UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

Filed by the Registrant  x                            Filed by a Party other than the Registrant  ¨

Check the appropriate box:

InterMune, Inc.

(Name of registrant as specified in its charter)

(Name of person(s) filing proxy statement, if other than the registrant)

Payment of Filing Fee (Check the appropriate box):

INTERMUNE, INC.

3280 Bayshore Boulevard

Brisbane, California 94005

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MAY 10, 2010

To the Stockholders of InterMune, Inc.:

Notice is hereby given that the Annual Meeting of Stockholders (“Annual Meeting”) of INTERMUNE, INC., a Delaware corporation (the “Company”), will be held on Monday, May 10, 2010, at 10:00 a.m. local time, at 3280 Bayshore Boulevard, Brisbane, California for the following purposes:

1. To elect two directors to hold office until the 2013 annual meeting of stockholders or until their successors are elected;

2. To ratify the selection, by the Audit and Compliance Committee of the Board of Directors, of Ernst & Young LLP as the independent registered public accounting firm of the Company for its fiscal year ending December 31, 2010; and

3. To transact such other business as may properly come before the meeting or any adjournment or postponement thereof.

The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.

The Board of Directors has fixed the close of business on March 23, 2010, as the record date for the determination of stockholders entitled to notice of and to vote at this Annual Meeting and at any adjournment or postponement thereof.

Brisbane, California

April 14, 2010

All stockholders are cordially invited to attend the meeting in person. Whether or not you expect to attend the meeting, please complete, date, sign and return the enclosed proxy card as promptly as possible in order to ensure your representation at the meeting. A return envelope (which is postage prepaid if mailed in the United States) is enclosed for that purpose. Alternatively, you may vote your shares on the Internet or by telephone by following the instructions in the proxy statement. If your shares are held in an account at a brokerage firm, bank or other nominee, you may be able to vote on the Internet or by telephone by following the instructions provided with your voting form. Even if you have already voted your proxy, you may still vote in person if you attend the meeting. Please note, however, that if your shares are held in an account at a brokerage firm by a broker, bank or other nominee, and you wish to vote at the meeting, you must obtain a proxy card issued in your name from the record holder.

INTERMUNE, INC.

3280 Bayshore Boulevard

Brisbane, California 94005

PROXY STATEMENT

PRELIMINARY COPIES FILED PURSUANT TO RULE 14a-6(a)

FOR THE 2010 ANNUAL MEETING OF STOCKHOLDERS

MAY 10, 2010

QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING

Why am I receiving these materials?

We sent you this proxy statement and the enclosed proxy card because the Board of Directors of InterMune, Inc. (sometimes referred to as the “Company,” “InterMune,” “we,” “our,” or “us”) is soliciting your proxy to vote at the 2010 Annual Meeting of Stockholders (the “Annual Meeting”). You are invited to attend the Annual Meeting to vote on the proposals described in this proxy statement. However, you do not need to attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card, or follow the instructions below to submit your proxy over the telephone or on the Internet.

The Company intends to mail this proxy statement and accompanying proxy card on or about April 14, 2010 to all stockholders of record entitled to vote at the Annual Meeting.

Who can vote at the Annual Meeting?

Only stockholders of record at the close of business on March 23, 2010 will be entitled to vote at the Annual Meeting. At the close of business on the record date, there were 55,283,056 shares of common stock outstanding and entitled to vote.

Stockholder of Record: Shares Registered in Your Name

If, on March 23, 2010, your shares were registered directly in your name with InterMune’s transfer agent, BNY Mellon Shareowner Services, then you are a stockholder of record. As a stockholder of record, you may vote in person at the meeting or vote by proxy. Whether or not you plan to attend the meeting, we urge you to fill out and return the enclosed proxy card or vote by proxy over the telephone or on the Internet as instructed below to ensure your vote is counted.

Beneficial Owner: Shares Registered in the Name of a Broker, Bank or Other Agent

If, on March 23, 2010, your shares were held in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. You are also invited to attend the Annual Meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the meeting unless you request and obtain a valid proxy card from your broker or other agent.

On what am I voting?

You are being asked to vote:

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In addition, you are entitled to vote on any other matters that are properly brought before the Annual Meeting.

How do I vote?

You may either vote “For” the nominees to the Board or withhold your vote for the nominees. For each of the other matters to be voted on, you may vote “For” or “Against” or abstain from voting. The procedures for voting are fairly simple:

Stockholder of Record: Shares Registered in Your Name

If you are a stockholder of record, you may vote in person at the Annual Meeting, vote by proxy using the enclosed proxy card, vote by proxy over the telephone or vote by proxy on the Internet. Whether or not you plan to attend the meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the meeting and vote in person if you have already voted by proxy.

Beneficial Owner: Shares Registered in the Name of Broker, Bank or Other Agent

If you are a beneficial owner of shares registered in the name of your broker, bank or other agent, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from the Company. Simply complete and mail the proxy card to ensure that your vote is counted. Alternatively, you may vote by telephone or over the Internet as instructed by your broker, bank or other agent. To vote in person at the Annual Meeting, you must obtain a valid proxy card from your broker, bank or other agent. Follow the instructions from your broker, bank or other agent included with these proxy materials, or contact your broker, bank or other agent to request a proxy card.

We provide Internet proxy voting to allow you to vote your shares on-line, with procedures designed to ensure the authenticity and correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your Internet access, such as usage charges from Internet access providers and telephone companies.

How many votes do I have?

On each matter to be voted upon, you have one vote for each share of common stock you own as of March 23, 2010.

What if I return a proxy card but do not make specific choices?

If we receive a signed and dated proxy card and the proxy card does not specify how your shares are to be voted, your shares will be voted “For” the election of each of the two nominees for director and “For” proposal 2. If any other matter is properly presented at the meeting, your proxy (one of the individuals named on your proxy card) will vote your shares using his or her best judgment.

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Who is paying for this proxy solicitation?

We will pay for the entire cost of soliciting proxies. In addition to these mailed proxy materials, our directors and employees and BNY Mellon Shareowner Services may also solicit proxies in person, by telephone, or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies, but BNY Mellon Shareowner Services will be paid its customary fee of approximately $6,500 plus out-of-pocket expenses if it solicits proxies. We may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

What does it mean if I receive more than one proxy card?

If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.

Can I change my vote after submitting my proxy?

Yes. You can revoke your proxy at any time before the final vote at the meeting. You may revoke your proxy in any one of four ways:

When are stockholder proposals due for next year’s Annual Meeting?

To be considered for inclusion in next year’s proxy materials, your proposal must be submitted in writing by December 15, 2010, to InterMune’s Secretary at 3280 Bayshore Boulevard, Brisbane, California 94005. If you wish to submit a proposal that is not to be included in next year’s proxy materials or to nominate a director, you must do so between January 10, 2011 and February 9, 2011. You are also advised to review our Amended and Restated Bylaws, which contain additional requirements about advance notice of stockholder proposals and director nominations. The Amended and Restated Bylaws were adopted by InterMune on March 22, 2010 which, among other things, included modifications to (i) existing provisions providing for advance notice of stockholder proposals and nominations (other than proposals properly made in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as amended (“Rule 14a-8”)) to expand the disclosure stockholders must provide regarding themselves when submitting proposals and nominations for consideration; (ii) require stockholders nominating directors to disclose the same information about proposed director nominees that would be required if the director nominee were submitting a proposal, and require the director nominees to complete a questionnaire and representation and agreement with respect to their background, any voting commitments or compensation arrangements and their commitment to abide by the Company’s policies and guidelines; (iii) require stockholders to update the disclosures described above as of the record date for the meeting of stockholders and as of the date that is ten business days prior to the date of the meeting or any adjournment or postponement thereof; and (iv) clarify that the requirements set forth in the Amended and Restated Bylaws apply to all stockholder proposals and director nominees, other than stockholder proposals made pursuant to Rule 14a-8.

How are votes counted?

Votes will be counted by the Inspector of Election appointed for the Annual Meeting, who will separately count “For” and (with respect to proposals other than the election of directors) “Against” votes, abstentions and

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broker non-votes. In addition, with respect to the election of directors, the Inspector of Election will count the number of “withheld” votes received for the nominees. If your shares are held by your broker as your nominee (that is, in “street name”), you will need to obtain a proxy form from the institution that holds your shares and follow the instructions included on that form regarding how to instruct your broker to vote your shares. If you do not give instructions to your broker, your broker can vote your shares with respect to “discretionary” items, but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules of the New York Stock Exchange on which your broker may vote shares held in street name in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, the shares will be treated as broker non-votes.

How many votes are needed to approve each proposal?

What is the quorum requirement?

A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if at least a majority of the outstanding shares are represented by stockholders present at the meeting or by proxy. On the record date, there were 55,283,056 shares outstanding and entitled to vote. Accordingly, 27,641,529 shares must be represented by stockholders present at the meeting or by proxy in order to have a quorum.

