      -46-
<PAGE>

     IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed by its duly authorized representative as of the date first above
written.

                                    INSPIRE PHARMACEUTICALS, INC.

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

                                    GENENTECH, INC.

                                    By:  /s/ Arthur D. Levinson
                                         ----------------------
                                        Arthur D. Levinson, Ph.D.
                                        President and Chairman of the Board

                                      -47-
<PAGE>

                                                                       EXHIBIT A
                                                                       ---------

                               EXISTING COMPOUNDS

                       [CONFIDENTIAL TREATMENT REQUESTED]

                                      A-1
<PAGE>

                                   EXHIBIT B
                                   ---------

                               Financial Appendix

     This Exhibit B covers financial planning, accounting policies and
          ---------
procedures to be followed in determining Development Costs, Fully Burdened
Manufacturing Costs and Operating Profit or Loss and related sharing of revenue
and expenses pursuant to the Agreement.

     For such purpose, this Exhibit B sets forth the principles for reporting
                            ---------
actual results and budgeted plans of the combined operations in the Territories,
the frequency of reporting, the use of a single "Functional Currency" (as
defined below) and the methods of determining payments to the Parties, auditing
of accounts and other matters.

     For purposes of this Exhibit B only, the consolidated accounting of
                          ---------
operations for the Territories shall be referred to as "GenSpire."  GenSpire is
not a legal entity and has been defined for identification purposes only.

     This Exhibit B also provides the definitions of certain financial terms
          ---------
applicable to the Parties for purposes of the Agreement; provided, however, that
the definition of "Fully Burdened Manufacturing Costs" shall apply to Genentech
or Inspire to the extent it manufactures any  Product (or component thereof)
under the Agreement and the definition of "Development Costs" shall apply to the
development work by both Parties under the Agreement.  All capitalized terms
used herein without definition shall have the meanings ascribed thereto in the
Agreement, unless otherwise expressly provided herein. References in this
Exhibit B to a "Party" or "Parties" shall be construed to mean Genentech or
---------
Inspire, as the case may be, and in every case shall be deemed to include the
Party's Affiliates under the Agreement.

                                      B-1
<PAGE>

B.1. Principles of Reporting

       The presentation of results of operations of the Parties in the
Territories will be based on each Party's respective financial information
presented separately and on a consolidated basis in the reporting format
depicted as follows:

                                                       Genentech  Inspire  Total
                                                       ---------  -------  -----

        [CONFIDENTIAL TREATMENT REQUESTED]

       It is the intention of the Parties that the interpretation of these
definitions will be consistent with GAAP in the United States.

       If necessary, a Party will make the appropriate adjustments to the
financial information it supplies under the Agreement to conform to the above
format of reporting results of operation.

B.2.   Frequency of Reporting

       The fiscal year of GenSpire will be a calendar year.

       Reporting by each Party for GenSpire revenues and expenses will be
performed as follows, with submissions due on the date indicated or the next
business day if such date is a weekend or U.S. holiday:

                                      B-2
<PAGE>

<TABLE>
<CAPTION>
          ---------------------------------------------------------------------------------------
              Reporting Event          Frequency                   Timing of Submission
          ---------------------------------------------------------------------------------------
<S>         <C>                  <C>                     <C>
            Actuals              Quarterly

          -----------------------------------------------
            Forecasts            Approximately
                                 Quarterly

          -----------------------------------------------      [CONFIDENTIAL TREATMENT REQUESTED]
            Preliminary Budgets  Annually
          -----------------------------------------------
            Final Budgets        Annually
          -----------------------------------------------
            Long-Range Plan      Annually
          -----------------------------------------------
</TABLE>

Reports of actual results compared to budget shall be made to the relevant Joint
Project Team on a * basis. After approval by the Joint Project Team as to
amounts, such Joint Project Team shall forward the report to the JSC for its
approval. Variances from the total overall budgets, and significant variances in
budget line items, shall only be included in calculation of Operating Profit or
Loss when approved by the JSC after referral by the Joint Project Team.

Genentech will be responsible for the preparation of consolidated reporting of
GenSpire (including Operating Profit or Loss), calculation of the profit/loss
sharing and determination of the cash settlement.  Genentech will provide the
financial representatives from each Party within fifteen (15) working days of
the submission date shown above, a statement showing the consolidated results
and calculations of the Operating Profit or Loss sharing and cash settlement
required in a format agreed to by the Parties.

Inspire shall promptly provide all orders received by its sales people, if any,
to Genentech for processing and distribution.

On a * basis, Genentech will supply Inspire with each * Gross Sales and Net
Sales of Products in units, local currency and U.S. dollars (using the * rate
for conversion for such * as shown in The Wall Street Journal) by country in the
Territories according to Genentech's sales reporting system, which shall be
consistent with the definitions herein. Each such report shall be provided as
early as possible, but no later than fifteen (15) days after the last day of the
* in question, and shall provide * and * cumulative figures.

                     * [CONFIDENTIAL TREATMENT REQUESTED]

                                      B-3
<PAGE>

     The financial representatives from the Parties will meet as appropriate but
at least quarterly to review and approve the following:

     .    actual results

     .    forecasts

     .    budgets

     .    inventory levels

     .    Sales Returns and Allowances

     .    other financial matters, including Genentech's (and Inspire's, if
          applicable) methodologies for charging costs and allocating sales
          representatives to GenSpire for determination of actuals, forecasts,
          budgets and long-range plans and the results of applying such
          methodologies.

B.3. Budget and Long-Range Plan

Responsibility for the budget and long-range plan in each Field will rest with
the relevant Joint Project Team, which will develop budgets for development and
commercialization for the term of the Joint Project Team, subject to final
approval by the JSC.

Budgets will be prepared annually.  In addition, headcount chargeable to
GenSpire will be agreed to annually by the JSC.

Budgets will be supplemented with detailed business plans for clinical trials,
Registration Applications, and detailed plans for product introduction, sales
efforts and promotion as determined by each Joint Project Team.  Budgets, once
approved by the JSC, can only be changed with the written approval of the JSC.

The Joint Project Team, with the assistance of the financial representatives
from Genentech and Inspire, will be responsible for identifying, analyzing and
reporting all significant line item budget variances and all overall, total
budget variances.  Only the JSC may approve materially unfavorable line item
budget variations, as defined by the Joint Project Team, and all overall, total
budget variations, chargeable to GenSpire during the course of any year during
the term of the Agreement.

A [CONFIDENTIAL TREATMENT REQUESTED] long-range plan for GenSpire shall be
established on a yearly basis under the direction of the JSC and submitted to
Genentech and Inspire by [CONFIDENTIAL TREATMENT REQUESTED] of each year.

                                      B-4
<PAGE>

B.4.   Definitions

       B.4.1   "Allocable Overhead" means costs incurred by a Party or for its
account which are attributable to a Party's supervisory services, occupancy
costs, corporate bonus (to the extent not charged directly to department), and
its payroll, information systems, human relations or purchasing functions and
which are allocated to company departments based on space occupied or headcount
or other activity-based method consistently applied by a Party, or a standard
rate if agreed to by the Parties. Allocable Overhead shall not include any costs
attributable to general corporate activities including, by way of example,
executive management, investor relations, business development, legal affairs
and finance.

       B.4.2.  "Cost of Sales" means Fully Burdened Manufacturing Costs (as
defined below).

       B.4.3.  "Development Costs"

       (a) "Development Costs" means the development costs actually incurred by
Genentech or Inspire from the Effective Date of the Agreement through the later
of (i) the date of Registration (including thereafter costs to maintain or
expand such Registration) of the final Product in the Field in the Territory, or
(ii) the date of termination of development efforts of the final Product in the
Field for which Registration is sought in the Territory.  Such costs shall
comprise those costs required to obtain, maintain and/or expand the relevant
authorization and/or ability to manufacture, formulate, fill, use, ship, sell
and/or distribute a Product in commercial quantities to Third Parties in the
Territory.

       "Development Costs" shall include, without limitation, costs of research
or development including costs of studies on the toxicological,
pharmacokinetical, metabolical or clinical aspects of a Product conducted
internally or by individual investigators or consultants necessary for the
purpose of obtaining, maintaining and/or expanding marketing approval of a
Product, process development, process improvement and scale-up and recovery
costs, qualification lots, costs for preparing, submitting, reviewing or
developing data or information for the purpose of submission to a governmental
authority to obtain, maintain and/or expand marketing approval of a Product, and
applicable Allocable Overhead.

       "Development Costs" shall also include, without limitation, expenses for
data management, statistical designs and studies, document preparation, and
other administration expenses associated with the clinical testing program or
post-marketing studies required to maintain product approvals.

       (b) "U.S. Development Costs" means (i) Development Costs through the end
of Phase II plus (ii) fifty percent (50%) of Development Costs in the United
States and Europe, beginning in Phase III through the date of termination of
development efforts of the final Product in the Field for which Registration is
sought in the Territory.

                                      B-5
<PAGE>

       (c) In determining Development Costs chargeable under the Agreement, each
Party will use its respective project accounting systems and will review and
approve its respective project accounting systems and methodologies with the
other Party.

       B.4.4.  "Distribution Costs" means the costs, including applicable
Allocable Overhead, specifically identifiable to the distribution of a Product
by a Party including customer services, collection of data about sales to
hospitals and other end users, order entry, billing, shipping, credit and
collection and other such activities.  For the purpose of the Agreement,
Genentech will charge GenSpire for Distribution Costs an amount equal to
[CONFIDENTIAL TREATMENT REQUESTED] of Net Sales in a lump sum.

       B.4.5.  "Fully Burdened Manufacturing Costs" of an item or items,
including, without limitation, a Compound, Bulk Materials or a Product (in bulk,
vialed or finished product form, as the case may be) means one hundred percent
(100%) of a Party's fully burdened manufacturing cost (as defined in the Party's
generally accepted accounting policies consistently applied) which shall
comprise the sum of:

       (a) The cost of goods produced, as determined by the Party(ies)
performing (or having performed by a Third Party) each stage of the
manufacturing process in accordance with GAAP consistently applied by such
Party(ies), including, but not limited to, direct labor and material costs and
product quality assurance/control costs as well as applicable Allocable
Overhead;

       (b) All of the Party's allocable intellectual property acquisition and
licensing costs (including, without limitation, any royalties) paid to Third
Parties as such costs relate to Products; and

       B.4.6.  "General and Administrative Costs" means costs chargeable to
GenSpire equal to [CONFIDENTIAL TREATMENT REQUESTED] after approval by the
applicable Regulatory Authority in any country, of Genentech and of Inspire, in
the aggregate, but only to the extent these costs are chargeable to GenSpire.

       B.4.7.  "Gross Profit" means Net Sales less Cost of Sales for sales of a
Product by a Party to Third Parties in the Territory.

       B.4.8.  "Gross Sales" means the gross amount invoiced by either Party or
their Affiliates or Sublicensees for sales of a Product to Third Parties in the
Territory.

       B.4.9.  "Marketing Costs" means the direct costs of marketing, promotion,
advertising, Product promotional materials, professional education, product
related public relations, relationships with opinion leaders and professional
societies, market research (before and after product approval), healthcare
economics studies, post-marketing studies not required to maintain product
approvals, and other similar activities related to the Products and approved by
the Joint Project Team.  Such costs will include both internal costs (e.g.,
without limitation, salaries, benefits, supplies and materials, etc.),
applicable Allocable Overhead, and outside

                                      B-6
<PAGE>

services and expenses (e.g., without limitation, consultants, agency fees,
meeting costs, etc.). "Marketing Costs" shall also include, without limitation,
activities related to obtaining reimbursement from payers and costs of sales and
marketing data. "Marketing Costs" will specifically exclude the costs of
activities which promote either Party's business as a whole without being
product specific (such as corporate image advertising).

     B.4.10. "Net Sales" means Gross Sales of a Product less applicable Sales
Returns and Allowances.

     B.4.11. "Operating Profit or Loss" means Net Sales of all Products less the
following items with respect to each Product, all for a given period: Cost of
Sales, Marketing Costs, Sales Costs, Development Costs (to the extent chargeable
to GenSpire), General and Administrative Costs, Distribution Costs, and Other
Operating Income/Expense.

     B.4.12. "Other Operating Income/Expense" means other operating income or
expense from or to Third Parties which is not part of the primary business
activity of GenSpire, but is considered and approved by the Joint Project Team
and JSC as income or expense for purposes of GenSpire and is limited to the
following:

     .    actual inventory write-offs of any Product

     .    patent and trademark costs

     .    product liability insurance to the extent the Parties obtain a joint
          policy

     .    indemnification costs (as described in Section 11 of the Agreement)

     .    other (to be approved by JSC)

     B.4.13. "Sales Costs" means Genentech's costs, including Allocable
Overhead, approved by the Joint Project Team with the annual budget, incurred by
the Parties or for their account and specifically identifiable to the sales
efforts of Products to all markets in the Territory including the managed care
market. "Sales Costs" shall include, without limitation, costs associated with
sales representatives for Products, including compensation, benefits and travel,
supervision and training of such sales representatives, sales meetings, and
other sales related expenses. "Sales Costs" will not include the start-up costs
associated with either Party's sales force, including recruiting, relocation and
other similar costs. Inspire's sales costs shall not be included in profit/loss
calculations.

     B.4.14. "Sales Returns and Allowances" means the sum of (a), (b), and (c),
where: (a) is a provision, determined by a Party under GAAP for sales of
Products in the Territory for (i) trade, cash and quantity discounts or rebates
on Products (other than price discounts granted at the time of invoicing and
which are included in the determination of Gross Sales), (ii) credits or
allowances given or made for rejection or return of, and for uncorrectable
amounts on, previously sold Products or for retroactive price reductions
(including Medicare and similar types of rebates and chargebacks), (iii) taxes,
duties or other governmental charges levied on or measured by the billing amount
for Products, as adjusted for rebates and refunds, (iv)

                                      B-7
<PAGE>

charges for freight and insurance directly related to the distribution of
Products, to the extent included in Gross Sales, and (v) credits for allowances
given or made for wastage replacement, indigent patient and any other sales
programs agreed to by the Parties for Products; (b) is a quarterly adjustment of
the provision determined in (a) to reflect amounts actually incurred by a Party
in the Territory for items (i), (ii), (iii), (iv) and (v) in clause (a); and (c)
is an adjustment for combination products (if any) under the Agreement. The
provision allowed in clause (a) and adjustments made in clauses (b) and (c) (if
any) will be reviewed by the Joint Project Team.

