Exhibit 10.1

FACILITY AGREEMENT

FACILITY AGREEMENT (this “Agreement”), dated as of September 26, 2008 (the
“Agreement Date”), between ISTA Pharmaceuticals, Inc., a Delaware corporation
(the “Borrower”), and those lenders set forth on Schedule 1 attached hereto
(individually, a “Lender” and together, the “Lenders” and, together with the
Borrower, the “Parties”).

W I T N E S S E T H:

WHEREAS, the Borrower wishes to borrow from the Lenders up to sixty-five million
Dollars ($65,000,000) for the purpose described in Section 2.1; and

WHEREAS, the Lenders desire to make loans to the Borrower from time to time for
such purpose.

NOW, THEREFORE, in consideration of the mutual agreements set forth herein, the
Lenders and the Borrower agree as follows:

ARTICLE 1

DEFINITIONS

Section 1.1 General Definitions. Wherever used in this Agreement, the Exhibits
or the Schedules attached hereto, unless the context otherwise requires, the
following terms have the following meanings:

“Additional Amounts” has the meaning given to it in Section 2.6(b).

“Affiliate” means, with respect to any Person, any other Person:

(a) that owns, directly or indirectly, in the aggregate of more than fifty
percent (50%) of the beneficial ownership interest of such Person; or

(b) that directly or indirectly through one or more intermediaries controls, or
is controlled by, or is under common control with, such Person; or

(c) that directly or indirectly is a general partner, controlling shareholder,
or managing member of such Person.

“Business Day” means a day on which banks are open for business in The City of
New York.

“Cash and Cash Equivalents” means with respect to any date of determination, the
amount shown as such on the consolidated balance sheet of the Borrower and its
Subsidiaries at the time such balance sheet is filed with the SEC on Form 10–Q
or Form 10–K under the Exchange Act or otherwise made available to the
Borrower’s stockholders.

“Code” means the Internal Revenue Code of 1986, as amended, and any Treasury
Regulations promulgated thereunder.

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“Common Stock” means the common stock, par value $0.001 per share, of the
Borrower.

“Convertible Notes” means those certain Senior Subordinated Convertible Notes
issued by the Borrower on June 22, 2006 in the aggregate principal amount of
$40,000,000.

“Indebtedness” means the following, whether direct or contingent:

(a) all indebtedness for borrowed money;

(b) the deferred purchase price of assets or services which in accordance with
GAAP would be shown to be a liability (or on the liability side of a balance
sheet);

(c) all guaranty obligations;

(d) the maximum amount of all letters of credit issued or acceptance facilities
established for the account of the Borrower and, without duplication, all drafts
drawn thereunder (other than letters of credit supporting other indebtedness of
Borrower and which are otherwise permitted hereunder);

(e) all capitalized lease obligations;

(f) all indebtedness of another Person secured by any Lien on any property of
the Borrower, whether or not such indebtedness has been assumed or is recourse;

(g) all obligations under take-or-pay or similar arrangements or under any
interest rate swaps, caps, floors, collars and other interest hedge or
protection agreements, treasury locks, equity forward contracts, currency
agreements or commodity purchase or option agreements or other interest or
exchange rate or commodity price hedging agreements and any other derivative
instruments, in each case, whether the Borrower is liable contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which
obligations the Borrower otherwise assures a creditor against loss;

(h) indebtedness created or arising under any conditional sale or title
retention agreement; and

(i) obligations of the Borrower with respect to withdrawal liability to or on
behalf of any “multi employer plan” as defined in Section 4001(a) of ERISA.

“Default” means any event which, at the giving of notice, lapse of time or
fulfillment of any other applicable condition (or any combination of the
foregoing), would constitute an Event of Default.

“Disbursement” has the meaning given to it in Section 2.2(a).

“Disbursement Date” means the date on which a Disbursement occurs.

“Disbursement Request” has the meaning given to it in Section 2.2(a).

“Dollars” and the “$” sign mean the lawful currency of the United States of
America.

 

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“Event of Default” has the meaning given to it in Section 5.5.

“Evidence of Disbursement” has the meaning given to it in Section 2.2.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, including
the rules and regulations promulgated thereunder.

“Excluded Taxes” means all income taxes, minimum or alternative minimum income
taxes, withholding taxes imposed on gross amounts, any tax determined based upon
income, capital gains, gross income, sales, net profits, windfall profits or
similar items, franchise taxes (or any other tax measured by capital, capital
stock or net worth), gross receipts taxes, branch profits taxes, margin taxes
(or any other taxes imposed on or measured by net income, or imposed in lieu of
net income) payable by the Lenders in any jurisdiction to any Government
Authority (or political subdivision or taxing authority thereof) in connection
with any payments received under this Agreement by the Lenders, or any such tax
imposed in connection with the execution and delivery of, and the performance of
its obligations under, this Agreement.

“Final Payment” means such amount as may be necessary to repay the Loan in full
and any other amounts owing by the Borrower to the Lenders pursuant to the
Financing Documents.

“Final Payment Date” means the earlier of (i) the date on which the Borrower
repays the outstanding principal of the Loan (together with any other amounts
accrued and unpaid under this Agreement) to the Lenders pursuant to this
Agreement and (ii) the fifth anniversary of the Agreement Date.

“Financing Documents” means this Agreement, the Notes, the Registration Rights
Agreement, the Security Agreement, the Warrants and any other document or
instrument delivered in connection with any of the foregoing whether or not
specifically mentioned herein or therein.

“GAAP” means generally accepted accounting principles consistently applied as
set forth in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the accounting
profession).

“Government Authority” means any government, governmental department, ministry,
cabinet, commission, board, bureau, agency, tribunal, regulatory authority,
instrumentality, judicial, legislative, fiscal, or administrative body or
entity, whether domestic or foreign, federal, state or local, having
jurisdiction over the matter or matters and Person or Persons in question,
including, without limitation, the SEC.

“Indemnified Person” has the meaning given to it in Section 6.11.

“Indemnity” has the meaning given to it in Section 6.11.

“Interest Rate” means 6.5% simple interest per annum, payable on the outstanding
principal amount of each of the Notes.

“Lien” means any lien, pledge, preferential arrangement, mortgage, security
interest, deed of trust, charge, assignment, hypothecation, title retention,
privilege or other encumbrance on or with respect to property or interest in
property having the practical effect of constituting a security interest, in
each case with respect to the payment of any obligation with, or from the
proceeds of, any asset or revenue of any kind.

 

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“Loan” means the loan to be made available by the Lenders to the Borrower
pursuant to Section 2.2 in the maximum aggregate amount of sixty five million
Dollars ($65,000,000) or, as the context may require, the principal amount
thereof from time to time outstanding.

“Loss” has the meaning given to it in Section 6.11.

“Major Transaction” has the meaning set forth in the Warrants.

“Material Adverse Effect” means a material adverse effect on (a) the business,
operations, prospects, condition (financial or otherwise) or property of the
Borrower, (b) the validity or enforceability of any provision of any Financing
Document, (c) the ability of the Borrower to timely perform its Obligations or
(d) the rights and remedies of the Lenders under any Financing Document.

“Notes” means the notes issued to the Lenders evidencing the Loan in the form
attached hereto as Exhibit A

“Obligations” means all obligations (monetary or otherwise) of the Borrower
arising under or in connection with the Financing Documents.

“Organizational Documents” means the Certificate of Incorporation and Bylaws,
each as amended to date, of the Borrower.

“Permitted Indebtedness” means the principal of (and premium, if any), interest
on, and all fees and other amounts (including, without limitation, any
reasonable out-of-pocket costs, enforcement expenses (including reasonable
out-of-pocket legal fees and disbursements), collateral protection expenses and
other reimbursement or indemnity obligations relating thereto) payable by
Borrower and/or its Subsidiaries under or in connection with: (i) Indebtedness
of Borrower in favor of the Lenders arising under this Agreement or any other
Financing Document, (ii) Indebtedness pursuant to that certain Loan and Security
Agreement, dated as of December 22, 2005, as amended, supplemented or otherwise
modified from time to time, between the Borrower and Silicon Valley Bank, with
the amount that Borrower may borrow under said agreement not to exceed the
lesser of $25,000,000 and 85% of eligible accounts receivable as of the end of
the preceding fiscal quarter plus net cash, (iii) Indebtedness existing as of
the date hereof (which the Borrower represents to not be in excess of
$50,579,893.20, (iv) future Indebtedness in respect of purchase money financing,
capital lease obligations and equipment financing facilities in an aggregate
amount not to be in excess of $5,000,000 at any given time, and letters of
credit required in connection with the purchase of equipment, (v) Indebtedness
to trade creditors incurred in the ordinary course of business,
(vi) Indebtedness in respect of the purchase price for, or in connection with a
bona fide arm’s-length purchase of, any assets (including Indebtedness assumed
as a result of such purchase) so long as the aggregate amount of such
Indebtedness outstanding at any time shall not exceed the sum of (x) 25% of the
assets of the Borrower determined in accordance with GAAP and (y) 50% of the
principal amount of the Notes repaid by the Borrower to the Lenders, in each
case at the time of calculation, (vii) Indebtedness secured by Borrower’s
auction rate securities in an amount not to exceed $4,700,000, and
(viii) extension, refinancings and renewals of any of the foregoing items of
Permitted Indebtedness, provided that the principal amount is not increased or
the terms modified to impose more burdensome terms upon the Borrower. Any
Indebtedness in excess of the amount permitted pursuant to clause (vi) shall be
subject to a Subordination Agreement.

