Note Regarding Forward-Looking Statements

Various statements made in this Quarterly Report on Form 10-Q are forward-looking and involve risks and uncertainties. All statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. All statements other than statements of current or historical facts are forward-looking statements, including, without limitation, any expectations of revenues, expenses, cash flows, earnings or losses from operations, capital or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning product research, development and commercialization timelines; any statements of expectations or belief; and any statements of assumptions underlying any of the foregoing. We often, although not always, identify forward-looking statements by using words or phrases such as "likely", "expect", "intend", "anticipate", "believe", "estimate", "plan", "project", "forecast" and "outlook".

The following are some of the factors that could cause actual results to differ materially from the anticipated results or other expectations expressed, anticipated or implied in our forward-looking statements: uncertainties with respect to: Alimera's ability to finance, achieve additional marketing approvals, successfully complete pricing and reimbursement discussions for, commercialize and achieve market acceptance of, and generate revenues to pSivida from, ILUVIEN for DME in the EU; Alimera's resubmission of its NDA for ILUVIEN for DME and its ability to obtain regulatory approval for, and if approved, to finance, successfully commercialize and achieve market acceptance of, and generate revenues to pSivida from, ILUVIEN for DME in the U.S.; financing and success of Phase III posterior uveitis trials, including efficacy, side effects and risk/benefit profile of the posterior uveitis micro-insert; initiation, financing and success of Latanoprost Product Phase II trials and exercise by Pfizer of its option; development of products using Tethadur and BioSilicon; initiation and completion of clinical trials and obtaining regulatory approval of product candidates; adverse side effects; ability to attain profitability; ability to obtain additional capital; further impairment of intangible assets; fluctuations in operating results; decline in royalty revenues; ability to, and to find partners to, develop and market products; termination of license agreements; competition and other developments affecting sales of products; market acceptance; protection of intellectual property and avoiding intellectual property infringement; retention of key personnel; product liability; consolidation in the pharmaceutical and biotechnology industries; compliance with environmental laws; manufacturing risks; risks and costs of international business operations; credit and financial market conditions; legislative or regulatory changes; volatility of stock price; possible dilution; possible influence by Pfizer; absence of dividends; and other factors described in our filings with the Securities and Exchange Commission. You should read and interpret any forward-looking statements together with these risks. Should known or unknown risks materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected in the forward-looking statements. You should bear this in mind as you consider any forward-looking statements.

Our forward-looking statements speak only as of the date on which they are made. We do not undertake any obligation to publicly update or revise our forward-looking statements even if experience or future changes makes it clear that any projected results expressed or implied in such statements will not be realized.

Our Business

We develop tiny, sustained-release, drug delivery products designed to deliver drug at a controlled and steady rate for months or years. We are focused on treatment of chronic diseases of the back of the eye utilizing our core technology platforms, Durasert and BioSilicon. We currently have three approved products and two principal product candidates under development, which represent successive generations of our Durasert technology platform.

ILUVIEN. Our most recently approved product is an injectable, sustained-release micro-insert for the treatment of vision impairment associated with chronic diabetic macular edema considered insufficiently responsive to available therapies ("DME"). This product, to be marketed under the name ILUVIEN®, is being developed by our licensee, Alimera Sciences, Inc. ("Alimera"). ILUVIEN for DME has received marketing authorization in the U.K., Austria, France, Germany, Portugal and Spain, and has been recommended for marketing authorization in Italy. Alimera has announced its plans to launch the direct commercialization of ILUVIEN for DME in Germany, the U.K. and France in 2013 and its pursuit of pricing and reimbursement in those countries.

Alimera reported its intention to respond in the first quarter of 2013 to the second Complete Response Letter ("2011 CRL") received from the U.S. Food and Drug Administration ("FDA") in November 2011 with respect to the New Drug Application ("NDA") for ILUVIEN for DME. Based on a June 2012 meeting with the FDA, Alimera reported that it plans to respond to the issues raised by the FDA in the 2011 CRL, including additional analysis of the benefits and risks of ILUVIEN, based on clinical data from its two previously completed pivotal Phase III clinical trials, and to focus on the population of patients with chronic DME considered insufficiently responsive to available therapies, the same indication for which regulatory approval was granted in various EU countries.