Your shares will be counted towards the quorum only if you submit a valid proxy vote or vote at the meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. If there is no quorum, either the chairman of the meeting or a majority of the votes present at the meeting may adjourn the meeting to another date.

How can I find out the results of the voting at the Annual Meeting?

Preliminary voting results will be announced at the Annual Meeting. Final voting results will be published in the Company’s current report on Form 8-K within four business days after the Annual Meeting.

PROPOSAL 1

ELECTION OF DIRECTORS

The Company’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws provide that the Board of Directors (the “Board”) shall be divided into three classes, with each class having a three-year term. Vacancies on the Board may be filled only by persons elected by a majority of the remaining directors. A director elected by the Board to fill a vacancy (including a vacancy created by an increase in the number of directors) shall serve for the remainder of the full term of the class of directors in which the vacancy occurred and until such director’s successor is elected and qualified.

The Board currently consists of six directors, divided into the three following classes:

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At each annual meeting of stockholders, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third subsequent annual meeting of stockholders.

There are two nominees for two Class I positions: Dr. Kabakoff and Mr. Welch, each of whom is a current director. Dr. Kabakoff and Mr. Welch each have been nominated for and have elected to stand for reelection. Each director to be elected will hold office from the date of their election by the stockholders until the third subsequent annual meeting of stockholders or until his successor is elected and has been qualified, or until such director’s earlier death, resignation or removal.

Pursuant to the Company’s Amended and Restated Certificate of Incorporation, the number of directors has been fixed at seven by a resolution of the Board. The Board currently consists of six directors leaving one vacancy which the Board may fill at any time. Our Corporate Governance and Nominating Committee of the Board is in the process of seeking a suitable nominee to fill the vacancy. Given the current vacancy, while there could be a total of three Class I directors, there are only two nominees. Proxies cannot be voted for a greater number of persons than the number of nominees named.

The Company does not have a policy regarding directors’ attendance at the Annual Meeting. One of the Company’s six directors who were members of the Board at the time attended the 2009 annual meeting of stockholders.

Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the two nominees named below. In the event that any nominee should be unavailable for election as a result of an unexpected occurrence, such shares will be voted for the election of such substitute nominee as the Board may propose. Each person nominated for election has agreed to serve if elected, and management has no reason to believe that any nominee will be unable to serve. Directors are elected by a plurality of the votes present in person or represented by proxy and entitled to vote at the meeting.

The following table sets forth, for the Class I nominees and our other current directors who will continue in office after the Annual Meeting, information with respect to their ages and position/office held with the Company:

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Set forth below is biographical information for each nominee and each person whose term of office as a director will continue after the Annual Meeting.

Nominees for Election to a Three-Year Term Expiring at the 2013 Annual Meeting of Stockholders

DAVID S. KABAKOFF, PH.D. has served as a member of the Board since November 2005. Dr. Kabakoff has served as Executive-in-Residence of Sofinnova Ventures from May 2007 to the present. Dr. Kabakoff has also served as President and Chief Executive Officer of Strategy Advisors, LLC, a consulting company, from August 2000 to the present. From January 2001 to June 2005, when it was acquired by Cephalon, Inc., a biotechnology company, Dr. Kabakoff served as the founder, Chairman and Chief Executive Officer of Salmedix, Inc., a biotechnology company. From May 1996 to August 2000, Dr. Kabakoff served in senior executive positions at Dura Pharmaceuticals Inc., a specialty pharmaceuticals company that was acquired by Elan Pharmaceuticals. From 2005 to 2009, Dr. Kabakoff served on the board of directors of Avalon Pharmaceuticals, Inc. Dr. Kabakoff also serves on the boards of directors of several private companies. Dr. Kabakoff holds a B.A. in Chemistry from Case Western Reserve University and a Ph.D. in Chemistry from Yale University. The Board believes that Dr. Kabakoff brings strategic insight and leadership and a wealth of experience in the biotechnology industry to the Board.

DANIEL G. WELCH has served as the Chairman, Chief Executive Officer and President of the Company and a member of the Board since May 2008 and as the President and Chief Executive Officer of the Company and a member of the Board since September 2003. From March 2003 to September 2003, Mr. Welch served as a consultant to Warburg Pincus LLC, a global private equity investment firm. From August 2002 to January 2003, Mr. Welch served as Chairman and Chief Executive Officer of Triangle Pharmaceuticals, Inc., a pharmaceutical company. From October 2000 to June 2002, Mr. Welch served as President of the pharmaceutical division of Elan Corporation, PLC. From September 1987 to August 2000, Mr. Welch served in various senior management roles at Sanofi-Synthelabo and its predecessor companies Sanofi and Sterling Winthrop, including Vice President of worldwide marketing and Chief Operating Officer of the U.S. business. From November 1980 to September 1987, Mr. Welch was with American Critical Care, a division of American Hospital Supply. Mr. Welch currently serves on the board of directors of Seattle Genetics since 2007 and also serves on the board of directors of a private company. Mr. Welch holds a B.S. in Marketing from the University of Miami and an M.B.A. from the University of North Carolina. The Board believes that Mr. Welch is a strong operating executive with operational and strategic expertise in the global pharmaceutical market, whose experience contributes valuable insight to the Board.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE

IN FAVOR OF THE NAMED NOMINEES.

Directors Continuing in Office Until the 2011 Annual Meeting of Stockholders

LOUIS DRAPEAU has served as a member of the Board since his appointment September 2007. He currently serves as Chief Executive Officer as well as Vice President and Chief Financial Officer of InSite Vision Incorporated. Prior to joining InSite Vision in October 2007, Mr. Drapeau served as Senior Vice President, Finance and Chief Financial Officer for Nektar Therapeutics from January 2006 to August 2007. From August 2002 to August 2005, he held the position of Senior Vice President and Chief Financial Officer at BioMarin Pharmaceutical Inc., a biotechnology company. Mr. Drapeau also served as Acting Chief Executive Officer of BioMarin from August 2004 to May 2005. Mr. Drapeau spent more than 30 years with public accounting firm Arthur Andersen, including 19 years as an Audit Partner in Arthur Andersen’s Northern California Audit and Business Consulting practice and 12 years as managing partner. From 2006 to 2008, Mr. Drapeau served on the board of directors of Inflazyme Pharmaceuticals, a biotechnology company whose stock is traded on the Toronto stock exchange. He currently serves on the boards of directors of Bio-Rad Laboratories and Bionovo, Inc. since 2007 and 2008, respectively. Mr. Drapeau holds a B.S. in Mechanical Engineering and an M.B.A. both from Stanford University. The Board believes that Mr. Drapeau operational experience and financial expertise in the

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health care sector contributes valuable insight to the Board. His extensive experience with Arthur Andersen also qualifies him as a financial expert and makes him a strong Chairman of the Audit and Compliance Committee of the Board.

JAMES I. HEALY, M.D., PH.D. has served as a member of the Board since April 1999 and served as the Chairman of the Board from October 1999 through January 2000. Dr. Healy joined Sofinnova Ventures in June 2000 as a General Partner and Managing Director. From January 1998 through March 2000, Dr. Healy was employed at Sanderling Ventures and served as a consultant to Ista Pharmaceuticals. From 1990 to 1997, Dr. Healy was employed by the Howard Hughes Medical Institute and Stanford University. Dr. Healy has served on the board of the following public companies. From 2001 to 2006, Dr. Healy served on the board of directors of Cotherix, Inc. (acquired by Actelion). In addition, from 2001 through 2008, Dr. Healy served on the board of directors of Novacea, Inc (merged with Trancept Pharmaceuticals Inc). Dr. Healy currently serves on the board of directors of each of Movetis NV since 2006 and Anthera Pharmaceuticals, Inc since 2006 and as a member of the board of directors of Amarin Corporation since 2008. Dr. Healy also currently serves on the board of directors of several private companies. Dr. Healy holds a B.A. in Molecular Biology and a B.A. in Scandinavian studies, both from the University of California at Berkeley where he graduated with Distinction in General Scholarship, Honors, and received a Departmental Citation. Dr. Healy holds an M.D. and a Ph.D. in immunology from Stanford University School of Medicine where he was supported by the Medical Scientist Training Program, was a Beckman Scholar and received a bursary award from the Novartis Foundation. The Board believes that Dr. Healy’s knowledge of medicine together with his extensive experience as a venture capitalist and role as a board member for a number of emerging biotechnology companies provide the Board with valuable insight into a broad range of issues related to the Company’s business activities.