B.5    Foreign Exchange

The "Functional Currency" for accounting for Operating Profit or Loss will be
U.S. dollars.  For billing and reporting, the statement of operations and sales
will be translated into U.S. dollars at the average rate of exchange listed in
The Wall Street Journal on each business day of the applicable calendar quarter.

B.6.   Audits and Interim Reviews

Either Party shall have the right to request that the other Party's independent,
certified accounting firm perform an audit or interim review of the other
Party's books in order to express an opinion regarding such Party's compliance
with GAAP.  Such audits or review will be conducted at the expense of the
requesting Party.

At the request and expense of either Party ("Auditing Party"), the other Party
("Audited Party") shall permit an independent, certified public accountant
appointed by the Auditing Party and reasonably acceptable to the Audited Party,
at reasonable times and upon reasonable written notice, to examine such records
as may be necessary to: (i) determine the correctness of any report or payment
made under this Agreement; (ii) obtain information as to the aggregate U.S.
Operating Profit or Loss and/or royalties payable for any calendar quarter in
the case of Genentech's failure to report or pay pursuant to this Agreement; or
(iii) determine the correctness of any discovery or development costs related to
Future Generation Compounds or the application of the proceeds under Section
5.7(b); provided, however, that such accountant shall sign a confidentiality
agreement in a form reasonably satisfactory to the Audited Party, and, provided
further, that such examination shall not be permitted more than once in any
twelve (12)-month period.  Said accountant shall not disclose to the Auditing
Party or any other person any information, except that such accountant may
disclose to the Auditing Party the fact of a deficiency, the lack of a
deficiency or any overpayment, and the degree thereof, including the dollar
amount.  All results of any such examination shall be made available to the
Audited Party.

In the event that any audit reveals a deficiency in the amount that should have
been paid by Genentech to Inspire, then Genentech shall pay the underpaid amount
to Inspire within forty-five (45) days after Inspire makes a demand therefor,
plus interest thereon if such deficiency is in excess of the greater of $100,000
or five percent (5%) of the amount that actually should have been paid by
Genentech.  Such interest shall be  calculated from the date such underpaid
amount was due until the date such underpaid amount is actually paid, at the
rate of one percent (1%) over the prime rate of interest reported in The Wall
Street Journal for the date such amount was

                                      B-8
<PAGE>

due. In addition, if such underpaid amount is in excess of the greater of
$100,000 or five percent (5%) of the amount that actually should have been paid
by Genentech, then Genentech shall reimburse Inspire for the reasonable cost of
such audit. In the event of an overpayment, such amounts shall be deducted from
Inspire's royalties. If such overpaid amounts have not been settled by such
royalty deductions three (3) years from the date originally overpaid, Genentech
shall invoice Inspire for such amounts.

At the request and expense of Genentech, Inspire shall permit legal counsel or
an independent, certified public accountant (at Genentech's option) appointed by
Genentech and reasonably acceptable to Inspire, at reasonable times and upon
reasonable notice, to examine such records as may be necessary to verify
Inspire's compliance with Section 6.6 of the Agreement; provided, however, that
such an examination shall not be permitted more than once in any twelve (12)-
month period with respect to any particular Third Party.  Said legal counsel or
accountant shall not disclose to Genentech any information other than the fact
of such compliance (or the lack thereof) and the material discrepancies in the
case of noncompliance.  All results of any such examination shall be made
available to Inspire.

B.7.   Payments between the Parties

Royalty payments by Genentech to Inspire pursuant to Section 7.3 of the
Agreement and, subject to Section B.13 below, payments to each Party of the
agreed upon percentages of Operating Profit or Loss as provided under Section
B.10 below will be made quarterly, based on actual results within forty-five
(45) days after the end of each quarter, adjusted for reimbursement of the net
expenses or income incurred or received by each Party.  A report specifying how
each payment was calculated shall also be submitted with each payment to the
non-paying Party.  Balancing payments by one (1) Party to reimburse the other
Party's Development Costs for purposes of the sharing of such costs under the
Agreement will be approved by the JSC.  Within forty-five (45) days of the end
of each calendar quarter, there shall be reconciliation of the Development Costs
that are to be shared and that are incurred during that year by Genentech and
Inspire, with a payment by one (1) Party to the other to the extent necessary so
that each Party bears its appropriate percentage of such shared Development
Costs.  In the event any payment is made after the date specified herein, the
paying Party shall increase the amount otherwise due and payable by adding
interest thereon, computed at the rate of one percent (1%) over the prime rate
of interest reported in The Wall Street Journal on the date so specified.
Genentech will perform the consolidation and settlement calculations for
submission to the JSC for its information.

B.8.   Responsibility for Reporting

The responsibility for the consolidated reporting of GenSpire to the Joint
Project Team and JSC shall be with Genentech in close cooperation with Inspire.
This will be the basis for the GenSpire accounting and determining of payments
to the Parties.  Genentech shall provide Inspire with a copy of the GenSpire
consolidated reporting and the calculation serving as the basis of determining
payments to the Parties.  Inspire will provide Genentech with financial

                                      B-9
<PAGE>

statements for its activities in the Territory, prepared in accordance with the
terms contained in this Exhibit B in order for Genentech to prepare the
                        ---------
consolidated reports.

B.9.   Accounting for Development Costs, Marketing Costs and Sales Costs

All Development Costs, Marketing Costs and Sales Costs will be based on the
appropriate costs definition stated in Section B.4 of this Exhibit B.
                                                           ---------

Each Party shall report Development Costs in a manner consistent with its
project cost system.  In general, these project cost systems report actual time
spent on specific projects, apply the actual labor costs, capture actual costs
of specific projects and allocate other expenses to projects.  For Marketing
Costs, the Parties will report costs based on spending in marketing departments.
The Parties acknowledge that the methodologies used will be based on systems in
place in the applicable departments.

B.10.  Operating Profit and Loss Sharing

In the event Inspire exercises its Co-Development Option pursuant to Section 5.6
of the Agreement, Genentech and Inspire agree to share the Operating Profit or
Loss from the sale of Products in Field B in the United States in the following
manner:

       [CONFIDENTIAL TREATMENT REQUESTED]

The Party supplying commercial supplies of Product shall finance the cost of
building inventory necessary for product launch, other pre-launch marketing
activities approved by the Joint Project Team, and commercial sales of Product.
Subject to Section B.13 below, the non-supplying Party shall repay to the
supplying Party its share of such costs, as allocated in Section B.10(a) or (b)
above, as applicable, following first Registration of such Products from the
Operating Profit or Loss allocated to the non-supplying Party in any calendar
quarter.  If such repayment is not complete three (3) years following such first
Registration, the non-supplying Party will complete such repayment in a lump sum
paid at the end of the next calendar quarter following such first Registration.
Interest on any such repayment will be charged at a rate equal to one percent
(1%) over the prime rate of interest as published in The Wall Street Journal on
the first business day of such calendar quarter.

B.11.  Development Cost Sharing

In the event Inspire exercises its Co-Development Option for Products in Field B
in the United States pursuant to Section 5.6 of the Agreement, Genentech and
Inspire agree to share the U.S. Development Costs as follows and as further
provided in Section 5.6 of the Agreement and in

                                      B-10
<PAGE>

this Exhibit B:  [CONFIDENTIAL TREATMENT REQUESTED].
     ---------

B.12.  Start of Operations and Effective Accounting Date Termination

Operation of GenSpire will be deemed to have commenced, retroactively, as of the
commencement of Phase III clinical trials for a Product in Field B if Inspire
has exercised its Co-Development Option.  Costs and expenses incurred prior to
such date are not chargeable to GenSpire.

For reporting and accounting purposes with respect to GenSpire, the effective
termination date of the Agreement with regard to the last detailing year in the
Territory will be the nearest month end to which such termination takes place.

B.13.  Promissory Note Offset

In accordance with Section 5.6 of the Agreement, any amounts that would
otherwise be due and payable by Genentech to Inspire for Operating Profit and
Loss allocation hereunder shall first be applied to repay any outstanding
amounts owed by Inspire to Genentech under the Promissory Note, in accordance
with the terms of the Promissory Note, as of the date such payments by Genentech
to Inspire for Operating Profit and Loss allocation are due under the Agreement.

                                      B-11
<PAGE>

                                                                       EXHIBIT C
                                                                       ---------

                                INITIAL PATENTS
                                ---------------

1.   Dinucleotides Useful for the Treatment of Lung Disease
     Licensed from The University of North Carolina-Chapel Hill
     Inventors:  R. Boucher, et al.
     U.S. Patent No. 5,635,160 filed 7 Jun 1995; Issued 3 Jun 1997
     PCT filed 6 Jun 1996 designating all member countries; Published WO96/40059
     Dec 1996
     Foreign National Filings entered in EPO, Australia, Brazil, Canada, China,
     Japan, Mexico, Norway, New Zealand and S. Korea
     Hong Kong designated Oct. 1998

2.   Dinucleotides Useful for the Treatment of Lung Disease
     Licensed from The University of North Carolina-Chapel Hill
     Inventors:  R. Boucher, et al.
     U.S. Patent No. 5,935,555 filed 8 May 1997; Issued 10 Aug. 1999
     CIP of above

3.   Method of Preventing or Treating Pneumonia in Immobilized Patients Using
     UTP and Related Compounds
     Inventors:  K. Jacobus and J. Leighton
     U.S. Patent No. 5,763,447; Filed 23 Jul 1996, U.S. Patent Issued 9 Jun 1998
     S. Africa application filed July 23, 1997 as 97/6538
     PCT Filed Jul 23, 1997; Serial No. PCT/US 97/12938
     Publication WO98/03182 on 29 Jan. 1998
     National Phase filing due 23 January 1999 with Australia, Canada, China,
     EP, Japan, Korea, Mexico and New Zealand to be designated

4.   Method of Treating Sinusitis with UTP and Related Compounds
     Inventors:  K. Jacobus, et al.
     U.S. Patent No. 5,789,391; Filed 3 Jul 1996, U.S. Patent Issued 4 Aug 1998
     PCT filed 3 Jul 1997
     National Phase Filing due 3 Jan 1999 with Australia, Canada, China, EP,
     Japan, Korea, Mexico and New Zealand to be designated

5.   Method of Treating Sinusitis with UTP and Related Compounds
     Inventors: K. Jacobus, et al.
     U.S. Patent No. 5,958,897; Filed 9 Jan 1998, U. S. Patent Issued 28 Sep
     1999
     PCT Filed 3 Jul 1997
     National Phase Filing due 3 Jan 1999 with Australia, Canada, China, EP,
     Japan, Korea, Mexico and New Zealand to be designated

                                      C-1
<PAGE>

6.   Method of Treating Sinusitis with UTP and Related Compounds
     Inventors: K. Jacobus, et al.
     U.S. Patent No. 5,972,904; Filed 9 Jan 1998, U. S. Patent Issued 26 Oct
     1999
     PCT Filed 3 Jul 1997
     National Phase Filing due 3 Jan 1999 with Australia, Canada, China, EP,
     Japan, Korea, Mexico and New Zealand to be designated

7.   Method of Treating Sinusitis with UTP and Related Compounds
     Inventors: K. Jacobus, et al.
     U.S. Patent No. 5,981,506; Filed 9 Jan 1998 U. S. Patent Issued 9 Nov 1999
     PCT Filed 3 Jul 1997
     National Phase Filing due 3 Jan 1999 with Australia, Canada, China, EP,
     Japan, Korea, Mexico and New Zealand to be designated

8.   Certain Dinucleotides and Their Use as Modulators of Mucociliary Clearance
     and Ciliary Beat Frequency
     Inventors:  W. Pendergast, et al.
     U.S. Patent No. 5,837,861; issued 17 Nov. 1998
     PCT filed 6 Feb 1998
     Non-convention Foreign Filings conducted in Argentina, Malaysia, S. Africa
     10 Feb 1998
     Claims for compounds (NCEs) and also formulations, methods of treatment
     National Phase filings entered in Australia, Brazil, Canada, China, EPO,
     Japan, S. Korea, Mexico, Norway, New Zealand

9.   Method of Treating Ciliary Dyskinesia with UTP and Related Compounds
     Licensed from The University of North Carolina-Chapel Hill
     Inventors:  K. Jacobus, et al.
     U.S. filed 27 Mar 1996
     PCT filed 27 Mar 1997 designating all member countries
     Publication as WO97/35591 on 2 Oct 1997
     Foreign National Phase entered in Australia, Canada, China, EP, Japan,
     Korea, Mexico and New Zealand and Taiwan on 27 Sep 1998

10.  Method of Treating Bronchitis with UTP and Related Compounds
     Licensed from The University of North Carolina-Chapel Hill
     Inventors:  C. Shaffer, et al.
     U.S. Filed 7 Nov 1996
     PCT Filed 21 Oct 1997
     CIP filed 26 July 1999
     Publication as WO98/19685 on 14 May 1998
     National Phase filings entered in Australia, Brazil, Canada, China, EPO,
     Japan, Korea, Mexico, Norway, New Zealand

                                      C-2
<PAGE>

11.  Method For Large-Scale Production of Di(Uridine 5'-)Tetraphosphate
     Inventors:  B. Yerxa, et al.
     Provisional US Filing 25 Jul 1997
     US CIP and PCT filed 24 Jul 1998
     Non-convention countries S. Africa, Argentina, and Indonesia designated 25
     Jul 1998
     And Malaysia, Philippines, Thailand, and Taiwan requested 3 Nov. 1998
     Published as WO99/05155
     National Phase filing due 25 Jan. 2000 with Australia, Brazil, Canada,
     China, EPO, Japan, Mexico, Norway, S. Korea, and New Zealand designated

                                      C-3
<PAGE>

                                                                       EXHIBIT D
                                                                       ---------

                               INITIAL MEMBERS OF
                               ------------------

                            JOINT STEERING COMMITTEE
                            ------------------------

A.   Initial Designees of Inspire:

     1.   Christy Shaffer, Ph.D., President and Chief Executive Officer

     2.   Benjamin Yerxa, Ph.D., Senior Director, Preclinical Programs

     3.   Gregory Mossinghoff, Chief Business Officer

B.   Initial Designees of Genentech:

     Genentech's designees shall be determined as soon as practicable after the
     Effective Date.