Durasert Product Development. We plan to develop the same micro-insert used in ILUVIEN for the treatment of chronic, non-infectious uveitis affecting the posterior segment of the eye ("posterior uveitis"). The FDA has cleared our IND, permitting us to move directly to two Phase III trials for this indication without the necessity of conducting Phase I or Phase II trials. The FDA has agreed that the primary end point in these trials, which are expected to involve a total of 300 patients, will be recurrence of uveitis within 12 months and that we can reference much of the data, including the clinical safety data, from the clinical trials for ILUVIEN for DME. Treatment of posterior uveitis with this micro-insert is being studied in an investigator-sponsored Phase II study. Target enrollment for the study was expanded following completion of initial enrollment. We did not license Alimera the rights to use this micro-insert for the treatment of uveitis.

We are also developing a bioerodible, injectable micro-insert delivering latanoprost ("Latanoprost Product") to treat glaucoma and ocular hypertension. An investigator-sponsored Phase I/II dose-escalation study is ongoing to assess the safety and efficacy of the Latanoprost Product in patients with elevated intraocular pressure. Pfizer has an option, under certain circumstances, to license the development and commercialization of the Latanoprost Product worldwide.

We are also investigating the use of Durasert technology for the treatment of orthopedic diseases.

BioSilicon. BioSilicon is the second key technology platform we are targeting for sustained drug delivery. Our primary research focus is on Tethadur, which seeks to utilize BioSilicon to deliver peptides, proteins and other large biologic molecules on a sustained basis. Our BioSilicon technology can also be designed for smaller molecules. Our research program with respect to Tethadur includes a feasibility study of ophthalmic applications under a technology evaluation agreement with a global biopharmaceutical company and pre-clinical testing of a sustained release peptide for systemic application. We are also investigating the use of BioSilicon in our Latanoprost Product.

FDA Approved Products. Our two FDA-approved products, Retisert for the treatment of posterior uveitis and Vitrasert for the treatment of AIDS-related cytomegalovirus retinitis, are surgically implanted. They are both licensed to Bausch & Lomb.

Durasert™, BioSilicon™ and Tethadur™ are our trademarks. Retisert® and Vitrasert® are Bausch & Lomb's trademarks, and ILUVIEN® and FAME™ are Alimera's trademarks.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires that we make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates, judgments and assumptions on historical experience, anticipated results and trends, and on various other factors that we believe are reasonable under the circumstances at the time. By their nature, these estimates, judgments and assumptions are subject to an inherent degree of uncertainty. Actual results may differ from our estimates under different assumptions or conditions. In our Annual Report on Form 10-K for the year ended June 30, 2012 ("fiscal year 2012"), we set forth our critical accounting policies and estimates, which included revenue recognition and valuation of our intangible assets. There have been no material changes to our critical accounting policies from the information provided in our Annual Report on Form 10-K for fiscal year 2012.

Results of Operations

Three Months Ended December 31, 2012 Compared to Three Months Ended December 31,
2011:



                                          Three Months Ended
                                             December 31,                   Change
                                          2012          2011          Amounts         %
                                                (In thousands except percentages)

  Revenues                              $    585      $     630      $     (45 )        (7 )%


  Operating expenses:
  Research and development                 1,575          1,992           (417 )       (21 )%
  General and administrative               1,658          1,451            207          14 %
  Impairment of intangible assets             -          14,830        (14,830 )        na


  Total operating expenses                 3,233         18,273        (15,040 )       (82 )%


  Loss from operations                    (2,648 )      (17,643 )       14,995          85 %


  Other income (expense):
  Change in fair value of derivatives         -             128           (128 )      (100 )%
  Interest income                              4             11             (7 )       (64 )%
  Other expense, net                          (1 )           -              (1 )        na


  Total other income                           3            139           (136 )       (98 )%


  Loss before income taxes                (2,645 )      (17,504 )       14,859          85 %
  Income tax benefit                          37             44             (7 )       (16 )%


  Net loss                              $ (2,608 )    $ (17,460 )    $  14,852          85 %

Revenues

Revenues decreased by $45,000, or 7%, to $585,000 for the three months ended December 31, 2012 from $630,000 for the three months ended December 31, 2011. Collaborative research and development revenue decreased by $9,000 due to decreased revenue recognition from the Restated Pfizer Agreement as a result of increased estimated total costs of the research and development program over a longer estimated performance period, offset by other research and development revenue. Royalty income on sales of Retisert and Vitrasert by Bausch & Lomb decreased to $390,000 for the three months ended December 31, 2012 compared to $426,000 for the three months ended December 31, 2011.