Directors Continuing in Office Until the 2012 Annual Meeting of Stockholders

LARS G. EKMAN, M.D., PH.D. has served as Lead Independent Director of the Board since May 2008 and has been a member of the Board since September 2006. Dr. Ekman has served as Chairman and Chief Executive Officer of Cebix Incorporated, a biotechnology company, since May 2008. Until transitioning his role to serve solely as a director of Elan Corporation in December 2007, Dr. Ekman served as President of Research and Development of Elan which he joined in 2001 as Executive Vice President and President of Global Research and Development. From 1997 to 2001 he was Executive Vice President, Research and Development at Schwartz Pharma AG. From 1984 to 1997, Dr. Ekman was employed in a variety of senior scientific and clinical functions at Pharmacia (now Pfizer). Dr. Ekman currently serves on the board of directors of ARYx Therapeutics, Elan Corporation and Amarin Corporation since 2003, 2005 and 2008, respectively. Dr. Ekman also currently serves on the board of directors of a private company. Dr. Ekman holds an M.D. and a Ph.D. in Experimental Biology both from the University of Gothenburg, Sweden. The Board believes that Dr. Ekman brings global experience and proven leadership in the pharmaceutical industry. As a former senior executive at several global pharmaceutical companies, Dr. Ekman has gained extensive knowledge of the research, development and commercialization of pharmaceutical products in a variety of therapeutic areas. This experience enables him to provide the Board with invaluable insight into a broad range of issues that impact the Company’s business and makes him a strong Chairman of the Science Committee of the Board, in addition to serving as the Board’s Lead Independent Director.

JONATHAN S. LEFF has served as a member of the Board since January 2000. Mr. Leff joined Warburg Pincus LLC, a global private equity investment firm, in 1996 and is currently a Managing Director responsible for the firm’s investment efforts in biotechnology and pharmaceuticals. Mr. Leff served on the board of directors of Sunesis Pharmaceuticals from 1999 to 2006. In addition, he served on the board of directors of Transkaryotic Therapies from 2000 to 2005 and on the board of directors of Neurogen Inc. from 2001 to 2008. Mr. Leff currently serves on the boards of directors of ZymoGenetics, Inc., Allos Therapeutics, Inc. and Inspire Pharmaceuticals, Inc., since 2000, 2002 and 2007, respectively. Mr. Leff also serves on the board of directors of several private companies. Mr. Leff holds an A.B. in Government from Harvard University and an M.B.A. from Stanford University. His extensive experience investing in and serving on boards of public biotechnology and

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pharmaceutical companies have provided Mr. Leff with substantial expertise in corporate governance and executive compensation, making him a strong Chairman of the Compensation and Governance and Nominating Committee of the Board.

Director Qualifications and Diversity

The Compensation and Governance and Nominating Committee is responsible for identifying, evaluating, and recommending to the Board, individuals qualified to be directors of the Company. As set forth in further detail below in the description of the Board’s committees, the Compensation and Governance and Nominating Committee takes into consideration a number of relevant factors for Board membership including, but not limited to, diversity, age, skills, experience and understanding of the Company’s business and business environment. We do not have a formal diversity policy for selecting Board members. However, we believe it is important that our Board members collectively bring the experiences and skills appropriate to effectively carry out the Board’s responsibilities both as our business exists today and as we plan to develop an organization capable of successfully conducting research, development and commercialization of our products. We therefore seek as members of our Board individuals with a variety of perspectives and the expertise and ability to provide advice and oversight in one or more of these areas: accounting controls, business strategy, risk management, strategic partnering, financial engineering, science and medicine, health care system, legal and regulatory compliance and compensation and retention practices. Finally, Board members should display the personal attributes necessary to be an effective director: unquestioned integrity, sound judgment, independence in fact and mindset, ability to operate collaboratively, and commitment to the company, its shareholders, and other constituencies.

Board Leadership Structure

Mr. Welch, the Company’s Chief Executive Officer and President, also serves as the Chairman of the Board. This leadership structure has been in place since 2008, in connection with the departure of two former members of the Board, William R. Ringo and Michael Smith. At the same time that Mr. Welch was appointed Chairman, the Board also appointed Lars Ekman as the Company’s Lead Independent Director. Dr. Ekman conducts an executive session with all directors other than Mr. Welch on a quarterly basis. This approach is commonly used by other public companies in the United States and the Board believes it has been effective for this Company as well. The Company has a single leader, and the Company’s Chairman and Chief Executive Officer is seen by customers, business partners, investors and others as providing strong leadership for the Company in the communities we serve and in our industry. The Board believes that combining the roles of Chairman of the Board and Chief Executive Officer has fostered a constructive and cooperative relationship between the Board and management and resulted in open and effective communications between the Board and management. The Board also believes that, its regular sessions with the Lead Independent Director afford the Board the opportunity to discuss matters independent of Mr. Welch if desired, and given its current size and the constructive working relationships of its members, changing the existing structure would not improve the performance of the Board. The directors bring a broad range of leadership experience to the boardroom and regularly contribute to the thoughtful discussions involved in overseeing the affairs of the Company. All directors are well engaged in their responsibilities, express their views and are open to the opinions expressed by other directors.

Independence of the Board of Directors

As required under the Nasdaq Stock Market (“Nasdaq”) listing standards, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the Board. The Board consults with the Company’s counsel to ensure that the Board’s determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent listing standards of the Nasdaq, as in effect from time to time.

Consistent with these considerations, after review of all relevant transactions or relationships between each director, or any of his family members, and the Company, its senior management and its independent registered

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public accounting firm, the Board affirmatively has determined that all of the Company’s directors are independent directors within the meaning of the applicable Nasdaq listing standards, except for Mr. Welch, the Company’s current Chairman, Chief Executive Officer and President.

Information Regarding the Board of Directors and its Committees

In March 2004, the Board approved the amended Corporate Governance Guidelines and Code of Director Conduct and Ethics to ensure that the Board will have the necessary authority and practices in place to review and evaluate the Company’s business operations as needed, to make decisions that are independent of the Company’s management and to ensure honest and ethical conduct by the members of the Board. The guidelines are also intended to align the interests of directors and management with those of the Company’s stockholders. The Corporate Governance Guidelines and Code of Director Conduct and Ethics sets forth the practices the Board will follow with respect to Board composition and selection, Board meetings and involvement of senior management, chief executive officer succession planning and selection, Board compensation, committees, self-assessment, interaction with outside parties, orientation and continuing education and ethical conduct. The Corporate Governance Guidelines and Code of Director Conduct and Ethics may be viewed on our Internet website at http://www.intermune.com/pdf/governance_guidelines.pdf.

During 2009, the Board met eleven times, including by telephone conference, and acted by unanimous written consent six times. No director attended fewer than 75% of the aggregate of the total number of meetings of the Board (held during the period for which he was a director) and the total number of meetings held by all committees of the Board on which he served (during the period that he served as a committee member). Currently, the Board has an Audit and Compliance Committee, a Compensation and Governance and Nominating Committee and a Science Committee.

Audit and Compliance Committee

The Audit and Compliance Committee of the Board oversees the Company’s corporate accounting and financial reporting processes, the systems of internal accounting and financial controls and audits of financial statements, the quality and integrity of financial statements and reports, the qualifications, independence and performance of the firms engaged as independent outside auditors, corporate compliance, including development, implementation, administration and enforcement of the Company’s compliance programs and reviewing the Company’s compliance with its policies and all applicable laws. For this purpose, the Audit and Compliance Committee performs several functions. Among other things, the Audit and Compliance Committee:

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The Board annually reviews the Nasdaq listing standards definition of independence for Audit and Compliance Committee members and has determined that all members of the Company’s Audit and Compliance Committee are independent, as independence is currently defined in Rule 5605(a)(2) of the Marketplace Rules of the Nasdaq Stock Market and (ii) of the Nasdaq listing standards. Mr. Drapeau is currently the Chairman of the Audit and Compliance Committee. The Board has determined that Mr. Drapeau qualifies as an “audit committee financial expert,” as defined in applicable Securities and Exchange Commission (“SEC”) rules. In March 2008, the Board approved the Charter of the Audit and Compliance Committee of the Board, which charter was amended by the Board in December 2009. The amended charter can be found on our corporate website at http://www.intermune.com/pdf/Charter_of_the_Audit_and_Compliance_Committee.pdf. The Audit and Compliance Committee is currently composed of Mr. Drapeau, Dr. Healy and Dr. Kabakoff. In 2009, the Audit and Compliance Committee met six times. (Please see “Audit and Compliance Committee Report” below.)

Compensation and Governance and Nominating Committee

The Compensation and Governance and Nominating Committee of the Board approves the type and level of compensation for officers and employees of the Company, administers the Company’s stock plans, performs such other functions regarding compensation as the Board may delegate, develops and implements policies and procedures and oversees corporate governance matters, including the evaluation of Board performance and processes, and recommends qualified candidates for Board membership to the Board for nomination to the Board and election by the stockholders. The Compensation and Governance and Nominating Committee approves all compensation, including equity grants, for the Company’s vice presidents and above, and all equity grants to non-vice president employees and consultants for greater than or equal to 20,000 shares of common stock.

For Board membership, the Compensation and Governance and Nominating Committee takes into consideration applicable laws and regulations (including those of Nasdaq), diversity, age, skills, experience, integrity, ability to make independent analytical inquires, understanding of the Company’s business and business environment, willingness to devote adequate time and effort to Board responsibilities and other relevant factors.

The Compensation and Governance and Nominating Committee reviews candidates for director in the context of the current composition, skills and expertise of the Board, the operating requirements of the Company and the interests of stockholders. In the case of new director candidates, the Compensation and Governance and Nominating Committee determines whether the nominee must be independent for Nasdaq purposes, which determination is based upon applicable Nasdaq listing standards and applicable SEC rules and regulations. The Compensation and Governance and Nominating Committee then uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a professional search firm. The Compensation and Governance and Nominating Committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the functions and needs of the Board. The Compensation and Governance and Nominating Committee meets to discuss and consider such candidates’ qualifications. All members of the Compensation and Governance and Nominating Committee and the Chairman, Chief Executive Officer and President then interview candidates that the Compensation and Governance and Nominating Committee believes have the requisite background, before recommending a nominee to the Board, which votes to elect the nominees.

The Compensation and Governance and Nominating Committee will consider director candidates recommended by stockholders. Though the committee has not established a formal policy with regard to

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consideration of director candidates recommended by stockholders, the Board recently adopted the Amended and Restated Bylaws which, among other things, included modifications to (i) existing provisions providing for advance notice of stockholder nominations to expand the disclosure stockholders must provide regarding themselves when submitting nominations for consideration; (ii) require stockholders nominating directors to disclose the same information about proposed director nominees that would be required if the director nominee were submitting a proposal, and require the director nominees to complete a questionnaire and representation and agreement with respect to their background, any voting commitments or compensation arrangements and their commitment to abide by the Company’s policies and guidelines; (iii) require stockholders to update the disclosures described above as of the record date for the meeting of stockholders and as of the date that is ten business days prior to the date of the meeting or any adjournment or postponement thereof; and (iv) clarify that the requirements set forth in the Amended and Restated Bylaws apply to all stockholder director nominees. The Board believes that such rigorous procedures set forth in the Amended and Restated Bylaws is currently sufficient and the establishment of a formal policy is not necessary. To date, the Compensation and Governance and Nominating Committee has not received a director nominee from any stockholder. Stockholders who wish to recommend individuals for consideration by the Corporate Governance and Nominating Committee to become nominees for election to the Board may do so by delivering a written recommendation by certified mail only, c/o the Chairman or Secretary, at the following address: InterMune, Inc., 3280 Bayshore Boulevard, Brisbane, California 94005 no sooner than 120 days and no later than 90 days prior to the anniversary date of the Company’s last annual meeting of stockholders. Submissions must include the full name of the proposed nominee, a description of the proposed nominee’s business experience for at least the previous five years, complete biographical information, a description of the proposed nominee’s qualifications as a director and a representation that the nominating stockholder is a beneficial or record owner of the Company’s stock. Any such submission must be accompanied by the written consent of the proposed nominee to be named as a nominee and to serve as a director if elected.

In March 2008, the Board approved the Charter of the Compensation and Governance and Nominating Committee of the Board of Directors, which can be found on our corporate website at http://www.intermune.com/pdf/Charter_of_the_Compensation_and_Governance_and_Nominating_Committee.pdf. The Board has authorized a subcommittee comprised of the Company’s Chief Executive Officer, Senior Vice President of Human Resources and General Counsel to make normative (i.e., consistent with a matrix pre-approved by the Compensation and Governance and Nominating Committee) new hire equity grants of less than 20,000 shares of common stock to non-executive committee employees and consultants. (Please see “Compensation and Governance and Nominating Committee Report” below.) The Compensation and Governance and Nominating Committee is currently composed of Messrs. Ekman, Leff and Drapeau and Mr. Leff is currently the Chairman of the committee. Each of Messrs. Drapeau, Ekman and Leff are considered to be independent as independence is currently defined in Rule 5605(a)(2) of the Marketplace Rules of the Nasdaq Stock Market. In 2009, the Compensation and Governance and Nominating Committee met five times.

Science Committee

In March 2007, the Board created a Science Committee. In July 2007, the Board approved the Science Committee charter, which will be posted on our corporate website at http://www.intermune.com/pdf/charter_science_committee.pdf. The Science Committee is composed of Dr. Ekman, Dr. Healy and Dr. Kabakoff and Dr. Ekman is currently the Chairman of the committee.

Stockholder Communications with the Board of Directors

The Board provides a procedure for stockholders to send written communications to the Board or any of the directors. Stockholders may send written communications to the Board or any of the directors by certified mail only, c/o the Chairman or Secretary, InterMune, Inc., 3280 Bayshore Boulevard, Brisbane, California 94005. All such written communications will be compiled by the Chairman or Secretary of the Company and submitted to the Board or the individual directors, as the case may be, within a reasonable period.

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Code of Business Conduct and Ethics

The Board has approved a Code of Business Conduct and Ethics (the “Code”) applicable to all of our employees, including our Chief Executive Officer, Chief Financial Officer and Controller, and to the members of the Board. The purpose of this Code is to deter wrongdoing and to promote, among other things:

The Code of Business Conduct and Ethics is available on our corporate website at http://www.intermune.com/pdf/Code_of_Conduct_01OCT07.pdf. If the Company grants any waiver from a provision of the Code with respect to any Company officer at the level of Vice President or above, the Company will promptly disclose the nature of the waiver along with the reasons for the waiver.

Risk Oversight

Our Board oversees an enterprise-wide approach to risk management, designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance shareholder value. A fundamental part of risk management is not only understanding the risks a Company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. The involvement of the full Board in setting the Company’s business strategy is a key part of its assessment of management’s appetite for risk and also a determination of what constitutes an appropriate level of risk for the Company. The full Board participates in a regular and ongoing assessment of enterprise risk management in consultation with the Company’s senior management including the Chief Executive Officer, the Chief Financial Officer, the General Counsel and the Chief Compliance Officer. In this process, risk is assessed throughout the business, focusing on three primary areas of risk: financial risk, legal compliance risk and operational strategic risk.

While the Board has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk management. In particular, the Audit and Compliance Committee focuses on financial and compliance risks including internal controls. The Audit and Compliance Committee, receives an annual risk assessment report from the Company’s external auditors, assists the Board in fulfilling its oversight responsibility with respect to regulatory, healthcare compliance and public policy issues that affect the Company and works closely with the Company’s legal and regulatory groups. In addition, the Compensation and Governance and Nominating Committee considers risks related to succession planning, the attraction and retention of talent and risks relating to the design of compensation programs and arrangements. The Compensation and Governance and Nominating Committee also reviews compensation and benefits plans affecting employees in addition to those applicable to executive officers. The full Board considers strategic risks and opportunities and regularly receives detailed reports from both the Audit and Compliance Committee and the Compensation and Governance and Nominating Committee regarding risk oversight in their areas of responsibility.

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2009 AUDIT AND COMPLIANCE COMMITTEE REPORT(1)

The Audit and Compliance Committee, currently composed of Mr. Drapeau (Chairman), Dr. Healy and Dr. Kabakoff, oversees the Company’s financial reporting process on behalf of the Board. The Audit and Compliance Committee meets with the independent registered public accounting firm, Ernst & Young LLP, with and without management present, to discuss the results of Ernst & Young LLP’s examinations and evaluation of the Company’s internal controls and the overall quality of the Company’s financial reporting.

The members of the Audit and Compliance Committee are appointed by and serve at the discretion of the Board. The Audit and Compliance Committee held six meetings during 2009.

The Company’s management team has the primary responsibility for the financial statements and the reporting process, including the system of internal controls and disclosure controls and procedures. In fulfilling its oversight responsibilities, the Audit and Compliance Committee reviewed the audited financial statements in the Annual Report on Form 10-K with management and the unaudited financial statements in the Quarterly Reports on Form 10-Q, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.

The Audit and Compliance Committee, among other things, is responsible for reviewing, approving and managing the engagement of the independent registered public accounting firm, including the scope, extent and procedures of the annual audit and compensation to be paid, and all other matters the Audit and Compliance Committee deems appropriate, including the auditors’ accountability to the Board and the Audit and Compliance Committee. The Audit and Compliance Committee reviewed with the independent registered public accounting firm, who are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of the Company’s accounting principles and such other matters as are required to be discussed with the Audit and Compliance Committee under generally accepted auditing standards and those matters required to be discussed by SAS 61, as amended and as adopted by the Public Company Accounting Oversight Board (PCAOB) in Rule 3200T, which addresses communications between the Company’s independent registered public accounting firm and the Committee.

In addition, the Audit and Compliance Committee discussed with the independent registered public accounting firm its independence from management and the Company, including the matters and disclosures received in the written disclosures and the letter from the independent registered public accounting firm required by PCAOB Ethics and Independence Rule 3526, Communications with Audit Committees Concerning Independence, and has considered the compatibility of non-audit services with the auditors’ independence. The Audit and Compliance Committee also discussed with the Company’s independent registered public accounting firm the overall scope and plans for their audits and the Audit and Compliance Committee reviewed and made non-material changes to the Committee’s charter.

In reliance on the reviews and discussions referred to above, the Audit and Compliance Committee recommended to the Board (and the Board approved) that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for filing with the SEC. The Audit and Compliance Committee has also retained Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal year ending December 31, 2010.

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Oversight of Assessment of Internal Control Over Financial Reporting

During 2009, management documented, tested and evaluated the Company’s internal control over financial reporting pursuant to the requirements of the Sarbanes-Oxley Act of 2002. The Audit and Compliance Committee was kept apprised of the Company’s progress by management and the independent registered public accounting firm at committee meetings. At the conclusion of the assessments, management and Ernst & Young LLP each provided the Audit and Compliance Committee with its respective report on the effectiveness of the Company’s internal control over financial reporting. The Committee reviewed management’s and the independent registered public accounting firm’s evaluations that were included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Management did not identify any material weaknesses in the Company’s internal controls over financial reporting and concluded that the Company’s internal controls were effective as of December 31, 2009.

PROPOSAL 2

RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit and Compliance Committee has selected Ernst & Young LLP as the Company’s independent registered public accounting firm to serve as the Company’s independent auditors for the fiscal year ending December 31, 2010 and has further directed management to submit the Audit and Compliance Committee’s selection of independent registered public accounting firm for ratification by the stockholders at the Annual Meeting. Ernst & Young LLP has audited the Company’s financial statements since January 2000. Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions. In the event the stockholders do not ratify such appointment, the Board will reconsider its selection.

AUDITOR’S FEES

Audit Fees. The aggregate fees billed by Ernst & Young LLP for the audit of the Company’s financial statements, review of the Company’s interim financial statements, review of SEC registration statements, issuance of comfort letters and consents for the year ended December 31, 2009 were $1,068,173 and for the year ended December 31, 2008 were $742,696.

Audit-Related Fees. Ernst & Young LLP did not provide any audit-related services to the Company during 2009 or 2008.

Tax Fees. The aggregate fees billed by Ernst & Young LLP in relation to the preparation and review of the Company’s income tax returns and for general tax advice provided for the year ended December 31, 2009 and for the year ended December 31, 2008 were as follows:

All Other Fees. Ernst & Young LLP did not provide any other services to the Company during 2009 or 2008.

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Pursuant to the Audit and Compliance Committee’s charter, the Audit and Compliance Committee reviews, and prior to initiation of services, authorizes all non-audit services provided to the Company by the independent registered public accounting firm, and considers the possible effect of such services on the independence of such auditors. The Audit and Compliance Committee by prior resolution may pre-approve non-audit services. The Audit and Compliance Committee has determined that the non-audit services provided by Ernst & Young LLP in 2009 were compatible with maintaining the auditors’ independence. The Audit and Compliance Committee pre-authorized all audit and non-audit services conducted by Ernst & Young LLP in 2009. Ernst & Young LLP may not perform any non-audit services except as pre-authorized by the Audit and Compliance Committee or its Chairman. The Audit and Compliance Committee has not pre-authorized the Company to engage Ernst & Young LLP to perform any non-audit services for 2010.

Stockholder ratification of the Audit and Compliance Committee’s selection of Ernst & Young LLP as the Company’s independent registered public accounting firm is not required by the Company’s Amended and Restated Bylaws or otherwise. However, the Board is submitting the selection of Ernst & Young LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit and Compliance Committee and the Board will reconsider whether or not to retain that firm. Even if the selection is ratified, the Audit and Compliance Committee may engage different independent registered public accounting firms at any time during the year if it determines that such a change would be in the best interests of the Company and its stockholders.

THE BOARD OF DIRECTORS RECOMMENDS

A VOTE IN FAVOR OF PROPOSAL 2

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SECURITY OWNERSHIP OF

CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership of the Company’s common stock as of February 28, 2010 (except as otherwise noted) by (i) each director and nominee for director; (ii) each of the executive officers named in the Summary Compensation Table below (the “Named Executive Officers”); (iii) all executive officers and directors of the Company as a group; and (iv) all those known by the Company based on publicly available records to be beneficial owners of more than five percent of its common stock.

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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 2009, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with, with the exception of the following late filings: (a) Mr. Louis Drapeau was late filing a Form 4 with respect to one (1) transaction which was subsequently reported on a Form 4; (b) Dr. Lars G. Ekman was late filing a Form 4 with respect to one (1) transaction which was subsequently reported on a Form 4; (c) Dr. James I. Healy was late filing a Form 4 with respect to one (1) transaction which was subsequently reported on a Form 4; (d) Dr. David S. Kabakoff was late filing a Form 4 with respect to one (1) transaction which was subsequently reported on a Form 4; and (e) Mr. Jonathan Leff was late filing a Form 4 with respect to one (1) transaction which was subsequently reported on a Form 4.

EXECUTIVE OFFICERS

Information relating to the Company’s executive officers is incorporated herein by reference from the information under the caption “Executive Officers of the Registrant” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

COMPENSATION DISCUSSION AND ANALYSIS (CD&A)

Overview of the Company’s Compensation Program

The Compensation and Governance and Nominating Committee (the “Committee”), composed entirely of independent directors, as independence is defined in Rule 5605(a)(2) of the Marketplace Rules of the Nasdaq Stock Market, administers the Company’s executive and equity compensation programs. The Committee (i) oversees the Company’s compensation and benefit plans and policies, (ii) administers its stock plans

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(including reviewing and approving equity grants to all Company employees and making recommendations to the Board of Directors of the Company (the “Board”) for equity grants to the Company’s executive officers) and (iii) reviews annually all compensation matters relating to the Company’s executive officers, including the Named Executive Officers and makes recommendations to the Board, which has responsibility for approving all compensation matters relating to the Company’s executive officers, including the Chief Executive Officer. The Company’s Named Executive Officers for 2009 are Daniel G. Welch, Chairman, Chief Executive Officer and President; John Hodgman, Chief Financial Officer and Senior Vice President, Finance; Steven Porter, M.D., Ph.D., Chief Medical Officer and Senior Vice President, Clinical Affairs; Williamson Bradford, M.D., Ph.D., Senior Vice President, Clinical Science and Biometrics; and Scott Seiwert, Ph.D. Senior Vice President, Research and Technical Development.

Charter of the Compensation and Governance and Nominating Committee

The charter of the Committee (the “Charter”) reflects the above-described responsibilities, and the Committee and the full Board annually review and periodically revise the Charter as necessary. The full text of the Charter is posted on the Company’s website at http://www.intermune.com/pdf/Charter_of_the_Compensation_and_Governance_and_Nominating_Committee.pdf and is attached to this proxy statement as Appendix A. The Committee’s membership is determined by the Committee and the full Board.

The Committee’s General Compensation Philosophy

The Committee’s philosophy for the Company’s compensation and benefits programs are:

Committee Actions Taken During 2009

The Committee recognizes the importance of establishing sound principles for developing and administering compensation and benefits programs, and has taken actions to ensure that such compensation and benefits programs effectively carry out the Committee’s responsibilities as well as maintain strong links between executive pay and the Company’s performance.

As further described below, examples of Committee actions that the Committee has taken include:

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Total Compensation

Total compensation for the Company’s Named Executive Officers includes base salary, annual cash incentive awards, long-term equity incentive awards and certain benefits. Annual cash incentive awards consist of cash incentive bonuses based on satisfying corporate goals established for the year by the Board as well as on meeting individual performance objectives set by the Chief Executive Officer or the Committee. In addition, Named Executive Officers may receive long-term equity incentive awards in the form of grants of options to purchase shares of the Company’s common stock, with exercise prices set at fair market value on the date of grant, or grants of restricted stock to reinforce long-term decision making and a focus on stockholder value creation.

The Committee believes that due to the Company’s current business stage as a research and development biotechnology company about to embark on recommercialization, traditional measures of corporate performance, such as earnings per share or sales growth, do not readily apply in reviewing performance of the Company and the executive officers. Therefore, in addition to traditional measures of performance, in making recommendations to the Board regarding the compensation of the Company’s Named Executive Officers, the Committee looks to other indicia of performance, such as:

Assessment of performance on these qualitative factors necessarily involves a subjective assessment by the Committee of corporate performance and the Committee presents its recommendations to the Board for approval. Moreover, the Committee does not base its recommendations to the Board regarding corporate performance or executive compensation on any single performance factor, but rather considers several factors, including overall change in stockholder value, and evaluates both corporate and individual performance. In addition, total compensation paid by the Company to its executive officers is designed to be competitive with the range of compensation packages paid to the executive management of other companies of comparable size, complexity and geographical location in the biotechnology industry. Toward that end, each year the Committee reviews various independent industry surveys, consults with an independent executive compensation consultant who reports directly to the Committee, and gathers data to prepare its recommendations to the Board for approval. Please refer to the “Independent Compensation Consultant” section below for further discussion.

The Committee believes that the midpoint salary, target annual cash incentive award levels and target long-term equity incentive award values should be set in part by reference to the competitive practices of a select peer group of biotechnology companies and also the broader biotechnology industry, based upon available survey data. Primary emphasis is placed on the peer group data, with the broader survey data serving as additional validation of the accuracy of the peer group information. The Committee assesses the compensation practices of a peer group of biotechnology companies, many of which also are located in the San Francisco Bay Area, which reflects the primary talent market for all positions within the Company as well as the cost of living factors that influence compensation levels in each unique biotechnology market. The Committee considered company size as measured by headcount, business complexity, research and development portfolio and other criteria to choose these companies.

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Based on these criteria, the companies selected by the Committee for 2009 are:

Because the Company made only minor changes in compensation between 2008 and 2009, a less detailed analysis of comparators was done in 2009 and the list of comparator companies remained unchanged from 2008 with the exception of CV Therapeutics which was previously part of the group of companies selected by the Committee in 2008 but was dropped in 2009 due to its acquisition by Gilead in 2009. As the Company approaches re-commercialization, we anticipate that the comparator group will be modified in 2010 to include additional commercial companies.

The Committee also uses a broader biotechnology industry survey data consisting primarily of national companies in the industry that best align with our market capitalization, drug pipeline, capital burn rate and number of total employees in determining the competitive positioning of pay for recommendation to the Board. The peer group and broader biotechnology industry benchmark can change from time to time based on the criteria stated above as part of the Committee’s review of our compensation practices. Collectively, the peer group and survey data form the market benchmarks for determining compensation programs, practices and levels. In general, the industry survey data is used to determine competitive ranges for salary and annual cash bonus targets for non-executive employees, while peer group data is used to determine salary and annual cash bonus targets for executives, as well as both initial and ongoing equity grants for all employees. In addition to reviewing executive officers’ compensation against the benchmarks, the Committee also considers recommendations from the Chief Executive Officer regarding total compensation for those executives reporting directly to him, including the Named Executive Officers. Management provides the Committee with historical and prospective breakdowns of the total compensation components for each executive officer to inform its decisions.

In addition to the external benchmarks, the Committee considers internal pay equity among and between members of the Company’s executive management team in making compensation-related recommendations to the Board. In doing so, the Committee considers, with regard to each member of the executive management team, the individual’s:

In examining long-term incentives for the Named Executive Officers, the Committee examines the equity holdings of each Named Executive Officer, including an analysis of the vested/unvested equity value and

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holdings for such executive. This information is used in determining equity compensation actions that may be taken to ensure the program reinforces a commitment to long-term decision making, the retention objectives for the Named Executive Officers and the future contribution that is expected of the incumbents.

The Committee has reviewed total summary compensation information for each of the Named Executive Officers in 2009 consisting of all components of the Named Executive Officers’ 2009 compensation, including current pay (salary and bonus), outstanding equity awards, benefits, perquisites and potential change-in-control severance payments.

Independent Compensation Consultant

In addition to using the Company’s Human Resources, Finance and Legal departments, the Committee engaged Radford, a division of Aon Corporation, as its independent outside compensation consultant (“Radford”). Radford reports directly to the Committee, advising the Committee on all material matters relating to executive, equity and employee compensation. In 2008, the Committee directed Radford to survey the peer group companies and benchmark executive compensation practices among those companies and across the defined benchmarks to determine the Company’s competitive position with regard to executive compensation. At that time and at the Committee’s direction, Radford examined cash compensation, incentive plan design, long-term incentive programs, equity dilution and contractual obligations under the Company’s programs. The Committee also directed Radford to examine the Company’s overall compensation program to ensure alignment with the Company’s strategy, compensation philosophy and fairness in the administration of the Company’s programs. Because the Company made no significant changes to its compensation programs in 2009, Radford performed a less detailed analysis in 2009. The Committee may make other requests to Radford on an ad hoc basis to address compensation matters concerning the Board and executive officers.

Neither Radford nor Aon Corporation advises the Company or its management, and neither receives any compensation from the Company, other than annual professional fees of less than $100,000 in providing services for the executive salary review and other consulting services as described above. The Committee’s advisor attended the majority of the meetings of the Committee during 2009.

Internal Revenue Code Section 162(m)

The Committee has not adopted a policy with respect to the application of Section 162(m) of the Internal Revenue Code. Section 162(m) generally disallows a tax deduction to public companies for compensation over $1.0 million paid to the corporation’s chief executive officer and the three other most highly compensated executive officers, other than the chief financial officer. Qualified performance-based compensation, including stock options granted under the Amended and Restated 2000 Equity Incentive Plan in accordance with the restrictions described above, is not intended to be subject to the deduction limitation if certain requirements are met. The Company generally intends to grant stock options to its executive officers in a manner that satisfies the requirements for qualified performance-based compensation to avoid any disallowance of deductions under Section 162(m).

Elements of Compensation

The total compensation program for the executive officers of the Company consists of the following:

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As set out in greater detail below, each element of the Company’s total compensation program is intended to serve the Company’s overall objectives, as described above. The Committee does not have a set formula for determining the mix of each pay element, and instead ensures that compensation across all elements is fair and consistent with the Company’s philosophy in total.

Base Cash Salaries

The base salaries of the Named Executive Officers are reviewed by the Committee and the Board on an annual basis, as well as at the time of a promotion or other material change in responsibilities. Any increases in base salary are based on an evaluation of the particular individual’s performance and level of pay compared to the benchmarks, as well as the individual’s criticality to the Company’s future plans.

Merit increases normally take effect in the first fiscal quarter of the year and are typically retroactive to January 1st of such year. Consistent with the peer group data, and in order to maintain compensation parity with peers, the base salaries for each of the Named Executive Officers were increased by approximately 3.0% in 2009.

In recommending the base salaries for each of the Named Executive Officers for 2009 to the Board, the Committee took into account:

The Board and the Committee determined that base salaries for 2009 were competitive with those at the peer group companies and appropriate based on each individual executive’s experience, responsibilities and performance. The Board and the Committee determined that the base salaries were competitive because each Named Executive Officer was paid at approximately the 60 ^th percentile of executives in similar positions at the Company’s peer group companies, consistent with the Company’s overall compensation philosophy. The following table sets forth information regarding each Named Executive Officer’s base salary:

Annual Cash Incentive Awards

The Named Executive Officers receive annual cash incentive awards under the Company-wide performance bonus program. For each Named Executive Officer, other than the Chief Executive Officer (whose bonus is discussed below), the annual cash incentive target is set at 35% of the executive’s base salary. For those executives, 70% of the target annual cash incentive is linked to successful achievement of specified corporate goals that the Board determines annually for the current fiscal year, although the Board retains discretion to apply qualitative judgments in assessing performance. The remaining 30% of the target annual cash incentive is linked to performance versus the executive’s individual objectives as determined by the Chief Executive Officer. Under the plan approved by the Board, the Named Executive Officers can earn an award ranging from 0% to 150% of

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the annual cash incentive target based on Company and individual performance. Under the terms of Mr. Welch’s offer letter agreement, his annual cash incentive target is 75% of his base salary. For Mr. Welch, 80% of the target annual cash incentive is linked to successful achievement of specified corporate goals while the remaining 20% of the target annual cash incentive is linked to performance versus Mr. Welch’s individual objectives as determined by the Board. Mr. Welch may earn up to 200% of his target bonus, meaning that he may earn up to 150% of his base salary.

In recommending the target level of annual cash incentive awards to the Board, which approved them, the Committee compared the Company’s total cash compensation (annual base salary plus annual cash incentive) levels to data from the approved peer group, as well as from the Radford 2009 Biotechnology Compensation Report relating to public biotechnology companies with 150 to 500 employees, as well as the approved peer group (the “Radford Benchmarks”). In addition, the Committee used the services of Radford to conduct its periodic review of the effectiveness and competitiveness of the Company’s executive compensation. As noted above, primary emphasis was placed on the peer group data, with the broader survey data serving as additional validation of the accuracy of the peer group information. For 2009, the Committee generally targeted total cash compensation at the 60^th percentile, based on Company and individual performance, and with reference to the Radford Benchmarks. Each of the Named Executive Officers received total cash compensation that is at or slightly below the 60^th percentile as determined above.

For the purposes of the annual cash incentive awards for 2009, the material corporate goals are as set forth below:

In addition to the material corporate goals described above, the Committee set numerous other corporate goals in the areas of regulatory, clinical development and medical affairs, finance and research against which overall corporate performance was determined. No single one of these other corporate goals could have a material impact on the compensation payable to our Named Executive Officers. These corporate goals were set at levels the Committee determined would be achieved based on the Company’s budget and internal projections and would require our Named Executive Officers and other employees to maintain their level of performance and dedication throughout 2009 in order to attain.

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Individual performance objectives for the Named Executive Officers, and the Company’s Chief Executive Officer’s determination (or the Board’s determination with respect to the Chief Executive Officer) of achievement for each Named Executive Officer, for 2009 included the following, all of which were achieved:

On March 22, 2010, the Committee met to consider the achievement of the goals for the annual cash incentive awards of the Company’s Named Executive Officers for fiscal year 2009. The Committee considered the performance of the Named Executive Officers and the Company generally in relation to the Company’s 2009 corporate performance goals and made its recommendations to the Board on March 22, 2010 for approval by the Board. The Board determined that the Company successfully achieved its 2009 Board approved corporate performance goals, with some achievements exceeding expectations as described below. Again, the material corporate goals that were achieved for 2009 are as follows:

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As a result of the Company’s 2009 performance, the Committee recommended to the Board that the corporate component of 2009 annual incentive compensation (which accounts for 70% of the target annual cash incentive for Named Executive Officers other than the Chief Executive Officer, and for 80% of the target annual cash incentive for the Chief Executive Officer) be established at 120%.

Based on the Committee’s recommendations and determinations, the Board approved cash bonus for executive officers considering each individual’s performance as assessed by the Chief Executive Officer against the pre-defined objectives and the achievement of the corporate objectives. The amount of each Named Executive Officer’s annual cash incentive was calculated as set forth in the table below.

Long-term Equity Incentive Compensation

The Committee uses the grant of stock options and shares of restricted stock under the Company’s equity incentive plans to align the interests of stockholders and management. Options and shares of restricted stock granted to Named Executive Officers are intended to provide a continuing financial incentive to maximize long-term value to stockholders and to help keep the executive’s total compensation opportunity competitive. Annual equity incentive grants are determined with reference to the peer group data, specifically annual value transfer, percentage of a peer company’s total equity granted annually to each Named Executive Officer, and the actual number of shares and/or options granted to each peer Named Executive Officer. In addition, because stock options generally become exercisable over a period of several years and grants of shares of restricted stock are subject to a declining risk of forfeiture by the Company over a period of several years, such grants encourage executives to remain in the long-term employ of the Company.

In addition to annual equity incentive grants, the Company typically grants options and/or shares of restricted stock to Named Executive Officers:

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In general, newly hired Named Executive Officers receive a grant of options only as an initial incentive; ongoing grants generally tend to a blend of options and shares of restricted stock in order to reduce the Company’s overall annual equity burn rate. When granting shares of restricted stock in 2009, the Company calculated the number of shares using a 2.5:1 ratio of options grants to shares of restricted stock. In determining the size of an option grant or grant of shares of restricted stock to a Named Executive Officer, the Board takes into account the following criteria:

The per share exercise price of the Company’s stock options is set as the per share closing trading price of the Company’s common stock on the date of grant as reported by NASDAQ.

Unlike in prior years, the annual equity incentive grants made in 2009 for executive officers of the Company were all in the form of performance-based restricted stock awards as opposed to stock option grants and/or a combination of stock option grants and restricted stock awards. The Board determined that the entire 2009 annual equity incentive grant should be in the form of performance-based restricted stock awards because it felt that the use of the performance-based restricted stock for key executives would serve as a strong incentive to achieve the important corporate goals related to securing approval of pirfenidone in the US and Europe while at the same time serving as a strong retention incentive during this critical period for the Company. The following table sets forth the performance-based restricted stock awards that were granted to each Named Executive Officer in 2009:

None of the performance-based restricted stock granted to the Named Executive Officers set forth above vested in 2009. See footnote (1) to the table under “Grants of Plan-Based Award” below which describes the vesting mechanism for such restricted stock.

The Company’s general policy is to grant options on fixed dates generally during open trading windows and on dates determined in advance, although there may be occasions when grants are made on other dates. All required approvals are obtained in advance of or on the actual grant date. The Company does not time the granting of our options with any favorable or unfavorable news released by the company.

Other Benefits

The Named Executive Officers also are eligible to participate in other benefit plans and programs made available to other eligible full-time employees, such as the Company’s (1) health insurance and other welfare benefit programs, (2) Amended and Restated 2000 Employee Stock Purchase Plan, and (3) 401(k) plan.

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Post-Termination Compensation and Benefits

The Company has entered into a written agreement with Mr. Welch which, among other things, provides that if (i) Mr. Welch’s employment is terminated without cause (as defined in the agreement) or (ii) Mr. Welch resigns for good reason (as defined in the agreement), Mr. Welch will, subject to certain conditions, be entitled to receive certain benefits, including two years’ base salary, two years’ target annual cash incentive, two years’ benefits continuation, and two years’ accelerated vesting of outstanding equity grants or, if such termination or resignation takes place following a change of control (as defined in the agreement) accelerated vesting of all outstanding equity grants. To the extent that Mr. Welch incurs an excise tax as a result of taxes imposed on him under Section 4999 of the IRC, the Company will gross-up such payments to make Mr. Welch whole on an after-tax basis.

The Company has entered into written agreements with each executive officer in addition to Mr. Welch to provide that in the event of a change of control (as defined in the agreements) of the Company that results in (i) such executive officer’s employment is terminated by the Company without cause or (ii) the executive officer resigns for good reason (as defined in the agreements), such executive officer will, subject to certain conditions, be entitled receive certain benefits, including two years’ base salary and two years benefits continuation, immediate vesting of all outstanding equity grants, and certain transition management services. If an executive officer, other than Mr. Welch, is terminated without cause by the Company and such termination is not the result of a change of control, such executive officer (provided such officer has been employed with the Company for at least two years) will receive twelve months’ base salary, twelve months’ benefits continuation and twelve months’ equity award vesting acceleration. In addition, such officer will receive a pro-rated target annual cash incentive award if such termination takes place in the second half of the year.

The Committee believes these agreements are necessary to retain the Company’s executive officers. Because mergers and acquisitions are common in the biotechnology industry, the Committee believes that these agreements, which provide executive officers with some measure of financial security in the event of a change of control of the Company, are essential to encouraging the executives to remain with the Company to achieve its business goals. Absent such protections, the Committee believes that executives would be more inclined to pursue opportunities with other organizations that do provide this protection or seek opportunities in industries they perceive would be less vulnerable to such changes of control. The Committee intends to review the need for these agreements periodically (at least annually) to determine whether they continue to be required. The terms of severance pay and benefits set out in the agreements were determined with reference to competitive benchmarks (i.e., the practices of other biotechnology companies with 150-500 employees and other companies with which InterMune competes for talent). Radford has confirmed in 2009 that the severance pay and benefits are substantially similar to those at those at the benchmark companies and therefore are appropriately competitive.

Stock Ownership/Retention Guidelines

The Company has not adopted a policy that its executive officers hold any particular amount of Company stock in their personal portfolio, nor has the Company adopted any sort of minimum holding period or hold-until-retirement stock retention requirements. This policy is reviewed as part of the annual review of executive compensation.

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EQUITY COMPENSATION PLAN INFORMATION

The following table provides certain information as of December 31, 2009 regarding our equity compensation plans, all of which have been approved by our stockholders.

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2009 COMPENSATION AND GOVERNANCE AND NOMINATING COMMITTEE REPORT(2)

The Compensation and Governance and Nominating Committee (the “Committee”) currently consists of Mr. Jonathan Leff (Chairman), Mr. Louis Drapeau and Dr. Lars Ekman, each of whom is an independent director, as independence is defined in Rule 5605(a)(2) of the Marketplace Rules of the Nasdaq Stock Market. The following is a report of the Committee describing the compensation policies applicable to the Company’s executive officers during the fiscal year ended December 31, 2009.

Assessment of Risk

Our Committee believes that our executive compensation policies and practices are not reasonably likely to have a material adverse effect on the Company in the future. Although performance-based compensation constitutes a significant percentage of our executives’ overall total compensation (and, the Committee believes, thereby motivates our executives to help fulfill our corporate mission and vision, including specific and focused company performance objectives), the non-performance based compensation also is a sufficiently high percentage of overall total compensation that the Committee does not believe that unnecessary or excessive risk taking is encouraged by the performance-based compensation. In addition, a significant portion of executives’ performance-based compensation is in the form of long-term equity incentives that the Committee does not believe encourages unnecessary or excessive risk because they generally vest over a three to four-year period of time, thereby focusing the executives on our company’s long-term interests. The Committee believes that performance-based compensation does not constitute a significant percentage of our non-executive employees’ overall total compensation, and therefore does not encourage such employees to take unnecessary or excessive risk.

By design, the Committee does not believe our compensation policies and practices for any of our employees, including executives, incentivize excessive risk taking. The base salary component of our compensation practices does not encourage risk-taking because it is a fixed amount. The current annual cash incentive program has the following risk-limiting characteristics:

In addition, our annual equity incentive award program has the following risk-limiting characteristics:

As a matter of best practice, we will continue to monitor our compensation policies and practices.

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Compensation Discussion and Analysis

The Committee has reviewed and discussed the Company’s Compensation Discussion and Analysis with management. Based on this review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s definitive proxy statement on Schedule 14A for its 2010 Annual Meeting, which is incorporated by reference in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, each as filed with the Securities and Exchange Commission.

COMPENSATION AND GOVERNANCE AND NOMINATING COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of the Company’s executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company’s Board or Compensation and Governance and Nominating Committee.

EXECUTIVE COMPENSATION

Compensation of Directors

Directors, other than the Lead Independent Director, who are neither employees of nor consultants to the Company (each, a “non-employee director”) receive an annual retention fee of $50,000, paid on a quarterly basis. The Lead Independent Director receives an annual retention fee of $75,000, paid on a quarterly basis. The Chairman of the Audit/Compliance Committee is paid an additional annual fee of $15,000, paid on a quarterly basis and each of the Chairmen of the Compensation/Corporate Governance & Nominating Committee and the Science Committee is paid an additional annual fee of $10,000, paid on a quarterly basis. Furthermore, each director is paid, on a quarterly basis, an additional $5,000 per year for each committee he or she serves on.

During 2009, the Company paid an aggregate of $340,000 for such retention and attendance fees. In accordance with Company policy, directors are also reimbursed for reasonable expenses in connection with attendance at Board and committee meetings. During 2009, the Company paid an aggregate of approximately $31,816 for such expenses.

Option Grants. Options for common stock are automatically granted under the Amended and Restated 2000 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”) as follows:

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These option grants are non-discretionary and are automatically granted under the Directors’ Plan without further action by the Company, the Board or its stockholders

Vesting. For grants to a non-employee director in his or her capacity as a director, as long as the non-employee director continues to serve with the Company or any of its affiliates (whether in the capacity of a director, consultant or employee): (i) each Initial Grant will vest in monthly installments commencing one month after the date of its grant, at the rate of 1/36th of the total number of shares subject to the option, and (ii) each annual grant for 20,000 shares (or each annual grant for 12,000 shares following the March 2007 amendment of the Directors’ Plan) will vest in monthly installments commencing one month after the date of its grant, at the rate of 1/12th of the total number of shares subject to the option.

For grants to the independent Chairman of the Board in his or her capacity as Chairman, as long as such person continues to serve with the Company as Chairman, each option granted for 10,000 shares will vest in monthly installments commencing one month after the date of its grant, at the rate of 1/12th of the total number of shares subject to the option.

If an annual option grant to a non-employee director or the Chairman of the Board is pro-rated because that person was appointed as a non-employee director or the Chairman of the Board, as the case may be, after the annual grant date, then the vesting schedule for that option grant will be adjusted so that the pro-rated number of shares will vest in equal monthly installments between the grant date of the option and the Company’s next annual meeting of stockholders.

Exercise Price. Options have an exercise price equal to 100% of the fair market value of the Company’s common stock on the grant date.

On May 21, 2009, the Company granted options to purchase an aggregate of 60,000 shares under the Directors’ Plan in the individual amounts of: 12,000 each to Dr. Ekman, Dr. Healy, Mr. Leff, Dr. Kabakoff and Mr. Drapeau having a per share exercise equal to $11.33, the closing trading price of the Company’s common stock on the grant date. No options were exercised by non-employee directors in 2009.

Director Compensation Table

The following table sets forth summary information concerning the compensation awarded to, paid to or earned by each of our non-employee members of the Board for the year ended December 31, 2009.

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Compensation of Named Executive Officers

Summary Compensation Table

The following table sets forth summary information concerning the compensation awarded to, paid to or earned by each of our Named Executive Officers for all services rendered for the fiscal years ended December 31, 2009, 2008 and 2007.

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Grants of Plan-Based Award

The following table sets forth summary information regarding all grants of plan-based awards made to our Named Executive Officers for the year ended December 31, 2009.

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Outstanding Equity Awards at Fiscal Year-End

The following table sets forth summary information regarding the outstanding equity awards made to our Named Executive Officers at December 31, 2009.

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Option Exercised and Stock Vested

The following table sets forth summary information regarding the option exercises and vesting of stock awards made to each of our Named Executive Officers for the year ended December 31, 2009.

Employment, Severance and Change of Control Agreements

Welch Offer Letter Agreement. The Company entered into an offer letter agreement with Mr. Welch in September 2003 (the “Welch Letter Agreement”). Under the terms of the Welch Letter Agreement, Mr. Welch is entitled to an annual base salary, which is reviewed annually by the Compensation Committee. For 2005, his base salary was $572,000. In addition, Mr. Welch is eligible for an annual bonus based on the attainment of corporate goals established between the Board and Mr. Welch. Under the Welch Letter Agreement, Mr. Welch’s annual target bonus is 75% of his base salary, with a potential of between 0% and 150% of his base salary as the Board may approve (the “Target Bonus”). Under the terms of the Welch Letter Agreement, Mr. Welch was also granted an option to purchase 625,000 shares of the Company’s common stock pursuant to the Incentive Plan (the “Options”). The Options have a ten-year term and vest in equal monthly installments over four years. As of September 24, 2007, all of the Options are fully vested. Mr. Welch was also entitled to certain relocation expenses and four-year cost of living housing differential payment (“COLA”). The COLA is paid to Mr. Welch in equal monthly installments pursuant to which Mr. Welch has received $117,577 in his first two years of employment, $33,513 in his third year of employment, and $16,576 in his fourth year of employment.

In addition, at the end of each calendar year, the Company has grossed-up for income tax purposes the portion of the COLA payment that was used to pay for Mr. Welch’s non-deductible expenses.

Under the terms of the Welch Letter Agreement, if Mr. Welch is terminated for Cause (as defined in the Welch Letter Agreement) due to indictment for criminal activities, and he is later adjudicated innocent of the charges on which he was indicted or the indictment is subsequently quashed, Mr. Welch will be entitled at the time of such adjudication or quashing to: (i) two times the sum of his base salary and Target Bonus at the time of such termination for Cause, and (ii) an amount equal to the product of (x) the number of Options that would have become vested if his termination had been considered a termination without Cause and (y) the difference between the exercise price of such Options and the highest closing price of the Company’s common stock during the year following his date of termination, in each case with interest from the date of termination at the prevailing prime rate.

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In the event Mr. Welch resigns from the Company without Good Reason (as defined in the Welch Letter Agreement), Mr. Welch will be entitled to any accrued but unpaid salary or Target Bonus (“Accrued Obligations”). If Mr. Welch resigns from the Company with Good Reason or if he is terminated without Cause, he will be entitled to the following payments and benefits:

Upon the occurrence of a Change in Control on or after September 25, 2004 and in the absence of Mr. Welch’s termination or resignation, all of his Options will vest.

To the extent that Mr. Welch incurs an excise tax as a result of taxes imposed on him under Section 4999 of the IRC, the Company will gross-up such payments to make Mr. Welch whole on an after-tax basis.

Offer Letter Agreements. The Company has entered into or amended the offer letter agreements with each of Mr. Hodgman and Drs. Porter, Bradford and Seiwert to provide that if their employment terminates other than for cause (as defined in the offer letter agreements), they will be entitled to the following lump sum cash severance payment, continuation of benefits, and vesting of Company stock following their termination date:

Change of Control and Severance Agreements. The Company has entered into or amended the offer letter agreements with each of Mr. Hodgman and Drs. Porter, Bradford and Seiwert, to provide that in the event of a change in control (as defined in the offer letter agreements) of the Company that results in (i) such executive officer’s termination without cause or (ii) his or her resignation for good reason (as defined in the offer letter or offer letter amendment), such executive officer will, subject to certain conditions, be entitled to receive the following benefits:

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. In addition, if an executive officer, other than Mr. Welch, is terminated without cause by the Company and such termination is not the result of a change of control, such executive officer (provided such officer has been employed by the Company for at least two years) will receive twelve months’ base salary, twelve months’ benefits continuation and twelve months’ equity award vesting acceleration. In addition, such executive officer will receive a pro-rated target annual cash incentive award if such termination takes place in the second half of the year.

SEVERANCE AND CHANGE-IN-CONTROL BENEFITS

The following tables quantify the amount that would be payable to the NEOs and members of the Board of Directors assuming the termination of employment without cause or with good reason occurred as the result of a change in control. The amounts shown assume that the termination was effective as of December 31, 2009, and includes amounts earned through that time and are estimates of the amounts which would be paid out to the executives upon their termination. The actual amounts to be paid out can only be determined at the time of the executives’ separation from the Company after the occurrence of a change in control.

Daniel Welch

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John Hodgman