                                      D-1
<PAGE>

                                                                       EXHIBIT E
                                                                       ---------

                             FORM OF NOTE AGREEMENT
                             ----------------------

                           UNSECURED PROMISSORY NOTE

     $______________                                          ________, ________
                                                          ______, North Carolina

     FOR VALUE RECEIVED, Inspire Pharmaceuticals, Inc., a Delaware corporation
("Company") promises to pay to Genentech, Inc., a Delaware corporation, or its
registered assigns ("Holder"), the principal sum of _____________ Dollars and
________ Cents ($__________), or such lesser amount as shall equal the
outstanding principal amount hereof, together with interest from the date of
this Note on the unpaid principal balance at a rate equal to prime rate plus one
percent (1%) per annum, computed on the basis of the actual number of days
elapsed and a year of 365 days. All unpaid principal, together with any then
unpaid and accrued interest and other amounts payable hereunder, shall be due
and payable on the earlier of (i) five years from the date hereof, and (ii) the
merger or consolidation of the Company with or into any other corporation or
corporations (except where a majority of the outstanding equity securities of
the surviving corporation immediately after the merger or consolidation is held
by persons who were shareholders of the Company immediately prior to the merger
or consolidation), or a sale or other transfer of all or substantially all of
the assets of the Company (or any series of related transactions resulting in
the same).  Company shall make quarterly payments of 1/20th of the original
principal amount of this Note, plus accrued interest thereon, beginning on
________, _________ and each third monthly anniversary thereafter.

     The following is a statement of the rights of Holder and the conditions to
which this Note is subject, and to which Holder, by the acceptance of this Note,
agrees:

     1.   Definitions.  As used in this Note, the following capitalized terms
          -----------
have the following meanings:

          (a) "Company" includes the corporation initially executing this Note
and any Person which shall succeed to or assume the obligations of Company under
this Note in accordance with and subject to the terms of this Note.

          (b) "Holder" shall mean the Person specified in the introductory
paragraph of this Note or any other Person(s) who shall at the time be the
registered holder of this Note.

          (c) "Lien" shall mean, with respect to any property, any security
interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or
on such property or the income therefrom, including, without limitation, the
interest of a vendor or lessor under a conditional sale agreement, capital lease
or other title retention agreement, or any agreement to

                                      E-1
<PAGE>

provide any of the foregoing, and the filing of any financing statement or
similar instrument under the Uniform Commercial Code or comparable law of any
jurisdiction.

          (d) "License Agreement" means the Development, License and Supply
Agreement between Genentech, Inc. and the Company dated December 15, 1999, as
amended from time to time.

          (e) "Person" shall mean and include an individual, a partnership, a
corporation (including a business trust), a joint stock company, a limited
liability company, an unincorporated association, a joint venture or other
entity or a governmental authority.

     2.   Prepayment.  Upon five (5) days prior written notice to Holder,
          ----------
Company may prepay this Note in whole or in part; provided, however, that any
such prepayment will be applied first to the payment of expenses due under this
Note, second to interest accrued on this Note and third, if the amount of
prepayment exceeds the amount of all such expenses and accrued interest, to the
payment of principal of this Note.

     3.   Certain Covenants.  While any amount is outstanding under the Note:
          -----------------

          (a) Liens.  Without the prior written consent of Holder, Company shall
              -----
not create, incur, assume or permit to exist any Lien on or with respect to the
License Agreement or any intellectual property or other assets of Holder
licensed to the Holder by the Company thereunder.

          (b) Asset Dispositions.  Without the prior written consent of Holder,
              ------------------
Company shall not sell, lease, transfer, license or otherwise dispose of the
License Agreement or any intellectual property or other assets of Holder
licensed or sublicensed to the Holder by the Company thereunder, other than as
permitted under the License Agreement.

          (c) Dividends, Redemptions, Etc.  Without the prior written consent of
              ---------------------------
Holder, Company shall not (i) pay any dividends or make any distributions on its
equity securities; (ii) purchase, redeem, retire, defease or otherwise acquire
for value any of its equity securities, other than in respect to stock purchases
from departing employees; (iii) return any capital to any holder of its equity
securities; (iv) make any distribution of assets, equity securities, obligations
or other securities to any holder of its equity securities; or (v) set apart any
sum for any such purpose.

     4.   Events of Default.  The occurrence of any of the following shall
          -----------------
constitute an "Event of Default" under this Note and the other Transaction
Documents:

          (a) Failure to Pay.  Company shall fail to pay (i) when due any
              --------------
principal payment under this Note or the License Agreement or (ii) any interest
or other payment required under the terms of this Note or the License Agreement
and such payment shall not have been made within five (5) days of Company's
receipt of Holder's written notice to Company of such failure to pay; or

                                      E-2
<PAGE>

          (b) Breaches of Certain Covenants. Company shall fail to observe or
              -----------------------------
perform any covenant, obligation, condition or agreement set forth in Section 3
of this Note; or

          (c) Breaches of Other Covenants. Company shall fail to observe or
              ---------------------------
perform any other covenant, obligation, condition or agreement contained in this
Note (other than those specified in Sections 4(a) and 4(b)) or fail to observe
or perform any material covenant, obligation, condition or agreement contained
in the License Agreement and such failure shall continue for fifteen (15) days;
or

          (d) Representations and Warranties. Any representation, warranty,
              ------------------------------
certificate, or other statement (financial or otherwise) made or furnished by or
on behalf of Company to Holder in writing in connection with this Note or the
License Agreement, or as an inducement to Holder to enter into this Note or the
License Agreement, shall be false, incorrect, incomplete or misleading in any
material respect when made or furnished; or

          (e) Voluntary Bankruptcy or Insolvency Proceedings. Company shall (i)
              ----------------------------------------------
apply for or consent to the appointment of a receiver, trustee, liquidator or
custodian of itself or of all or a substantial part of its property, (ii) be
unable, or admit in writing its inability, to pay its debts generally as they
mature, (iii) make a general assignment for the benefit of its or any of its
creditors, (iv) be dissolved or liquidated, (v) become insolvent (as such term
may be defined or interpreted under applicable statute), (vi) commence a
voluntary case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or consent to any such relief or to
the appointment of or taking possession of its property by any official in an
involuntary case or other proceeding commenced against it, or (vi) take any
action for the purpose of effecting any of the foregoing; or

          (f) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for
              ------------------------------------------------
the appointment of a receiver, trustee, liquidator or custodian of Company or of
all or a substantial part of the property thereof, or an involuntary case or
other proceedings seeking liquidation, reorganization or other relief with
respect to Company or the debts thereof under any bankruptcy, insolvency or
other similar law now or hereafter in effect shall be commenced and an order for
relief entered or such proceeding shall not be dismissed or discharged within
thirty (30) days of commencement; or

          (g) License Agreement. The License Agreement terminates or is declared
              -----------------
void.

     5.   Rights of Holder upon Default.  Upon the occurrence or existence of
          -----------------------------
any Event of Default (other than an Event of Default, referred to in Sections
4(e) and 4(f)) and at any time thereafter during the continuance of such Event
of Default, Holder may, by written notice to Company, declare all outstanding
obligations payable by Company under this Note to be immediately due and payable
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived, anything contained herein or in the License
Agreement to the contrary notwithstanding. Upon the occurrence or existence of
any Event of

                                      E-3
<PAGE>

Default described in Sections 4(e) and 4(f), immediately and without notice, all
outstanding Obligations payable by Company under this Note shall automatically
become immediately due and payable, without presentment, demand, protest or any
other notice of any kind, all of which are hereby expressly waived, anything
contained herein or in the License Agreement to the contrary notwithstanding. In
addition to the foregoing remedies, upon the occurrence or existence of any
Event of Default, Holder may exercise any other right, power or remedy granted
to it by this Note or otherwise permitted to it by law, either by suit in equity
or by action at law, or both.

     6.   Right of Offset.  Notwithstanding anything contained herein to the
          ---------------
contrary, in the event that Company is owed any amounts in the form of Operating
Profit or Loss (as defined in the License Agreement) by Holder under the License
Agreement, such amounts owed by Holder to Company shall be credited as
prepayments, in accordance with Section 2 above, against this Note effective as
of the date such payments are due under the License Agreement.

     7.   Surrender and Cancellation of Note.  Upon payment in full of all
          ----------------------------------
principal, expenses and interest payable under this Note, Holder agrees to
surrender this Note to Company for cancellation.

     8.   Successors and Assigns.  Subject to the restrictions on transfer
          ----------------------
described in Section 10 below, the rights and obligations of Company and Holder
shall be binding upon and benefit the successors, assigns, heirs, administrators
and transferees of the parties.

     9.   Waiver and Amendment.  Any provision of this Note may be amended,
          --------------------
waived or modified upon the written consent of Company and Holder.

     10.  Assignment by Company.  Neither this Note nor any of the rights,
          ---------------------
interests or obligations hereunder may be assigned, by operation of law or
otherwise, in whole or in part, by Company without the prior written consent of
Holder.

     11.  Notices.  Any notice, request or other communication required or
          -------
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier or personal delivery (a) if to
Company, at 4222 Emperor Boulevard, Suite 470, Durham, North Carolina 27703,
attention Christy L. Shaffer, Ph.D., and (b) if to Holder, to Genentech, Inc. 1
DNA Way, South San Francisco, CA 94080-4990, attention Corporate Secretary. Any
party hereto may by notice so given change its address for future notice
hereunder.  Notice shall conclusively be deemed to have been given when
received.

     12.  Payment.  Payment shall be made in lawful tender of the United States.
          -------

     13.  Default Rate; Usury.  In the event that any payment of principal or
          -------------------
interest provided for herein is not paid by Company when due (including the
entire unpaid balance of this Note in the event such amount is made immediately
due and payable pursuant to the terms hereof), then Company shall pay interest
on the such amounts not paid when due at a rate per

                                      E-4
<PAGE>

annum equal to the rate otherwise applicable hereunder plus two percent (2%). In
the event any interest is paid on this Note which is deemed to be in excess of
the then legal maximum rate, then that portion of the interest payment
representing an amount in excess of the then legal maximum rate shall be deemed
a payment of principal and applied against the principal of this Note.

     14.  Entire Agreement.  This Note and the License Agreement, taken
          ----------------
together, constitute and contain the entire agreement of Company and Holder, and
supersede any and all prior agreements, negotiations, correspondence,
understandings and communications among the parties, whether written or oral,
respecting the subject matter hereof.

     15.  Expenses; Waivers.  If action is instituted to collect this Note,
          -----------------
Company promises to pay all costs and expenses, including, without limitation,
reasonable attorneys' fees and costs, incurred in connection with such action.
Company hereby waives notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor and all other notices or demands
relative to this instrument.

     16.  Governing Law.  This Note and all actions arising out of or in
          -------------
connection with this Note shall be governed by and construed in accordance with
the laws of the State of Delaware, without regard to the conflicts of law
provisions of the State of Delaware, or of any other state.

     IN WITNESS WHEREOF, Company has caused this Note to be issued as of the
date first written above.

                              INSPIRE PHARMACEUTICALS, INC.
                              a Delaware corporation

                              By:______________________________

                              Name:____________________________

                              Title:___________________________

                                      E-5
<PAGE>

                                                                       EXHIBIT F
                                                                       ---------

                       PROVISIONS REQUIRED FOR AGREEMENTS
                               WITH SUBLICENSEES

     6.8. Adverse Reaction Reporting

     8.3. Records Retention

     8.4. Audits

     8.6. Bartering Prohibited

     10.  Publication; Confidentiality (provided, however, that in lieu of
          including a confidentiality provision in the sublicense agreement
          between a Party and a Third Party sublicensee under this Agreement,
          such Third Party sublicensee may enter into a confidentiality or
          nondisclosure agreement directly with the other Party that includes
          provisions substantially similar, taking into account the facts and
          circumstances of the particular sublicense, as set forth in Section
          10).

     11.  Indemnification

                                      F-1<PAGE>

                                                                   EXHIBIT 10.21

                                                                  EXECUTION COPY

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

                            SERIES G PREFERRED STOCK

                                      AND

                           WARRANT PURCHASE AGREEMENT

                                    BETWEEN

                         INSPIRE PHARMACEUTICALS, INC.

                                      AND

                                GENENTECH, INC.