Alimera reported that it expects to begin generating revenue from sales of ILUVIEN for DME in Germany during the first quarter of 2013 and in the U.K. and France later in 2013. Under the Alimera Agreement, we will be entitled to 20% of net profits, as defined, on a country-by-country basis from ILUVIEN for DME. We do not know when and if Alimera will achieve net profits in each EU country where it has marketing approval and intends to commercialize ILUVIEN directly. If ILUVIEN for DME were to be approved by the FDA following Alimera's intended response to the 2011 CRL, we would be entitled to receive a $25.0 million milestone payment from Alimera within 30 days following any such FDA approval, although we do not know when or if that approval would occur.

Research and Development

Research and development decreased by $417,000, or 21%, to $1.6 million for the three months ended December 31, 2012 from $2.0 million for the three months ended December 31, 2011. This decrease was primarily attributable to reduced amortization of intangible assets resulting from a $14.8 million intangible asset impairment write-down at December 31, 2011. We may significantly increase our research and development expense during the remainder of fiscal year 2013, primarily dependent upon whether and when we initiate internally funded Phase III clinical trials of our sustained-release micro-insert to treat patients with posterior uveitis.

General and Administrative

General and administrative increased by $207,000, or 14%, to $1.7 million for the three months ended December 31, 2012 from $1.5 million for the three months ended December 31, 2011. This increase was primarily attributable to higher incentive compensation accruals.

Change in Fair Value of Derivatives

Change in fair value of derivatives was $0 for the three months ended December 31, 2012 compared to income of $128,000 for the prior year's second quarter. This net decrease, determined using the Black-Scholes valuation model, was due to the expiration of the last of the A$-denominated warrants in July 2012.

Income Tax Benefit

Income tax benefit was $37,000 for the three months ended December 31, 2012 compared to $44,000 for the quarter a year earlier and consisted of refundable foreign research and development tax credits.

Six Months Ended December 31, 2012 Compared to Six Months Ended December 31, 2011:

                                           Six Months Ended
                                             December 31,                   Change
                                          2012          2011          Amounts         %
                                                (In thousands except percentages)

  Revenues                              $  1,138      $   2,289      $  (1,151 )       (50 )%


  Operating expenses:
  Research and development                 3,098          4,121         (1,023 )       (25 )%
  General and administrative               3,278          3,512           (234 )        (7 )%
  Impairment of intangible assets             -          14,830        (14,830 )        na


  Total operating expenses                 6,376         22,463        (16,087 )       (72 )%


  Loss from operations                    (5,238 )      (20,174 )       14,936          74 %


  Other income (expense):
  Change in fair value of derivatives         -             170           (170 )      (100 )%
  Interest income                             11             20             (9 )       (45 )%
  Other expense, net                          (2 )           (2 )           -            0 %


  Total other income                           9            188           (179 )       (95 )%


  Loss before income taxes                (5,229 )      (19,986 )       14,757          74 %
  Income tax benefit                          70             99            (29 )       (29 )%


  Net loss                              $ (5,159 )    $ (19,887 )    $  14,728          74 %

Revenues

Revenues decreased by $1.2 million, or 50%, to $1.1 million for the six months ended December 31, 2012 from $2.3 million for the six months ended December 31, 2011. Collaborative research and development revenue decreased principally as a result of $1.1 million recognized in the prior year period due to the July 2011 termination by Intrinsiq of its exclusive field-of-use license for nutraceutical and food science applications of BioSilicon and a decrease in revenue recognized under the Restated Pfizer Agreement, partially offset by other research and

development revenue. Royalty income from Bausch & Lomb totaled $774,000 for the six months ended December 31, 2012 compared to $624,000 for the six months ended December 31, 2011 as a result of increased Retisert royalties.

Research and Development

Research and development decreased by $1.0 million, or 25%, to $3.1 million for the six months ended December 31, 2012 from $4.1 million for the six months ended December 31, 2011. This decrease was primarily attributable to a $1.3 million decrease in amortization of intangible assets resulting from a $14.8 million intangible asset impairment write-down at December 31, 2011, partially offset by increased personnel expenses.

