Exhibit 10.25

 

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8% CONVERTIBLE SECURED PROMISSORY NOTE

 

THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
OR EXEMPTION FROM REGISTRATION UNDER THE FOREGOING LAWS.

 

FOR VALUE RECEIVED, ALLIANCE PHARMACEUTICAL CORP., a New York corporation (the
“Company”), hereby promises to pay to the order of Photogen Technologies, Inc.
(the “Holder”), at 140 Union Square Drive, New Hope, PA 18938, the principal
amount of ($            ) in lawful money of the United States of America, on
the terms set forth in section 2 hereof.  This Note is being issued by the
Company along with similar convertible notes also designated as 8% Convertible
Secured Promissory Notes (the “Other Notes,” and together with this Note, the
“Notes”) pursuant to that certain Convertible Secured Note Purchase Agreement,
dated October 4, 2002, between the Company and the other signatories thereto
(the “Purchase Agreement”).  The obligations under the Notes are secured by a
priority security interest in certain assets of the Company (the “Collateral”)
pursuant to the Imagent Security Agreement, dated as of October 4, 2002 (the
“Security Agreement”), made by the Company to the Collateral Agent (as defined
in the Purchase Agreement) for the benefit of the Holders (as defined below),
the General Collateral Security Agreement, dated as of October 4, 2002 (the
“General Collateral Security Agreement”) made by the Company to the Collateral
Agent for the benefit of the Holders and the Imagent and Oxygent Patent and
Trademark Security Agreement, dated as of October 4, 2002 (the “Patent and
Trademark Security Agreement”) made by the Company to the Collateral Agent for
the benefit of the Holders.

 

1.                                      Definitions.  The following terms shall
have the meanings ascribed to them below:

 

“Business Day” means any day, other than a Saturday or Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by
law, regulation or executive order to close.

 

“Conversion Amount” means the portion of the principal amount of this Note being
converted plus any accrued and unpaid interest thereon through the Conversion
Date each as specified in the notice of conversion in the form attached as
Exhibit 1 hereto (the “Notice of Conversion”).

 

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“Conversion Date” means, for any conversion, the date specified in the Notice of
Conversion so long as the copy of the Notice of Conversion is faxed (or
delivered by other means resulting in notice) to the Company at or before 11:59
p.m., New York City time, on the Conversion Date indicated in the Notice of
Conversion; provided, however, that if the Notice of Conversion is not so faxed
or otherwise delivered before such time, then the Conversion Date shall be the
date the Holder faxes or otherwise delivers the Notice of Conversion to the
Company.

 

“Conversion Price” shall mean $0.35 per share of common stock of the Company,
subject to adjustment as set forth herein.

 

“Daily Market Price” means, as of any date of determination, the daily volume
weighted average sale price for the Common Stock (as defined below), for the
Trading Day immediately preceding such date of determination (subject to
equitable adjustment for any stock splits, stock dividends, reclassifications or
similar events during such trading day and further shall be subject to
adjustment as provided herein) on the principal United States securities
exchange or trading market where the Common Stock is listed or traded as
reported by Bloomberg, or if the foregoing does not apply, the volume weighted
average price for the Common Stock in the OTC Bulletin Board for such security
as reported by Bloomberg, or, if no sale price is reported for such security by
Bloomberg, the volume weighted average of the bid prices of any market makers
for such security as reported in the “pink sheets” by the Pink Sheets LLC, in
each case for such date or, if such date was not a Trading Day for such
security, on the next preceding date which was a Trading Day.  For the avoidance
of doubt, the Trading Day immediately preceding any Conversion Date is the last
calendar day that is a Trading Day and which is immediately preceding the
Conversion Date.  If the Daily Market Price cannot be calculated for such
security as of either of such dates on any of the foregoing bases, the Daily
Market Price of such security on such date shall be the fair market value as
reasonably determined by an investment banking firm selected by the Company and
reasonably acceptable to the Holders of a majority of the principal amount and
interest of the Notes outstanding, with the costs of such appraisal to be borne
by the Company.

 

“Trading Day” means any day on which the principal United States securities
exchange or trading market where the Common Stock (as defined below) is then
listed or traded, is open for trading.

 

2.                                      Payments of Interest and Principal. 
Subject to the provisions of section 3 below, payments of principal plus
interest on the unpaid principal balance of this Promissory Note (this “Note”)
outstanding from time to time shall be payable in accordance with the following:

 

(a)                                  Interest.  During the period commencing on
the date hereof and terminating on the Maturity Date (as defined herein),
interest on the unpaid principal amount of this Note shall accrue at a rate
equal to 8% per annum, computed on the basis of actual days elapsed over a
360-day year, and shall be payable semi-annually (commencing on March 30, 2003)
up to and including the Maturity Date (as defined below).

 

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(b)                                 Principal.  The principal balance
outstanding on this Note shall be due and payable to the Holder on October 15,
2004 (the “Maturity Date”).  Contemporaneously with the repayment of this Note,
the Holder shall surrender this Note, duly endorsed, at the office of the
Company.

 

(c)                                  Payments.  Except as provided in
section 2(d) below, all payments of principal, interest, fees and other amounts
due hereunder shall be made by the Company in lawful money of the United States
of America by wire transfer or by any other method approved in advance by the
Holder to the account of the Holder at the address of the Holder set forth in
section 10 hereof or at such other place designated by the Holder in writing to
the Company.

 

(d)                                 Payment Shares.  (i) The Company, at its
election, may make any payment of interest on this Note wholly or partly in
shares of the Company’s common stock (the “Common Stock”), par value $0.01 per
share (the “Payment Shares”).  If the Company elects to use Payment Shares it
shall provide the Holder with notice of such election at least ten (10) days
prior to the applicable interest payment date.  On the interest payment date,
the Company shall deliver to the Holder the number of Payment Shares equal to
the quotient obtained by dividing (A) 120% of the cash interest payment amount
by (B) the Payment Share Value (as defined below).  Notwithstanding the above,
if the Payment Share Value shall be less than the Conversion Price, the Company
shall not be permitted to use Payment Shares to make an interest payment and
shall be required to make such interest payment in lawful money of the United
States of America as provided in section 2(c) above.

 

(ii)                                  Value of Payment Shares.  The Payment
Shares shall be valued at 100% of the average closing bid price of the Company’s
Common Stock on the Nasdaq Stock Market, Inc. National Market System (“Nasdaq”)
or such other securities exchange or other market on which the Common Stock is
trading, as reported by Bloomberg, L.P., for the twenty (20) trading days ending
on the trading day prior to the applicable interest payment date.  Such value
shall be referred to herein as the “Payment Share Value.”

 

(iii)                               Payment Shares Validly Issued.  The Payment
Shares, when issued pursuant to and in compliance with this section 2(d)(iii),
shall be, and for all purposes shall be deemed to be, validly issued, fully paid
and nonassessable shares of Common Stock; the issuance and delivery thereof is
in all respects hereby authorized; and the issuance thereof, together with
lawful money of the United States of America, if any, paid in lieu of fractional
shares of Common Stock, will be, and for all purposes shall be deemed to be, in
full discharge and satisfaction of the Company’s obligation to pay the interest
on this Note to which such Payment Shares relate.

 

(iv)                              Registration of Payment Shares.  All Payment
Shares shall be registered under the Securities Act of 1933 and free of all
restriction on resales.

 

(v)                                 Electronic Transmission of Payment Shares. 
If the Company’s transfer agent is participating in the Depository Trust Company
(“DTC”) Fast Automated Securities Transfer program, and so long as the
certificates therefor do not bear a legend and the Holder thereof is not then
required to return such certificate for the placement of a legend thereon, the
Company shall cause its transfer agent to electronically transmit the Payment

 

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Shares to the Holder by crediting the account of the Holder or its nominee with
DTC through its Deposit Withdrawal Agent Commission system (“DTC Transfer”).  If
the aforementioned conditions to a DTC Transfer are not satisfied, the Company
shall deliver to the Holder physical certificates representing the Payment
Shares.  Further, the Holder may instruct the Company to deliver to the Holder
physical certificates representing the Payment Shares in lieu of delivering such
shares by way of DTC Transfer.

 

(e)                                  Acceleration of the Maturity Date. 
Notwithstanding any other provision in this Note to the contrary, this Note
shall become due and payable together with all accrued interest due on the
outstanding principal amount hereunder, at the option of the Holder exercised by
written notice to the Company, in the case of clauses (i) to (ix) below and
without notice or any other action by Holder in the case of clauses (x) to (xii)
below, in the event that (i) the Company fails to pay the principal of or
interest on this Note as and when due; (ii) the Company shall default in the
performance of or otherwise breach any of its representations and warranties or
other obligations set forth in the Convertible Secured Note Purchase Agreement,
dated as of the date hereof (the “Purchase Agreement”), between the Company and
the Holder and the holders (together with the Holder, the “Holders”) of the
other notes issued pursuant to the Purchase Agreement (the “Other Notes”) or any
of the Transaction Documents (as defined in the Purchase Agreement), and if such
default is capable of cure, such default remains uncured beyond any applicable
cure period; (iii) the Holder shall not have the right to enforce its remedies
under section 8 of the Security Agreement, section 9 of the General Collateral
Security Agreement, or section 7 of the Patent and Trademark Security Agreement;
(iv) the Holder shall not have a perfected security interest in the Collateral
(as defined, and pursuant to the terms set forth, in the Security Agreement, the
General Collateral Security Agreement and the Patent and Trademark Security
Agreement) (v) the Company’s Common Stock (including any Conversion Shares or
Payment Shares once registered under the Securities Act of 1933) is suspended
from trading on any of, or is not listed (and authorized) for trading on at
least one of, the New York Stock Exchange, the American Stock Exchange, the
Nasdaq National Market, the Nasdaq SmallCap Market or is not eligible for
trading on the OTC Bulletin Board for an aggregate of 10 trading days in any
nine month period; (vi) the Company fails to remove any restrictive legend of
any certificate or any Conversion Shares issued to the Holders of the Notes upon
conversion of any of the Notes as and when required by this Note, or the
Purchase Agreement, and any such failure continues uncured for ten (10) business
days after the Company has been notified thereof in writing by the Holder; (vii)
the Company fails to pay, when due, or within any applicable grace period, any
payment with respect to any indebtedness of the Company in excess of $500,000
due to any third party (including, without limitation, any of the Other Notes),
other than payments contested by the Company in good faith, or otherwise is in
breach or violation of any agreement for monies owed or owing in an amount in
excess of $500,000 which breach or violation permits the other party thereto to
declare a default or otherwise accelerate amounts due thereunder; (viii) the
entry of a final judgment against the Company, which is not subject to appeal by
the Company, in an amount in excess of $500,000, or the attachment or seizure of
or levy upon any property of the Company to satisfy an obligation of the
Company; (ix) the Company provides notice to any Holder of the Notes, including
by way of public announcement, at any time, of its intention not to issue, or
otherwise refuses to issue, Conversion Shares to any Holder of the Note upon
conversion in accordance with the terms of the Notes (other than due to the
circumstances contemplated by section 3(h) and section 4 for which the Holders
shall have the remedies set forth therein); (x) the Company shall file a
petition under bankruptcy,

 

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insolvency or debtor’s relief law or make an assignment for the benefit of its
creditors; (xi) proceedings shall be instituted against the Company before a
court of competent jurisdiction under any federal or state bankruptcy law that
(X) is for relief against the Company in an involuntary case brought with
respect to the Company in such court, (Y) seeks to appoint a custodian, receiver
or other similar official for all or substantially all the Company’s property or
(Z) seeks to liquidate the Company, and such proceedings remain unstayed and in
effect for sixty (60) days; or (xii) an Event of Default occurs and is
continuing under the Security Agreement, the General Collateral Security
Agreement, or the Imagent and Oxygent Patent and Trademark Security Agreement. 
In the event that the payment of principal and interest due hereunder is
accelerated pursuant to subsection 2(e), interest shall continue to accrue at
18% per annum as of the date of such acceleration until such date as the Holder
is paid in full under this Note.

 

3.                                      Conversion.

 

(a)          Conversion at the Option of the Holder.  Subject to the limitations
on conversions contained in section 3(h) and section 4 the Holder may, at any
time and from time to time on or after the date hereof, convert all or any part
of the outstanding principal amount of this Note, plus all accrued interest
thereon through the Conversion Date, into a number of fully paid and
nonassessable shares of Common Stock (“Conversion Shares”) upon payment of the
Conversion Price.  The number of shares of Common Stock issuable upon payment of
the Conversion Price shall be determined in accordance with the following
formula:

 

Conversion Amount

Conversion Price

 

(b)         Mechanics of Conversion.  In order to effect a conversion pursuant
to this section 3, the Holder shall: (a) fax (or otherwise deliver) a copy of
the fully executed Notice of Conversion to the Company or the transfer agent for
the Common Stock and (b) surrender or cause to be surrendered this Note, duly
endorsed, along with a copy of the Notice of Conversion as soon as practicable
thereafter to the Company or the transfer agent.  Upon receipt by the Company of
a facsimile copy of a Notice of Conversion from a Holder, the Company shall
immediately send, via facsimile, a confirmation to such Holder stating that the
Notice of Conversion has been received, the date upon which the Company expects
to deliver the Conversion Shares issuable upon such conversion and the name and
telephone number of a contact person at the Company regarding the conversion. 
The Company shall not be obligated to issue Conversion Shares upon a conversion
unless either this Note is delivered to the Company or the transfer agent as
provided above, or the Holder notifies the Company or the transfer agent that
such certificates have been lost, stolen or destroyed and delivers the
documentation to the Company required by section 13.

 

(c)          Delivery of Conversion Shares Upon Conversion.  Upon the surrender
of this Note accompanied by a Notice of Conversion, the Company shall, no later
than the later of (a) the second business day following the Conversion Date and
(b) the business day following the date of such surrender (or, in the case of
lost, stolen or destroyed certificates, after provision of indemnity pursuant to
section 13) (the “Delivery Period”), issue and deliver to the Holder or its
nominee (x) that number of Conversion Shares issuable upon conversion of the
portion of this Note being converted and (y) a new Note in the form hereof
representing the

 

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balance of the principal amount hereof not being converted, if any.  If the
Company’s transfer agent is participating in the DTC Fast Automated Securities
Transfer program, and so long as the certificates therefor do not bear a legend
and the Holder thereof is not then required to return such certificate for the
placement of a legend thereon, the Company shall cause its transfer agent to
electronically transmit the Conversion Shares to the Holder by crediting the
account of the Holder or its nominee with DTC through its DTC Transfer.  If the
aforementioned conditions to a DTC Transfer are not satisfied, the Company shall
deliver to the Holder physical certificates representing the Conversion Shares. 
Further, the Holder may instruct the Company to deliver to the Holder physical
certificates representing the Conversion Shares in lieu of delivering such
shares by way of DTC Transfer.

 

(d)         Adjustment to Conversion Price.  The Conversion Price in effect at
any time shall be subject to adjustment from time to time upon the happening of
certain events, as follows:

 

(i)                                     Common Stock Dividends; Common Stock
Splits; Reverse Common Stock Splits.  If the Company, at any time while this
Note is outstanding, (A) shall pay a stock dividend on its Common Stock, (B)
subdivide outstanding shares of Common Stock into a larger number of shares, or
(C) combine outstanding shares of Common Stock into a smaller number of shares,
the Conversion Price shall be multiplied by a fraction the numerator of which
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding before such event and the denominator of which shall be the
number of shares of Common Stock outstanding after such event.  Any adjustment
made pursuant to this section 3(d)(i) shall become effective immediately after
the record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or re-classification. 
Notwithstanding the foregoing, if the Company shall combine outstanding shares
of Common Stock into a smaller number of shares at any time prior to the
Maturity Date, then the Conversion Price in effect immediately prior to such
reverse stock split shall not be adjusted and shall remain in effect after
giving effect to such reverse stock split.

 

(ii)                                  Subscription Rights.  If the Company, at
any time while this Note is outstanding, shall fix a record date for the
distribution to all of the Holders of Common Stock evidence of its indebtedness
or assets or rights, options, warrants or other securities entitling them to
subscribe for, purchase, convert to, exchange for or to otherwise acquire any
security (excluding those referred to in section 3(d)(i) above), then in each
such case the Conversion Price at which this Note shall thereafter be
exercisable shall be determined by multiplying the Conversion Price in effect
immediately prior to the record date fixed for determination of shareholders
entitled to receive such distribution by a fraction, the denominator of which
shall be the closing bid price of the Common Stock determined as of the record
date mentioned above, and the numerator of which shall be such closing bid price
of the Common Stock on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Board of Directors in good faith; provided, however, that in the event of a
distribution exceeding twenty percent (20%) of the net assets of the Company,
such fair market value shall be determined by an appraiser selected in good
faith by the Holder; and provided, further, that the Company, after receipt of
the determination by such appraiser

 

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shall have the right to select an additional appraiser meeting the same
qualifications, in good faith, in which case the fair market value shall be
equal to the average of the determinations by each such appraiser.  The Company
shall pay for all such appraisals.  Such adjustment shall be made whenever any
such distribution is made and shall become effective immediately after the
record date mentioned above.

 

(iii)                               Other Events.  In case of (A) any
reclassification of the Common Stock into other securities of the Company, (B)
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property or (C) any merger or consolidation as a
result of which the holders of the Common Stock immediately prior thereto do not
hold a majority of the shares of Common Stock of the surviving corporation
immediately thereafter, or any sale or other disposition of all or substantially
all of the assets of the Company (each of (A), (B) or (C), an “Extraordinary
Event”), the Holder shall have the right thereafter to convert this Note into
shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of Common Stock following such Extraordinary Event,
that the Holder would have been entitled to receive had it converted this Note
immediately prior to such Extraordinary Event (without taking into account any
limitations or restrictions on the convertibility of the Notes).  In the case of
an Extraordinary Event, the terms of any such Extraordinary Event shall include
such terms so as to continue to give to the Holder the right to receive the
securities, cash or property set forth in this section 3(d)(iii) upon any
conversion following such Extraordinary Event.  This provision shall similarly
apply to successive Extraordinary Events.  For the avoidance of doubt, nothing
contained in this clause (iii) shall be construed to impair the Holders rights
under section 5.

 

(iv)                              Except as provided in subsection (v) hereof,
if and whenever the Company shall issue or sell, or is, in accordance with any
of subsections (iv)(A) through (iv)(H) hereof, deemed to have issued or sold,
any Additional Shares of Common Stock for a consideration per share less than
the Conversion Price in effect immediately prior to the time of such issue or
sale, then and in each such case (a “Trigger Issuance”) the then-existing
exercise price per share shall be reduced, as of the close of business on the
effective date of the Trigger Issuance, to the lowest price per share at which
any share of Common Stock was issued or sold or deemed to be issued or sold in
the Trigger Issuance; provided, however, that in no event shall the Conversion
Price after giving effect to such Trigger Issuance be greater than the
Conversion Price in effect prior to such Trigger Issuance.

 

For purposes of this subsection (iv), “Additional Shares of Common Stock” shall
mean all shares of Common Stock issued by the Company or deemed to be issued
pursuant to this subsection (iv), other than Excluded Issuances (as defined in
subsection (v) hereof).

 

For purposes of this subsection (iv), the following subsections (iv)(A) to
(iv)(H) shall also be applicable (subject, in each such case, to the provisions
of subsection (v) hereof) and to each other subsection contained in this
subsection (iv):

 

(A)  Issuance of Rights or Options.  In case at any time the Company shall in
any manner grant (directly and not by assumption in a merger or otherwise) any
warrants or other rights to subscribe for or to purchase, or any options for the
purchase of, Common Stock or any stock or security convertible into or

 

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exchangeable for Common Stock (such warrants, rights or options being called
“Options” and such convertible or exchangeable stock or securities being called
“Convertible Securities”) whether or not such Options or the right to convert or
exchange any such Convertible Securities are immediately exercisable, and the
price per share for which Common Stock is issuable upon the exercise of such
Options or upon the conversion or exchange of such Convertible Securities
(determined by dividing (i) the sum (which sum shall constitute the applicable
consideration) of (x) the total amount, if any, received or receivable by the
Company as consideration for the granting of such Options, plus (y) the
aggregate amount of additional consideration payable to the Company upon the
exercise of all such Options, plus (z), in the case of such Options which relate
to Convertible Securities, the aggregate amount of additional consideration, if
any, payable upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon the conversion
or exchange of all such Convertible Securities issuable upon the exercise of
such Options) shall be less than the Conversion Price in effect immediately
prior to the time of the granting of such Options, then the total number of
shares of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total amount of such Convertible Securities
issuable upon the exercise of such Options shall be deemed to have been issued
for such price per share as of the date of granting of such Options and
thereafter shall be deemed to be outstanding for purposes of adjusting the
Conversion Price.  Except as otherwise provided in subsection (iv)(D), no
adjustment of the Conversion Price shall be made upon the actual issue of such
Common Stock or of such Convertible Securities upon exercise of such Options or
upon the actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.

 

(B)  Issuance of Convertible Securities.  In case the Company shall in any
manner issue (directly and not by assumption in a merger or otherwise) or sell
any Convertible Securities, which Convertible Securities do not have a
fluctuating conversion or exercise price or exchange ratio, whether or not the
rights to exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the sum (which sum shall
constitute the applicable consideration) of (x) the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus (y) the aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (ii) the total number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities) shall be less than
the Conversion Price in effect immediately prior to the time of such issue or
sale, then the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued for such price per share as of the date of the issue or sale of
such Convertible Securities and thereafter shall be deemed to be outstanding for
purposes of

 

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adjusting the Conversion Price, provided that (a) except as otherwise provided
in subsection (iv)(D), no adjustment of the Conversion Price shall be made upon
the actual issuance of such Common Stock upon conversion or exchange of such
Convertible Securities and (b) no further adjustment of the Conversion Price
shall be made by reason of the issue or sale of Convertible Securities upon
exercise of any Options to purchase any such Convertible Securities for which
adjustments of the Conversion Price have been made pursuant to the other
provisions of subsection (iv).

 

(C)  Issuance of Variable Rate Convertible Security.  If the Company in any
manner issues or sells any Convertible Securities with a fluctuating conversion
or exercise price or exchange ratio (a “Variable Rate Convertible Security”),
then the “price per share for which Common Stock is issuable upon such
conversion or exchange” for purposes of the calculation contemplated by
section 3(d)(iv)(B) shall be deemed to be the lowest price per share which would
be applicable (assuming all holding period and other conditions to any discounts
contained in such Variable Rate Convertible Security have been satisfied) if the
Conversion Price on the date of issuance of such Variable Rate Convertible
Security was 75% of the Conversion Price on such date (the “Assumed Variable
Market Price”).  Further, if the Conversion Price at any time or times
thereafter is less than or equal to the Assumed Variable Market Price last used
for making any adjustment under this section 3(d)(iv) with respect to any
Variable Rate Convertible Security, the Conversion Price in effect at such time
shall be readjusted to equal the Conversion Price which would have resulted if
the Assumed Variable Market Price at the time of issuance of the Variable Rate
Convertible Security had been 75% of the Daily Market Price existing at the time
of the adjustment required by this sentence.

 

(D)  Change in Option Price or Conversion Rate.  Upon the happening of any of
the following events, namely, if the purchase price provided for in any Option
referred to in subsection (iv)(A) hereof, the additional consideration, if any,
payable upon the conversion or exchange of any Convertible Securities referred
to in subsections (iv)(A) or (iv)(B), or the rate at which Convertible
Securities referred to in subsections (iv)(A) or (iv) (B) are convertible into
or exchangeable for Common Stock shall change at any time (including, but not
limited to, changes under or by reason of provisions designed to protect against
dilution), the Conversion Price in effect at the time of such event shall
forthwith be readjusted to the Conversion Price which would have been in effect
at such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or conversion
rate, as the case may be, at the time initially granted, issued or sold.  On the
termination of any Option for which any adjustment was made pursuant to this
subsection (iv) or any right to convert or exchange Convertible Securities for
which any adjustment was made pursuant to this subsection (iv) (including
without limitation upon the redemption or purchase for consideration of
Convertible Securities by the Company), the Conversion Price then in effect
hereunder shall forthwith be changed to the Conversion Price which would have
been in effect at the time of

 

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such termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such termination, never been issued.

 

(E)  Calculation of Consideration Received. If any Common Stock, Options or
Convertible Securities are issued, granted or sold for cash, the consideration
received therefor will be the amount received by the Company therefor, after
deduction of all underwriting discounts or allowances in connection with such
issuance, grant or sale.  In case any Common Stock, Options or Convertible
Securities are issued or sold for a consideration part or all of which shall be
other than cash, including in the case of a strategic or similar arrangement in
which the other entity will provide services to the Company, purchase services
from the Company or otherwise provide intangible consideration to the Company,
the amount of the consideration other than cash received by the Company
(including the net present value of the consideration expected by the Company
for the provided or purchased services) will be the fair market value of such
consideration, except where such consideration consists of securities, in which
case the amount of consideration received by the Company will be the Daily
Market Price with respect to such securities thereof as of the date of receipt.
In case any Common Stock, Options or Convertible Securities are issued in
connection with any merger or consolidation in which the Company is the
surviving Company, the amount of consideration therefor will be deemed to be the
fair market value of such portion of the net assets and business of the
non-surviving Company as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. Notwithstanding anything else herein
to the contrary, if Common Stock, Options or Convertible Securities are issued,
granted or sold in conjunction with each other as part of a single transaction
or in a series of related transactions, any Holder of the Notes may elect to
determine the amount of consideration deemed to be received by the Company
therefor by deducting the fair value of any type of securities (the “Disregarded
Securities”) issued, granted or sold in such transaction or series of
transactions. If the Holder makes an election pursuant to the immediately
preceding sentence, no adjustment to the Conversion Price shall be made pursuant
to this subsection (iv)(E) for the issuance of the Disregarded Securities or
upon any conversion or exercise thereof. For example, if the Company were to
issue convertible notes having a face value of $1,000,000 and warrants to
purchase shares of Common Stock at an exercise price equal to the market price
of the Common Stock on the date of issuance of such warrants in exchange for
$1,000,000 of consideration, the fair value of the warrants would be subtracted
from the $1,000,000 of consideration received by the Company for the purposes of
determining whether the shares of Common Stock issuable upon conversion of the
convertible notes shall be deemed to be issued at a price per share below market
price and, if so, for purposes of determining any adjustment to the Conversion
Price hereunder as a result of the issuance of the Convertible Securities.  The
Company shall calculate, using standard commercial valuation methods appropriate
for valuing such assets, the fair market value of any consideration other than
cash or securities; provided, however, that if the Holder hereof does not agree
to such fair market value

 

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calculation within three business days after receipt thereof from the Company,
then such fair market value will be determined in good faith by an investment
banker or other appropriate expert of national reputation selected by the
Company and reasonably acceptable to the Holders of a majority of the principal
and interest outstanding under the Notes, with the costs of such appraisal to be
borne by the Company.

 

(F)  Other Action Affecting Conversion Price. If the Company takes any action
affecting the Common Stock after the date hereof that would be covered by this
section 3, but for the manner in which such action is taken or structured, which
would in any way diminish the value of the Notes then the Conversion Price shall
be adjusted in such manner as the Board of Directors of the Company shall in
good faith determine to be equitable under the circumstances.

 

(G)  Record Date. In case the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them (i) to receive a dividend or
other distribution payable in Common Stock, Options or Convertible Securities or
(ii) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be, provided, however, that any such adjustment in the Conversion Price shall be
reversed or shall not become effective, as applicable, if the Company abandons
the action to which the record date pertains.

 

(H)  Treasury Shares. The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account of the
Company or any of its wholly-owned subsidiaries, and the disposition of any such
shares (other than the cancellation or retirement thereof) shall be considered
an issue or sale of Common Stock for the purpose of this subsection (iv).

 

(v)                                 Anything herein to the contrary
notwithstanding, the Company shall not be required to make any adjustment of the
Conversion Price in the case of the issuance of (A) capital stock, Options or
Convertible Securities issued to directors, officers, employees or consultants
of the Company in connection with their service as directors of the Company,
their employment by the Company or their retention as consultants by the Company
pursuant to an equity compensation program approved by the Board of Directors of
the Company or the compensation committee of the Board of Directors of the
Company and consistent with past practice, or (B) shares of Common Stock upon
the conversion or exercise of Options or Convertible Securities issued prior to
the date hereof, and (C) shares of Common Stock issued or issuable by reason of
a dividend, stock split or other distribution on shares of Common Stock (but
only to the extent that such a dividend, split or distribution results in an
adjustment in the Conversion Price pursuant to the other provisions of this
Note) (collectively, “Excluded Issuances”).