                         DATED AS OF DECEMBER 17, 1999
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION>
                                                         PAGE
                                                         ----
<S>                                                      <C>
SERIES G PREFERRED STOCK..............................     1

1.  SALE AND PURCHASE OF SHARES; CLOSING..............     1

 1.1  Authorization of Shares.........................     1
 1.2  Sale and Purchase of Shares.....................     1
 1.3  Closing.........................................     2
 1.4  Delivery........................................     3
 1.5  Conversion Prior to Occurrence of All Closings..     3
 1.6  Use of Proceeds.................................     3

2.  REPRESENTATIONS AND WARRANTIES OF COMPANY.........     4

 2.1  Organization; Good Standing and Qualification...     4
 2.2  Authorization...................................     4
 2.3  Valid Issuance of Shares........................     4
 2.4  Governmental Consents...........................     4
 2.5  Capitalization..................................     5
 2.6  Subsidiaries....................................     6
 2.7  Environmental and Safety Laws...................     6
 2.8  Litigation......................................     6
 2.9  Intellectual Property...........................     6
 2.10 Compliance with Other Instruments...............     6
 2.11 Contracts and Commitments.......................     7
 2.12 Related-Party Transactions......................     7
 2.13 Permits, etc....................................     7
 2.14 Information Supplied to Purchasers..............     8
 2.15 Corporate Documents.............................     8
 2.16 Title to Property and Assets....................     8
 2.17 Financial Statements............................     8
 2.18 Undisclosed Liabilities.........................     8
 2.19 Absence of Certain Developments.................     8
 2.20 Employee Benefit Plans..........................     9
 2.21 Tax Returns; Payments and Elections.............     9
 2.22 Qualified Small Business Stock..................     9
 2.23 Securities Laws.................................     9

3.  REPRESENTATIONS AND WARRANTIES OF PURCHASER.......    10

 3.1  Authorization...................................    10
 3.2  Purchase Entirely for Own Account...............    10
 3.3  Disclosure of Information.......................    10
 3.4  Investment Experience...........................    10
 3.5  Accredited Purchaser............................    10
 3.6  Restricted Securities...........................    11

4.  CONDITIONS TO OBLIGATIONS OF PURCHASER............    11

 4.1  Representations and Warranties..................    11
 4.2  Performance.....................................    12
 4.3  Opinion of Counsel..............................    12
 4.4  Securities Law Approvals........................    12
</TABLE>

                                      (i)
<PAGE>

<TABLE>
<S>                                                      <C>
 4.5  Investors' Rights Agreement.....................   12
 4.6  License Agreement...............................   12
 4.7  Certificates and Documents......................   12
 4.8  Compliance Certificate..........................   12
 4.9  Absence of Litigation...........................   12
 4.10 Other Matters...................................   12

5.  CONDITIONS TO OBLIGATIONS OF COMPANY..............   13

 5.1  Representations and Warranties..................   13
 5.2  Performance.....................................   13
 5.3  Payment of Purchase Price.......................   13
 5.4  Stockholders Agreement..........................   13
 5.5  Investors' Rights Agreement.....................   13
 5.6  License Agreement...............................   13
 5.7  Absence of Litigation...........................   13
 5.8  Other Matters...................................   13

6.  COVENANTS.........................................   14

 6.1  Financial Statements............................   14
 6.2  Employee Agreements.............................   14

7.  RESTRICTIONS ON TRANSFER; LEGENDS.................   14

 7.1  Legend..........................................   14
 7.2  Restrictions on Transfer........................   15

8.  MISCELLANEOUS.....................................   15

 8.1  Survival of Representations and Warranties......   15
 8.2  Assignment; Binding Effect......................   15
 8.3  Governing Law...................................   16
 8.4  Counterparts....................................   16
 8.5  Captions........................................   16
 8.6  Indemnification.................................   16
 8.7  Notices.........................................   16
 8.8  Amendments and Waivers..........................   17
 8.9  Severability....................................   17
 8.10 Entire Agreement................................   17
</TABLE>

                        LIST OF SCHEDULES AND EXHIBITS
                        ==============================

          SCHEDULE 1   COMPANY DISCLOSURE SCHEDULE

          EXHIBIT A    AMENDMENT
          EXHIBIT B    FORM OF WARRANT
          EXHIBIT C    INVESTORS' RIGHTS AGREEMENT
          EXHIBIT D    FORMS OF PROPRIETARY INFORMATION AGREEMENTS
          EXHIBIT E    OPINION OF COUNSEL

                                     (ii)
<PAGE>

                           SERIES G PREFERRED STOCK
                        AND WARRANT PURCHASE AGREEMENT

          THIS SERIES G PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (this
"Agreement"), dated as of December 16, 1999 (the "Effective Date"), is entered
into by and between Inspire Pharmaceuticals, Inc. (the "Company"), a corporation
organized and existing under the laws of the State of Delaware, and Genentech,
Inc. (the "Purchaser"), a corporation organized and existing under the laws of
the State of Delaware.

                            PRELIMINARY STATEMENTS
                            ----------------------

          A.  The Company and the Purchaser are entering into that certain
Development, License and Supply Agreement (the "License Agreement"), of even
date herewith, pursuant to which, inter alia, the Company has granted to the
Purchaser certain license rights with respect to the technology identified
therein.

          B.  The Company has authorized the sale and issuance of an aggregate
of up to 1,200,000 shares (the "Shares") of the Series G Non Voting Convertible
Preferred Stock of the Company, par value $0.001 per share (the "Series G
Stock"), and the sale and issuance of warrants (the "Warrants") to purchase an
aggregate of up to 533,333 shares (the "Warrant Shares") of common stock of the
Company, par value $0.001 per share (the "Common Stock").

          C.  The Company wishes to issue and sell to the Purchaser, and the
Purchaser wishes to purchase from the Company, the Shares and the Warrants on
the terms and conditions set forth herein.

          NOW, THEREFORE, in consideration of the foregoing statements and the
mutual covenants and agreements of the parties contained in this Agreement, the
parties hereto agree as follows:

1.        SALE AND PURCHASE OF SHARES; CLOSING.

          1.1  Authorization of Shares. Prior to the First Closing (as defined
in Section 1.3), the Company shall have: (i) adopted and filed with the
Secretary of State of Delaware an Amended and Restated Certificate of
Incorporation in the form attached hereto as Exhibit A (the "Amendment"), which
sets forth the relative terms of the Series G Stock to be purchased under this
Agreement; (ii) authorized the sale and issuance to the Purchaser of the Shares
and the Warrants; and (iii) authorized the sale and issuance to the Purchaser of
the Warrant Shares upon the exercise of the Warrants.

          1.2  Sale and Purchase of Shares. Subject to the terms and conditions
of this Agreement, at each Closing the Company shall sell and issue, and the
Purchaser shall purchase:
<PAGE>

          (a) Upon the Effective Date: (i) an aggregate of 1,000,000 shares of
Series G Stock at a purchase price of $10.00 per share, for an aggregate
purchase price of $10,000,000; and (ii) Warrants for an aggregate of 444,444
shares of Common Stock at a purchase price of $0.001 per underlying Warrant
Share, for an aggregate purchase price of $444.44.

          (b) Upon the achievement of the first milestone described in Section
7.2(a) of the License Agreement: (i) an aggregate of 100,000 shares of Series G
Stock at a purchase price of $10.00 per share, for an aggregate purchase price
of $1,000,000; and (ii) Warrants for an aggregate of 44,444 shares of Common
Stock at a purchase price of $0.001 per underlying Warrant Share, for an
aggregate purchase price of $44.44.

          (c) Upon the achievement of the first milestone described in Section
7.2(b) of the License Agreement: (i) an aggregate of 100,000 shares of Series G
Stock at a purchase price of $10.00 per share, for an aggregate purchase price
of $1,000,000; and (ii) Warrants for an aggregate of 44,444 shares of Common
Stock at a purchase price of $0.001 per underlying Warrant Share, for an
aggregate purchase price of $44.44.

          The Purchaser shall promptly provide the Company with notice of the
occurrence of the events set forth in Sections 1.2(b) and (c).

          The aggregate purchase price to be paid for the shares of Series G
Stock and the Warrants to be paid at each Closing shall be referred to,
collectively, as the "Purchase Price".

     1.3  Closing.

          (a) The closing of the sale and purchase of the Shares and the
Warrants as provided in Section 1.2(a) (such closing, the "First Closing") shall
take place on the Effective Date (the "First Closing Date").

          (b) The closing of the sale and purchase of the Shares and the
Warrants upon the occurrence of the event set forth in Section 1.2(b) (such
closing, the "Second Closing") shall take place 3 business days following the
date on which such event occurs (the "Second Closing Date").

          (c) The closing of the sale and purchase of the Shares and Warrants
upon the occurrence of the event set forth in Section 1.2(c) (such closing, the
"Third Closing") shall take place 3 business days following the date on which
such event occurs (the "Third Closing Date").

          (d) The First Closing shall take place at 10:00 a.m. at the offices of
the Purchaser on December 15, 1999, or such other time, date and place as are
mutually agreeable to the Company and the Purchaser.  Each of the other Closings
shall take place at such time, date and place as are mutually agreeable to the
Company and the Purchaser;

                                      -2-
<PAGE>

provided that if any such Closing has not occurred prior to the end of the 30
day period provided in Section 1.3(b) or (c), as the case may be, then such
Closing shall take place at 10:00 a.m. at the offices of the Purchaser on such
third day (or if such day is not a business day, on the business day next
following such day).

     1.4  Delivery. At each Closing, subject to the terms and conditions of this
Agreement, the Company shall deliver to the Purchaser a certificate representing
the Shares being purchased at such Closing, and a certificate, substantially in
the form attached hereto as Exhibit B, evidencing the Warrants being purchased
by the Purchaser, against payment to the Company of the Purchase Price, by wire
transfer, certified check or other method acceptable to the Company.

     1.5  Conversion Prior to Occurrence of All Closings. In the event that the
Company affects a firm commitment underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
prior to the occurrence of all of the Closings, the Company will issue, and the
Purchaser will purchase, that number of shares of Common Stock which is equal to
the quotient obtained by dividing the Purchase Price by the average of the Fair
Market Value of the Common Stock for the twenty (20) Business Days (as such term
is hereinafter defined) immediately preceding the Closing Date (such average
being hereinafter referred to as the "Conversion Value"). For purposes of this
Agreement, the term "Business Day" shall mean a day on which the Nasdaq National
Market or, if the Common Stock is not then listed on the Nasdaq National Market,
any other established exchange or national system on which the Common Stock is
listed, is open for any trading; and "Fair Market Value" shall mean, for any
Business Day, the closing sales price of the Common Stock (or the closing bid,
if no sales were reported) as quoted on the Nasdaq National Market, on any
established stock exchange or national market system on which the Common Stock
is listed for such Business Day. For purposes of this Agreement, following any
such conversion, except where context dictates otherwise: the term "Shares"
shall mean the aggregate number of shares of Common Stock issuable pursuant to
clause (i) above; the term "Warrants" shall mean the warrants to purchase Common
Stock issuable pursuant to clause (ii) above; and the term "Warrants Shares"
shall mean the aggregate number of shares of Common Stock issuable pursuant to
the exercise of the warrants issuable pursuant to clause (ii) above.

     1.6  Use of Proceeds.  The Company shall use [CONFIDENTIAL TREATMENT
REQUESTED] of the proceeds from the sale of the Shares and Warrants to fund the
Phase IIa clinical trials, as contemplated by Section 5.7(b)(i) of the License
Agreement.  The remaining balance of such proceeds shall be used to fund other
studies, as contemplated by Section 5.7(b)(ii) of the License Agreement.

                                      -3-
<PAGE>

2.   REPRESENTATIONS AND WARRANTIES OF COMPANY.

     Except as set forth in the Disclosure Schedule attached as Schedule 1, the
Company hereby represents, warrants and agrees to and with the Purchasers, as of
the date of this Agreement and each Closing Date, as follows:

     2.1  Organization; Good Standing and Qualification.  The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted and to
execute, deliver and perform its obligations under this Agreement, the Amended
and Restated Investors' Rights Agreement in the form attached hereto as Exhibit
C (the "Investors' Rights Agreement") and the other agreements and documents
contemplated hereby and thereby (collectively, the "Closing Documents") and the
consummation of the transactions contemplated by the Closing Documents.  The
Company is duly qualified to transact business and is in good standing in the
State of North Carolina and in each other foreign jurisdiction in which the
failure to so qualify would have a material adverse effect on its business or
properties.

     2.2  Authorization.  This Agreement and the Investors' Rights Agreement
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, subject to and limited by: (i)
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws
generally applicable to creditors' rights; and (ii) judicial discretion in the
availability of equitable relief. The Company's execution, delivery and
performance of its obligations under the Closing Documents have been duly
authorized by all necessary corporate, stockholder or other action of the
Company. The Company has full power and authority to enter into this Agreement.

     2.3  Valid Issuance of Shares.  The Shares and the Warrants, when issued,
sold and delivered in accordance with this Agreement in exchange for the
Purchase Price, will be duly and validly issued, fully paid and nonassessable
and free of restrictions on transfer other than those contained in this
Agreement and, based in part upon the representations of the Purchaser in this
Agreement, will be issued in compliance with all applicable federal and state
securities laws.  As of the Closing Date, the Common Stock, issuable upon
conversion of the Shares (such Common Stock, the "Conversion Shares") shall have
been duly and validly reserved for issuance, and the Common Stock issuable upon
exercise of the Warrants shall have been duly and validly reserved for issuance.
Upon the issuance of the Conversion Shares in accordance with the terms of the
Amendment, the Conversion Shares shall be duly and validly issued, fully paid
and nonassessable and will be issued in compliance with all currently applicable
federal and state securities laws. Upon the issuance of the Warrant Shares in
accordance with the terms of the Warrant, the Warrant Shares shall be duly and
validly issued, fully paid and nonassessable and will be issued in compliance
with all currently applicable federal and state securities laws.

     2.4  Governmental Consents.  The Company is not required to obtain the
consent, approval, order, or authorization of, or complete any registration,
qualification, designation,

                                      -4-
<PAGE>

declaration or filing with, any federal, state, local, or provincial
governmental authority in connection with the execution, delivery and
performance of the Closing Documents and the consummation of the transactions
contemplated thereby, except for (i) filing the Amendment with the Secretary of
State of the State of Delaware, and (ii) certain federal and state securities
law notice filings which the Company agrees to make in a timely fashion.

     2.5  Capitalization.  As of the Closing Date, the authorized capital of the
Company shall consist of the following:

          (a) 56,000,000 shares of Common Stock and 52,000,000 shares of
preferred stock, $0.001 par value per share, of which: (i) 9,365,000 shares
shall have been designated Series A Convertible Preferred Stock (the "Series A
Stock"); (ii) 9,365,000 shares shall have been designated Series AA Convertible
Preferred Stock; (iii) 10,881,014 shares shall have been designated Series B
Convertible Preferred Stock (the "Series B Stock"); (iv) 10,881,014 shares shall
have been designated Series BB Convertible Preferred Stock; (v) 375,000 shares
have been designated Series C Convertible Preferred Stock (the "Series C
Stock"); (vi) 416,667 shares have been designated Series D Convertible Preferred
Stock (the "Series D Stock"); (vii) 8,000,000 shares shall have been designated
Series E Convertible Preferred Stock (the "Series E Stock"); (viii) 28,170
shares have been designated Series F Convertible Preferred Stock (the "Series F
Stock"); and (ix) 1,200,000 share have been designated Series G Stock.