 

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“Permitted Liens” means: (i) Liens existing on the date hereof and disclosed on
Exhibit B hereof; (ii) Liens in favor of the Lenders; (iii) statutory Liens
created by operation of applicable law; (iv) Liens arising in the ordinary
course of business and securing obligations that are not overdue or are being
contested in good faith by appropriate proceedings; (v) Liens securing purchase
money or capitalized lease equipment financing; (vi) Liens for Taxes not yet due
and payable or that are being contested in good faith by appropriate
proceedings; (vii) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default; (viii) licenses and
sub-licenses granted in the ordinary course of Borrower’s business and, with
respect to any licenses where Borrower is the licensee or sublicensee, any
interest or title of a licensor or sublicensor under any such license or
sublicense; (ix) Liens securing Permitted Indebtedness; (x) any option or other
agreement to purchase any asset of the Borrower or any Subsidiary the
disposition of which is not otherwise prohibited hereby; and (xi) Liens in favor
of financial institutions arising in connection with Borrower’s accounts
maintained in the ordinary course of Borrower’s business held at such
institutions to secure standard fees for services charged by, but not financing
made available by, such institutions.

“Person” means and includes any natural person, individual, partnership, joint
venture, corporation, trust, limited liability company, limited company, joint
stock company, unincorporated organization, government entity or any political
subdivision or agency thereof, or any other entity.

“Registration Rights Agreement” means the Registration Rights Agreement, dated
as of the date hereof, among the Borrower and the Lenders.

“SEC” means the United States Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended, including the
rules and regulations promulgated thereunder.

“Security Agreement” means the Security Agreement, dated as of the date hereof,
among the Borrower and the Lenders granting to the Lenders a first priority
security interest in the Borrower’s intellectual property as described therein.

“Subordination Agreement” means the Agreement attached hereto as Exhibit C.

“Subsidiary or Subsidiaries” means, as to the Borrower, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned by the Borrower.

“Taxes” means all deductions or withholdings for any and all present and future
taxes, levies, imposts, stamp or other duties, fees, assessments, deductions,
withholdings, all other governmental charges, and all liabilities with respect
thereto.

“Warrants” means the warrants attached hereto as part of Exhibit D issued
pursuant to Section 2.10.

 

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Section 1.2 Interpretation. In this Agreement, unless the context otherwise
requires, all words and personal pronouns relating thereto shall be read and
construed as the number and gender of the party or parties requires and the verb
shall be read and construed as agreeing with the required word and pronoun; the
division of this Agreement into Articles and Sections and the use of headings
and captions is for convenience of reference only and shall not modify or affect
the interpretation or construction of this Agreement or any of its provisions;
the words “herein,” “hereof,” “hereunder,” “hereinafter” and “hereto” and words
of similar import refer to this Agreement as a whole and not to any particular
Article or Section hereof; the words “include,” “including,” and derivations
thereof shall be deemed to have the phrase “without limitation” attached thereto
unless otherwise expressly stated; references to a specified Article, Exhibit,
Section or Schedule shall be construed as a reference to that specified Article,
Exhibit, Section or Schedule of this Agreement; and any reference to any of the
Financing Documents means such document as the same shall be amended,
supplemented or modified and from time to time in effect.

Section 1.3 Business Day Adjustment. If the day by which a payment is due to be
made is not a Business Day, that payment shall be made by the next succeeding
Business Day unless that next succeeding Business Day falls in a different
calendar month, in which case that payment shall be made by the Business Day
immediately preceding the day by which such payment is due to be made.

ARTICLE 2

AGREEMENT FOR THE LOAN

Section 2.1 Use of Proceeds. The Borrower shall use the proceeds from the Loan
to redeem the Convertible Notes and for operating expenses and general corporate
purposes.

Section 2.2 Disbursements. Subject to satisfaction of the conditions contained
in Article IV, a disbursement of a portion of the Loan (each a “Disbursement”)
in the minimum amount of $5,000,000 shall be made upon the Borrower’s request (a
“Disbursement Request”) in the form of Schedule 2, delivered to the Lenders not
less than 15 Business Days prior to the date of such Disbursement. Against each
Disbursement, the Borrower shall deliver to the Lenders a completed receipt (the
“Evidence of Disbursement”) in the form of Schedule 3, which receipt shall not
be effective until the Disbursement is actually advanced to the Borrower.
Borrower’s ability to issue Disbursement Requests shall terminate on the one
(1) year anniversary of the Agreement Date. The Lenders shall fulfill each
Disbursement Request in accordance with their respective allocations set forth
on Schedule 1 attached hereto.

Section 2.3 Payment. (a) The Borrower shall remit the Final Payment to the
Lenders on the earlier to occur of (i) the Final Payment Date and (ii) an Event
of Default, after the expiration of all applicable cure or grace periods. The
Borrower may prepay the Loan at any time without premium or penalty. The
Borrower shall remit to the Lenders, and the Lenders shall receive, 33% of the
principal amount outstanding on the Notes on each of the third and fourth
anniversaries of the Agreement Date and 34% of such principal amount outstanding
on the fifth anniversary of the Agreement Date.

(b) If the Borrower disposes in one or more transactions less than 50% of its
assets determined in accordance with GAAP, the Borrower shall remit to the
Lenders, and the Lenders shall receive, as prepayment of the Notes, 50% of the
proceeds of such disposition(s) within 5 days of the Borrower’s receipt thereof.

 

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Section 2.4 Transaction Fee. On the date hereof, the Borrower has paid to
Deerfield Management Company, L.P. a transaction fee of $1,625,000.

Section 2.5 Payments. Payments of any amounts due to the Lenders under this
Agreement shall be made in Dollars in immediately available funds prior to 11:00
a.m New York City time on such date that any such payment is due, at such bank
or places, as the Lenders shall from time to time designate in writing at least
5 Business Days prior to the date such payment is due. The Borrower shall pay
all and any costs (administrative or otherwise) imposed by banks, clearing
houses, or any other financial institution, in connection with making any
payments under any of the Financing Documents, except for any costs imposed by
the Lenders’ banking institutions.

Section 2.6 Taxes, Duties and Fees.

(a) The Borrower shall pay or cause to be paid all present and future Taxes
(other than Excluded Taxes, if any), duties, fees and other charges of
whatsoever nature, if any, now or at any time hereafter levied or /imposed by
any Government Authority, by any department, agency, political subdivision or
taxing or other authority thereof or therein, by any organization of which the
applicable Government Authority is a member, or by any jurisdiction through
which the Borrower makes payments hereunder, on or in connection with the
payment of any and all amounts due under this Agreement, and all payments of
principal and other amounts due under this Agreement shall be made without
deduction for or on account of any such Taxes, duties, fees and other charges,
except for Excluded Taxes, which may be deducted or withheld from payments made
by the Borrower only if such deduction or withholding is required by applicable
law.

(b) If the Borrower is required to withhold any such amount or is prevented by
operation of law or otherwise from paying or causing to be paid such Taxes,
duties, fees or other charges as aforesaid except for Excluded Taxes, the
principal or other amounts due under this Agreement (as applicable) shall be
increased to such amount as shall be necessary to yield and remit to the Lenders
the full amount it would have received taking into account any such Taxes
(except for Excluded Taxes), duties, fees or other charges payable on amounts
payable by the Borrower under this Section 2.6(b) had such payment been made
without deduction of such Taxes, duties, fees or other charges (all and any of
such additional amounts, herein referred to as the “Additional Amounts”).

(c) If Section 2.6(b) above applies and the Lenders so require the Borrower
shall deliver to the Lenders official tax receipts evidencing payment (or
certified copies of them) of the Additional Amounts within thirty (30) days of
the date of payment.

(d) If the Lenders receive a refund from a Government Authority to which the
Borrower has paid withholding Taxes pursuant to this Section 2.6, the Lenders
shall pay such refund to the Borrower.

Section 2.7 Costs, Expenses and Losses. If, as a result of any failure by the
Borrower to pay any sums due under this Agreement on the due date therefor
(after the expiration of any applicable grace periods), or to borrow in
accordance with a Disbursement Request made pursuant to Section 2.2, the Lenders
shall incur costs, expenses and/or losses, by reason of the liquidation or
redeployment of deposits from third parties or in connection with obtaining
funds to make or maintain any Disbursement, the Borrower shall pay to the
Lenders upon request by the Lenders, the amount of such costs, expenses and/or
losses

 

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within fifteen (15) days after receipt by it of a certificate from the Lenders
setting forth in reasonable detail such costs, expenses and/or losses, along
with supporting documentation. For the purposes of the preceding sentence,
“costs, expenses and/or losses” shall include, without limitation, any interest
paid or payable to carry any unpaid amount and any loss, premium, penalty or
expense which may be incurred in obtaining, liquidating or employing deposits of
or borrowings from third parties in order to make, maintain or fund the Loan or
any portion thereof.