 

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(e)                                  Covenants.

 

(i)                                     Reservation of Conversion Shares.  The
Company covenants that it will at all times reserve and keep available out of
its authorized shares of Common Stock, free from preemptive rights, solely for
the purpose of issue upon conversion of the Notes and issuances of shares of
Common Stock in accordance with section 2(d) as herein provided, the Conversion
Shares and Payment Shares.  The Company covenants that the Conversion Shares and
any Payment Shares shall, when issued, be duly and validly issued and fully paid
and non-assessable.

 

(ii)                                  Required Registration.  The Company
covenants that if any Conversion Shares or Payment Shares require registration
with or approval of any governmental authority under any Federal or state law,
or any national securities exchange, before such shares may be issued upon
conversion, the Company will use its best efforts to cause such shares to be
duly registered or approved, as the case may be.

 

(f)                                    Fractional Shares.  Upon a conversion
hereunder or in connection with the payment of interest in Payment Shares, the
Company shall not be required to issue stock certificates representing fractions
of shares of the Common Stock, but may if otherwise permitted, make a cash
payment in respect of any final fraction of a share based on the closing bid
price at such time.  If the Company elects not, or is unable, to make such a
cash payment, the Holder shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.

 

(g)                                 Notice of Adjustments.  Upon the occurrence
of each adjustment or readjustment of the Conversion Price pursuant to
section 3, the Company, at its own expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to each Holder a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based.  The Company shall, upon
the written request at any time of the Holder, furnish to such Holder a like
certificate setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the number of shares of common
stock and the amount, if any, of other securities or property which at the time
would be received upon conversion of the Note.

 

(h)                                 No Five Percent Holders.  In no event shall
a Holder of this Note be entitled to receive shares of Common Stock upon
conversion or in accordance with section 3(d) to the extent that the sum of (a)
the number of shares of Common Stock beneficially owned by the Holder and its
affiliates (exclusive of shares of Common Stock issuable upon conversion of the
unconverted portion of the Note or the unexercised or unconverted portion of any
other securities of the Company subject to a limitation on conversion or
exercise analogous to the limitations contained herein) and (b) the number of
shares of Common Stock issuable upon the conversion of the Note or payment or
interest thereon, as applicable, with respect to which the determination of this
subparagraph is being made, would result in beneficial ownership by the Holder
and its affiliates of more than 4.99% of the outstanding shares of Common
Stock.  For purposes of this subparagraph, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13 D-G thereunder, except as otherwise provided
in clause (a) above.  Except as provided in the

 

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immediately succeeding sentence, the restriction contained in this subparagraph
(ii) shall not be altered, amended, deleted or changed in any manner whatsoever
unless the Holders of a majority of the outstanding shares of Common Stock and
the Holders of a majority of the principal amount and interest of the Notes
outstanding shall approve such alteration, amendment, deletion or change.  In
applying the foregoing, such limitation should be applied in conjunction with
the application of limitations on conversion or exercise analogous to the
foregoing limitation.

 

4.                                      Nasdaq Limitation.

 

(a)                                  Shareholder Approval.  If applicable, if on
any date (the “Determination Date”) (A) the number of shares of Common Stock
issued or issuable pursuant to this Note, the Other Notes issued pursuant to the
Purchase Agreement, including the Conversion Shares and the Payment Shares, and
pursuant to the Warrants (as defined in the Purchase Agreement) (the “Issued
Shares of Common Stock”), would exceed 19.9% of the number of shares of Common
Stock outstanding as of the date hereof (the “Issuable Maximum”), (B) the
Conversion Price, the value of the Payment Shares or the Exercise Price (as
defined in the Warrants), as applicable, in each case at the time in effect for
each of the Issued Shares of Common Stock was less than the greater of book
value or the fair market value of the Common Stock, valued at the closing bid
price, on the date hereof, and (C) the Company shall not have previously
obtained the vote of the shareholders of the Company (the “Shareholder
Approval”), if any, as may be required by the applicable rules and regulations
of Nasdaq (or any successor entity) to approve the issuance of shares of Common
Stock in excess of the Issuable Maximum in a private placement whereby shares of
Common Stock are deemed to have been issued at a price that is less than the
greater of book value or fair market value of the Common Stock, then with
respect to (i) the aggregate principal amount of the Notes then held by the
Holders for which a conversion at the Conversion Price at the time in effect,
and (ii) the aggregate number of Warrant Shares (as defined in the Warrant) then
held by the Warrantholder (as defined in the Warrant) which at the Exercise
Price (as defined in the Warrant) at the time in effect, collectively would
result in an issuance of Common Stock in excess of the Issuable Maximum (the
“Excess Principal”), the Company may elect to prepay cash to the Holders in an
amount equal to the then outstanding principal amount of this Note plus accrued
and unpaid interest on such principal amount (the “Prepayment Amount”).  Any
such election by the Company must be made in writing to the Holders within five
(5) days after such Determination Date and the payment of such Prepayment Amount
applicable to such prepayment must be made in full to the Holders with ten (10)
days after the date such notice is delivered.  If the Company does not deliver
timely a notice of its election to prepay hereunder or shall, if it shall have
delivered such a notice, fail to pay the Prepayment Amount hereunder within
fifteen (15) days thereafter, then each Holder shall have the option by written
notice to the Company, to declare any such notice given to such Holder by the
Company, if given, to be null and void and require the Company to either: (Y)
use its best efforts to obtain the Shareholder Approval applicable to such
issuance as soon as is possible, but in any event not later than the 60th day
after such request unless the Company has previously used its best efforts to,
but has failed to, obtain such approval (provided, that if the Company shall
fail to obtain the Shareholder Approval during such 60-day period, the Holder
may demand the cash payment set forth in clause (Z) herein) or (Z) pay cash to
such Holder, within ten (10) days of such Holder’s notice, in an amount equal to
100% of the Prepayment Amount (the “Demand Prepayment Amount”) for such Holder’s
ratable portion of the Excess Principal.  The Demand Prepayment Amount payable
to the Holders pursuant to this section 4(a)