          (b) The issued and outstanding shares of Common Stock and Preferred
Stock are set forth in Section 2.5(b) of the Disclosure Schedule.  Sufficient
shares of Common Stock have been reserved for issuance upon conversion of all
outstanding shares of Preferred Stock.  Sufficient shares of Common Stock have
been duly reserved for issuance upon conversion of the Series G Stock to be
issued hereunder and 533,333 shares of Common Stock have been reserved for
issuance upon exercise of the Warrants to be issued hereunder.  In addition,
4,000,000 shares of Common Stock have been reserved for issuance under the
Company's 1995 Stock Plan, as amended from time to time (the "Stock Plan"), of
which options for 1,231,250 shares have been exercised and options for 2,590,406
shares are issued and remain outstanding.

          (c) Except as set forth in this Section 2 and on Schedule 1, there are
no outstanding options, warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition from the Company of any
shares of its capital stock, other than options issued and outstanding under the
Stock Plan.

          (d) Except as disclosed on Schedule 1 and except as set forth in this
Agreement and the Amendment, there are no agreements, written or oral, between
the Company and any holder of its capital stock, or, to the knowledge of the
Company, between or among any holders of its capital stock, relating to the
acquisition (including the redemption by the Company), disposition, or voting of
the capital stock of the Company.  The issuance of the Shares sold hereunder is
not, and the issuance of the Conversion Shares, if any, will not be, subject to
any preemptive rights or rights of first refusal.

                                      -5-
<PAGE>

     2.6  Subsidiaries.  The Company does not own or control, directly or
indirectly, any interest in any other corporation, association or other business
entity.

     2.7  Environmental and Safety Laws.  To its knowledge, the Company is not
in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law, or regulation.

     2.8  Litigation.  There is no action, suit, proceeding, or investigation
currently pending or, to the knowledge of the Company, currently threatened
against the Company or any of its officers or directors that:  (i) might result
in any material adverse change in the assets, condition, affairs, or prospects
of the Company, financially or otherwise; or (ii) might result in any material
change in the current equity ownership of the Company, nor is the Company aware
of any basis for the foregoing.  There is no action, suit, proceeding, or
investigation by the Company currently pending or that the Company intends to
initiate.

     2.9  Intellectual Property. The Company has sufficient rights in, or owns,
all licenses, patents, trademarks, service marks, trade names, copyrights, trade
secrets, information, proprietary rights and processes necessary for its
business as proposed to be conducted without, to the Company's knowledge, any
material conflict with or infringement of the intellectual property rights of
any third party. A list of: (i) the material intellectual property rights owned
by, or licensed to, the Company, and (ii) agreements relating to outstanding
options or agreements of any kind relating to the foregoing, is set forth on
Schedule 1. The Company has not received any communications alleging that the
Company has infringed or misappropriated or, by conducting its business as
proposed, would infringe or misappropriate any patent, trademark, service mark,
trade name, copyright, trade secret or other proprietary right of any third
party. The Company has no knowledge that any of its employees or consultants is
obligated under any contract (including licenses, covenants, or commitments of
any nature) or other agreement, or is subject to any judgment, decree or order
of any court or administrative agency, that would interfere with his or her
ability to perform his or her intended duties for the Company or that would
conflict with the intended business of the Company. Except as disclosed on
Schedule 1, the Company does not intend to utilize any inventions made by its
current employees or consultants prior to their association with the Company.
Except as set forth on Schedule 1, each employee of and consultant to the
Company has entered into a proprietary information agreement substantially
similar to one of the forms attached hereto as Exhibit D, and each employee and
consultant has made no material exceptions thereto.

     2.10  Compliance with Other Instruments.  The Company is not in violation
or default of (i) any provision of its Certificate of Incorporation or By-laws,
(ii) any instrument, judgment, order, writ, decree or contract legally binding
upon the Company, or (iii) to the knowledge of the Company, any material
provision of any federal or state statute, rule or regulation applicable to the
Company. The execution, delivery and performance of the Closing Documents and
the consummation of the transactions contemplated therein by the

                                      -6-
<PAGE>

Company will not: (x) conflict with, nor result in any violation of or default
under any such instrument, judgment, order, writ, decree, contract or provision;
or (y) give rise to any event that results in the creation of any lien, charge
or encumbrance upon any assets of the Company or the suspension, revocation,
impairment, forfeiture or non-renewal of any material permit, license,
authorization or approval that applies to the Company, its business or
operations or any of its assets or properties.

     2.11  Contracts and Commitments.  Schedule 1 lists all agreements,
contracts, obligations or commitments to which the Company is a party or by
which it or any of its properties are bound that are material to the conduct and
operations of the Company's business and properties, including, but not limited
to any employment contracts; stock redemption or purchase agreements; loan
agreements, security agreements and guaranties; licenses, distributor or sales
representative agreements; agreements with officers, directors, employees or
stockholders of the Company or persons or organizations related to or affiliated
with any such persons; leases; agreements relating to product development; or
pension, profit sharing, retirement or stock option plans (collectively,
"Material Contracts").  Each such Material Contract constitutes a valid and
legally binding obligation of the Company, enforceable in accordance with its
respective terms, and is in full force and effect.  The Company has not received
any notice of default under any Material Contract, and there is no state of
facts which upon notice or lapse of time or both would constitute such a
default.  To the knowledge of the Company, no other party to a Material Contract
is in default thereunder and there is no state of facts which upon notice or
lapse of time or both would constitute such a default.  Neither the Company nor,
to its knowledge, any of its employees, officers or directors is a party to any
contract or agreement that prohibits them from freely engaging in the business
of the Company.

     2.12  Related-Party Transactions.  No employee, officer, consultant,
director or principal stockholder of the Company, and no member of any such
person's immediate family, is indebted to the Company, nor is the Company
indebted (or committed to make loans or extend or guarantee credit) to any such
person.  To the knowledge of the Company, none of the officers or directors of
the Company has a business relationship (other than as a director, officer or
employee) with the Company or has any direct or indirect ownership interest in
any firm or corporation with which the Company has a business relationship;
provided, however, that direct or indirect ownership of less than a one percent
interest in any entity shall not constitute an "ownership interest" for purposes
of this Section 2.12.  To the knowledge of the Company, no member of the
immediate family of any officer or director of the Company is directly or
indirectly interested in any Material Contract with the Company.

     2.13  Permits, etc.  The Company has obtained all franchises, permits,
licenses and any similar authority necessary for the conduct of its current
operations, the lack of which could materially and adversely affect the
business, properties, prospects or financial condition of the Company.  The
Company has not received notice that it is in violation in any material respect
under any of such franchises, permits, licenses or other similar authority.

                                      -7-
<PAGE>

     2.14  Information Supplied to Purchasers.  Neither this Agreement, nor the
Schedules and Exhibits attached, nor any document, certificate, projection or
statement furnished to the Purchasers by or on behalf of the Company in
connection with the transaction contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein or therein not misleading. There
is no material fact relating to the business, prospects, operations, affairs or
conditions of the Company which adversely affects or in the future may (to the
extent reasonably foreseeable) adversely affect the same that has not been set
forth in this Agreement or in the Schedules or Exhibits attached.

     2.15  Corporate Documents.  As of the Closing, the Certificate of
Incorporation of the Company shall be in the form of the Amendment.

     2.16  Title to Property and Assets.  The property and assets of the
Company that it owns are free and clear of all mortgages, liens, loans and
encumbrances, except such encumbrances and liens which have arisen in the
ordinary course of business and which, either singly or the aggregate, do not
materially impair the Company's ownership or use of such property or assets.

     2.17  Financial Statements.  The Company has delivered to the Purchasers
its audited financial statements at December 31, 1998 and for the fiscal year
then ended and its unaudited financial statements at October 31, 1999 and for
the month then ended and year-to-date (collectively, the "Financial
Statements"). The statements are true, complete and correct in all material
respects subject (in the case of the unaudited statements) to normal year-end
adjustments, and have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the period and
are consistent with each other. The Financial Statements accurately set out,
describe and fairly present the financial condition and operating results of the
Company as of the dates, and for the periods, indicated therein subject (in the
case of the unaudited statements) to normal year-end adjustments.

     2.18  Undisclosed Liabilities.  Except as set forth in Schedule 1, the
Company has no liability (fixed, accrued or contingent, including any
liabilities for taxes due) that is not fully reflected or provided for on the
Financial Statements as defined in Section 2.17, except liabilities incurred in
the ordinary course of business since October 31, 1999, none of which,
individually or in the aggregate, has been or is materially adverse to the
condition, financial or otherwise, of the Company or its assets, properties or
business.

     2.19  Absence of Certain Developments. Since October 31, 1999, except as
contemplated by this Agreement, there has been (i) no material adverse change in
the condition (financial or otherwise) of the Company or in the assets,
liabilities, properties, or business of the Company, (ii) no declaration,
setting aside, or payment of any dividend or other distribution with respect to,
or any direct or indirect redemption or acquisition of, any of the capital stock
of the Company and no undertaking by the Company to do any of the foregoing,
(iii) no waiver of any valuable right of the Company or cancellation of any debt
or claim held by the Company, (iv) no loan by the Company to any officer,
director,

                                      -8-
<PAGE>

employee or stockholder of the Company, or any agreement or commitment therefor,
(v) no extraordinary increase, direct or indirect, in the compensation paid or
payable to any officer, director, employee or agent of the Company (other than
in connection with a change of position or duties), (vi) no material loss,
destruction or damage to any property of the Company, whether or not insured,
(vii) no labor dispute involving the Company and no material change in the
personnel of the Company or the terms and conditions of their employment, and
(viii) no acquisition or disposition of any assets (or any contract or
arrangement therefor), nor any other transaction, by the Company other than for
fair value in the ordinary course of business.

     2.20  Employee Benefit Plans.  Except as set forth in Schedule 1, the
Company does not have any Employee Benefit Plan as defined in the Employee
Retirement Income Security Act of 1974, as amended.

     2.21  Tax Returns; Payments and Elections.  The Company has duly and timely
filed all tax returns and reports as required by applicable law. Such returns
and reports are true and correct in all material respects, including without
limitation the amount shown as due from the Company. The Company has paid all
taxes and other assessments due. The provision for taxes of the Company as shown
in the Financial Statements is adequate for taxes due or accrued as of the date
thereof. The Company's tax returns have not been audited by the United States
Internal Revenue Service or by any state taxing authority and, to the knowledge
of the Company, no such audit has been threatened by any such federal or state
authority.

     2.22  Qualified Small Business Stock.  The Company is a "qualified small
business," as defined in Section 1202(d) of the Internal Revenue Code of 1986,
as amended (the "Code"), and the Shares constitute "qualified small business
stock" as defined in Section 1202(c) of the Code.  The Company covenants and
agrees to comply with the reporting and recordkeeping requirements of Section
1202 of the Code and any regulations promulgated thereunder and to execute and
deliver to the Purchasers and the Internal Revenue Service, from time to time,
such forms, documents, schedules and other instruments as may be reasonably
requested thereby to cause the Shares and the Conversion Shares to qualify as
"qualified small business stock," as defined in Section 1202(c) of the Code.

     2.23 Securities Laws.  Assuming the accuracy of the representations and
warranties of the Purchaser contained in this Agreement, the offer, issuance and
sale of the Shares, the Warrants, the Warrant Shares and the Conversion Shares
in accordance with this Agreement is, and will be, in compliance with applicable
federal and state securities laws.

                                      -9-
<PAGE>

3.   REPRESENTATIONS AND WARRANTIES OF PURCHASER.

     The Purchaser hereby represents, warrants and agrees to and with the
Company, as of the date of this Agreement and each Closing Date, as follows:

     3.1  Authorization.  The Closing Documents constitute valid and legally
binding obligations of the Purchaser, enforceable in accordance with their
terms, subject to and limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium and other laws generally applicable to creditors
rights, and (ii) judicial discretion in the availability of equitable relief.
The Purchaser's execution and delivery of, and performance of its obligations
under, the Closing Documents have been duly authorized by all necessary
corporate, stockholder or other action of the Purchaser.  The Purchaser has full
power and authority to enter into this Agreement.

     3.2  Purchase Entirely for Own Account.    This Agreement is made with the
Purchaser in reliance upon the Purchaser's representation to the Company, which
the Purchaser hereby confirms by execution of this Agreement, that the Shares,
the Warrants, the Warrant Shares and the Conversion Shares (collectively, the
"Securities") will be acquired for investment for the Purchaser's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that the Purchaser has no present intention of selling,
granting any participation in or otherwise distributing the same.  By executing
this Agreement, the Purchaser further represents that the Purchaser is not a
party to and is not bound by any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participation to such person or to
any third person, with respect to any of the Securities.

     3.3  Disclosure of Information.    The Purchaser has received all the
information that it considers necessary or appropriate for deciding whether to
purchase the Shares and the Warrants.  The Purchaser further represents that it
has had sufficient opportunity to ask questions and receive answers from the
Company regarding the terms and conditions of the offering of the Shares and the
Warrants.  Notwithstanding the foregoing, this Section 3.3 in no way limits the
Company's representations and warranties made to the Purchaser under Section 2.

     3.4  Investment Experience.    The Purchaser acknowledges that it is able
to protect its own interests, can bear the economic risk of its investment, and
has such knowledge and such experience in financial or business matters that the
Purchaser is capable of evaluating the merits and risks of the investment in the
Shares and the Warrants.  The Purchaser also represents it has not been
organized for the purpose of acquiring the Shares and the Warrants.

     3.5  Accredited Purchaser.    The Purchaser is an "accredited investor"
within the meaning of Rule 501 promulgated pursuant to the Securities Act of
1933, as amended (the "Securities Act").