Section 2.8 Interest Rate. The principal amount outstanding under the Loan shall
bear interest at the Interest Rate (calculated on the basis of the actual number
of days elapsed in each month). Interest shall be paid quarterly in arrears
commencing on December 31, 2008 and on the first Business Day following the end
of each March, June, September and December thereafter.

Section 2.9 Interest on Late Payments. Without limiting the remedies available
to the Lenders under the Financing Documents or otherwise, to the maximum extent
permitted by applicable law, if the Borrower fails to make any payment of
principal or interest with respect to the Loan when due (after the expiration of
any applicable grace periods), the Borrower shall pay, in respect of the
outstanding principal amount and interest of the Loan, interest at the rate per
annum equal to the Interest Rate plus ten percent (10%) for so long as such
payment remains outstanding. Such interest shall be payable on demand.

Section 2.10 Delivery of Warrants. (a) As of the date hereof, the Borrower shall
issue to the Lenders Warrants to purchase an aggregate of 12,500,000 shares of
Common Stock at an initial Exercise Price (as defined in the Warrants) of $1.41
(the “Initial Exercise Price”).

(b) Concurrently with each Disbursement, the Borrower shall issue to Lenders
Warrants to purchase an aggregate number of shares of Common Stock equal to the
dollar amount of such Disbursement divided by ten (10). The Warrants issued
pursuant to this Section 2.10 shall be in the form annexed hereto as Exhibit D
and shall be issued at an initial Exercise Price equal to the greater of the
Initial Exercise Price and the Closing Price for shares of Common Stock on the
Trading Day immediately preceding the date of such Disbursement. The Term (as
defined in the Warrants) for Warrants issued pursuant to this subsection
(b) shall end on 5:00 p.m. New York City time on the sixth anniversary of the
date of this Agreement.

(c) As used herein, the Closing Price for Common Stock as of any date means the
closing sale price (based on a Trading Day from 9:30 a.m. to 4:00 p.m. (New York
City time)) on The NASDAQ Global Market (“NASDAQ”) or, if NASDAQ is not the
principal trading market for Common Stock, the closing sale price of Common
Stock on the principal securities exchange or trading market where Common Stock
is listed.

(d) All Warrants issued pursuant to this Section 2.10 shall be allocated among
the Lenders as set forth on Schedule 1.

(e) Notwithstanding anything herein to the contrary, the number of shares of
Common Stock into which a Warrant is exercisable on any relevant issue date
pursuant to subsection (b) above shall be adjusted to reflect any adjustments in
the number of shares of Common Stock into which such Warrant is exercisable that
would have taken effect pursuant to the terms of the Warrant had such Warrant
been issued on the date hereof and remained outstanding through the date of such
issuance.

 

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(f) If at any time after the date of this Agreement for so long as any Warrants
issuable pursuant to this Agreement (the “Agreement Warrants”) are outstanding,
the Borrower issues or sells any shares of Common Stock (a “Borrower Issuance”),
the Company shall issue Warrants (“New Warrants”) to the Lenders, concurrently
with each such Borrower Issuance exercisable into a number of shares of Common
Stock equal to (i) the number of shares of Common Stock issued in such Borrower
Issuance, other than Excluded Shares, multiplied by (ii) the Warrant Percentage
multiplied by the Outstanding Debt Percentage. Any New Warrants issued shall be
in the form of Exhibit D hereto except that the “Exercise Price” thereunder
shall be equal to the greater of the Initial Exercise Price and the Closing
Price of the Common Stock on the date prior to the Borrower Issuance. The Term
(as defined in the Warrants) for New Warrants issued pursuant to this subsection
(f) shall end on 5:00 p.m. New York City time on the sixth anniversary of the
date of this Agreement.

For purposes hereof:

“Adjusted Total Common Stock Outstanding” shall mean at any date or time as of
which such number is to be determined, all shares of Common Stock outstanding
(excluding shares then owned or held by or for the account of the Borrower or
any subsidiary thereof) as of such date or time and all shares of Common Stock
issuable upon exercise of any Agreement Warrants and New Warrants that are
outstanding on such date.

“Excluded Shares” shall mean shares of Common Stock issued pursuant to, or in
connection with (i) any equity compensation plan for officers, directors and
employees, (ii) any Agreement Warrants or New Warrants, whether by exercise
thereof or otherwise issuable pursuant to the terms thereof, (iii) stock splits,
reclassifications and other similar events which consist solely of the shares of
Common Stock changing into or becoming exchangeable for a larger number of
shares or (iv) acquisition agreements, licensing agreements, co-promotion or
co-marketing agreements, or joint venture or partnership agreements, in each
case relating to the development or commercial exploitation of the
pharmaceutical products of the Company or the intellectual property relating
thereto and on terms that are normal, reasonable and customary within the
Company’s industry for transactions of this type; provided, that with respect to
this clause (iv) in amounts not to exceed (x)(i) 1,651,831 shares of Common
Stock (subject to appropriate adjustment to reflect any stock splits,
reclassifications or other similar events) for any transaction occurring at a
time when the Closing Price for Common Stock on the Trading Day preceding the
issuance of such shares is $2.50 or less or (ii) 3,303,662 shares of Common
Stock (subject to appropriate adjustment to reflect any stock splits,
reclassifications or other similar events) for any transaction occurring at a
time when the Closing Price for Common Stock on the Trading Day immediately
preceding the issuance of such shares is greater than $2.50; provided, further
that with respect to this clause (iv) only up to an aggregate of 6,607,324
shares of Common Stock (subject to appropriate adjustment to reflect any stock
splits, reclassifications or other similar events) issued prior to the sixth
anniversary of this Agreement shall be deemed Excluded Shares:

“Outstanding Debt Percentage” shall mean a fraction represented as a decimal
expressed to the third decimal place equal to the total principal amount
outstanding under the Loan five (5) Business Days following the receipt of the
proceeds from such Borrower Issuance by the Borrower divided by the total amount
of all Disbursements made pursuant to this Agreement prior to such Borrower
Issuance.

 

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“Warrant Percentage” shall mean a fraction, represented as a decimal expressed
to the third decimal place equal to (x) the number of shares of Common Stock
into which all Agreement Warrants and New Warrants issued prior to the date of
such Borrower Issuance are exercisable (without regard to 9.98% restrictions
contained therein) immediately prior to the consummation of the Borrower
Issuance, divided by (y) the Adjusted Total Common Stock Outstanding immediately
prior to consummation of the Borrower Issuance.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES

Section 3.1 Representations and Warranties of the Borrower. The Borrower
represents and warrants as of the date hereof and as of each Disbursement Date
as follows:

(a) The Borrower is a corporation duly incorporated and validly existing under
the laws of the State of Delaware.

(b) The Borrower is conducting its business in compliance with its
Organizational Documents. The Organizational Documents of the Borrower
(including all amendments thereto) as currently in effect have been made
available to the Lenders and remain in full force and effect with no defaults
outstanding thereunder.

(c) The Borrower has full power and authority to enter into each of the
Financing Documents and to make the borrowings and the other transactions
contemplated thereby.

(d) All authorizations, consents, approvals, registrations, exemptions and
licenses with or from Government Authorities or other Persons that are necessary
for the conduct of its business as currently conducted and as proposed to be
conducted, for the borrowing hereunder, the execution and delivery of the
Financing Documents and the performance by the Borrower of the Obligations, have
been obtained and are in full force and effect, except (i) for such
registrations and filings in connection with the issuance of the Warrants and
shares of Common Stock pursuant the Financing Documents necessary to comply with
federal and state securities laws, rules and regulations, and (ii) to the extent
that any failure to so obtain for the conduct of the business as currently and
proposed to be conducted could not reasonably be expected to have a Material
Adverse Effect; provided, however, that the failure to receive an approval from
Government Authorities for the development or sale of any product shall not
constitute a Material Adverse Effect or a violation of this Section 3.1(d).

(e) Each Financing Document has been duly authorized, executed and delivered by
the Borrower and constitutes the valid and legally binding obligation of the
Borrower, enforceable in accordance with its terms, except as such
enforceability may be limited by (i) applicable insolvency, bankruptcy,
reorganization, moratorium or other similar laws affecting creditors’ rights
generally, and (ii) applicable equitable principles (whether considered in a
proceeding at law or in equity).

(f) No Default or Event of Default (or any other default or event of default,
however described) has occurred under any of the Financing Documents.

 

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(g) Neither the entering into any of the Financing Documents nor the compliance
with any of its terms conflicts with, violates or results in a breach of any of
the terms of, or constitutes a default or event of default (however described)
or requires any consent under, any agreement to which the Borrower is a party or
by which it is bound, or violates any of the terms of the Organizational
Documents or any judgment, decree, resolution, award or order or any statute,
rule or regulation applicable to the Borrower or its assets.

(h) The Borrower is not engaged in or the subject of any litigation,
arbitration, administrative regulatory compliance proceeding, or investigation,
nor are there any litigation, arbitration, administrative regulatory compliance
proceedings or investigations pending or, to the knowledge of the Borrower,
threatened before any court or arbitrator or before or by any Government
Authority against the Borrower, except for those that have been publicly
disclosed in reports filed with the SEC and the Borrower is not aware of any
facts reasonably likely to give rise to any such proceedings other than as may
have been publicly disclosed in such reports.