 

13

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shall be payable ratably in accordance with the respective principal amounts of
the Notes held by the Holders on the Determination Date which is convertible
into shares of Common Stock in excess of the Issuable Maximum.  If the Company
fails to pay any Holder the Demand Prepayment Amount in full pursuant to this
section 4(a) within ten (10) days after the date payable, the Company will pay
interest thereon at a rate of 20% per annum to such Holder, accruing interest
daily from the date of conversion until such amount, plus all such interest
thereon, if any, is paid in full.  Until the Company has received the
Shareholder Approval, no Holder of the Notes shall be issued, upon conversion of
Notes, shares of Common Stock in an amount greater than such Holder’s ratable
portion of the Issuable Maximum pursuant to section 4(b) below.

 

(b)                                 Allocations of Issuable Maximum.  The
Issuable Maximum shall be allocated pro rata among the Holder of this Note and
the holders of the Other Notes based on the respective outstanding principal
amounts of this Note and the Other Notes.  Each increase in the Issuable Maximum
shall be similarly allocated.

 

5.                                      Change of Control.  (a)       As soon as
possible upon learning of a potential “Change of Control” (as defined below) the
Company shall promptly make public disclosure of such potential change in
control and simultaneously provide the Holder prompt written notice thereof,
during which time the Holder may, by written notice to the Company, declare the
principal of this Note immediately due and payable and, upon such a declaration,
the maturity of this Note shall accelerate and it shall become due and payable
in an amount equal to at 130% of the then unpaid principal amount of the Note,
plus all accrued and unpaid interest thereon, through the payment date.

 

(b)                                 Definition of Change of Control.  A “Change
of Control” shall be deemed to have occurred when (i) any person (as defined in
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act or any successor
provision to either of the foregoing), other than a person who currently owns
25% or more of the combined voting power of Common Stock, becomes the beneficial
owner (as the term “beneficial owner” is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Exchange Act) of a majority
of the combined voting power of the Common Stock (ii) there shall have occurred
under any indenture or other instrument evidencing any indebtedness or preferred
equity of the Company any “change of control” (or similar term as defined in
such indenture or other evidence of indebtedness or preferred equity) obligating
the Company to repurchase, redeem or repay all or any part of the indebtedness
or capital stock provided for therein; or (iii) the Company merges with or into
another person or entity and the Corporation is not the surviving entity or
sells or disposes of all or substantially all of its assets to any person or
entity; (iv) the liquidation, dissolution, or the winding up of the affairs of
the Company or (v) during any calendar year, individuals who at the beginning of
such period constituted the Company’s board of directors (and any new members of
such board of directors whose election by the Company’s board of directors or
whose nomination for election by the Company’s stockholders was approved by a
vote of a majority of the members of such board of directors then still in
office who either were directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of the Company’s board of directors.

 

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6.                                      Discharge of Certain Provisions.

 

(a)                                  If: (i)  at or prior to the Maturity Date
the Company shall have deposited with the Collateral Agent (as defined in the
Security Agreement, the General Collateral Security Agreement and the Patent and
Trademark Security Agreement), in trust, funds sufficient to pay at maturity the
aggregate principal amount of this Note and the Other Notes, together with all
interest due thereon;

 

(ii)                                  notice of such deposit shall have been
given to the Holder and the holders of the Other Notes as to which such deposit
is applicable, within ten (10) days after the date of such deposit; and

 

(iii)                               no event listed in section 2(e) has occurred
and is continuing; and

 

(iv)                              the Company shall also pay or cause to be paid
all other sums payable hereunder by the Company, then on the date which is
ninety-one (91) days after the date of such deposit by the Company with the
Collateral Agent, so long as during such 90-day period no event listed in
section 2(e) has occurred and is continuing (x) this Note shall cease to be of
further effect and shall be deemed satisfied and discharged (except as provided
herein), (y) the Company shall be entitled to release of Collateral as provided
in the Security Agreement, the General Collateral Security Agreement and the
Patent and Trademark Security Agreement, and (z) the Holder, on demand of the
Company accompanied by an opinion of counsel and at the cost and expense of the
Company, shall execute proper instruments acknowledging the satisfaction and
discharge of this Note to the extent set forth herein.

 

(b)                                 So long as this Note shall remain
outstanding after it is deemed satisfied and discharged pursuant to
subsection (a) above, this Note shall continue in effect following such
satisfaction and discharge provided for above solely with respect to rights of
registration of transfer, exchange or replacement of this Note, and rights to
receive payment of the principal hereof and interest hereon in accordance with
the terms of this Note from such deposited funds; provided, however, that,
following such satisfaction and discharge, no claim for payment of principal of
or interest on this Note shall be made against the Company.  For the avoidance
of doubt, payment from such funds may also be made, in the case of interest due
on this Note, prior to such satisfaction and discharge.

 

(c)                                  For the avoidance of doubt, the Holder may
exercise its right to receive Conversion Shares pursuant to section 3 during the
ninety-one (91) day period referred to in subsection (a) above.  In the event
that during the ninety-one (91) day period referred to in subsection (a) above
the Holder exercises its right and receives Conversion Shares pursuant to
section 3, the amount held by the Collateral Agent equal to the Conversion Price
paid for the Conversion Shares received during such ninety-one (91) day period
shall be returned to the Company.