                                      -10-
<PAGE>

     3.6  Restricted Securities.

          (a)  The Purchaser understands that: (i) the Shares and the Warrants
are being offered and sold pursuant to an exemption from registration contained
in the Securities Act based in part upon the Purchaser's representations
contained in this Agreement and that the Shares and the Warrants are, and upon
issuance of the Conversion Shares and/or exercise of the Warrant Shares, will
be, "restricted securities" under the federal securities laws inasmuch as they
are being acquired from the Company in a transaction not involving registration
under the Securities Act; (ii) the Purchaser must bear the economic risk of this
investment indefinitely unless the Shares, the Warrants, the Warrant Shares or
the Conversion Shares, as the case may be are registered pursuant to the
Securities Act or an exemption from such registration is available; (iii) the
Company has no present intention of registering the Securities or any shares of
its capital stock; and (iv) there is no assurance that any exemption from
registration under the Securities Act will be available and that, even if
available, such exemption may not allow the Purchaser to transfer all or any
portion of the Securities under the circumstances, in the amounts or at the
times the Purchaser might propose.

          (b)  The Purchaser acknowledges and agrees that the Shares and the
Warrants and, if issued, the Conversion Shares and the Warrants Shares, must be
held indefinitely unless they are subsequently registered under the Securities
Act, an exemption from such registration is available or as otherwise permitted
by applicable federal or state law.  The Purchaser has been advised or is aware
of the provisions of Rule 144 promulgated under the Securities Act, which
permits limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including, among other things: the
availability of certain current public information about the Company, the resale
occurring not less than one year after a party has purchased and paid for the
security to be sold, the sale being through an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the United States Securities Exchange Act of 1934, as amended) and
the number of shares being sold during any three-month period not exceeding
specified limitations.

4.   CONDITIONS TO OBLIGATIONS OF PURCHASER.

     The obligations of the Purchaser under this Agreement are subject to the
fulfillment, or waiver by the Purchaser, of each of the following conditions of
the Company on or before each Closing:

     4.1  Representations and Warranties.  The representations and warranties
of the Company contained in this Agreement shall be true as of the Closing with
the same effect as though such representations and warranties had been made on
and as of the date of such Closing.

                                      -11-
<PAGE>

     4.2  Performance.  The Company shall have performed and complied with all
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by the Company as of the Closing.

     4.3  Opinion of Counsel.  The Purchaser shall have received an opinion
from Smith, Stratton, Wise, Heher & Brennan, counsel to the Company, dated as of
the Closing, addressed to the Purchaser, and substantially in the form attached
hereto as Exhibit E.

     4.4  Securities Law Approvals.  The Company shall have received all
requisite approvals, if any, of the securities authorities of each jurisdiction
in which such approval is required, and such approvals shall be in full force
and effect as of the Closing.

     4.5  Investors' Rights Agreement.  The Company, the requisite number of
stockholders of the Company who are parties to the Investors' Rights Agreement
and the Purchaser shall have entered into the Investors' Rights Agreement.

     4.6  License Agreement.  The Company and the Purchaser shall have entered
into the License Agreement.

     4.7  Certificates and Documents.  The Company shall have delivered to
counsel for the Purchaser a copy of the Certificate of Incorporation of the
Company, as in effect immediately prior to the Closing, certified by the
Secretary of State of the State of Delaware and a certificate, as of the most
recent practicable date, of the Secretary of State of the State of Delaware and
of the Secretary of State of the State of North Carolina as to the Company's
corporate good standing.

     4.8  Compliance Certificate.  The President of the Company shall deliver
to the Purchaser at the Closing a certificate certifying that the conditions
specified in Sections 4.1, 4.2 and 4.9 have been fulfilled and stating that
there shall have been no materially adverse change in the business, affairs,
prospectus, operations, properties, assets or condition of the Company since
October 31, 1999.

     4.9  Absence of Litigation.  No action, suit or proceeding shall have
been instituted before any court or governmental or regulatory body or
instituted or threatened by any governmental or regulatory body, to restrain,
modify or prevent the carrying out of the Closing or of the transactions
contemplated hereby, or to seek damages or a discovery order in connection with
such transactions.

     4.10  Other Matters.  All corporate and other proceedings in connection
with the transactions contemplated at the Closing by this Agreement, and all
documents and instruments incident to such transactions, shall be reasonably
satisfactory in substance and form to the Purchaser and their counsel, and the
Purchaser and their counsel shall have received all such counterpart originals
or certified or other copies of such documents as they may reasonably request.

                                      -12-
<PAGE>

5.   CONDITIONS TO OBLIGATIONS OF COMPANY.

     The obligations of the Company under this Agreement are subject to the
fulfillment, or waiver by the Company, of each of the following conditions of
the Purchaser on or before each Closing.

     5.1  Representations and Warranties. The representations and warranties of
the Purchaser contained in this Agreement shall be true as of the Closing with
the same effect as though such representations and warranties had been made on
and as of the date of such Closing.

     5.2  Performance. The Purchaser shall have performed and complied with all
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by the Purchaser as of the Closing.

     5.3  Payment of Purchase Price. The Purchaser shall have delivered the
Purchase Price.

    5.4  Stockholders Agreement. The Purchaser shall have become a party to
that certain Second Amended and Restated Stockholders' Agreement dated as of
April 8, 1997, as amended, among the Company and certain stockholders of the
Company (the "Stockholders' Agreement").

     5.5  Investors' Rights Agreement. The Company and the Purchaser shall have
entered into the Investors' Rights Agreement.

     5.6  License Agreement. The Company and the Purchaser shall have entered
into the License Agreement.

     5.7  Absence of Litigation. No action, suit or proceeding shall have been
instituted before any court or governmental or regulatory body or instituted or
threatened by any governmental or regulatory body, to restrain, modify or
prevent the carrying out of the Closing or of the transactions contemplated
hereby, or to seek damages or a discovery order in connection with such
transactions.

     5.8  Other Matters. All corporate and other proceedings in connection with
the transactions contemplated at the Closing by this Agreement, and all
documents and instruments incident to such transactions, shall be reasonably
satisfactory in substance and form to the Company and its counsel, and the
Company and its counsel shall have received all such counterpart originals or
certified or other copies of such documents as they may reasonably request.

                                      -13-
<PAGE>

6.   COVENANTS.

     The Company covenants and agrees that the Company will perform and observe
the following covenants and provisions:

     6.1  Financial Statements. The Company will maintain books of account in
accordance with generally accepted accounting principles applied on a consistent
basis, keep full and complete financial records, and the Company shall furnish
the following reports to the Purchaser:

          (a)  As soon as practicable, but in any event within 90 days after the
end of each fiscal year of the Company, an income statement for such fiscal
year, a balance sheet of the Company and statement of stockholders' equity as of
the end of such year, and a schedule as to the sources and applications of funds
for such year, such year-end financial reports to be in reasonable detail,
prepared in accordance with generally accepted accounting principles and audited
and certified by such independent public accountants of nationally recognized
standing selected by the Company; and

          (b)  As soon as practicable, but in any event within 30 days after the
end of each quarter, an unaudited income statement and schedule as to the
sources and application of funds and the balance sheet as of the end of such
quarter.

     6.2  Employee Agreements. The Company shall require all its employees and
consultants to enter into suitable agreements with provisions governing, among
other things, the protection of confidential information, assignment of
intellectual property and competition with the Company. The Board of Directors
shall approve the form of such agreements in advance.

     Notwithstanding the foregoing, this Section 6 will terminate upon
conversion of the Shares into Conversion Shares or if the company registers any
of its stock in connection with an initial public offering at a price of at
least $3.00 per share and having gross proceeds to the Company of not less than
$10,000,000.

7.   RESTRICTIONS ON TRANSFER; LEGENDS.

     7.1  Legend. The certificate evidencing the Securities that the Purchaser
has agreed to purchase, and each certificate issued in transfer therefor, will
bear a legend substantially as follows:

     THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
     SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR THE SECURITIES ACT OF ANY
     STATE AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
     HYPOTHECATED UNLESS AND UNTIL REGISTERED

                                      -14-
<PAGE>

     UNDER THE ACT AND APPLICABLE STATE SECURITIES ACTS OR, IN THE OPINION OF
     COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE
     SECURITIES, SUCH OFFER, SALE, OR TRANSFER, PLEDGE OR HYPOTHECATION IS
     PURSUANT TO AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION OR IS IN
     ACCORDANCE WITH THE PROVISIONS OF REGULATION D UNDER THE ACT. HEDGING
     TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS IN
     COMPLIANCE WITH THE ACT.

The certificate representing the Securities, and each certificate issued in
transfer thereof, will also bear any additional legend required under any
applicable securities law.

     7.2  Restrictions on Transfer. Absent an effective registration statement
under the Act covering the disposition of the Securities, the Purchaser will not
sell, transfer, assign, pledge, hypothecate or otherwise dispose of any or all
of the Securities, and the Company shall refuse to register the transfer of the
Securities to the extent permissible by applicable law, unless such sale,
transfer, assignment, pledge, hypothecation or other disposition is made in
accordance with the provisions of Regulation D under the Act or is otherwise
exempt from the registration and the prospectus delivery requirements of the Act
and the registration or qualification requirements of any other applicable
securities laws and the Purchaser provides the Company with an opinion of
counsel (which may be counsel for the Company) which is satisfactory to the
Company (both as to the issuer of the opinion and the form and substance
thereof) to such effect. The Company agrees that an opinion of counsel will not
be required for sales made in accordance with Rule 144, except in unusual
circumstances.

8.   MISCELLANEOUS.

     8.1  Survival of Representations and Warranties. The warranties,
representations and covenants of the Company and the Purchaser contained in or
made pursuant to this Agreement shall survive the execution and delivery of this
Agreement and the Closing.

     8.2  Assignment; Binding Effect.

          (a)  Neither party may assign this Agreement without the prior written
consent of the other party.  Any attempted assignment not made in accordance
with this Section 8.2(a) shall be void and of no effect.

          (b)  Except as otherwise provided herein, the terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
successors and permitted assigns of the parties (including transferees of any
Securities). Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto or their respective
successors and permitted assigns any rights, remedies, obligations,

                                      -15-
<PAGE>

or liabilities under or by reason of this Agreement, except as expressly
provided in this Agreement.

     8.3  Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to principles
of conflicts of law.

     8.4  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 one and the same instrument.

     8.5  Captions. The captions used in this Agreement are for convenience only
and are not to be considered in construing or interpreting this Agreement.

     8.6  Indemnification. The Company shall indemnify, defend and hold harmless
the Purchaser and its directors, officers, employees, agents and affiliates, and
the directors, officers, employees and agents of such affiliates, against any
and all liabilities, losses, costs or damages, together with all reasonable
costs and expenses related thereto (including reasonable attorney's fees and
expenses), arising from third party suits relating to or connected with the
untruth, inaccuracy or breach of any statement, representation, warranty or
covenant of the Company contained in this Agreement, including claims brought by
other shareholders of the Company, except to the extent that any such
liabilities, losses, costs or damages are a result of a misrepresentation made
by the Purchaser.

     8.7  Notices. Any notice or request required or permitted to be given under
or in connection with this Agreement shall be deemed to have been sufficiently
given if in writing and personally delivered or sent by certified mail (return
receipt requested), facsimile transmission (receipt verified), or overnight
express courier service (signature required), prepaid, to the party for which
such notice is intended, at the address set forth for such party below:

               (i)  In the case of the Company, to:

                    Inspire Pharmaceuticals, Inc.
                    4222 Emperor Boulevard, Suite 470
                    Durham, North Carolina  27703
                    Attention: Christy L. Shaffer, Ph.D.
                    Facsimile No.:  (919) 941-9797

                                      -16-
<PAGE>

            (ii)    In the case of the Purchaser, to:

                    Genentech, Inc.
                    1 DNA Way, Mailstop 49
                    South San Francisco, California  94080
                    Attention:  Corporate Secretary
                    Facsimile No.:  (650) 952-9881

or to such other address for such party as it shall have specified by like
notice to the other party, provided that notices of a change of address shall be
effective only upon receipt thereof.  If delivered personally or by facsimile
transmission, the date of delivery shall be deemed to be the date on which such
notice or request was given.  If sent by overnight express courier service, the
date of delivery shall be deemed to be the next business day after such notice
or request was deposited with such service.  If sent by certified mail, the date
of delivery shall be deemed to be the fifth business day after such notice or
request was deposited with the U.S. Postal Service.

     8.8  Amendments and Waivers. Except as otherwise expressly set forth in
this Agreement, any term of this Agreement may be amended and the observance of
any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), with the written consent of
the Company and the Purchaser. No waivers of or exceptions to any term,
condition or provision of this Agreement, in any one or more instances, shall be
deemed to be, or construed as, a further or continuing waiver of any such term,
condition or provision.

     8.9  Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.

     8.10  Entire Agreement. This Agreement and the documents referred to herein
constitute the entire agreement among the parties and no party shall be liable
or bound to any other party in any manner by any warranties, representations or
covenants except as specifically set forth herein or therein.

                                     * * *

                                      -17-
<PAGE>

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

                                   COMPANY
                                   -------

                                   INSPIRE PHARMACEUTICALS, INC.

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

                                   PURCHASER
                                   ---------

                                   GENENTECH, INC.

                                     By:  /s/ Arthur D. Levinson
                                          -------------------------------------
                                   Name:  Arthur D. Levinson, PH.D.
                                          -------------------------------------
                                   Title: President and Chairman of the Board
                                          -------------------------------------
<PAGE>

                                  SCHEDULE 1
                                  ----------

                          COMPANY DISCLOSURE SCHEDULE
                          ---------------------------

          The inclusion of any agreement or other matter as part of this
     Schedule or any other Exhibit or Schedule to this Agreement should not be
     interpreted as indicating that the Company has determined that such
     agreement or other matter is necessarily material to the Purchasers.

Section 2.5(b)

     The issued and outstanding shares of capital stock of the Company as of the
     date of the Agreement are:

<TABLE>
<CAPTION>
    ==============================================================================================
                   Class or Series                                       Outstanding Shares
    ----------------------------------------------------------------------------------------------
    <S>                                                                  <C>
     Common Stock                                                              4,315,250
    ----------------------------------------------------------------------------------------------
     Series A Convertible Preferred Stock                                      9,200,000
    ----------------------------------------------------------------------------------------------
     Series AA Convertible Preferred Stock                                             0
    ----------------------------------------------------------------------------------------------
     Series B Convertible Preferred Stock                                     10,866,014
    ----------------------------------------------------------------------------------------------
     Series BB Convertible Preferred Stock                                             0
    ----------------------------------------------------------------------------------------------
     Series C Convertible Preferred Stock                                        375,000
    ----------------------------------------------------------------------------------------------
     Series D Convertible Preferred Stock                                        416,667
    ----------------------------------------------------------------------------------------------
     Series E Convertible Preferred Stock                                      6,201,985
    ----------------------------------------------------------------------------------------------
     Series F Convertible Preferred Stock                                              0
    ----------------------------------------------------------------------------------------------
     Series G Non Voting Convertible Preferred Stock                                   0
    ==============================================================================================
</TABLE>

Section 2.5(c)

     1.   The Company has entered into the following Warrant Agreements with
          Comdisco, Inc. ("Comdisco"):

                                    - S1 -
<PAGE>

               (a)  whereby the Company granted Comdisco the right to purchase
     up to an aggregate of 165,000 shares of Series A Stock at a purchase price
     of $1.00 per share subject to the terms and conditions of such Agreements,
     of which Comdisco transferred the right to purchase up to 16,500 shares of
     the Series A Stock at a purchase price of $1.00 to Gregory Stento,

               (b)  whereby the Company granted Comdisco the right to purchase
     up to an aggregate of 15,000 shares of Series B Stock at a purchase price
     of $1.20 per share subject to the terms and conditions of such Agreements,
     and

               (c)  whereby the Company granted Comdisco the right to purchase
     up to an aggregate of 28,170 shares of Series F Stock at a purchase price
     of $2.40 per share subject to the terms and conditions of such Agreements.

     2.   The Company has entered into a Warrant Agreement with PharmaLogic
          Development, Inc. ("PharmaLogic") whereby the Company granted
          PharmaLogic the right to purchase up to an aggregate of 20,000 shares
          of Common Stock at a purchase price of $2.40 per share subject to the
          terms and conditions of such Agreement.

Section 2.5(d)

     1.   The Company and each of H. Jefferson Leighton, Richard Boucher,
          Michael Knowles, T. Kendall Harden and M. Jackson Stutts are parties
          to Restricted Stock Purchase Agreements, each dated March 9, 1995 with
          respect to the shares of Common Stock held by such holders.

     2.   The Company and the holders of the Series A Stock, the Series B Stock
          and the Series E Stock are parties to that certain Amended and
          Restated Investors' Rights Agreement, dated as of October 29, 1999,
          which provides, inter alia, for such holders' participation in certain
          equity offerings by the Company and the registration of the Common
          Stock and other securities issued upon the conversion of such holders'
          Series A Stock, Series B Stock and Series E Stock. (In addition, the
          holders of Series A Stock, Series B Stock and Series E Stock have
          certain rights and obligations under the Certificate of Incorporation
          in connection with certain issuances of securities by the Company.)

     3.   The Company, the holders of the Series A Stock, Series B Stock, Series
          E Stock and certain holders of Common Stock are parties to that
          certain Second Amended and Restated Stockholders' Agreement, dated as
          of April 8, 1997, as amended, that pertains to the size of the
          Company's Board of Directors and the election of the directors of the
          Company and provides the Company and certain holders with a right of
          first refusal in connection with any such holder's disposition of any
          shares of Common Stock.

                                    - S2 -
<PAGE>

     4.   The Company and Kissei Pharmaceuticals Co., Ltd. are parties to that
          certain Registration Rights Agreement, dated as of September 10, 1998,
          that pertains to the registration of the Common Stock issued upon the
          conversion of Kissei's Series C Stock.

     5.   The Company and Santen Pharmaceutical Co., Ltd. are parties to that
          certain Registration Rights Agreement, dated as of December 16, 1998,
          that pertains to the registration of the Common Stock issued upon the
          conversion of Santen's Series D Stock and the stock of such other
          holders who become parties to such Agreement.

     6.   The Company maintains that certain 1995 Stock Plan, that governs the
          issuance of Incentive Stock Options and Non-Qualified Stock Options to
          select employees and consultants of the Company.

     7.   Also see Section 2.5(c) of this Schedule 1.

Section 2.9

     The following is a list of the Company's intellectual property describing
     the current status:

                                Issued Patents.
                                ---------------

     1.   Method of Treating Lung Disease with Uridine Triphosphates
          Licensed from The University of North Carolina-Chapel Hill
          Inventor:  R. Boucher
          U.S. Patent Issued 8 Mar 1994--U.S. Patent No. 5,292,498
          Non-convention PCT application claiming UTPgamma-S, etc. (but not UTP)
          was filed 9 Oct 1992 with Foreign National Phase entered in Australia,
          Japan, Norway, and the EPO.
          Australia, Notice of Allowance, Jan 1998

     2.   DNA Encoding the Human P2u Receptor and Null Cells Expressing P2u
          Receptor Licensed from The University of North Carolina-Chapel Hill
          Inventors:  R. Boucher, et al.
          U.S. Patent No. 5,691,156; Filed 19 May 1995; Issued 25 Nov 1997
          PCT filed 4 Oct 1994; Serial No. PCT/US94/11260; Abandoned 11 Apr 1996

     3.   Methods of Detecting Compounds Which Bind to the P2u Receptor
          Licensed from The University of North Carolina-Chapel Hill
          Inventors:  R. Boucher, et al.
          U.S. Filed 19 May 1995 (Divisional Application)
          U.S. Patent No. 5,607,836; Issued 4 Mar 1997

                                    - S3 -
<PAGE>

     4.   DNA Encoding the Human P\\2u\\ Receptor and Null Cells Expressing
          P\\2u\\ Receptor Licensed from The University of North Carolina-Chapel
          Hill
          Inventors: R. Boucher, et al.
          U.S. Patent No. 5,596,088; Issued 21 Jan 1997
          Publication WO95/10538 on 20 Apr 1995

     5.   Method of Detecting Lung Disease
          Licensed from The University of North Carolina-Chapel Hill
          Inventors:  R. Boucher
          U.S. Patent No. 5,628,984; Issued 13 May 1997
          PCT filed 31 Jul 1996 designating all member countries
          South African national application filed 31 Jul 1996; Issued 30
          Apr 1997 as No. 96/6425
          Foreign National filings entered in EPO, Australia, Brazil, Canada,
          China, Israel, Japan, Mexico, New Zealand, Norway and Korea
          Japan and Korea examinations requested
          Publication WO97/05195 on 13 Feb 1997

     6.   Method of Detecting Lung Disease
          Licensed from The University of North Carolina-Chapel Hill
          Inventors:  R. Boucher
          U.S. Patent No. 5,902,567; Issued 11 May 1999
          Div. of above

     7.   Dinucleotides Useful for the Treatment of Lung Disease
          Licensed from The University of North Carolina-Chapel Hill
          Inventors:  R. Boucher, et al.
          U.S. Patent No. 5,635,160 filed 7 Jun 1995; Issued 3 Jun 1997
          PCT filed 6 Jun 1996 designating all member countries; Published
          WO96/40059 Dec 1996
          Foreign National Filings entered in EPO, Australia, Brazil, Canada,
          China, Japan, Mexico, Norway, New Zealand and S. Korea
          Hong Kong designated Oct. 1998

     8.   Dinucleotides Useful for the Treatment of Lung Disease
          Licensed from The University of North Carolina-Chapel Hill
          Inventors:  R. Boucher, et al.
          U.S. Patent No. 5,935,555 filed 8 May 1997; Issued 10 Aug. 1999
          CIP of above.

     9.   Method of Preventing or Treating Pneumonia in Immobilized Patients
          Using UTP and Related Compounds
          Inventors:  K. Jacobus and J. Leighton
          U.S. Patent No. 5,763,447; Filed 23 Jul 1996, U.S. Patent Issued 9 Jun
          1998 S. Africa application filed July 23, 1997 as 97/6538

                                    - S4 -
<PAGE>

          PCT Filed Jul 23, 1997; Serial No. PCT/US 97/12938
          Publication WO98/03182 on 29 Jan. 1998
          National Phase filing due 23 January 1999 with Australia, Canada,
          China, EP, Japan, Korea, Mexico and New Zealand to be designated

     10.  a.  Method of Treating Sinusitis with UTP and Related Compounds
          Inventors:  K. Jacobus, et al.
          U.S. Patent No. 5,789,391; Filed 3 Jul 1996, U.S. Patent Issued 4 Aug
          1998 PCT filed 3 Jul 1997

          b-d.  Three U.S. Divisionals: Each Allowed and U.S. Patent No.
          5,958,897 issued 28 Sept. 1999; U.S. Patent No. 5,972,904 issued 26
          Oct. 1999; U.S. Patent No. 5,981,506 issued 9 Nov. 1999
          National Phase due 3 Jan 1999 with Australia, Canada, China, EP,
          Japan, Korea, Mexico and New Zealand to be designated

     11.  Certain Dinucleotides and Their Use as Modulators of Mucociliary
          Clearance and Ciliary Beat Frequency
          Inventors:  W. Pendergast, et al.
          U.S. Patent No. 5,837,861; issued 17 Nov. 1998
          PCT filed 6 Feb 1998
          Non-convention Foreign Filings conducted in Argentina, Malaysia, S.
          Africa 10 Feb 1998
          Claims for compounds (NCEs) and also formulations, methods of
          treatment National Phase filings entered in Australia, Brazil, Canada,
          China, EPO, Japan, S. Korea, Mexico, Norway, New Zealand

     12.  Method of Treating Dry Eye Disease with Purinergic Receptor Agonists
          Inventors:  B. Yerxa, et al.
          U.S. Patent No. 5,900,407; issued 4 May 1999
          PCT Filed 6 Feb 1998
          Non-convention countries S. Africa and Malaysia designated 6 Feb 1998
          National Phase filings entered in Australia, Brazil, Canada, China,
          EPO, Indonesia, Japan, S. Korea, Mexico, New Zealand, Norway,
          Singapore and Viet Nam

     13.  A Sterilized Isotonic and pH-Adjusted Pharmaceutical Formulation of
          Uridine Triphosphate
          Inventors:  K. LaCroix, et al.
          U.S. Patent No. 5,962,432 filed 3 Jul 1996 issued 5 Aug. 1999
          US CIP filed 23 Dec 1997; PCT filing 23 Dec. 1998

     14.  Novel Pharmaceutical Compositions of Uridine Triphosphate
          Inventors:  K. LaCroix, et al.
          U.S. CIP of US Patent No. 5,962,432 filed 23 Dec 1997

                                    - S5 -
<PAGE>

          U.S. Patent No. 5,968,913 issued 19 Oct. 1999
          Non-convention countries S. Africa, Argentina, and Taiwan designated
          23 Dec. 1998
          National Phase due 23 June, 2000

                             Other Patent Filings.

     15.  Method of Treating Otitis Media with UTP and Related Compounds
          Inventors:  D. Drutz, et al.
          U.S. Filed 15 Feb 1996
          PCT filed 14 Feb 1997 designating all member countries
          Published WO97/29756 on 21 Aug 1997
          Non-convention countries S. Africa and Argentina designated
          Foreign National Phase entered in EPO, Canada, Mexico, Australia, New
          Zealand, Japan, China, and Korea

     16.  Method of Treating Ciliary Dyskinesia with UTP and Related Compounds *
          Licensed from The University of North Carolina-Chapel Hill
          Inventors:  K. Jacobus, et al.
          U.S. filed 27 Mar 1996
          PCT filed 27 Mar 1997 designating all member countries
          Publication as WO97/35591 on 2 Oct 1997
          Foreign National Phase entered in Australia, Canada, China, EP, Japan,
          Korea, Mexico and New Zealand and Taiwan on 27 Sep 1998

     17.  Method of Early Lung Cancer Detection Via Sputum Induction and
          Analysis of Sputum to Detect Cancer Associated Substances
          Inventors:  K. LaCroix , et al.
          U.S. Filed 8 Oct. 1996; PCT Filed 8 Oct. 1997 was not pursued.
          U.S. filed 10 April 1998 based on above.
          Publication as WO98/15835 on 16 Apr 1998

     18.  Method of Treating Bronchitis with UTP and Related Compounds *
          Licensed from The University of North Carolina-Chapel Hill
          Inventors:  C. Shaffer, et al.
          U.S. Filed 7 Nov 1996
          PCT Filed 21 Oct 1997
          CPA filed 26 July 1999
          Publication as WO98/19685 on 14 May 1998
          National Phase filings entered in Australia, Brazil, Canada, China,
          EPO, Japan, Korea, Mexico, Norway, New Zealand

                                    - S6 -
<PAGE>

     19.  a.  Method For Large-Scale Production of Di(Uridine 5'-)Tetraphosphate
          Inventors:  B. Yerxa, et al.
          Provisional US Filing 25 Jul 1997
          US CIP and PCT filed 24 Jul 1998
          Non-convention countries S. Africa, Argentina, and Indonesia
          designated 25 Jul 1998
          And Malaysia, Philippines, Thailand, and Taiwan requested 3 Nov. 1998
          Published as WO99/05155
          National Phase filing due 25 Jan. 2000 with Australia, Brazil, Canada,
          China, EPO, Japan, Mexico, Norway, S. Korea, and New Zealand
          designated

          b.  US CIP filed 25 Nov. 1998 "Method of Promoting Cervical and
          Vaginal Secretions"
          Notice of Allowance 15 Nov. 1999
          -------------------
          National Phase due 25 Nov. 1999 with Argentina, Australia, Brazil,
          Canada, EPO, Japan, Mexico, Norway, S. Africa, S. Korea, and New
          Zealand designated

     20.  Therapeutic Dinucleotide and Derivatives *
          Method of Use Patent
          Inventors:  B. Yerxa, et al.
          Provisional US Filing 22 May 1998
          US and PCT filing 22 May 1999
          National phase due 22 Nov. 2000

     21.  Method of Treating Lung Diseases with 5'-Diphosphate and Analogs
          Thereof*
          Inventors:  R. Boucher, et al.
          Provisional Filed Aug 1997 by UNC

          a.  U.S. Composition of Matter filing 28 Aug. 1998; patent pending

          b.  US Div. Method of Use filed 13 July 1999; Notice of Allowance 27
          Sept. 1999

          PCT filing 28 Aug 1998
          Published as WO99/09998 4 March 1999
          National phase due 28 Feb. 2000 with Australia, Brazil, Canada, China,
          Indonesia, Japan, Mexico, S. Korea, and New Zealand designated
          Non-convention countries S. Africa and Argentina designated Aug 1998

     22.  A Co-Invention Patent [UNC and Inspire] for Treating Lung Disease*
          Inventors: R. Boucher, et. al., US application filed Dec. 1998
          Confidential matter

                                    - S7 -
<PAGE>

     23.
          [CONFIDENTIAL TREATMENT REQUESTED]

     24.
          [CONFIDENTIAL TREATMENT REQUESTED]

     25.  Non-patent intellectual property, including without limitation,
          unpatented inventions, trade secrets, service marks, know-how,
          clinical data and technical data, either developed by the Company or
          licensed from other entities, including The University of North
          Carolina at Chapel Hill.