(i) The Borrower (i) is capable of paying its debts as they fall due, is not
unable and has not admitted its inability to pay debts as they fall due, (ii) is
not bankrupt or insolvent and (iii) has not taken action, and no such action has
been taken by a third party, for the Borrower’s winding up, dissolution, or
liquidation or similar executory or judicial proceeding or for the appointment
of a liquidator, custodian, receiver, trustee, administrator or other similar
officer for the Borrower or any or all of its assets or revenues.

(j) No Lien exists on Borrower’s property, except for Permitted Liens.

(k) The obligation of the Borrower to make any payment under this Agreement
(together with all charges in connection therewith) is absolute and
unconditional, and there exists no right of setoff or recoupment, counterclaim,
cross-claim or defense of any nature whatsoever to any such payment.

Section 3.2 Borrower Acknowledgment. The Borrower acknowledges that it has made
the representations and warranties referred to in Section 3.1 with the intention
of persuading the Lenders to enter into the Financing Documents and that the
Lenders have entered into the Financing Documents on the basis of, and in full
reliance on, each of such representations and warranties. The Borrower
represents and warrants to the Lenders that none of such representations and
warranties omits any matter the omission of which makes any of such
representations and warranties misleading.

Section 3.3 Representations and Warranties of the Lenders. Each of the Lenders
represents and warrants to the Borrower as of the date hereof and as of each
date Warrants are granted pursuant to this Agreement that:

(a) It is acquiring the Warrants and the shares of Common Stock issued upon
exercise of the Warrants (the “Exercise Shares”) solely for its account for
investment and not with a view to or for sale or distribution of the Warrants or
Exercise Shares or any part thereof. The entire legal and beneficial interests
of the Warrants and Exercise Shares such Lender is acquiring is being acquired
for, and will be held for, its account only.

 

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(b) The Warrants and the Exercise Shares have not been registered under the
Securities Act on the basis that no distribution or public offering of the stock
of the Borrower is to be effected. It realizes that the basis for the exemptions
may not be present if, notwithstanding its representations, such Lender has a
present intention of acquiring the securities for a fixed or determinable period
in the future, selling (in connection with a distribution or otherwise),
granting any participation in, or otherwise distributing the securities. None of
the Lenders has such present intention.

(c) The Warrants and the Exercise Shares must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption for such
registration is available.

(d) Neither the Warrants nor the Exercise Shares may be sold pursuant to Rule
144 adopted under the Securities Act unless certain conditions are met,
including, among other things, the existence of a public market for the shares,
the availability of certain current public information about the Borrower, the
resale following the required holding period under Rule 144 and the number of
shares being sold during any three month period not exceeding specified
limitation.

(e) It will not make any disposition of all or any part of the Warrants or
Exercise Shares until:

(i) The Borrower shall have received a letter secured by such Lender from the
SEC stating that no action will be recommended to the SEC with respect to the
proposed disposition;

(ii) There is then in effect a registration statement under the Securities Act
covering such proposed disposition and such disposition is made in accordance
with said registration statement; or

(iii) Such Lender shall have notified the Borrower of the proposed disposition
and, in the case of a sale or transfer in a so-called “4(1) and a half”
transaction, shall have furnished counsel for the Borrower with an opinion of
counsel, substantially in the form annexed as Exhibit C to the Warrant. The
Borrower agrees that it will not require an opinion of counsel with respect to
transactions under Rule 144 of the Securities Act.

(f) It understands and agrees that all certificates evidencing the shares to be
issued to the Lenders upon exercise of the Warrants may bear the following
legend:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES
MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT INCLUDING, WITHOUT LIMITATION,
PURSUANT TO RULES 144 OR 144A UNDER SAID ACT OR PURSUANT TO A PRIVATE SALE
EFFECTED UNDER APPLICABLE FORMAL OR INFORMAL SEC INTERPRETATION OR GUIDANCE,
SUCH AS A SO-CALLED “4(1) AND A HALF” SALE.”

 

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“THE SALE, TRANSFER OR ASSIGNMENT OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE TERMS OF A CERTAIN REGISTRATION RIGHTS AGREEMENT
DATED AS OF SEPTEMBER 26, 2008, AS AMENDED FROM TIME TO TIME, AMONG THE COMPANY
AND CERTAIN HOLDERS OF ITS OUTSTANDING SECURITIES. COPIES OF SUCH AGREEMENT MAY
BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF THE COMPANY.”

(g) Such Lender is an “accredited investor” as defined in Regulation D
promulgated the Securities Act.

(h) Such Lender is a limited partnership duly organized and validly existing
under the laws of the jurisdiction of its formation.

(i) Each Financing Document to which it is a party has been duly authorized,
executed and delivered by such Lender and constitutes the valid and legally
binding obligation of such Lender, enforceable in accordance with its terms,
except as such enforceability may be limited by (i) applicable insolvency,
bankruptcy, reorganization, moratorium or other similar laws affecting
creditors’ rights generally, and (ii) applicable equitable principles (whether
considered in a proceeding at law or in equity).

(j) Such Lender has full power and authority to make the Disbursements and to
enter into and perform its other obligations under each of the Financing
Documents and carry out the other transactions contemplated thereby. Such Lender
has sufficient funds, and will at all times during the first year following the
Agreement Date, have sufficient funds to make the Disbursements.

ARTICLE 4

CONDITIONS OF DISBURSEMENTS

Section 4.1 Conditions to Initial Disbursement of the Loan. The obligation of
the Lenders to make the initial Disbursement shall be subject to the fulfillment
of the following conditions:

(a) The Lenders shall have received a copy of all documents authorizing the
Borrower to execute, deliver and perform each of the Financing Documents and to
engage in the transactions contemplated thereby and an opinion of Borrower’s
counsel satisfactory to the Lenders.

Unless otherwise notified by the Borrower and without prejudice to the
generality of this Section 4.1, the right of the Lenders to require compliance
with any condition under this Agreement which may be waived by the Lenders in
respect of any Disbursement is expressly preserved for the purpose of any
subsequent Disbursement.

 

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ARTICLE 5

PARTICULAR COVENANTS AND EVENTS OF DEFAULT

Section 5.1 Affirmative Covenants. Unless the Lenders shall otherwise agree:

(a) The Borrower shall (i) maintain its existence and qualify and remain
qualified to do its business as currently conducted, except where the failure to
so maintain such qualification would not reasonably be expected to have a
Material Adverse Effect, (ii) maintain all approvals necessary for the Financing
Documents to be in effect, and (iii) operate its business with reasonable due
diligence, efficiency and in conformity with sound business practices.

(b) The Borrower shall comply in all material respects with all applicable laws,
rules, regulations and orders of any Government Authority, except where the
necessity of compliance therewith is contested in good faith by appropriate
proceedings or where the failure to so comply, individually or in the aggregate,
would not reasonably be expected to have a Material Adverse Effect.

(c) The Borrower shall obtain, make and keep in full force and effect all
licenses, contracts, consents, approvals and authorizations from and
registrations with Government Authorities that may be required to conduct its
business, except to the extent that the failure to do so would not reasonably be
expected to have a Material Adverse Effect.

(d) The Borrower shall promptly notify the Lenders of the occurrence of (i) any
Default or Event of Default; or (ii) any claims, litigation, arbitration,
mediation or administrative or regulatory proceedings that are instituted or
threatened against the Borrower, except for matters that, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect;
and (iii) each event which, at the giving of notice, lapse of time,
determination of materiality or fulfillment of any other applicable condition
(or any combination of the foregoing), would constitute an event of default
(however described) under any of the Financing Documents.

(e) The Borrower shall comply with the terms of each of the Financing Documents.

(f) (i) If the Borrower is not required to file reports pursuant to Sections 13
or 15(d) of the Exchange Act, the Borrower will provide quarterly financial
statements for itself and its Subsidiaries within 45 days after the end of each
quarter, and annual financial statements within 120 days after the end of each
year; (ii) the Borrower will timely file with the SEC (subject to appropriate
extensions made under Rule 12b-25 of the Exchange Act) any annual reports,
quarterly reports and other periodic reports pursuant to Section 13 or 15(d) of
the Exchange Act; and (iii) the Borrower and its Subsidiaries will provide to
the Lenders copies of all documents, reports, financial data and other
information as the Lenders may reasonably request, and permit the Lenders to
visit and inspect any of the properties of the Borrower and its Subsidiaries,
and to discuss its and their affairs, finances and accounts with its and their
officers, all at such times as the Lenders may reasonably request; and (iv) the
Lenders shall have the right to consult with and advise the management of the
Borrower and its Subsidiaries on matters relating to the operation of the
Borrower and it Subsidiaries.

 

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Section 5.2 Negative Covenants. Unless the Lenders shall otherwise agree:

(a) The Borrower shall not (i) liquidate or dissolve; or (ii) enter into any
merger, consolidation or reorganization, unless either (A) the Borrower is the
surviving corporation, or (B) in the case where Borrower is not the surviving
corporation, the Person so resulting or surviving shall expressly assume the
Obligations or otherwise redeem all outstanding Obligations.

(b) The Borrower shall not (i) enter into any partnership, joint venture,
syndicate, pool, profit-sharing or royalty agreement or other combination, or
engage in any transaction with an Affiliate, whereby its income or profits are,
or might be, shared with another Person or enter into any management contract or
similar arrangement whereby a substantial part of its business is managed by
another Person, (ii) distribute, or permit the distribution of, any assets of
the Borrower or its Subsidiaries, including its intangibles, to any shareholders
of the Borrower or the holder of any equity interest in any Subsidiary of the
Borrower or any of its Affiliates (other than the Borrower or a Subsidiary of
the Borrower); provided, however, that (A) with respect to the restrictions in
clause (i), the Borrower may enter into any collaborative arrangement, licensing
agreement, joint venture or partnership providing for the research, development
or commercial exploitation of compounds, products or services whereby payments
received therefrom or its income or profits are, or might be, shared in the
ordinary course of business with another Person; and (B) with respect to the
restrictions in clause (ii), royalties and other payments made by any
partnership, joint venture, syndicate, pool, profit-sharing or royalty agreement
or other combination, to the parties thereto in the ordinary course of business
shall not be deemed to be a distribution of assets.

(c) The Borrower shall not: (i) create, incur or suffer any Lien upon any of its
assets, now owned or hereafter acquired, except Permitted Liens; or (ii) assign,
sell, transfer or otherwise dispose of, any of the Financing Documents, or the
rights and obligations thereunder.

(d) The Borrower shall not create, incur assume, guarantee or be remain liable
with respect to any Indebtedness, other than Permitted Indebtedness, or prepay
any Indebtedness (other than Permitted Indebtedness) or take any actions which
impose on the Borrower an obligation to prepay any Indebtedness, except
Permitted Indebtedness.

Section 5.3 Reimbursement of Taxes. The Borrower shall pay all Taxes, duties,
fees or other charges payable on or in connection with the execution, issue,
delivery, registration, notarization or enforcement of the Financing Documents
and shall, upon notice from the Lenders, reimburse the Lenders for any such
Taxes, duties, fees or other charges paid by the Lenders thereon; provided,
however, that notwithstanding the foregoing, under no circumstances shall the
Borrower have any obligation to reimburse the Lenders for Excluded Taxes.

Section 5.4 Major Transaction. If a Major Transaction occurs, the Lenders, in
the exercise of their sole discretion, may deliver a written notice to the
Borrower (the “Put Notice”) within 10 Business Days after the date of the
announcement of such Major Transaction, that (a) 110% of the outstanding
principal of the Notes and (b) accrued and unpaid interest on the Notes, and
with any other amounts accrued or payable under the Financing Documents ((a) and
(b) together, the “Put Price”) is immediately due and payable upon consummation
of the Major Transaction. If the Lenders deliver a Put Notice, then upon such
consummation, the Borrower shall pay the Put Price to the Lenders and the
Obligations shall terminate.

 

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Section 5.5 General Acceleration Provision upon Events of Default. If one or
more of the events specified in this Section 5.5 shall have happened and be
continuing beyond the applicable cure period (each, an “Event of Default”), the
Lenders, by written notice to the Borrower, may cancel the Borrower’s right to
request Disbursements and declare the principal of, accrued and unpaid interest
on, the Notes or any part of any of them (together with any other amounts
accrued or payable under this Agreement) to be, and the same shall thereupon
become, immediately due and payable, without any further notice and without any
presentment, demand, or protest of any kind, all of which are hereby expressly
waived by the Borrower, and take any further action available at law or in
equity, including, without limitation, the sale of the Loan and all other rights
acquired in connection with the Loan:

(a) A Lender shall have failed to receive payment of (i) principal when due, or
(ii) interest and any other amounts due under the Loan or the Notes within five
(5) Business Days of their due date.

(b) The Borrower shall have failed to comply with the due observance or
performance of any other covenant contained in this Agreement or any Note and
such failure shall not have been cured by Borrower within 30 days after
receiving written notice of such default or failure from the Lenders.

(c) Any representation or warranty made by the Borrower in any Financing
Document shall be have been incorrect, false or misleading as of the date it was
made, deemed made, reaffirmed or confirmed.

(d) (i) The Borrower shall generally be unable to pay its debts as such debts
become due, or shall admit in writing its inability to pay its debts as they
come due or shall make a general assignment for the benefit of creditors;
(ii) the Borrower shall declare a moratorium on the payment of its debts;
(iii) the commencement by the Borrower of proceedings to be adjudicated bankrupt
or insolvent, or the consent by it to the commencement of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization, intervention or other similar relief under
any applicable law, or the consent by it to the filing of any such petition or
to the appointment of an intervenor, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of all or substantially all of its
assets; (iv) the commencement against the Borrower of a proceeding in any court
of competent jurisdiction under any bankruptcy or other applicable law (as now
or hereafter in effect) seeking its liquidation, winding up, dissolution,
reorganization, arrangement, adjustment, or the appointment of an intervenor,
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official), and any such proceeding shall continue undismissed, or any order,
judgment or decree approving or ordering any of the foregoing shall continue
unstayed or otherwise in effect, for a period of ninety (90) days; (v) the
making by the Borrower of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debt generally as they
become due; or (vi) any other event shall have occurred which under any
applicable law would have an effect analogous to any of those events listed
above in this subsection.

 

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(e) One or more judgments against the Borrower taken as a whole or attachments
against any of its property, which in the aggregate exceed $500,000, or which
could have a Material Adverse Effect remain(s) unpaid, unstayed on appeal,
undischarged, unbonded or undismissed for a period of thirty (30) days from the
date of entry of such judgment.

(f) Any license, permit or approval held by the Borrower from any Government
Authority shall have been suspended, canceled or revoked and such suspension,
cancellation or revocation could reasonably be expected to have a Material
Adverse Effect, and such suspension, cancellation or revocation shall not have
been cured within 30 days.

(g) Any authorization necessary for the execution, delivery or performance of
any Financing Document or for the validity or enforceability of any of the
Obligations under any Financing Document is not given or is withdrawn or ceases
to remain in full force or effect.

(h) The validity of or any Financing Document shall be contested by any
legislative, executive or judicial body of any jurisdiction, or any treaty, law,
regulation, communiqué, decree, ordinance or policy of any jurisdiction shall
purport to render any material provision of any Financing Document invalid or
unenforceable or shall purport to prevent or materially delay the performance or
observance by the Borrower of the Obligations, and the parties are unable to
negotiate a replacement provision pursuant to Section 6.7 below.

(i) The Borrower has failed to comply in any material respect with the reporting
requirements of the Exchange Act, unless corrected by the Borrower promptly (if
capable of such correction) through the filing of an amendment to an existing
report or making an appropriate subsequent filing with the SEC.

(j) There is a failure to perform in any agreement to which the Borrower is a
party with a third party or parties resulting in a right by such third party or
parties to accelerate the maturity of any Indebtedness for borrowed money in an
amount in excess of $1,000,000.

(k) If an Event of Default pursuant to the Warrants (as such term is defined in
the Warrants) shall have occurred, but only if a Lender is a holder of any of
the Warrants at the time of such Event of Default.

(l) Cash and Cash Equivalents on the last day of each calendar quarter are less
than $10,000,000.

Section 5.6 Automatic Acceleration on Dissolution or Bankruptcy. Notwithstanding
any other provisions of this Agreement, if an Event of Default under
Section 5.5(d) shall occur, the principal of the Loan (together with any other
amounts accrued or payable under this Agreement) shall thereupon become
immediately due and payable without any presentment, demand, protest or notice
of any kind, all of which are hereby expressly waived by the Borrower.

Section 5.7 Recovery of Amounts Due. If any amount payable hereunder is not paid
as and when due, the Borrower hereby authorizes the Lender to proceed, to the
fullest extent permitted by applicable law, without prior notice, by right of
set-off, banker’s lien or counterclaim, against any moneys or other assets of
the Borrower to the full extent of all amounts payable to the Lenders.

 

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ARTICLE 6

MISCELLANEOUS

Section 6.1 Notices. Any notice, request or other communication to be given or
made under this Agreement shall be in writing. Such notice, request or other
communication shall be deemed to have been duly given or made when it shall be
delivered by hand, overnight mail, international courier (confirmed by
facsimile), or facsimile (with a hard copy delivered within two (2) Business
Days) to the Party to which it is required or permitted to be given or made at
such Party’s address specified below or at such other address as such Party
shall have designated by notice to the other Parties.

For the Borrower:

ISTA Pharmaceuticals, Inc.

15295 Alton Parkway

Irvine, CA 92618

Attention: Chief Executive Officer

Facsimile: (949) 789-7740

with a courtesy copy to:

Stradling Yocca Carlson & Rauth

660 Newport Center Drive, Suite 1600

Newport Beach, California 92660

Attention: Michael A. Hedge, Esq.

Facsimile: (949) 725-4100

For the Deerfield Lenders c/o:

Deerfield Private Design Fund, L.P.

780 Third Avenue, 37th Floor

New York, New York 10017

Attention: James E. Flynn

Facsimile: (212) 573-8111

with a courtesy copy to:

Katten Muchin Rosenman LLP

575 Madison Avenue

New York, New York 10022-2585

Facsimile: (212) 894-5827

Attention: Robert I. Fisher

 

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For the Sprout Lenders c/o:

New Leaf Venture Partners, LLC

Times Square Tower

7 Times Square - Suite 1603

New York, NY 10036

Att: Craig Slutzkin

Phone: 646-871-6420

FAX: 646-519-2773

For the Sanderling Lenders c/o:

Sanderling Ventures

400 S. El Camino Real, Suite 1200

San Mateo, CA 94402

P: (650) 401-2000

F: (650) 375-7077

Section 6.2 Waiver of Notice. Whenever any notice is required to be given to the
Lenders or the Borrower under the any of the Financing Documents, a waiver
thereof in writing signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice.

Section 6.3 Reimbursement of Legal and Other Expenses. If any amount owing to
the Lenders under any Financing Document shall be collected through enforcement
of this Agreement, any refinancing or restructuring of the Loan in the nature of
a work-out, settlement, negotiation, or any process of law, or shall be placed
in the hands of third Persons for collection, the Borrower shall pay (in
addition to all monies then due in respect of the Loan or otherwise payable
under any Financing Document) attorneys’ and other fees and expenses incurred in
respect of such collection.

Section 6.4 Applicable Law and Consent to Non-Exclusive New York Jurisdiction.
This Agreement shall be governed by and construed in accordance with the laws of
the State of New York, without giving effect to the conflicts of laws principles
thereof other than Sections 5-1401 and 5-1402 of the General Obligations Law of
such State.

(a) Any rights of the Lenders arising out of or relating to any Financing
Document, may, at the option of the Lenders, be enforced by the Lenders in the
courts of the United States of America located in the Southern District of the
State of New York or in any other courts having jurisdiction. For the benefit of
the Lenders, the Borrower hereby irrevocably agrees that any legal action, suit
or other proceeding arising out of any Financing Document may be brought in the
courts of the State of New York or of the United States of America for the
Southern District of New York. The Borrower irrevocably consents to the service
of any and all process in any such legal action, suit or other proceeding by the
mailing of copies of such process to the Borrower at its address specified in
Section 6.1 by registered mail, return receipt requested. By the execution and
delivery of this Agreement, the Borrower hereby irrevocably consents and submits
to the jurisdiction of any such court in any such action, suit or other
proceeding. Final judgment against the Borrower in any such action, suit or
other proceeding shall be conclusive and may be enforced in any other
jurisdiction by suit on the judgment. Nothing contained in any Financing
Document shall affect the right of the Lenders to commence legal proceedings in
any court having jurisdiction, or concurrently in more than one jurisdiction, or
to serve process, pleadings and other legal papers upon the Borrower in any
manner authorized by the laws of any such jurisdiction.

 

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(b) The Borrower irrevocably waives, to the fullest extent permitted by
applicable law, any objection which it may now or hereafter have to the laying
of venue of any action, suit or other proceeding arising out of or relating to
any Financing Document, brought in the courts of the State of New York or in the
United States District Court for the Southern District of New York, and any
claim that any such action, suit or other proceeding brought in any such court
has been brought in an inconvenient forum.

(c) The Borrower hereby waives any and all rights to demand a trial by jury in
any action, suit or other proceeding arising out of any Financing Document or
the transactions contemplated by any Financing Document.

(d) To the extent that the Parties may, in any suit, action or other proceeding
brought in any court arising out of or in connection with any Financing
Document, be entitled to the benefit of any provision of law requiring the
Borrower or the Lenders, as applicable, in such suit, action or other proceeding
to post security for the costs of the Borrower or the Lenders, as applicable, or
to post a bond or to take similar action, the Parties hereby irrevocably waive
such benefit, in each case to the fullest extent now or hereafter permitted
under any applicable laws.

Section 6.5 Successor and Assigns. This Agreement shall bind and inure to the
respective successors and assigns of the Parties, except that the Borrower may
not assign or otherwise transfer all or any part of its rights under this
Agreement or the Obligations without the prior written consent of the Lenders,
and except as set forth in the next sentence the Lenders may not assign or
otherwise transfer all or any part of their obligations under this Agreement
without the prior written consent of the Borrower. Each Lender may assign or
other transfer all of any part of its obligations under this Agreement to any
Affiliate of such Lender. Notwithstanding the foregoing, nothing in this
Agreement is deemed to limit or otherwise restrict a merger, reorganization or
sale of substantially all of the assets of the Borrower. Notwithstanding
anything to the contrary contained herein, if any assignment or participation is
to any Person that is not a “United States person” within the meaning of
Section 7701(a)(30) of the Code, then such Person shall submit to the Borrower,
on or before the date of such assignment or participation an IRS Form W–8BEN (or
any successor form) certifying as to such Person’s status for purposes of
determining exemption from United States withholding tax, information reporting
and backup withholding with respect to all payments to be made to such Person.
Any attempted assignment or participation in violation of this Section 6.5 shall
be void and of no force and effect. Until there has been a valid assignment of
this Agreement and of all of the rights hereunder by a Lender in accordance with
this Section 6.5, the Borrower shall deem and treat such Lender as the absolute
beneficial owner and holder of this Agreement and of all of the rights hereunder
for all purposes.

Section 6.6 Entire Agreement. The Financing Documents contain the entire
understanding of the Parties with respect to the matters covered thereby and
supersede any and all other written and oral communications, negotiations,
commitments and writings with respect thereto. The provisions of this Agreement
may be waived, modified, supplemented or amended only by an instrument in
writing signed by the authorized officer of each Party.

 

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Section 6.7 Severability. If any provision contained in this Agreement shall be
invalid, illegal or unenforceable in any respect under any law, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby. The Parties shall endeavor in good faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to that
of the invalid, illegal or unenforceable provision.

Section 6.8 Counterparts. This Agreement may be executed in several
counterparts, and by each Party on separate counterparts, each of which and any
photocopies and facsimile copies thereof shall be deemed an original, but all of
which together shall constitute one and the same agreement.

Section 6.9 Survival.

(a) This Agreement and all agreements, representations and warranties made in
the Financing Documents, and in any document, certificate or statement delivered
pursuant thereto or in connection therewith shall be considered to have been
relied upon by the other Parties and shall survive the execution and delivery of
this Agreement and the making of the Loan hereunder regardless of any
investigation made by any such other Party or on its behalf, and shall continue
in force until all amounts payable under the Financing Documents shall have been
fully paid in accordance with the provisions hereof and thereof, and the Lenders
shall not be deemed to have waived, by reason of making the Loan, any Default
that may arise by reason of such representation or warranty proving to have been
false or misleading, notwithstanding that the Lenders may have had notice or
knowledge of any such Default or may have had notice or knowledge that such
representation or warranty was false or misleading at the time any Disbursement
was made hereunder.

(b) The obligations of the Borrower under Section 2.7 and the obligations of the
Borrower and the Lenders under this Article VII hereof shall survive and remain
in full force and effect regardless of the consummation of the transactions
contemplated hereby, the repayment of the Loan, or the termination of this
Agreement or any provision hereof.

Section 6.10 Waiver. Neither the failure of, nor any delay on the part of, any
Party in exercising any right, power or privilege hereunder, or under any
agreement, document or instrument mentioned herein, shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege hereunder, or under any agreement, document or instrument mentioned
herein, preclude other or further exercise thereof or the exercise of any other
right, power or privilege; nor shall any waiver of any right, power, privilege
or default hereunder, or under any agreement, document or instrument mentioned
herein, constitute a waiver of any other right, power, privilege or default or
constitute a waiver of any default of the same or of any other term or
provision. No course of dealing and no delay in exercising, or omission to
exercise, any right, power or remedy accruing to the Lenders upon any default
under this Agreement, or any other agreement shall impair any such right, power
or remedy or be construed to be a waiver thereof or an acquiescence therein; nor
shall the action of the Lenders in respect of any such default, or any
acquiescence by it therein, affect or impair any right, power or remedy of the
Lenders in respect of any other default. All rights and remedies herein provided
are cumulative and not exclusive of any rights or remedies otherwise provided by
law.

 

21

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Section 6.11 Indemnity.

(a) The Parties shall, at all times, indemnify and hold each other harmless (the
“Indemnity”) and each of their respective directors, partners, officers,
employees, agents, counsel and advisors (each, an “Indemnified Person”) in
connection with any losses, claims (including the cost of defending against such
claims), damages, liabilities, penalties, or other expenses arising out of, or
relating to, the Financing Documents, the extension of credit hereunder or the
Loan or the use or intended use of the Loan, which an Indemnified Person may
incur or to which an Indemnified Person may become subject (each, a “Loss”). The
Indemnity shall not apply to the extent that a court or arbitral tribunal with
jurisdiction over the subject matter of the Loss, and over the Lenders or the
Borrower, as applicable, and such other Indemnified Person that had an adequate
opportunity to defend its interests, determines that such Loss resulted from the
gross negligence or willful misconduct of the Indemnified Person, which
determination results in a final, non-appealable judgment or decision of a court
or tribunal of competent jurisdiction. The Indemnity is independent of and in
addition to any other agreement of any Party under any Financing Document to pay
any amount to the Lenders or the Borrower, as applicable, and any exclusion of
any obligation to pay any amount under this subsection shall not affect the
requirement to pay such amount under any other section hereof or under any other
agreement.

(b) Without prejudice to the survival of any other agreement of any of the
Parties hereunder, the agreements and the obligations of the Parties contained
in this Section 6.11 shall survive the termination of each other provision
hereof and the payment of all amounts payable to the Lenders hereunder.

Section 6.12 No Usury. The Financing Documents are hereby expressly limited so
that in no contingency or event whatsoever, whether by reason of acceleration or
otherwise, shall the amount paid or agreed to be paid to the Lenders for the
Loan exceed the maximum amount permissible under applicable law. If from any
circumstance whatsoever fulfillment of any provision hereof, at the time
performance of such provision shall be due, shall involve transcending the limit
of validity prescribed by law, then, ipso facto, the obligation to be fulfilled
shall be reduced to the limit of such validity, and if from any such
circumstance the Lenders shall ever receive anything which might be deemed
interest under applicable law, that would exceed the highest lawful rate, such
amount that would be deemed excessive interest shall be applied to the reduction
of the principal amount owing on account of the Loan, or if such deemed
excessive interest exceeds the unpaid balance of principal of the Loan, such
deemed excess shall be refunded to the Borrower. All sums paid or agreed to be
paid to the Lenders for the Loan shall, to the extent permitted by applicable
law, be deemed to be amortized, prorated, allocated and spread throughout the
full term of the Loan until payment in full so that the deemed rate of interest
on account of the Loan is uniform throughout the term thereof. The terms and
provisions of this paragraph shall control and supersede every other provision
of this Agreement and the Notes.

Section 6.13 Further Assurances. From time to time, the Borrower shall perform
any and all acts and execute and deliver to the Lenders such additional
documents as may be necessary or as requested by the Lenders to carry out the
purposes of any Financing Document or any or to preserve and protect the
Lenders’ rights as contemplated therein.

 

22

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Section 6.14 Termination. Subject to the provisions of Section 6.9(b), upon
repayment of all outstanding principal of the Loan (together with any other
amounts accrued and unpaid under this Agreement), the Borrower may terminate
this Agreement upon 10 days’ notice to the Lenders.

Section 6.15 Amendment. This Agreement may be amended and waivers granted
hereunder by Lenders that hold fifty one percent (51%) of the aggregate
principal amount of the Notes so long as such amendment or waiver treats all
holders of the Notes the same.

[SIGNATURE PAGE FOLLOWS]

 

23

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IN WITNESS WHEREOF, the undersigned Lender and the Company have caused this
Agreement to be duly executed as of the date first written above.

 

COMPANY:   LENDER: ISTA PHARMACEUTICALS, INC.   DEERFIELD PRIVATE DESIGN FUND,
L.P. By:   /s/ Vicente Anido, Jr., Ph.D.     By:   /s/ James Flynn   Name:   
Vicente Anido, Jr., Ph.D.       Name:    James Flynn   Title:   President and
Chief Executive Officer       Title:   General Partner LENDER:   LENDER:
DEERFIELD PRIVATE DESIGN INTERNATIONAL, L.P.   DEERFIELD SPECIAL SITUATIONS
FUND, L.P. By:   /s/ James Flynn     By:   /s/ James Flynn   Name:    James
Flynn       Name:    James Flynn   Title:   General Partner       Title:  
General Partner LENDER:   LENDER: DEERFIELD SPECIAL SITUATIONS FUND
INTERNATIONAL LIMITED   SANDERLING VENTURE PARTNERS VI CO-INVESTMENT FUND, L.P.
  By: Middleton, McNeil, Mills & Associates VI, LLC By:   /s/ James Flynn    
By:   /s/ Robert G. McNeil   Name:    James Flynn       Name:    Robert G.
McNeil   Title:   General Partner       Title:   Managing Director LENDER:  
LENDER: SANDERLING VI LIMITED PARTNERSHIP   SANDERLING VI BETEILIGUNGS GMBH &
CO. KG By: Middleton, McNeil, Mills & Associates VI, LLC   By:   /s/ Robert G.
McNeil     By:   /s/ Robert G. McNeil   Name:    Robert G. McNeil       Name:   
Robert G. McNeil   Title:   Managing Director       Title:   Managing Director
LENDER:   LENDER: SANDERLING VENTURES MANAGEMENT VI   SPROUT CAPITAL IX, L.P.  
By: DLJ Capital Corporation   Its: Managing General Partner By:   /s/ Robert G.
McNeil     By:   /s/ Craig L. Slutzkin   Name:    Robert G. McNeil       Name: 
  Craig L. Slutzkin   Title:   Owner       Title:   Attorney in Fact LENDER:  
LENDER: SPROUT ENTREPRENEURS’ FUND, L.P.   SPROUT IX PLAN INVESTORS, L.P. By:
DLJ Capital Corporation   By: DLJ LBO Plans Management Corporation II Its:
General Partner   Its: General Partner By:   /s/ Craig L. Slutzkin     By:   /s/
Craig L. Slutzkin   Name:    Craig L. Slutzkin       Name:    Craig L. Slutzkin
  Title:   Attorney in Fact       Title:   Attorney in Fact

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SCHEDULE 1

SCHEDULE OF LENDERS

 

LENDER

   ALLOCATION OF
DISBURSEMENTS     ALLOCATION OF
WARRANTS  

Deerfield Private Design Fund, L.P.,

   28.11 %   28.11 %

Deerfield Private Design International, L.P.,

   45.28 %   45.28 %

Deerfield Special Situations Fund, L.P.

   2.88 %   2.88 %

Deerfield Special Situations Fund International Limited

   5.28 %   5.28 %

Sprout Capital IX, L.P.

   10.23 %   10.23 %

Sprout Entrepreneurs’ Fund, L.P.

   0.04 %   0.04 %

Sprout IX Plan Investors, L.P.

   0.49 %   0.49 %

Sanderling Venture Partners VI Co-Investment Fund, L.P.

   7.01 %   7.01 %

Sanderling VI Limited Partnership

   0.16 %   0.16 %

Sanderling VI Beteiligungs GmbH & Co. KG

   0.14 %   0.14 %

Sanderling Ventures Management VI

   0.38 %   0.38 %

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SCHEDULE 2

FORM OF DISBURSEMENT REQUEST

[LETTERHEAD OF THE BORROWER]

[Date]

Ladies and Gentlemen:

Request for Disbursement of the Loan

1. Please refer to the Facility Agreement (the “Facility Agreement”), dated as
of September 26, 2008, between ISTA Pharmaceuticals, Inc. (the “Borrower”) and
the Lenders (as defined therein).

2. Terms defined in the Facility Agreement shall have the same meanings herein.

3. The Borrower hereby requests a Disbursement, on [date], of the amount of
[amount of drawdown], in accordance with the provisions of Section 2.2 of the
Facility Agreement. You are requested to pay the amount to the following account
[account number] at [name of bank].

4. Attached hereto is a signed but undated receipt for the amount hereby
requested to be disbursed, and we hereby authorize the Lenders to date such
receipt as of the date of actual disbursement by the Lenders of the funds hereby
requested to be disbursed.

5. The Borrower hereby certifies as follows:

(a) The representations and warranties in Article III of the Facility Agreement
are true in all material respects on the date hereof with the same effect as
though such representations and warranties had been made on today’s date; and

(b) All of the conditions set forth in Article IV of the Facility Agreement have
been satisfied.

6. The above certifications are effective as of the date of this request for
Disbursement and will continue to be effective as of the Disbursement Date. If
any of these certifications is no longer valid as of or prior to the
Disbursement Date, the Borrower will immediately notify the Lenders and will
repay the amount disbursed upon demand by the Lenders if Disbursement is made
prior to the receipt of such notice.

 

ISTA PHARMACEUTICALS, INC. By:     Name:      Title:    

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SCHEDULE 3

FORM OF EVIDENCE OF DISBURSEMENT

[LETTERHEAD OF THE BORROWER]

[Date]

Ladies and Gentlemen:

 

  Re: Disbursement Receipt

ISTA Pharmaceuticals, Inc. (the “Borrower”) hereby acknowledge receipt of the
sum of [insert amount of disbursement] disbursed to us by the Lenders (as
defined therein) under the Loan provided for in the Facility Agreement, dated as
of September 26, 2008, between the Borrower and the Lenders.

 

Yours faithfully, ISTA PHARMACEUTICALS, INC. By:     Name:      Title:    

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EXHIBIT A

Form of Promissory Note

September __, 2008

FOR VALUE RECEIVED, ISTA Pharmaceuticals, Inc., a Delaware corporation (the
“Maker”), by means of this Promissory Note (this “Note”), hereby unconditionally
promises to pay to              [            ] (the “Payee”), a principal amount
equal to the lesser of (a) $[            ] and (b) the aggregate amount of
Disbursements allocated to the Payee pursuant to Section 2.2 of the Facility
Agreement (as defined below), as such principal amount is increased pursuant to
the Facility Agreement, in lawful money of the United States of America and in
immediately available funds, on the dates provided in the Facility Agreement.

This Note is a “Note” referred to in the Facility Agreement dated as of the date
hereof among the Maker, the Payee and the other parties thereto (as modified and
supplemented and in effect from time to time, the “Facility Agreement”), with
respect to the Loan made by the Payee thereunder. Capitalized terms used herein
and not expressly defined in this Note shall have the respective meanings
assigned to them in the Facility Agreement.

This Note shall bear interest on the principal amount hereof, as such principal
amount may be increased or decreased, at the rates and pursuant to the
provisions set forth in the Facility Agreement.

The Maker shall make all payments to the Payee of interest and principal under
this Note in the manner provided in and otherwise in accordance with the
Facility Agreement. The outstanding principal amount of this Note shall be due
and payable in full on the Final Payment Date.

If default is made in the punctual payment of principal or any other amount
under this Note in accordance with the Facility Agreement, or if any other Event
of Default has occurred, this Note shall, at the Payee’s option exercised at any
time upon or after the occurrence of any such payment default or other Event of
Default and in accordance with the applicable provisions of the Facility
Agreement, become immediately due and payable.

All payments of any kind due to the Payee from the Maker pursuant to this Note
shall be made in the full face amount thereof. All such payments will be free
and clear of, and without deduction or withholding for, any Taxes other than
Excluded Taxes. The Maker shall pay all and any costs (administrative or
otherwise) imposed by banks, clearing houses, or any other financial
institution, in connection with making any payments hereunder, except for any
costs imposed by the Payee’s banking institutions.

The Maker shall pay all costs of collection, including, without limitation, all
reasonable, documented legal expenses and attorneys’ fees, paid or incurred by
the Payee in collecting and enforcing this Note.

The Maker and every endorser of this Note, or the obligations represented
hereby, expressly waives presentment, protest, demand, notice of dishonor or
default, and notice of any kind with respect to this Note and the Facility
Agreement or the performance of the obligations under this Note and/or the
Facility Agreement. No renewal or extension of this Note or the Facility
Agreement, no release of any Person primarily or secondarily liable on this Note
or the Facility Agreement, including the Maker and any endorser, no delay in the
enforcement of payment of this Note or the Facility Agreement, and no delay or
omission in exercising any right or power under this Note or the Facility
Agreement shall affect the liability of the Maker or any endorser of this Note.

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No delay or omission by the Payee in exercising any power or right hereunder
shall impair such right or power or be construed to be a waiver of any default,
nor shall any single or partial exercise of any power or right hereunder
preclude the full exercise thereof or the exercise of any other power or right.
The provisions of this Note may be waived or amended only in a writing signed by
the Maker and the Payee. This Note may be prepaid in whole or in part without
premium or penalty.

THIS NOTE, AND ANY RIGHTS OF THE PAYEE ARISING OUT OF OR RELATING TO THIS NOTE,
MAY, AT THE OPTION OF THE PAYEE, BE ENFORCED BY THE PAYEE IN THE COURTS OF THE
UNITED STATES OF AMERICA LOCATED IN THE SOUTHERN DISTRICT OF THE STATE OF NEW
YORK OR IN ANY OTHER COURTS HAVING JURISDICTION. FOR THE BENEFIT OF THE PAYEE,
THE MAKER HEREBY IRREVOCABLY AGREES THAT ANY LEGAL ACTION, SUIT OR OTHER
PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE MAY BE BROUGHT IN THE COURTS
OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND HEREBY CONSENTS THAT PERSONAL SERVICE OF SUMMONS OR
OTHER LEGAL PROCESS MAY BE MADE AS SET FORTH IN SECTION 6.4 OF THE FACILITY
AGREEMENT, WHICH SERVICE THE MAKER AGREES SHALL BE SUFFICIENT AND VALID. THE
MAKER HEREBY WAIVES ANY AND ALL RIGHTS TO DEMAND A TRIAL BY JURY IN ANY ACTION,
SUIT OR OTHER PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE OR THE
TRANSACTIONS CONTEMPLATED BY THIS NOTE.

This Note shall be governed by, and construed in accordance with, the laws of
the State of New York applicable to contracts made and to be performed in such
State, without giving effect to the conflicts of laws principles thereof other
than Sections 5-1401 and 5-1402 of the General Obligations Law of the State of
New York.

Whenever this Note is held by a noteholder that is not a “United States person”
within the meaning of Section 7701(a)(30) of the Internal Revenue Code of 1986,
as amended (the “Code”), then it is the intention of the Maker and such
noteholder that (x) all interest accrued and paid on this Note will qualify for
exemption from United States withholding tax as “portfolio interest” because
this Note is an obligation which is in “registered form” within the meaning of
Sections 871(h)(2)(B) and 881(c)(2)(B) of the Code and the applicable Treasury
Regulations promulgated thereunder, and (y) as such, all interest accrued and
paid on this Note will be exempt from United States information reporting under
Sections 6041 and 6049 of the Code and United States backup withholding under
Section 3406 of the Code. The Maker and the Payee shall cooperate with one
another, and execute and file such forms or other documents, or do or refrain
from doing such other acts, as may be required, to secure such exemptions from
United States withholding tax, information reporting, and backup withholding. In
furtherance of the foregoing, any transferee or assignee noteholder that is not
a United States person shall represent, warrant and covenant to the Maker that
(i) such noteholder is not, and will not be as long as any amounts due under
this Note have not been paid in full, a “United States person,” within the
meaning of Section 7701(a)(30) of the Code; (ii) such noteholder is not, and
will not be as long as any amounts due under this Note have not been paid in
full, a person described in Section 881(c)(3) of the Code; (iii) on or prior to
the date of transfer or assignment (and on or prior

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to the date the form provided pursuant to this clause (iii) is no longer valid)
until all amounts due under this Note have been paid in full, such noteholder
shall provide the Maker with a properly executed U.S. Internal Revenue Service
(“IRS”) Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for
United States Tax Withholding (or any successor form prescribed by the IRS),
certifying as to such noteholder’s status for purposes of determining exemption
from United States withholding tax, information reporting and backup withholding
with respect to all payments to be made to such noteholder hereunder; (iv) if an
event occurs that would require a change in the exempt status of such noteholder
or any of the other information provided on the most recent IRS Form W-8BEN (or
successor form) previously submitted by such noteholder to the Maker, such
noteholder will so inform the Maker in writing (or by submitting to the Maker a
new IRS Form W-8BEN or successor form) within 30 days after the occurrence of
such event; and (v) such noteholder will not assign or otherwise transfer this
Note or any of its rights hereunder except in accordance with the provisions
hereof.

In order to qualify as a “registered note” for purposes of the Code, transfer of
this Note may be effected only by (i) surrender of this Note to the Maker and
the re-issuance of this Note to the transferee, or the Maker’s issuance to the
Payee of a new note in the same form as this Note but with the transferee
denoted as the Payee, or (ii) the recording of the identity of the transferee by
the Affiliate of the Payee that is maintaining a record ownership register of
this Note as agent to, and on behalf of, the Maker. Such Affiliate in its
capacity as such agent shall notify the Maker in writing immediately upon any
change in such identity. The terms and conditions of this Note shall be binding
upon and inure to the benefit of the Maker and the Payee and their permitted
assigns; provided, however, that if any such assignment (whether by operation of
law, by way of transfer or participation, or otherwise) is to any noteholder
that is not a “United States person” within the meaning of Section 7701(a)(30)
of the Code, then such noteholder shall submit to the Maker on or before the
date of such assignment an IRS Form W-8BEN (or any successor form) certifying as
to such noteholder’s status for purposes of determining exemption from United
States withholding tax, information reporting and backup withholding with
respect to all payments to be made to such noteholder under the new note (or
other instrument). Any attempted transfer in violation of the relevant
provisions of this Note shall be void and of no force and effect. Until there
has been a valid transfer of this Note and of all of the rights hereunder by the
Payee in accordance with this Note, the Maker shall deem and treat the Payee as
the absolute beneficial owner and holder of this Note and of all of the rights
hereunder for all purposes (including, without limitation, for the purpose of
receiving all payments to be made under this Note).

It is the intention of the Maker and the Payee that this Note is to be a
registered instrument and not a bearer instrument and the provisions of this
Note are to be interpreted accordingly. This Note is intended to be registered
as to both principal and interest and all payments hereunder shall be made to
the named Payee or, in the event of a transfer pursuant to the Facility
Agreement and this Note, to the transferee identified in the record of ownership
of this Note maintained by the Payee on behalf of the Maker. Transfer of this
Note may not be effected except in accordance with the provisions hereof.

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IN WITNESS WHEREOF, an authorized representative of the Maker has executed this
Note as of the date first written above.

ISTA PHARMACEUTICALS, INC.

 

By:       Name:   Title:

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EXHIBIT B

Existing Liens

[intentionally omitted]

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EXHIBIT C

Subordination Agreement

[intentionally omitted]

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EXHIBIT D

Form of Warrant

[intentionally omitted]