 

7.                                      Transfer of Note.  Upon due presentment
for registration of transfer of this Note, the Company will execute, register
and deliver in exchange a new Note equal in aggregate principal amount to the
then unpaid principal amount of this Note, dated the date to which interest has
been paid and registered in the name of the transferee.  This Note shall not be
transferable without the written consent of the Company (which shall not be
unreasonably

 

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withheld) and, in all events shall only be transferable only to a person who is
an “accredited investor” as defined in Regulation D promulgated under the
Securities Act.

 

8.                                      Governing Law.  This Note shall be
governed by and construed in accordance with the domestic substantive laws of
the State of New York, without giving effect to any choice or conflict of law
provision or rule that would cause the application of the laws of any other
jurisdiction.

 

9.                                      Jurisdiction.  The Company irrevocably
consents to the jurisdiction of the United States federal courts and the state
courts located in the County of New York, State of New York in any suit or
proceeding based on or arising under this Note and irrevocably agrees that all
claims in respect of such suit or proceeding may be determined in such courts. 
The Company irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding.  The Company further agrees that service
of process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding.  The Company agrees that a final non-appealable judgment in any such
suit or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on such judgment or in any other lawful manner.  Nothing
herein shall affect the right of the Holder to institute suit and conduct an
action in any other appropriate manner, jurisdiction or court or to serve
process in any other manner permitted by law.

 

10.                               Notices.  All notices and other communications
given to any party hereto pursuant to this Note shall be in writing and shall be
delivered, or mailed first class postage prepaid, registered or certified mail,
addressed as follows:

 

(a)                                  If to the Company, to:

 

Alliance Pharmaceutical Corp.
6175 Lusk Boulevard
San Diego, California 92121
Fax number: (858) 410-5306
Attention: President

 

with a copy to:

 

Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, NY 10038
Fax number: (212) 806-6006
Attention: Melvin Epstein, Esq.

 

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(b)                                 If to the Holder, to:

 

Photogen Technologies, Inc.
140 Union Square Drive
New Hope, PA 18938
Fax number: (215) 862-7130
Attention: Taffy J. Williams, Ph.D., President

 

with a copy to:

 

Epstein Becker & Green, P.C.
111 Huntington Avenue
Boston, Massachusetts 12199
Fax number: (617) 342-4001
Attention: Susan E. Pravda, Esq.

 

Each such notice or other communication shall for all purposes be treated as
being effective or having been given when delivered, if delivered personally, by
e-mail or facsimile with confirmation of receipt or by overnight courier or, if
sent by mail, at the earlier of its actual receipt or three (3) days after the
same has been deposited in a regularly maintained receptacle for the deposit of
United States mail, addressed and postage prepaid as aforesaid.

 

11.                               Company’s Waivers.  The Company, to the extent
permitted by law, waives and agrees not to assert or take advantage of any of
the following: (a) any defense based upon an election of remedies by the Holder
which may destroy or otherwise impair any subrogation or other rights of the
Company or any guarantor or endorser of this Note; (b) any duty on the part of
the Holder to disclose any facts or other data the Holder may now or hereafter
know; (c) acceptance or notice of acceptance of this Note by the Company; (d)
presentment and/or demand for payment of this Note or any indebtedness or
obligations hereby promised; and (e) protest and notice of dishonor with respect
to this Note or any indebtedness or performance of obligations arising
hereunder.

 

12.                               Amendment; Waiver.  All amendments or waivers
of any of the terms hereof (including, without limitation, any waiver of
acceleration of the Maturity Date) and any payment of this Note with any
consideration other than cash shall be made or effected only with the written
consent of the Holders of a majority of the principal amount and interest of the
Notes outstanding.  No failure or delay on the part of any Holder in the
exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of

 

17

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any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege.

 

13.                               Replacement of Note.  Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Note by the Holder, the Company shall issue a replacement
instrument, at the Company’s expense, representing such Note in lieu of such
lost, stolen, destroyed, or mutilated instrument, provided that the Holder
agrees to indemnify the Company for any losses incurred by the Company with
respect to such lost instrument (other than the cost of issuing the new
instrument).

 

14.                               Headings.  The headings of the sections of
this Note are inserted for convenience only and do not constitute a part of this
Note.

 

15.                               Rank.  The Notes shall rank senior to any
indebtedness outstanding as of the date hereof as to repayment.

 

16.                               Consent Rights.  The Company shall not (i)
declare or pay any dividends (whether in cash or stock) or otherwise make any
distributions with respect to Common Stock or (ii) create or sell any securities
that rank senior to or pari passu with the Notes without the written consent of
the Holders of a majority of the principal amount and interest of the Note and
the Other Notes outstanding.

 

17.                               Assignability.  This Note shall be binding
upon the Company and its successors and assigns and shall inure to the benefit
of the Holder and its successors and assigns.  Notwithstanding anything to the
contrary contained in this Note or the Transaction Documents, this Note may be
pledged and all rights of the Holder under this Note may be assigned to any
affiliate or to any other person or entity without the consent of the Company,
subject to the Securities Act of 1933.

 

18.                               Cost of Collection.  If default is made in the
payment of this Note, the Company shall pay the Holder hereof costs of
collection, including reasonable attorneys’ fees.

 

19.                               Remedies Cumulative.  The remedies provided in
this Note shall be cumulative and in addition to all other remedies available
under this Note, at law or in equity (including a decree of specific performance
and/or other injunctive relief), and nothing herein shall limit a Holder’s right
to pursue actual damages for any failure by the Company to comply with the terms
of this Note.  The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder of the Note and that the
remedy at law for any such breach may be inadequate.  The Company therefore
agrees, in the event of any such breach or threatened breach, that the Holder of
the Note shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.

 

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IN WITNESS WHEREOF, the Company has caused this Note to be signed and to be
dated the day and year first above written.

 

 

 

ALLIANCE PHARMACEUTICAL CORP.

 

 

 

 

 

By:

 

 

 

Name: Theodore D. Roth

 

Title: President and Chief Operating Officer

 

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