General and Administrative

General and administrative decreased by $234,000, or 7%, to $3.3 million for the six months ended December 31, 2012 from $3.5 million for the six months ended December 31, 2011. This decrease was primarily attributable to lower professional fees and stock-based compensation, partially offset by higher incentive compensation accruals.

Change in Fair Value of Derivatives

Change in fair value of derivatives was $0 for the six months ended December 31, 2012 compared to income of $170,000 for the prior year's first six months. This net decrease, determined using the Black-Scholes valuation model, was due to the expiration of the last of the A$-denominated warrants in July 2012.

Income Tax Benefit

Income tax benefit was $70,000 for the six months ended December 31, 2012 compared to $99,000 for the six month period of the prior year. The net change was attributable to a $13,000 net reduction of deferred tax liabilities in the prior year period and lower refundable foreign research and development tax credits.

Liquidity and Capital Resources

During the past three fiscal years, we have financed our operations primarily from license fees, research and development funding, royalties and payment of a contingent note from our collaboration partners, and registered direct offerings of our common stock and warrants in January 2011 and August 2012. At December 31, 2012, our principal sources of liquidity consisted of cash, cash equivalents and marketable securities totaling $15.7 million. Our cash equivalents are predominantly invested in one institutional money market fund and our marketable securities are primarily invested in investment-grade corporate debt and commercial paper with maturities at December 31, 2012 ranging from 3 days to 9.5 months.

With the exception of fiscal year 2010, we have incurred operating losses each year since inception and, at December 31, 2012, we had a total accumulated deficit of $256.9 million. We generally expect negative cash flows from operations on a quarterly basis at least until such time as we receive sufficient revenues from ILUVIEN for DME in the EU or one or more of our product candidates achieves regulatory approval and provides us sufficient revenues. We believe that our capital resources of $15.7 million at December 31, 2012 and expected royalty income from Bausch & Lomb should enable us to fund our operations as currently planned into the first quarter of calendar year 2014, including plans for Phase III clinical trials of the posterior uveitis micro-insert expected to commence during fiscal 2013. Whether we will require, or desire, to raise additional capital will be influenced by many factors, including, but not limited to:

• whether, when and to what extent we receive revenues from Alimera with respect to ILUVIEN for DME, including from commercialization in the EU or upon any approval or commercialization in the U.S.;

• whether and when we are able to enter into strategic arrangements for our product candidates and the nature of those arrangements;

• when and if we initiate, how we conduct, and whether and the extent to which we internally fund product development and programs, including clinical trials and other research and development;

• whether and when Pfizer exercises its option with respect to the Latanoprost Product;

• timely and successful development, regulatory approval and commercialization of our products and product candidates;

• changes in our operating plan resulting in increases or decreases in our need for capital.

Absent adequate levels of funding from new and existing collaboration agreements and/or financing transactions, management currently believes that our cash position beyond early calendar year 2014 depends significantly on possible revenues from the successful commercialization by Alimera of ILUVIEN for DME in the EU and if ILUVIEN for DME were to be approved by the FDA and successfully commercialized in the U.S. However, there is no assurance that the FDA or other regulatory authorities will approve ILUVIEN for DME, that it will achieve market acceptance in any market or that we will receive significant, if any, revenues from ILUVIEN for DME. Exercise by Pfizer of its option for the Latanoprost Product would also enhance our cash position, although there is no assurance when the option will become exercisable or if Pfizer will exercise it.

We enhanced our capital resources in August 2012, raising net proceeds of $4.7 million through a registered direct offering of common stock and warrants. If we determine that it is desirable or necessary to raise additional capital in the future, we do not know if it will be available when needed or on terms favorable to us or our stockholders. The state of the economy and the financial and credit markets at the time we seek additional financing may make it more difficult and more expensive to obtain. If available, additional equity financing may be dilutive to stockholders, debt financing may involve restrictive covenants or other unfavorable terms and potential dilutive equity, and funding through collaboration agreements may be on unfavorable terms, including requiring us to relinquish rights to certain of our technologies or products. If adequate financing is not available if and when needed, we may be required to delay, reduce the scope of or eliminate research or development programs, postpone or cancel the pursuit of product candidates, including pre-clinical and clinical trials and new business opportunities, reduce staff and operating costs or otherwise significantly curtail our operations to reduce our cash requirements and extend our capital.

Our consolidated statements of historical cash flows are summarized as follows: