THIS SECURED PROMISSORY NOTE (THE “NOTE”) HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR UNDER THE
SECURITIES LAWS OF ANY STATE. THIS NOTE IS SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN
FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER, THAT
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER THE SECURITIES ACT.
 
INSITE VISION INCORPORATED
 
SENIOR SECURED NOTE
 
$[                ]
 
January 11, 2006

 
FOR VALUE RECEIVED, InSite Vision Incorporated, a Delaware corporation (
“Maker”), promises to pay to the order of _______________________ (“Holder”), at
______________________________________, the principal sum of _____________
($_________), together with all accrued interest thereon, upon the terms and
conditions specified below. This Note is secured by that certain Amended and
Restated Security Agreement dated as of December 30, 2005, as the same may be
amended from time to time (the “Security Agreement”).
 
1. Loan Proceeds. The proceeds of this Note shall be used for general corporate
purposes of Maker.
 
2. Due Date. Unless earlier accelerated pursuant to the terms hereof, this Note
shall mature and the outstanding principal balance of this Note together with
all accrued and unpaid interest hereunder shall become due and payable in a lump
sum on July 11, 2006 (the “Maturity Date”); provided, however, that if Maker
delivers written notice to Holder at any time not less than fifteen (15) days
prior to the Maturity Date stating that Maker has elected to extend the term of
this Note effective as of the Maturity Date, this Note shall instead mature and
the outstanding principal balance of this Note together with all accrued and
unpaid interest hereunder shall become due and payable in a lump sum on January
11, 2007 (the “Extended Maturity Date”).
 
3.  Interest. Interest shall accrue on the unpaid balance outstanding from time
to time under this Note at the rate of ten percent (10%) per annum until the
Maturity Date; provided, however, that: (i) if the term of this Note is extended
by Maker pursuant to Section 2 hereof, then from and after the original Maturity
Date to and including the Extended Maturity Date, interest shall accrue on the
unpaid balance outstanding from time to time under this Note at the rate of
twelve percent (12%) per annum, and (ii) any principal amount not paid when due
and, to the extent permitted by applicable law, any interest not paid when due,
in each case whether at stated maturity, by required prepayment, declaration,
acceleration, demand or otherwise (both before as well as after judgment), shall
bear interest payable upon demand at a rate that is five percent (5%) per annum
in excess of the rate of interest otherwise payable under this Note. All
computations of interest shall be made on the basis of a year of 365 days for
the actual number of days (including the first day but excluding the last day)
occurring in the period for which such interest is payable. Accrued and unpaid
interest shall become due and payable at the maturity of this Note. In no event
shall the interest rate payable on this Note exceed the maximum rate of interest
permitted to be charged under applicable law. If the rate of interest payable
under this Note is ever reduced as a result of the preceding sentence and at any
time thereafter the maximum rate permitted by applicable law shall exceed such
reduced rate of interest then provided for hereunder, then the rate provided for
hereunder shall be increased to a rate not to exceed the maximum rate permitted
by applicable law at such time, such that the total amount of interest received
by the Holder is equal to or as nearly equal to the amount provided for in the
first sentence of this paragraph as applicable law permits.
 
 
 

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4. Payment. Payment shall be made in lawful tender of the United States and
shall be applied first to the payment of all accrued and unpaid interest and
then to the payment of principal. Subject to Sections 9 and 10 of this Note,
prepayment of the principal balance of this Note, together with all accrued and
unpaid interest on the portion of principal so prepaid, may be made in whole or
in part at any time without penalty.
 
5. Reference Agreements. This Note is issued pursuant to the terms of that
certain Subscription Agreement dated December 30, 2005 (the “Subscription
Agreement”) by and between Maker and the Subscribers, as defined therein. The
Subscription Agreement and the Security Agreement are collectively referred to
herein as the “Reference Agreements”.
 
6. Covenants. Maker covenants and agrees that until this Note is paid in full it
will,  
 
A. promptly after the occurrence of an Event of Acceleration or an event, act or
condition that, with notice or lapse of time or both, would constitute an Event
of Acceleration, provide Holder with a certificate of the chief executive
officer or chief financial officer of Maker specifying the nature of such event,
act or condition and Maker’s proposed cure thereto;
 
B. not, without the written consent of the Holders of a majority of the then
outstanding principal of all 2005 Senior Notes (the “Requisite Holders”) (i)
incur any indebtedness for money borrowed, other than indebtedness (x) in an
aggregate amount not to exceed $100,000 or (y) owing to a seller incurred solely
for the purpose of financing the purchase price of an asset of a type
customarily purchased by Maker acquired from such seller or (ii) grant, or
permit to be created, any lien other than the security interests created under
the Security Agreement, any security interest which would constitute a Permitted
Lien (as defined in the Security Agreement) and purchase money security
interests;
 
 
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C. not, without the prior written consent of the Requisite Holders, enter into
directly or indirectly any transaction (including without limitation the
purchase, lease, sale or exchange of properties of any kind or the rendering of
any service) with any officer, director, employee, or stockholder holding
greater than 5% of the outstanding voting securities of Maker or any affiliate
or family member of any officer, director, employee or stockholder (including
any amendment, modification, waiver or prepayment of a 2003 Senior Note (as
defined in the Security Agreement) or any other promissory note or evidence of
indebtedness), other than (i) transactions or incurrence of obligations
involving payments of less than $60,000 in the aggregate, (ii) payment of
salary, director’s fees, consulting fees for services rendered, bonuses or other
similar compensation related to employment or consulting arrangements or service
as a member of the board of directors, or any committee of the board of
directors, of Maker, as reflected in the Company’s 2006 budget, a copy of which
has been provided to Paramount BioCapital, Inc. (iii) reimbursement of expenses
incurred on behalf of the Company, subject to satisfactory documentation, (iv)
employee benefits, including stock option agreements under any stock option plan
of Maker, and (v) subject to Section 6(D) below, payments with respect to
Maker’s capital stock made to all holders thereof on a pro rata basis;
 
D. not, without the prior written consent of the Requisite Holders, directly or
indirectly (i) purchase, redeem, retire or otherwise acquire for value any of
its capital stock or other securities now or hereafter outstanding, return any
capital to its stockholders (other than the repurchase at cost of shares of
unvested or restricted stock as permitted under the Company’s stock option or
stock purchase plan upon termination of employment or service), or distribute
any of its assets to its stockholders or (ii) make any payment or declare any
dividend on any of its capital stock or other securities; or
 
E. not, without the prior written consent of the Requisite Holders, change its
primary line of business from that conducted by it as of the date hereof.
 
7. Events of Acceleration. The entire unpaid principal balance of this Note,
together with all accrued and unpaid interest, shall become immediately due and
payable prior to the specified due date of this Note upon the occurrence of one
or more of the following events (each an “Event of Acceleration”):
 
A. Maker shall fail to make any payment of principal or interest due under this
Note; provided that such occurrence shall not be deemed an “Event of
Acceleration” unless such condition remains uncured at the end of the third
(3rd) day after such payment is due, other than payments due upon maturity which
shall be deemed an “Event of Acceleration” immediately upon such failure;
 
B. Maker shall fail to observe or perform, in any material respects, any term or
provision of this Note; provided that such occurrence shall not be deemed an
"Event of Acceleration" unless such condition remains uncured at the end of
the fifth (5th) day after the earlier of (x) written notice from any Holder (or
the Collateral Agent) of the occurrence of such default or (y) Holder’s receipt
of written notice from Maker of the occurence of such event in accordance with
Section 7(J) below;
 
 
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C. Maker shall fail to observe or perform, in any material respect, any material
agreement or covenant in any Reference Agreement; provided that the agreements
and covenants set forth in Sections 6.2 and 6.8 of the Subscription Agreement
shall constitute material agreements and covenants for purposes of this clause
(C);
 
D. Any representations or warranties of Maker in any of the Reference Agreements
shall be found to be untrue or incorrect and the effect of which has a material
adverse effect on the business or operations of Maker or impairs, in any
material respect, the ability of Maker to repay this Note on the Maturity Date;
 
E. Pursuant to or within the meaning of the United States Bankruptcy Code or any
other federal or state law relating to insolvency or relief of debtors (a
“Bankruptcy Law”), Maker shall (i) commence a voluntary case or proceeding; (ii)
consent to the entry of an order for relief against it in an involuntary case;
(iii) consent to the appointment of a trustee, receiver, assignee, liquidator or
similar official; (iv) make an assignment for the benefit of its creditors; or
(v) admit in writing its inability to pay its debts as they become due;
 
F. A court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that (i) is for relief against Maker in an involuntary case; (ii)
appoints a trustee, receiver, assignee, liquidator or similar official for Maker
or substantially all of Maker's properties; or (iii) orders the liquidation of
Maker, and in each case the order or decree is not dismissed or stayed within 30
days;
 
G. The occurrence of any event of default under the Security Agreement securing
this Note or any obligation secured thereby;
 
H. The occurrence of any “Event of Acceleration” under any promissory note
issued by Maker and defined as a “2003 Senior Note” or a “2005 Senior Note” in
the Security Agreement or the occurrence of any event of default under any other
note issued or obligation for borrowed money with a principal amount in excess
of $100,000 owed by Maker;
 
I. Any order, judgment or decree shall be entered against Maker decreeing the
dissolution or split-up of Maker or any money judgment in excess of $500,000
(exclusive of amounts covered by insurance or subject to indemnification by a
person capable of fulfilling its indemnification obligations, for which the
insurer or person providing indemnity has acknowledged responsibility), and, in
each case, the order, judgment or decree is not paid, dismissed or stayed within
30 days; or
 
 
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J. Maker shall fail to provide written notice to Holders of the occurrence of
any event set forth in this Section 7 within 10 days of an officer of Maker
having knowledge of the occurrence of such event. 
 
provided that if it is possible for Maker to cure an “Event of Acceleration”
that has occurred under clauses (C), (D), (G), or (H) of this Section 7, such
occurrence shall not be deemed an "Event of Acceleration" unless such condition
remains uncured as of the tenth (10th) day after the earlier of (x) written
notice from any Holder (or the Collateral Agent) of the occurrence of such event
or (y) Holder’s receipt of written notice from Maker of the occurence of such
event in accordance with Section 7(J) above.  Upon the expiration of such ten
(10) day period, the event that was the subject of the notice sent by any Holder
(or the Collateral Agent) or pursuant to Section 7(J) shall constitute an "Event
of Acceleration" without any action, demand or notice of the Holder. 
 
8. Security. Payment of this Note shall be secured by a lien on substantially
all of Maker’s assets in accordance with the Security Agreement executed as of
the date hereof by Maker in favor of the Collateral Agent (as defined therein)
for the benefit of the Holder and others as described therein. Maker, however,
shall remain liable for payment of this Note, and assets of Maker, in addition
to the collateral under the Security Agreement, may be applied to the
satisfaction of Maker’s obligations hereunder. In the case of any Event of
Acceleration, Holder, or the Collateral Agent on behalf of Holder, as
applicable, shall have the rights set forth herein and as set forth in the
Security Agreement, subject in all cases to the terms and provisions of the
Collateral Agency and Intercreditor Agreement dated as of the date hereof by and
among the Collateral Agent, Holder, and the other persons party thereto (the
“Collateral Agency and Intercreditor Agreement”).
 
9. Optional Redemption. This Note may be redeemed by Maker at any time, in whole
or in part, prior to the Maturity Date or, if Maker has elected to extend the
term of this Note pursuant to Section 2 hereof, prior to the Extended Maturity
Date, at a redemption price equal to one hundred percent (100%) of the principal
amount of this Note plus accrued but unpaid interest thereon (the “Redemption
Price”) until the Maturity Date or, if Maker has elected to extend the term of
this Note pursuant to Section 2 hereof, the Extended Maturity Date.
 
10. Mandatory Redemption. Maker shall be obligated to redeem this Note at the
Redemption Price within ten (10) days after the consummation of a Qualified
Financing, a Sale of Maker or a Corporate Collaboration. For purposes hereof,
(i) “Qualified Financing” shall mean the closing of an equity financing or
series of equity financings by Maker resulting in aggregate gross cash proceeds
(before commissions or other expenses) to Maker of at least $12,500,000; (ii)
“Sale of Maker” shall mean a transaction (or series of related transactions)
between the Company and one or more non-affiliates, pursuant to which such party
or parties acquire (A) capital stock of Maker possessing the voting power to
elect a majority of the board of directors of Maker (whether by merger,
consolidation, sale or transfer of Maker’s capital stock or otherwise); or (B)
all or substantially all of Maker’s assets determined on a consolidated basis;
provided, however, that a transaction (or series of related transactions)
pursuant to which the then-existing holders of Maker’s capital stock immediately
prior to such transaction (or series of related transactions) continue to own,
directly or indirectly, a majority of the outstanding shares of the capital
stock of Maker or such other resulting, surviving or combined company resulting
from such transaction (or series of related transactions) shall not be deemed to
be a Sale of Maker; and (iii) “Corporate Collaboration” shall mean the closing
by the Company of a transaction in which any rights to AzaSite are licensed to a
third party.
 
 
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11. Transfer Restrictions. This Note is subject to transfer restrictions as set
forth in the Subscription Agreement.
 
12. Collection. If action is instituted to collect this Note, Maker promises to
pay all costs and expenses (including reasonable attorney fees) incurred in
connection with such action.
 
13. Amendment; Waiver. Any modification, amendment or waiver of any term of this
Note must be made in writing and signed by the Requisite Holders and Maker;
provided that the Holders that do not consent to such modification, amendment or
waiver shall receive treatment equivalent to that of the Requisite Holders; and
any such modification, amendment or waiver shall be limited to its express
terms.
 
A. No delay by Holder in acting with respect to the terms of this Note shall
constitute a waiver of any breach, default, or failure of a condition under this
Note.
 
B. Maker waives presentment, demand, notice of dishonor, notice of default or
delinquency, notice of acceleration, notice of protest and nonpayment, notice of
costs, expenses or losses and interest thereon, notice of interest on interest
and diligence in taking any action to collect any sums owing under this Note or
in proceeding against any of the rights or interests in or to properties
securing payment of this Note.
 
14. Conflicting Agreements. In the event of any inconsistencies between the
terms of this Note and the terms of the Collateral Agency and Intercreditor
Agreement, the Collateral Agency and Intercreditor Agreement shall govern solely
as to matter specifically addressed in the Collateral Agency and Intercreditor
Agreement; provided that as to prinicipal and interest owing to the Holder and
the occurrence of an Event of Acceleration, the Note shall govern in all events.
In the event of any inconsistencies between the terms of this Note and the terms
of any other document related to the loan evidenced by this Note (other than the
Collateral Agency and Intercreditor Agreement), the terms of this Note shall
prevail.
 
15. Construction; Section Headings. This Note is the result of negotiations
among, and has been reviewed by Holder, Maker and their respective counsel.
Accordingly, this Note shall be deemed to be the product of all parties hereto
and no ambiguity shall be construed in favor of or against Holder or Maker. The
headings of Sections in this Note are provided for convenience only and will not
affect its construction or interpretation. All references to “Section” or
“Sections” refer to the corresponding Section or Sections of this Note unless
otherwise specified. All words used in this Note will be construed to be of such
gender or number as the circumstances require. Unless otherwise expressly
provided, the words “hereof and “hereunder” and similar references refer to this
Note in its entirety and not to any specific section or subsection hereof, the
words “including” or “includes” do limit the preceding words or terms and the
word “or” is used in the inclusive sense.
 
 
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16. Notices. All notices and other communications provided for hereunder shall
be in writing (including telefacsimile communication) and mailed, telecopied, or
delivered as follows: if to Maker, at its address specified opposite its
signature below; and if to Holder, at the address set forth in the first
paragraph of this Note; or in each case at such other address as shall be
designated by Holder or Maker. All such notices and communications shall, when
mailed, telecopied or sent by overnight courier, be effective when deposited in
the mails, delivered to the overnight courier, as the case may be, or sent by
telecopier. Electronic mail may be used to distribute routine communications;
provided that no signature with respect to any notice, request, agreement,
waiver, amendment, or other documents may be sent by electronic mail.
 
17. Governing Law. This Note shall be construed in accordance with the laws of
the State of New York (including without limitiation Section 5-1401 of the
General Obligations Law of the State of New York) without resort to that State’s
conflict-of-laws rules.
 
18. Severability. If any provision in this Note is held invalid or unenforceable
by any court of competent jurisdiction, the other provisions of this Note will
remain in full force and effect. Any provision of this Note held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
 
19. Replacement of Note. Upon receipt by Maker of evidence satisfactory to it of
the loss, theft, destruction or mutilation of this Note, and (in case of loss,
theft or destruction) of indemnity reasonably satisfactory to it, and upon
reimbursement to maker of all reasonable expenses incidental thereto, and (if
mutilated) upon surrender and cancellation of this Note, Maker shall make and
deliver to the Holder a new note of like tenor in lieu of this Note. Any
replacement note made and delivered in accordance with this Section 19 shall be
dated as of the date hereof.
 
IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered by
its duly authorized officer as of the day and year and at the place first above
written.
 

        INSITE VISION INCORPORATED  
   
   
  By:    

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Name: S. Kumar Chandrasekaran, Ph.D.   Title:  Chief Executive Officer

 
7.

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