     *    Inspire and UNC Joint Inventorship and/or Ownership

Section 2.11

The Company is a party to the following Material Contracts:

     1.   Consultation and Scientific Advisory Board Agreements, dated March 10,
          1995, between the Company and each of Drs. Richard Boucher and T.
          Kendall Harden (as amended).

     2.   Consulting Agreements, dated March 10, 1995, between the Company and
          each of Drs. Michael Knowles (as amended) and M. Jackson Stutts (as
          amended).

     3.   The following agreements, each dated March 10, 1995, between the
          Company and the University of North Carolina:

          (a) Sponsored Research Agreement, as amended;

          (b) Sole License Agreement regarding certain "P2U" technology;

          (c) Clinical Trial Agreement, as amended, including an amendment which
          provides for new clinical studies of INS316 and INS365 not specified
          in detail in the original agreement. Each specific clinical protocol
          is submitted and reviewed by UNC as an amendment to the master
          agreement. There is currently one ongoing study at UNC (mucociliary
          clearance study in nonsmokers and smokers).

     4.   Lease, dated May 17, 1995, between the Company and Imperial Center
          Limited Partnership, as amended, for office and laboratory space
          located at Royal Center, Durham, North Carolina.

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     5.   Agreement between the Company and Lineberry Associates, dated August
          16, 1995, concerning data management and statistical analysis
          consulting services in connection with clinical trials.

     6.   Confidentiality Agreement, dated August 16, 1995, between the Company
          and Susan Skinner relating to consulting services with respect to
          regulatory, chemistry and manufacturing issues.

     7.   Master Lease Agreement, dated October 13, 1995, between the Company
          and Comdisco.

     8.   Loan Agreement, dated October 13, 1995, between the Company and
          Comdisco in the original principal amount of $400,000.

     9.   Consulting Agreement, dated January 15, 1996, between the Company and
          Dr. Jose L. Boyer, as amended.

     10.  License Agreement, dated February 1, 1996, between the Company and the
          University of North Carolina for the use of the P2Y1 receptor.

     11.  License Agreement, dated March 25, 1996, between the Company and the
          University of North Carolina for the use of the P2Y4 and P2Y5
          receptors.

     12.  Clinical Product Development Agreement, dated June 7, 1996, between
          the Company and Cook Imaging, Inc. concerning the formulation of
          clinical trial supplies.

     13.  Confidential Disclosure Agreement between the Company and Beckloff &
          Associates, dated September 16, 1996, concerning cGMP audits.

     14.  Sponsored Research Agreement, dated October 31, 1996, between the
          Company and the University of North Carolina.

     15.  Confidential Disclosure Agreement, dated January 11, 1996, between the
          Company and Simirex relating to the packaging and labeling of the
          Company's potential products.

     16.  Software License Agreement, dated January 14, 1997, between the
          Company and Tripos, Inc. whereby the Company licenses certain software
          from Tripos.

     17.  Agreement between the Company and Pro Bio Sint, through the U.S. agent
          Davos, dated April 14, 1997, for clinical and pre-NDA development
          quantities of INS365.

     18.  Clinical Trial Research Agreement, dated June 9, 1997, between the
          Company and Children's Hospital and Medical Center, for a clinical
          study in CF patients.

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     19.  Agreement between the Company and Cirrus Pharmaceuticals, Inc., dated
          July 1, 1997, concerning analytical or development work to be provided
          by Cirrus.

     20.  Supply Agreement between the Company and Yamasa Corporation, through
          the U.S. agent Summit Pharmaceuticals Corporation and Sumitomo
          Corporation, dated July 30, 1997, for clinical and clinical
          development quantities of UTP.

     21.  Agreement between the Company and The Technology Partnership, dated
          September 17, 1997, concerning development of novel delivery system
          technology for the administration of UTP and/or INS365.

     22.  Lease, dated December 30, 1997, between the Company and Petula
          Associates, Ltd. for office and laboratory space located at Royal
          Center, Durham, North Carolina.

     23.  Confidential Disclosure Agreement, dated November 29, 1995, between
          the Company and Magellan Laboratories, Inc., Morrisville, North
          Carolina, related to various testing protocols (e.g. stability
          studies) ranging from 6 months to 2 years.

     24.  Confidential Disclosure Agreement between the Company and McCrone
          Associates, dated January 7, 1998, concerning analytical work to be
          provided by McCrone

     25.  Sponsored Research Agreement, dated January 12, 1998, between the
          Company and the University of North Carolina at Chapel Hill and
          amended March 1999 for research by Jose Boyer, entitled "Drug
          Discovery for p2t receptor and [human] ATP diphosphohydrolase."
          Isolation characterization of biologic targets and compound screening.

     26.  Materials Transfer Agreement, dated February 4, 1998, between the
          Company and NeoGenesis Incorporated, Cambridge, Massachusetts relating
          to the transfer, screening and identification of compounds.

     27.  Agreements, dated May 30, 1997 and December 6, 1996, between the
          Company and Mount Sinai Medical Center of Greater Miami concerning
          preclinical studies.

     28.  Sublease Agreement, dated August 15, 1998, between the Company and
          SciQuest, Inc. concerning the Company's sublease to SciQuest of office
          and laboratory space located at Royal Center, Durham, North Carolina.

     29.  Exclusive License Agreement, dated September 1, 1998, between the
          Company and the University of North Carolina concerning U.S. Patent
          No. 5,635,160 covering INS365 and related compounds and U.S. Patent
          Application Nos. 08/624,914 and 08/744,267 and all corresponding
          foreign applications.

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     30.  Joint Development, License and Supply Agreement, dated as of September
          10, 1998, between the Company and Kissei Pharmaceuticals Co., Ltd. for
          the development, commercialization and marketing of INS365 for the
          treatment of respiratory diseases in humans (excluding otitis media
          and sinusitis) in Japan.

     31.  Sublease Agreement, dated September 22, 1998, between the Company and
          ICAgen, Inc. concerning ICAgen's sublease to the Company of office and
          laboratory space located at Royal Center, Durham, North Carolina.

     32.  Ownership Agreement, dated September 28, 1998, between the Company and
          Suhaib M. Siddiqi concerning the allocation of revenues generated from
          the molecular software product referred to as "What If for Windows."

     33.  Marketing and Distribution Agreement, dated October 22, 1998, between
          the Company, G. Vriend and European Molecular Biology Laboratories for
          the rights to market and distribute the molecular software product
          referred to as "What If for Windows."

     34.  Joint Development, License and Supply Agreement, dated as of December
          16, 1998, between the Company and Santen Pharmaceutical Co., Ltd. for
          the development, commercialization and marketing of INS365 for the
          therapeutic treatment of ocular surface diseases, i.e. dry eye disease
          regardless of how caused, in humans, in Japan and 9 other Asian
          countries.

     35.  The Company has established a Scientific Advisory Board ("SAB"), as
          well as several Clinical Trial Boards: Cystic Fibrosis Advisory Board,
          Critical Care Advisory Board and Chronic Bronchitis Advisory Board.
          The members of each Advisory Board are compensated. The Company has
          entered into a Scientific Advisory Board Agreement with each of the
          eight members of the SAB and has granted each SAB member a non-
          qualified stock option to purchase up to 10,000 shares of Common
          Stock. None of the Clinical Trial Board members have stock in Inspire,
          other than Dr. Michael Knowles, founder of Inspire.

     36.  Sponsored Research Agreements, dated January 15, 1998, between the
          Company and The Trustees of Columbia University in the City of New
          York, concerning research in accordance with its proposals entitled
          "Culture of Meibomian gland cells on permeable supports."

     37.  Agreement between the Company and Tony Fox, M.D., Ph.D. dated January
          20, 1999, concerning the Company's retention of Dr. Fox as a medical
          safety consultant.

     38.  Agreement between the Company and Gary Novack, Ph.D. of PharmaLogic
          Development Inc. dated January 8, 1999, concerning consulting services
          to evaluate proposed ophthalmology business relationships.

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     39.  Agreement between the Company and Simbec Research Limited dated
          February 10, 1999, concerning the conduct of a clinical trial of
          INS365 ophthalmic solution in normal subjects.

     40.  Sponsored Research Agreement, dated March 15, 1999, between the
          Company and The Regents of the University of California, Berkeley,
          concerning research in accordance with its proposal entitled
          "Treatment of Macular Edema in Diabetes and in Age Related Macular
          Degeneration: Manipulation of Retinal Pigment Epithelial Fluid
          Transport."

     41.  Agreement between the Company and Lineberry Research Associates dated
          March 26, 1999, concerning INS365, Data Management and Statistics
          services connected with a clinical trial of mucociliary clearance in
          non-smokers and smokers.

     42.  Agreement with Cirrus Pharmaceuticals, Inc., Chapel Hill, North
          Carolina for formulation development work for a preclinical program
          dated March 30, 1999.

     43.  Agreement between the Company and Pacific Rim Ventures Co., Ltd.,
          dated April 1, 1999 concerning the consulting services pertaining to
          assisting with the business development activities leading to securing
          a corporate partnership for UTP (INS316) as an acute sputum induction
          agent in Japan and for Japan/Asia.

     44.  Agreements between the Company and Quintiles Simirex dated June 30,
          1999, August 10, 1998 and May 26, 1998, concerning the labeling,
          packaging, and shipment of INS365 for use in a clinical trial of
          mucociliary clearance in non-smokers and smokers.

     45.  Agreement between the Company and North Carolina State University,
          College of Veterinary Medicine dated July 12, 1999, concerning
          activities relating to P2Y Receptor Agonist on Fresh and Extended Boar
          Semen.

     46.  Agreement between the Company and Associates in Transformational
          Oncology Management (ATOM) dated July 15, 1999, concerning validation
          of market size and commercial value of INS316 (UTP).

     47.  Agreement between the Company and Yamasa Corporation dated July 21,
          1999, concerning the manufacturing of INS365 by Summit Pharmaceuticals
          Corporation for use in clinical trials.

     48.  Confidential Disclosure Agreement between the Company and Pathology
          Associates International, dated July 1, 1998, and Agreement for
          Studies, dated July 1, 1998, concerning pathology consulting services
          and studies.

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     49.  Agreement between the Company and Simbec Research Limited dated August
          5, 1999, concerning the conduction of clinical trial of the lung
          deposition INS365 with three delivery devices.

     50.  Sponsored Research between the Company and University of Southern
          California dated August 1, 1999, concerning the transport and
          metabolism of topically applied purinergic analogs.

     51.  Sponsored Research Agreement between the Company and Schepens Eye
          Research Institute, dated August 1, 1999, concerning the development
          of human conjunctival, endocervical, and tracheal epithelial cell
          lines expressing mucins 4, 5AC, and 5B for testing agents that affect
          mucin secretion, and an Option Agreement, dated August 15, 1999, for
          an exclusive license by Inspire for any or all Inventions coming out
          of the work.

     52.  Agreement between the Company and P.C.H. Integrated Regulatory
          Services dated August 3, 1999 for regulatory consulting services.

     53.  Mutual Non-Disclosure Agreement, dated January 14, 1999, between the
          Company and Automatic Liquid Packaging, Woodstock, Illinois related to
          the manufacture of blow/fill/seal packaging for (INS365) and placebo.

     54.  Sponsored Research Agreement between the Company and The Brigham and
          Women's Hospital, Inc., dated October 5, 1999, concerning the
          development of human conjunctival, endocervical, and tracheal
          epithelial cell lines expressing mucins 4, 5AC, and 5B for testing
          agents that affect mucin secretion.

     55.  Agreement between the Company and JoAnn Gorden, dated October 1, 1999
          for regulatory consulting services.

     56.  Sponsored Research Agreement between the Company and Columbia
          University dated October 15, 1999, concerning research entitled "An
          Evaluation of the Effects of P2Y2 Purinergic Receptor Agonists on the
          Fluid Secretion of Excised Rabbit Conjunctival Epithelium."

     57.  Sponsored Research Agreement between the Company and The Duke Eye
          Research Institute dated October 18, 1999, concerning research in
          accordance with its proposal entitled "The Effect of INS37217 on
          Subretinal Fluid Reabsorption in the Rabbit."

     58.  Confidential Disclosure Agreement, dated September 24, 1999, between
          the Company and ClinSites Pharmaceutical Development Associates, and
          Agreement dated October 30, 1999, for monitoring, data management, and
          biostatistics for an ophthalmic clinical trial.

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     59.  Agreement between the Company and Quintiles Laboratories Limited dated
          October 27, 1999 for clinical chemistry, hematology, and urinalysis
          for an ophthalmic clinical trial.

     60.  Agreements, dated December 14, 1998 and November 22, 1999, between the
          Company and Aradigm Corporation related to feasibility testing of
          INS365 using the AERx system.

     61.  Also see Item 1 under Section 2.5(c) of this Schedule 1.

     62.  Also see Items 1, 2, 3, 4, 5 and 6 under Section 2.5(d) of this
          Schedule 1.

Section 2.18

     None.

Section 2.20

     The Company maintains a non-contributory 401(k) plan.

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